Winning Post – Covid-19… Testing the industry to its breaking point?

As the UK enters its third week of lockdown,  Regulus Partners assess the devastating impact of Covid-19, in which reality indicates that betting incumbents will never see a ‘return to normal’…

NB – Helping industry stakeholders, Regulus Partners has produced a free UK sector-by-sector guide to impact which we will update due to the fluidity of the situation. Email Regulus directly for your free copy, or for our analysis on other markets)

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As the global Covid-19 pandemic disrupts lives and businesses almost everywhere, we provide insight and analysis into the UK gambling sector experience – it’s our own backyard, but we also hope that it will provide wider relevance, especially where online gambling is either allowed or largely unrestricted. We consider three key themes:

  • What is the short-term impact
  • What will recovery look like, when it comes (potentially if, in some cases)
  • Where does this leave the sector from a policy perspective

“Ask not what your country can do for you, ask what you can do for your country.” JFK

We are living in unprecedented times. At the macro level we have witnessed the Government intrude on the personal freedoms of its citizens in a manner not seen since the end of the Second World War and at the same time commit to a level of state support for employment and business inconceivable at the time of the Budget statement on 11 March. If the policies are not perceived to be effective or proportionate, then we may end up with a major political backlash (this, incidentally, also provides some sort of backstop to the level of disruption: the government knows people will not take it forever, even with the best intentions, since the direct threat to the vast majority of people is slight from Covid-19 but immense from an economic Depression). In parallel, with the country in ‘lock down’ we are also testing the extent to which participating in meetings represents valuable economic activity  – the world is likely to be a far more efficient place in the aftermath of Covid-19, at least for a time. However, we are not typically hired for our macro views, but for a granular examination of the business of gambling.

Short-term impact and issues

In Britain, all forms of retail gambling other than lotteries have been shut down (people are allowed to shop for ‘essential items’ where lotteries are provided and perhaps fortunately for many what is ‘essential’ has not yet been defined). There is perhaps a small irony that even the Public Health lobby did not expect so complete a victory in achieving effective prohibition (for now at least) of most forms of gambling so quickly – over a matter of (entirely genuine) public health. The closure will be effective for at least three weeks (and the Government seems more likely to tighten civic freedoms than to loosen them in the immediate future) and so we consider the impact on a per month basis:

  • Betting shops: are not generating c. £50m per week in revenue (with the Grand National loss a particular additional blow), which is costing the government c. £10m per week in taxes and duties and c. £12m per week in staff cost support; accumulating rents are c. £5m per week, while the supply chain (mostly racing, also machines) is exposed at c. £7m per week
  • Casinos: are not generating c. £27m per week in revenue, which is costing the government c. £7m per week in taxes and duties and c. £7m per week in staff cost support; accumulating rents are c. £1m per week, while the supply chain is exposed at c. £2m per week
  • Bingo: are not generating c. £13m per week in revenue, which is costing the government c. £2m per week in taxes and duties and c. £4m per week in staff cost support; accumulating rents are c. £1m per week, while the supply chain is exposed at c. £1m per week
  • Arcades: are not generating c. £7m per week in revenue (with a material seasonal uplift into the summer), which is costing the government c. £2m per week in taxes and duties and c. £3m per week in staff cost support; accumulating rents are c. £1m per week, while the supply chain is exposed at c. £1m per week
  • Total UK licensed retail commercial gambling: c. £100m of lost revenue per week (NB, ex lottery and machines in pubs); £21m in lost duties; £26m in staff cost support; £8m in accumulating rents and £11m in supply-chain exposure

While staff costs are largely covered by the government and revenue-related costs (duties, content on rev share) are also mitigated by closure, rent and other fixed costs (e.g. minimum value utilities, arguably fixed-cost content – though frustration is likely to be argued) continue to mount even if payment is delayed. If the lockdown lasts for a month or two, these are likely to be borne in the hope of a recovery ‘bounce’, if they last much longer then pressures are likely to start taking a structural toll. While all businesses are different, we would suggest that the level of disruption continuing into Q3 is likely to be a key tipping point in terms of business (as well as personal) stress levels.

Online gambling is in a more nuanced position. With most global sports halted, there are some substitution options (horseracing in South Africa and most of the US at the time of writing, as well as HK, Australia and Japan – less attractive in the UK due to time zones; a small number of other sports from less affected countries, e.g. table tennis; virtual; esports; probably most dangerously, financial markets) which will no doubt see huge spikes in activity. However, these huge spikes are relative to marginal engagement prior to the disruption– they are unlikely to be anywhere close to matching mainstream interest in soccer, tennis and GB racing (GB+IRE horseracing, soccer and tennis = 75% of UK sportsbook revenue), or even the disrupted ‘long tail’ of high profile but low betting-volume sports (cricket, golf, rugby, US sports etc). UK online sports betting is therefore likely to be down c. 70-80% even with a big spike in substitution products (NB, this shows how much the world has changed since 2001 when Foot and Mouth stopped Cheltenham but bookmakers were able to increase net revenue by providing higher margin substitute products). Again, with a few very big exceptions (Euros, flat season festivals, Wimbledon), as we enter the summer we tend to enter a seasonally quieter period: whether normal service has resumed by August (and the start of the football season, however disjointed) will be a key test of not just when but how the bounce looks (see below).

Online gaming (casino, poker, bingo) is almost completely unaffected (beyond staff needing to work from home) and is likely to be benefitting significantly from landbased disruption, the lack of sports and bored people stuck at home. Indeed, we expect an uplift of c. 20-30% YoY in online gaming, a return to levels of growth unseen for three years in the UK. Herein also lies a trap. People bored at home may also be anxious, depressed, stressed, without an income (the self-employed need urgent help) and/or any number of issues that makes them more vulnerable to gambling related harms. The fact that online gaming companies appear to be benefiting from the pandemic is bad enough under the circumstances, if any appear to be actively exploiting it in any way (marketing, aggressive product promotions, failure to adequately protect customers with changed circumstances or additional vulnerabilities etc) then the public-political outrage would be entirely justified and potentially even terminal for the sector and not just the perpetrators (again, see below).

Taken overall, therefore, we believe that the UK commercial gambling sector is down c. 60% YoY on a pcm basis due to the lockdown – a very significant and clearly unsustainable position, even with retail salaries covered. If the lockdown lasts for two months, then the annual impact would be -10%: painful but broadly manageable; the 30% implied revenue loss over a six month period would not be…

Consumer impact during this phase is painfully simple: only relatively exotic betting options or online gaming is available. Customers of the latter can carry on as normal but may adjust their habits to uncertainty (some spending less, others more). Retail customers have a choice to go online or not bother; betting customers have a choice to substitute or not bother. These choices are forced upon consumers for now – it is what they do when normality starts to return that will be critical.

For the supply chain, machine and SSBT providers on revenue share would seem to be by far the most directly exposed to loss, especially given that the unprecedented nature and scale of the issue is likely to make insurance companies run for the hills (online B2B exposure would mitigate, depending on relative scale). Sports rights holders are also holding certain cost and potentially uncertain revenue. GB horseracing is in an especially difficult position – it could be argued that it doesn’t need the levy or get media rights because there is no content, but the structural impact this could have on horsemen in particular could be profound and create medium-term damage out of proportion to the short-term saving (like athletes, horses need to be trained and this costs money; breeding also needs to continue to prevent a medium-term crisis). Parts of racing are very rich (land, patrons, charitable trusts) and so a solution that genuinely does look like ‘we are all in it together’ will be crucial for both the industry and its relationship with betting (which is getting crash course in emergency product substitution – that will also test the value of racing in the ‘new normal’, see below).

It may also become relevant to the commercial gambling sector that the government has had to step in to fund UK Sport due to a shortfall in lottery sales because of the lockdown. This is not just an issue about short-term funding for either human or equine sports participants (athletics and betting have a suitably distant relationship given the lack of betting volumes – it is perhaps ironical that they are nevertheless partly dependent upon gambling). The disruption to competition and training programmes will have a knock-on effect to the structure (and even commercial viability) of many sports. In the short/medium-term this will impact sporting calendars and betting margins, but it has the capacity to far more profoundly impact betting’s relationship with sport. The more that betting companies are able to demonstrate that they are there to support the sports they depend upon the better for sustainability, in our view: more parasitic relationships could backfire disastrously.

Recovery – for some?
There are broadly two extremes of timing and shape of recovery that may occur. The first is that the lockdown lasts for a long time, saps public and private resources and so we go back to work frugal, mindful and facing economic recession: a bit like most people’s (largely inaccurate) view of post WWII Britain. The other is that people are stuck at home not spending money while most people’s incomes are protected; so long as this doesn’t go on for too long there will be a significant consumer bounce (possibly followed by a mighty hangover as myriad second order impacts shake out): with the vibe more like the consumer release of the 1960s.  Our view, partly fguided by our assumption that governments will be forced to get economies moving again or the health advice will be worthless, is that this is more likely to be closer to the second (optimistic) scenario than the first – but it is worth considering both in terms of sectors and consumers (NB, the sector is probably more exposed than most on how the government treats the self-employed and small business owners from a consumer perspective) .

A few weeks up to a couple of months of pain:

  • Betting shops: if shops re-open for the start of the football season (even if a bit delayed) and well before the jumps season really gets going (as far out as November), then footfall is likely to return strongly, in our view; the key casualties would be shops earmarked for closure anyway, especially among smaller independents (perhaps c. 300 in total – noticeable but not structural beyond marking the end of betting as a viable small business); the lack of much availability in terms of sports should mean that channel shift is not accelerated much – but if global sports come back faster than the UK high-street then LBOs would have a problem
  • Casinos: would be similar to betting shops, with pent up demand coming back to provide a strong Q3, especially in London when tourism rebounds (assuming would-be gamblers remembered to bring a utility bill with them)
  • Bingo: is a much more challenging environment, based on both demographics and liquidity-led play; it is likely that even a relatively short hiatus in habit will have structural impact, especially in afternoon play; given bingo’s increasing reliance on a smaller number of players (admissions down, spend up), this is likely to hit margins and force closures – possibly up to c. 50 of the c. 350 bingo halls that are not arcades otherwise licensed
  • Arcades: are highly sensitive to high-street and/or seaside footfall and so if the crisis accelerates the demise of high-street traffic as more people embrace digital options (banking, retail, food etc) then this will impact arcade businesses; pent up demand may mask this for a quarter or two but in our view channel shift has been given an additional accelerant
  • Remote betting: is likely to be running at 70-80% down until global sports return; it is worth flagging that the all clear being sounded in a critical mass of geographies is only the beginning of a solution, since getting sports (competitions, athletes) up and running again will not be instant – nevertheless, we would expect the recovery to be visible, rapid and reassuring, even with the inevitable logistical wrinkles (and a few bookmaker-friendly upsets)
  • Remote gaming: is likely to continue its +20-30% YoY ‘substitution benefit’ period for as long as the disruption lasts in a short-term scenario, rebasing as sports and retail supply comes back on stream, though potentially finding a small amount (c. 2-5ppts) of structural growth as substituting customers stick to their new product

Prolonged social restrictions (i.e. beyond Q2) with knock-on economic effects:

  • Betting shops: if betting shops remain closed for more than a few months even government help on salaries is unlikely to be enough and mass closures become probable; to an extent this would be compressing another 5 years of channel shift into one, but without mitigators and without the opportunity for operators to actively reinvent the sector; we would guesstimate that there are probably only c. 3-4,000 shops that would survive this – especially since those re-opening would be doing so in very tough economic circumstance
  • Casinos: fall into three categories – London mainstream; London high-end and provincial. London casinos (60% of the market by revenue) will be a barometer of the capital’s health (including high-end tourism and business travel) but with one or two exceptions it would make sense to hang in and wait for better times; provincial casinos, however, tend to be more reliant on relatively small numbers of local customers and if these change their habits (e.g. adopt online) or circumstances (e.g. businesses suffer) then the impact becomes structural and difficult to mitigate; further, undersupply is national but not always local – much lower profitability and a handful of premises failures become likely, in our view
  • Bingo: prolonged closure is likely to be a disaster for bingo given the disruption to habits and liquidity on a business model that has already been facing material demographic pressures; there will be opportunities to reinvent it, but we believe the mainstream supply of 90s flat-floor sheds and former cinemas would be unlikely to recover
  • Arcades: the longer the crisis goes on for the more digital the economy will become; given that arcade product is readily available online (and currently far less restricted from a product perspective, albeit with more KYC requirements), months of disruption is likely to cause a structural shift even further away from the high-street which arcades can do little to mitigate; Seaside arcades represent the most seasonally-geared part of the gambling industry and the loss of summer trading may hit them hard. On a more positive note (as with bingo clubs), arcades enjoy political support due to their role within seaside economies.
  • Remote betting: the longer the crisis continues the more likely that virtuals, esports and other substitution products will receive the customer and development attention to give them a larger proportion of longer-term share; further, a structural shift to shorter attention spans might have been given a brief reversal by sheer boredom, but we suspect while a strong bounce with the return of sports is almost certain, the changing habits of customers will have seen accelerated change – innovation will be at a premium just as operations are stretched
  • Remote gaming: is likely to benefit marginally more the longer the crisis continues as people become increasingly frustrated at the wait for ‘normality’ to return; however, we would caution that this creates a very dangerous regulatory-political environment (see below)

The difference is therefore stark and the key variable is time.

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Content Provided by Regulus Partners

NB – Helping industry stakeholders, Regulus Partners has produced a free UK sector-by-sector guide to impact which we will update due to the fluidity of the situation. (Email  Regulus directly for a copy, or for our analysis on other markets)

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