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Thursday, 30 April 2015

Omni-channel: castles in the sky?

By Paul Leyland, Founding Partner, Regulus Partners

“Neither Admiral Roland nor I claim to be omniscient or infallible – but we do claim to be omni-channel” - Where Eagles Dare 

(if it reflected modern gambling company boardrooms)

UK land-based gambling operators have historically struggled to convert their brand and retail footprint into material remote businesses. William Hill, the UK land-based group with the most successful remote business, rather proved the point by reversing online stagnation through a Joint Venture with Playtech and a wholesale detachment from UK retail operations. None of the other UK land-based businesses with significant market share in any licensing class makes the top six of UK remote operators by market share.

Fishing for an edge over multi-national remote operators, ‘multi-channel’ has been deployed as a buzzword / aspiration / article of faith for many land-based businesses for some time (the author remembers naively enthusing its imminent potential over a decade ago). Given the almost total failure of multi-channel strategies to convert into meaningful market share, it is perhaps unsurprising that the very term disappeared quietly and un-mourned from the catechism at some point late last year.

Omni-channel is now the the latest buzzword. It is expounded almost everywhere with the fervency of new hope; as if ‘omni-channel’ is somehow so radically different from ‘multi-channel’; that multi-channel was so last year and previous failures can be brushed aside; that the potential for land-based to deliver significant remote market share as part of a coordinated customer offer is now (really) shortly upon us.

I can understand why gambling wishes to deploy the lexicon (even the practices) of the wider retail market: omni-channel is not a gambling buzzword just as multi-channel was not. However, words to not change operations, much less make sales. My concern is not with the word, but with three underling problems its current use disguises:

1.       Many customers are already ‘omni-channel’ due to industry-wide supply changes
2.       The solution involves technology but it is not a technology solution
3.       Channel shift means the requirement is defensive rather than a growth opportunity

Operators are increasingly talking of giving their customers “an omni-channel experience”. It is certainly the case that the remote offer of most land-based businesses is more-or-less disconnected from the land-based in all but brand. However, does this matter to the customer? The customer can already bet ‘in venue, online and on the move’ and can choose from a wide range of operators in each category. Some customers may add remote gambling to their land-based activities because of in-venue promotion, but the vast majority who want to are likely to be doing it already.

For example, 54% of William Hill’s UK remote customers use shops while 34% of shop customers use online: this is without much ‘active’ omni-channel activity from the supply side. Certainly, there are a few benefits around the edges that a land-based business can (and should) provide over remote only (eg, integrated loyalty and CRM; cash-in/out; wallet) but these pale in comparison with being able to match the quality of other remote offers, which new remote customers soon discover and come to expect.

This quality has been historically lacking from land-based businesses’ remote offer, which is a key reason for multi-channel failure: the reason does not go away with a new name. The first pillar of omni-channel success must therefore be a remote product that can compete with the best in class in all products offered. The alternative is brand damage, operational failure, and, over time, loss of market share (see below).

All the major land-based businesses already have remote businesses. They tend to be on different platforms with limited product and CRM over-lap. This creates headaches for an omni-channel strategy and it is telling that the major technology providers are investing in omni-channel technology to overcome these hurdles. Technology is, of course, a key enabler for successful supply-led omni-channel (vs. already existing demand-led omni-channel) and suppliers will undoubtedly benefit from the push for omni-channel.

But, why should a customer be drawn to “brand A” online just because it has a land-based presence? And not just to visit the site and register (the brand works there, as evidenced by lower CPAs), but to successfully deposit (first point of failure), gamble and keep gambling (regular point of failure).

In the retail universe, where stock is tangible, the quality of the product is a key reason. However, in the gambling world much of the product is intangible and has been largely commoditised (with some important distinctions). In the remote world this is overcome with offers and lower margins; the land-based environment on the other hand answers the commoditisation problem by being determined to protect product margin and keep investment to an acceptable minimum.  These tensions of strategy rip apart any attempt at a common offer or user experience.

Another key reason for theoretical land-based edge is the ‘personal touch’ with the customer. With a few exceptions, the systematic quality of contact and service in most land-based gambling is beyond poor. That is not to denigrate staff: many do an amazing job of fostering loyalty through dedication and force of personality; but they tend to do it in isolation from employers, without consistency and with very few levers to cross-sell and/or up-sell.

The second pillar of successful omni-channel is therefore to improve levels of product and service across the board. Many remote-only customers would be shocked at the lack of value and investment in land-based; many land-based-only customers would be surprised (some dangerously pleasantly) at the offer (churn) driven remote model. These can be reconciled but it requires a real focus on customer service alongside understanding (and delivering) what the customer actually wants rather than what the industry think they want.

In my view customer service is far more important than technology for delivering successful omni-channel strategies and this is not something the sector has historically excelled at.

Successful omni-channel therefore requires significant investment in both the remote and land-based businesses; not just in technology but also in remote capabilities, retail infrastructure and people. Getting all of this right takes most land-based businesses far outside their areas of expertise and comfort. However, it is eminently achievable with a lot of hard work and focus on successful execution (not just buzzwords).

Nevertheless, there is a sting in the tail. Getting all of this right has historically promised growth. It now promises survival. As the statistics quoted on William Hill demonstrate, many customers are already omni-channel and each new cohort swings the dial further to remote.

According to our own figures, land-based gambling has barely grown in the last five years (2% CAGR, with many areas in decline), while remote has achieved a CAGR of 17%: channel-shift is occurring. Moreover, demographics, the ubiquity of mobile, the focus of marketing and investment, regulatory pressure, and the lack of meaningful R&D in the land-based sector means this trend is likely to accelerate.

What does this mean for land-based operators? In a nutshell guaranteed loss of market share in the “omni-industry”.

Historically this has been relative in a (relatively) stable landbased environment. However, in an environment where remote spend occurs instead of land-based spend, then a ‘typical’ landbased market share of c. 25% (of a given licensing class) gets converted into a ‘typical’ remote share of sub 10%: even the highly successful William Hill has a much higher LBO market share (30%) than remote (14%); for less successful multi-channel businesses, the conversion rate is much worse. 

Moreover, this is structural: even in a fully taxed and regulated regime, the remote channel can deliver more operators to a given customer than even the most competitive and diverse local landbased environment can ever hope too; further, land-based tools for building market share (rollout; M&A) do not work to anywhere the same extent in remote due to the lack of tangible space to control. To state the obvious, lower market share in a value transfer environment means lower revenue in absolute terms. And lower revenue in a high fixed-cost environment means rapidly declining profits.

Being omni-channel is not about promising growth. Nor is it about technology fixes. It is about re-engineering entire businesses to avoid medium-term extinction.

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