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| Time to get another basket? A decade on from the Act, gambling is still the only show in town for most of Britain's major operators. |
By Dan Waugh, Partner
As Genting prepares to open Britain’s first truly integrated destination casino at the NEC in Solihull this week, Dan Waugh asks why our gambling industry has been so slow to embrace mainstream leisure.
A few years back, the American Gaming Association published ‘Beyond
the Casino Floor’, a report which claimed that the economic value of commercial
casinos in the United States was between three and four times greater than its
$35bn of annual gross gaming revenue.
It is unlikely that the British gambling industry will be
following the AGA’s example any time soon for the principal reason that
gambling in Great Britain – unlike in an increasing number of US states and other
markets - underpins nothing so very much more than....well.... gambling (and its traditional
adjuncts, horse-racing and dog-racing). Whereas in the US, around a third of
casino expenditures relate to non-gaming activity (more than 70% on the Las
Vegas Strip), in Britain it is closer to 5% (in licensed gambling venues).
The unwillingness or inability of gambling companies to
diversify revenue beyond gambling is perplexing to many overseas observers. For
all the hyperbole of the Gambling Bill era, betting and gaming remain niche
leisure pursuits - many of us do it but not very often; very few of us engage
in it frequently. As a result, consumer
expenditure on gambling is relatively small beer at the macro level.
Restricting commercial activities to gambling thus confines
the opportunities for growth. Given that most gambling businesses have fairly
high fixed-costs, the opportunity to generate marginal revenues from existing
areas of consumer spending should be highly attractive – but for a variety of
reasons this has not proved to be the case.
The image of Britain as a nation of gamblers owes much to
the National Lottery, which skews participation rates towards the
three-quarters commonly quoted. The key sectors of land-based gambling –
betting shops, bingo clubs, arcades and casinos – enjoy relatively low levels
of patronage compared with leisure at large. This is despite the relatively high
dispersal of licensed venues (there are around 10,000 overseen by the Gambling
Commission) which makes gambling significantly more convenient than in many
jurisdictions.
In the major global markets, the expansion of non-gambling
amenities within venues has driven increased visitation and encouraged trial
(if you want to be mass market then it pays to lead with mainstream activities
rather than those which are niche or taboo – just ask Ann Summers).
The reason for the industry’s obsession with gambling may
lie in the high gross margins and large VIP expenditures that are characteristic
of certain sectors. If one can make millions through the relatively simple
process of spinning a wheel or plugging in a slot machine, why bother with the
grind of activities which require more labour, more effort, different skills
and may yield lower margins?
A decade ago, a gaming executive I knew defended
the unspeakably bad food in his bingo halls by explaining to me that he would
rather see his customers spend their time and money on high margin bingo games
than on dining. He seemed to have completely missed the point that his
customers were spending their money in the local chip shops instead (and then
bringing the food into the clubs to eat). Things have moved on since then – but
not by as much as we might have hoped.
So does gambling’s reliance on gambling actually matter? The
industry appears not to care too greatly, the regulator has a range of other
issues to deal with and the Government is not particularly interested; and why
should they? Yet what if the question of diversification involved more than
simply the opportunity cost of foregone revenues?
First, there is the fact that gambling is a politically
volatile business, subject to unhelpful regulatory interventions and
opportunistic tax raids. On three occasions in the last eight years, three
different sectors of the gambling industry have seen their business models
unexpectedly challenged by Budget Day changes to gambling duties - casinos in
2007 and 2009; bingo clubs in 2009; and betting shops in 2014 (this excludes the
extension of remote gaming duty in 2014 to offshore operators which was well
flagged in advance).
Such changes are not unique to Great Britain (think UIGEA, the
current government crackdown in Macau, the backlash in Italy, the banishment to
Siberia of the Russian casino industry, the imposition of retrospective remote
gambling taxes in Spain, the outlawing of slots parlours in Poland – the list
goes on) and the lesson seems obvious - a business that is built entirely on
gambling revenues is one that is vulnerable to that which issues from the politician’s
soapbox or the bureaucrat’s pen.
Gambling – a sector that often suffers from an unhelpful
status in mythology and morality – is weak in part because it has so few
champions. A small percentage of customers care passionately about their right
to have a flutter, but taken as a whole the Great British public’s attitude to
gambling is one of mild disapproval. Output is not significant within the context
of national economics; employment is reasonably large (c.0.3% of Britain’s workforce)
but highly dispersed, modestly paid and in decline; and while some communities
truly value gambling (bingo clubs in some towns; arcades in seaside resorts, betting’s
support for race courses), opposition tends to be more active and more vocal
(e.g. the 93 local authorities who supported the London Borough of Newham’s
Sustainable Communities Act gambit or the councils who have adopted no casino
policies in spite of the fact that the law does not permit them to license
casinos anyway).
Linked to this issue of political volatility is the question
of gambling-related harm. There is a comforting story that we tell ourselves
within the gambling industry that we are working towards a world where all
gamblers spend within their means, allowing operators to benefit from
affordable (and so sustainable) consumer expenditure and long-term customer
relationships. Gambling businesses, we tell ourselves no more want problem
gamblers than pubs wants alcoholics. It’s a neat line but what if it isn’t true?
Several studies (notably the Australian Productivity
Commission and in this country the work of Professor Jim Orford) have suggested
that gambling companies are highly sensitive to the expenditures of problem
gamblers. We don’t know this to be the case but we do know that certain sectors
(casinos, betting shops and remote) derive large portions of their incomes from
a small proportion of highly frequent customers (n.b. frequency is a key flag
for possible harm).
This is what the writer and former Wall Street trader,
Nassim Nicholas Taleb calls ‘Extremistan’ – a place where the mean is
meaningless and the behaviour of the few markedly skews the overall picture. Pubs
on the other hand largely inhabit ‘Mediocristan’, where consumption values from
one customer to the next are less divergent.
If Orford is correct then this suggests an unhelpful paradox
where ‘responsible gambling’ may be put squarely at odds with commercial objectives.
If (and this remains to be proven) certain types of gambling are sensitive to
the expenditure of problem gamblers, it makes it that much harder for companies
to take meaningful action because to do so is to work against near-term
financial self-interest. Sacrifices that hurt tend to be harder to make.
In this situation, revenue diversification would seem to
have two things going for it. First, companies are going to find it easier to
do ‘the right thing’ if they are less dependent on ‘the wrong thing’; and
second, by offering customers a wider range of amenities, there may be positive
incentives for them to take breaks from gambling (as opposed to the negative
incentives of limit-setting). It shifts our interpretation of responsible
gambling from a series of mitigations to inherent characteristics. This logic
was embedded in the Budd view of gambling reform that somehow got lost along
the way.
All this is fine in theory but how on earth does gambling
make that journey from Extremistan towards Mediocristan (noting that dependence
on high-value customers is not the same as reliance on problem gambling and the
distribution of revenues will always be more skewed than in other parts of the leisure
market)? By dint of the current licensing regimes, casinos and bingo clubs have
the greatest opportunity for revenue diversification. Indeed, Simon Thomas at
the Hippodrome has been demonstrably successful in taking the casino mainstream
despite the obvious limitations of the 1968 Act regime; and now Genting is
raising the bar again (under the more generous 2005 Act) at the NEC.
Yet there is nothing to stop arcades and betting shop
operators from seeking to exploit new revenue opportunities. Their business
models may need to change in order to do so; but this is perhaps overdue anyway
given the erosion of the traditional customer base and the need to appeal to
younger customers in both formats. For all sectors, there are models of
diversification from overseas that might be adopted or adapted (see http://regulusp.blogspot.com/2015/02/time-to-think-outside-box.html);
and though this may require changes to regulation, reform is more likely to be
achieved if its consequences are in keeping with social policy objectives.
The dynamic of land-based gambling in Great Britain appears
today to be a long-term shift towards obsolescence with the threat of near-term
regulatory shocks. Both require strategic action, including a willingness to do
things differently. Kicking gambling’s dependence on gambling may just be an
important part of that process.
