Fall of the machines: How operators are adapting to life after FOBTs

On 1 April, maximum stakes on fixed-odds betting terminals (FOBTs) were reduced from £100 to £2 per spin, effectively obliterating what had been an eye-wateringly lucrative revenue stream for more than a decade. With around 34,000 of these B2 gaming machines in bookmakers across the UK, they generated £1.8bn in revenue and £400m in tax for the Treasury in 2018 when spins up to £100 were allowed. Yet this gravy train was abruptly derailed when, following the Triennial Review into FOBTs, the government decided in May 2018 to drastically curb stake limits to £2 – the worst-case scenario for bookmakers.

Since the crackdown, some of the multi-channel giants have spoken of the need to slash costs and remodel retail to cope with this seismic change in their business models. Others are looking for their online offering to pick up some lost income from FOBTs, or doubling down on greenfield opportunities overseas, such as the US. At the time of writing it is seven weeks since the machines were recalibrated, yet it is still early days and the full potential financial hit is still unclear.

GVC anticipates closing around 1,000 of its Ladbrokes and Coral shops

Paddy Power Betfair, soon-to-be-named Flutter Entertainment, said on 2 May that the impact of the cuts would be near the top end of its previous guidance of a 33-43% fall in machine revenue. Meanwhile, William Hill revealed in mid-May that FOBT revenue was down 40%. However, there was some good news for investors in GVC Holdings, when, ahead of its Capital Markets Day on 16 May, the group announced that the impact was better than expected. Having previously forecast the £2 limit would reduce earnings by £145m in 2020 and £120m by 2022, this was revised to £120m in 2020 and £105m by 2022.

The only listed operator to report financial results for beyond 1 April was William Hill. In a trading update for the 17 weeks to 30 April, the operator said gaming net revenue for its retail division slumped by 15%, which contributed to an overall 7% decline in net retail revenue. In a note on the company’s results, Regulus Partners said that if machine revenue was flat for the first three months of 2019, it suggests a 26% hit to revenue after the stake cuts were introduced. “Severe, though in line with expectations and not as bad as feared,” the analyst firm wrote.

Shut up shop

A clearer picture of the financial impact should emerge once H1 results are published later this summer by the public giants. That said, Hills, which has approached some 1,800 landlords seeking rent reductions of up to 50% for its shops, did reveal it closed 1% of its retail estate during the first 17 weeks of the year, which equates to 20-odd shops. Its annual rent bill is around £40m. Yet this is the calm before the storm as the company has stated previously that it expects stake cuts to reduce profitability in shops by between £70m and £100m and that up to 900 – or 39% – of its 2,300 licensed betting offices could close.

Rival GVC has said it anticipates closing around 1,000 of its 3,400-odd Ladbrokes and Coral shops, while CEO Kenny Alexander told investors in January that retail will become a “relatively
small part” of its operations. Warwick Bartlett, CEO of Global Betting and Gaming Consultants (GBGC) and former chairman of the Association of British
Bookmakers, estimates 40% of the 8,000-plus betting shops in the UK will ultimately go and that he has been told Ladbrokes Coral is shutting 30 outlets a week. “What they [bookmakers] are all saying is cashflow has disappeared from the business,” he says.

Meanwhile, consultant and secretariat of the Parliamentary All-Party Group on Betting & Gaming Steve Donoughue says FOBTs “put a sticking plaster on an outmoded way of offering gambling” and that retail is facing a “basic structural decline” much like record shops and book stores. “Technology and social/cultural factors are against betting shops,” he tells EGR Intel. As to the long-term impact of the new stake limits, Donoughue adds: “We don’t quite know what is going to happen – is the [FOBT] money going to stay in the betting shop? It’s got to be less than 100% and I think that spells serious consequences for betting shops.”

With the ubiquity and access to online and mobile gaming in the UK, including live casino, you may question why FOBT players choose to traipse to a betting shop to play computer-generated roulette. And, of course, online players have always been able to bet far more per spin or hand at an online casino compared to a shop gaming machine. However, the evidence would seem to suggest the FOBT customer base is typically a different demographic to the profile of most online gamblers.

“FOBT players are unique, cash-only players that do not want or cannot get bank accounts and online accounts,” says gambling consultant Richard Thorp, who has previously worked for FSB Tech and in the past was a betting shop manager for Ladbrokes. “It is more likely that the decision will drive this player base underground.” But how likely is it these players transfer their play to online? Bartlett offers his opinion: “At first blush I had thought online casinos would have picked up the FOBT customer but I have seen no real evidence of it yet, which leads one to believe that the conversion from shop to online isn’t going well.”

Crossing the divide

A key pillar to the viability of shops will be an even greater focus on omni-channel efforts in a bid to further close the gap between online and retail. The leading brands have offered physical cards for some time now, allowing shop customers to use cash to deposit in shops and load online accounts as well as collect online winnings over the counter. And in preparation for the FOBT stake reduction, Ladbrokes Coral recently extended its Best Price Guaranteed offer on horseracing to retail, providing the customer holds a Ladbrokes Grid or Coral Connect card.

To date, over two million customers have signed up to Grid and Connect, while 20% of Ladbrokes online net gaming revenue is from shop customers.

Over at Coral, it’s 14%. During his presentation at the GVC Capital Markets Day, outgoing co-COO Andy Hornby described the cards as being a “very, very powerful tool” and highlighted how acquiring online customers through shops saves on marketing and UA costs. Meanwhile, Alexander stressed to investors earlier this year that GVC would never consider selling its retail estate as it is “too strategically important to the omni-channel”.

William Hill closed 1% of its retail estate during the first 17 weeks of this year

While self-service betting terminals (SSBTs) will continue to play a key role in omni-channel, including allowing shop customers to use their phones to scan and track shop bets and cash out positions, converting certain customers to online channels will be an almost impossible task. “Sixty-six-year-old ‘Frank’, a retired plumber, probably doesn’t even own a computer,” says Donoughue. “There is a certain demographic that is technophobic.” Also, bookmakers have been pushing omni-channel and trying to acquire online players from their shops for years, so you’d have to question the growth here going forward.

Thorp says: “I’d suggest that the big players have already converted all the players they are going to get to online as shop staff have been incentivised to do this for a few years.” He also estimates between 10% and 15% of FOBT revenueprior to 1 April will now end up in SSBTs and over the counter on football only. Where the remaining 85% or more goes is open to debate. If some of those FOBT players do indeed decide to switch their play to online and mobile, there is no guarantee they will sign up with the same brand.

For instance, they may have frequented a particular shop purely because of its convenient location and, therefore, brand loyalty goes out the window. Yet the betting shops that are left after the cull will be particularly useful from a branding perspective if and when any future gambling ad restrictions are introduced. “GVC is saying there should be a total advertising ban, well they can say that because their shops are advertising hoardings,” Donoughue states. “You will need shops because in the future we are not going to have any TV advertising.”

Racing’s black hole

One major consequence of the closure of a few thousand betting shops will be the financial blow to horseracing. The sport receives millions of pounds each year from bookmakers (10% on gross profits from UK racing bets) via the levy. The Levy Board recently agreed to provide a £6.5m cash injection to prize money to help offset the effects of lost shops. In addition, racing media rights are based on a per-shop arrangement, so a drastic reduction in the number of licensed betting offices translates to less media income. This effect has been estimated at somewhere between £40m and £60m a year.

“It will have a big impact in how much levy is collected from bookmakers and how horseracing is funded,” says Stephen Harris, horseracing editor for BettingExpert.com and a former bookmaker. It also seems inevitable that there will have to be a reduction in the fixture list (there were 1,511 fixtures announced in January for 2019, three more than originally scheduled in 2018), with an emphasis on quality rather than, as Harris describes it, “betting shop fodder”.

“We are in a shitstorm where, quite frankly, gambling is under the microscope and evidence and reason aren’t getting a look in” – Steve Donoughue

“Hopefully racing will now become more customer-focused towards what racing fans want rather than the demands of the declining big shop-based bookmakers who constantly asked for more and more low-grade racing to fill time.” In the wake of the FOBT stake curbs, there are calls for bookmakers to refocus efforts on the racing product itself. This includes a willingness to lay bets and not use the big festivals as a vehicle to dish out loss-leading offers to acquire users and encourage them to play online casino.

Storm clouds gathering

Overall, however, these are uncertain times. Besides the FOBT changes, multi-channel operators have seen a hike in UK remote gaming duty from 15% to 21%, not to mention increased efforts and costs associated with responsible gambling and KYC. Then there’s the spectre of ad restrictions in the UK. The intense regulatory pressures make conditions today the “toughest by some distance”, according to Thorp. Donoughue serves up a more colourful assessment of the status quo: “We are in a shitstorm where, quite frankly, gambling is under the microscope and evidence and reason aren’t getting a look in.”

Operators know they simply have to make the best of the situation, though. Shops will go and there will unfortunately be job losses, yet they were living on borrowed time with FOBTs. For the key players, diversification is now the name of the game, with William Hill CEO Philip Bowcock now stressing the need for the operator to become a “digitally led and internationally diverse gambling business”. But while, much like other sectors, retail’s winning streak looks like coming to an end, it isn’t in its final death throes just yet.