British bookmakers may be more vulnerable to recession than in the past because online poker and computerized gambling machines attract fewer habitual gamblers than horse and greyhound racing do.
The industry has changed greatly since the recession of the early 1990s, so the current economic downturn will provide the first test of whether the new revenue streams will prove resilient.
Will the growing proportion of middle-income gamblers continue to bet when household budgets are stretched and discretionary spending is limited?
Horse racing and greyhound betting are still important revenue sources, but the emergence of online gambling, betting on a broader range of sports – particularly soccer – and the proportion of profits derived from machines, have fundamentally changed the sector.
During the last recession, analysts say, there was no material decline in British betting revenue. Although profits did fall across the industry, the decline was mainly the result of increasing costs as wages and rents rose and inflation increased. This time, Britain has been hit by a global economic slowdown that started more than a year ago with mortgage problems in the United States.
The Confederation of British Industry said last month that Britain was heading for a shallow recession in the second half of this year and that economic growth next year would be the weakest since 1992.
Executives at Ladbrokes and William Hill, the sector’s two biggest companies, have emphasized the resilience of the industry. The two companies say that they have yet to see signs of a downturn and maintain that as a low-ticket activity with average bets of less than £10, or about $17.50, gambling could be seen as an affordable indulgence.
But the Irish bookmaker Paddy Power, which also has shops in Britain, gave the first indication in August that the consumer slowdown could be having an impact. The company issued a warning on full-year profit and attributed a deterioration in its business to the weakening economic environment.
Analysts say spending on new products like Fixed Odds Betting Terminals might prove to be more discretionary than over-the-counter horse betting. “The increasing dependence on machine gaming introduces an additional unknown,” said Matthew Gerard of Investec Securities. “Fixed Odds Betting Terminals were only introduced in 2002, and there is limited evidence on revenue performance through any slowdown.”
In addition, gambling on sports like soccer has captured a wider market, appealing to a broader customer demographic than has been historically associated with the industry. “This may mean that a higher proportion of customers are not habitual gamblers and will be more likely to cut back on gambling expenditure in the event that their spending power is reduced,” said Derren Nathan, an analyst at Blue Oar Securities.
He added, “The middle-income punters that have become a key part of the companies’ customer base are more leveraged than they have ever been, and the current crisis in the financial services industry raises the specter of rising white-collar unemployment.”
Nathan said that unemployment within sectors in which the bookies’ traditional customer base is employed, like house building, is also a worry.
A slump in the British housing market could cost as many as 100,000 jobs, the National Federation of Builders said in July. The forecasts from the Confederation of British Industry show overall unemployment reaching two million in 2009, with housing and construction expected to be among the hardest-hit sectors.
The share prices of Ladbrokes and William Hill are close to five-year lows, in anticipation of a slowdown, while debt concerns have also weighed on William Hill.
“Given the recent turmoil in the banking market, we expect investors to remain nervous over William Hill’s intention to renegotiate £1.2 billion of banking facilities before 2009,” Nathan said.
William Hill is trading at 6 times forecast earnings for 2008, and Ladbrokes at 6.6 times. That compares with a price-earnings ratio for the FTSE All Share Travel & Leisure Index of 7.6, according to Reuters data.
Nathan, the Blue Oar analyst, contends that online gambling does not inspire customer loyalty to the same extent as traditional gambling, where people normally visit a regular betting shop.
“In terrestrial gambling, customers are likely to choose the store in which they gamble on location and on who is offering the best odds,” he said. “In online gaming, customer churn” – or customer attrition – “is faster.”
That conclusion would appear to be borne out by the most recent business update from an online gambling company, PartyGaming, which showed the number of people playing its poker games had fallen in July and August, prompting downgrades to earnings forecasts.
A rival, 888, reported flat revenues from its poker operation in the second quarter.
Davy Stockbrokers, a broker and securities firm based in Dublin, said it expected sales in betting shops to fall by at least 3 percent across the industry in 2009.
“While betting shops tend to be more defensive than many retail outlets, they are by no means immune from the economic slowdown,” said David Jennings, an analyst at Davy.
