Earlier this month gambling company Rank (RNK) released a disappointing update to the market. It warned that pre-tax profit for the full year would fall short of the year before, sending its shares tumbling on the day. It seems people just aren’t visiting venues and casinos like they used to. And while digital revenues are growing, they have not offset the sales decline witnessed across Rank's venues.
This divergence in performance between physical locations and online is a trend that’s making its way through several UK-listed gambling companies. Digital sales now make up 45 per cent of the total market, up from 30 per cent in 2011, according to data from Shore Capital. The total gambling market itself has also expanded by more than half since 2011, with an increase of 6.9 per cent in the year to March 2017.
A perfect storm of regulation and changing consumer habits is brewing against the gambling companies. The Department for Culture, Media and Sport is currently conducting a review into fixed-odds betting terminals to cut the maximum stake that can be gambled per go from £100 to somewhere between £50 and £2. How fast the machines spin and strategies for tackling issues around problem gambling are also under consideration. Speculation at the beginning of the year suggested that the department was leaning towards the £2 option, but these are still rumours. Regardless, any cut in the stakes could compound the problem of falling revenues at betting shops.
Consumer incomes are also under pressure from rising inflation and a lack of wage growth. This means people don’t have the disposable income they once did, and are more risk-averse when it comes to losing it all down at the local casino. Millennials would rather spend their money on experiences they can share with friends or on social media, and gambling isn’t proving to be a popular option.
This has investors wondering what the future of UK gambling companies will look like. Digital revenues are catching up on venues and online is, frankly, a cheaper operating model. Gambling companies are even encouraging this digital shift with incentives such as single 'virtual' wallets, which can be used both at physical locations and online.
Death of the casino
Casinos are at the heart of Rank's dilemma. Revenue from its Grosvenor Casinos fell 9 per cent in the 13 weeks to April, dragging the total underlying sales decline from those venues year-to-date to 3 per cent. Footfall to these locations was lower than in the past, including visits from VIP members. The situation was not aided by snowy weather during the period, although some analysts have argued the weather could have driven people indoors to gamble. The situation at the Mecca venues was just as grim, registering a 2 per cent fall in sales. Management now expects underlying revenue to be flat for the year, and pre-tax profits to fall somewhere between £76m and £78m – a disappointment considering last year’s £79.7m.
The update prompted some forecast downgrades from analysts. One analyst at Shore Capital said that while there are some attractive assets in Rank’s war chest, soft trading across the retail division and poor like-for-like growth means there's little evidence of a near-term catalyst for the share price. The recent resignation of chief executive Henry Birch has hardly instilled confidence, either.
High street betting shops aren’t faring much better than big casinos. The amount wagered at William Hill (WMH) betting shops fell 1 per cent in 2017, although retail revenues improved by 2 per cent thanks to an increase in net revenues from the gaming and Sportsbook segments. Recent investments have been directed towards the online business, although retail is still the largest division, representing 54 per cent of group sales.
Ladbrokes Coral has been highly exposed to the upcoming government decision on fixed-odds betting terminals, although this has been less of a concern since its takeover by GVC (GVC). It may seem odd that GVC picked an acquisition target that is so clearly in the firing line, but how much GVC will end up actually paying for Ladbrokes is still dependent on the government’s review. In any event, the deal's single biggest motivation appears to be the creation of “the largest listed online-led betting and gaming operator by revenue”.
Going digital
The bright spot for Rank was its digital business. Sales there were up 17 per cent both during the stated period to April and year-to-date. Rank bosses have been keen to see customers play both in person and online and has plans to launch its own 'single wallet' product during the second half of this calendar year.
Clearly, management at GVC has picked up on the trend towards online, too. At the full-year results in March chief executive Kenneth Alexander hinted that this could also apply to the group's business in the US. If regulatory rules allow, then the US could soon become the largest digital gambling market in the world. From Mr Alexander's vantage point, GVC has the technology in place to take advantage of this potential opportunity.
Paddy Power Betfair (PPB) is already the market leader for online gambling in the UK and Australia, and has recently updated its technology platform to make it easier to introduce new products online. But its digital success demonstrates that shifting the focus to online is not without risks. The company previously came under investigation by the Competition and Markets Authority (CMA) to ensure customers were being treated fairly. And as the market leader in two big gambling spheres, some analysts are wondering how it can continue to grow. Last year it bought US sports betting website Draft, so it too could capitalise on the opportunity in America.
William Hill's recent sale of its Australian business could also free up more money and time for it to focus on online developments. At the full-year results in February, chief executive Philip Bowcock said the company planned to invest more in online innovation and in its omni-channel platform. It’s no wonder they want to develop the digital division: the online business reported double-digit growth in both Sportsbook and gaming net revenue.
