I don’t see any reduction in the challenges for lottery retailers from a change of ownership of Tatts Group.
While the company is clearly in play with reports last week about Kohlberg Kravis Roberts restating their desire for the company and the on-going pursuit by Tabcorp, I don’t see how an acquisition can improve the lot of retailers.
Let’s think this through. The successful suitor will need to demonstrate prospects for a good return for their share price to benefit … and driving share price is the single most important goal of any public company.
To drive share price they have to pursue value. Value is driven by efficient, friction-less, customer engagement. Efficient, friction-less, customer engagement for lottery purchases is about online, mobile to be more specific.
That game of in-store lottery purchase versus online is over. Online has won. Those who disagree don’t realise yet that online has won.
You only have to look at what people are purchasing online, how and when they purchase and the purchase volume.
That I can purchase lottery tickets in seconds and easily sign up for a subscription is what I as a shopper want. I am sure it is what many shoppers want. It is also what I would want to see from tatts if I was a shareholder.
Sure, there are plenty who like the trek to the shop, the banter at the counter, the manual ticket check and the re check in your shop. I think those people are diminishing in number.
Based on their tech investment, tatts thinks this too. So does Tabcorp based o their online and mobile tech investments.
The only thing that may change user a new owner is the capex requirement around in-store infrastructure. However they play it, it won’t be good news for retailers.
If you have lotteries i your shop and are hoping for a new owner to make things easier for you, I suggest you don’t wait. Rather, work today to make your business strong and diverse so it has a future without lotteries.
Tatts is talking down online at their current round of retailer briefings. They say online has plateaued.
Here is the evidence on which Tatts relies to say online has plateaued. It is wrong to make the claim based on such limited data. You need to see the numbers a year and two years out. You also need deeper analysis of the data and not just the topline numbers they have released.
Does it seems a surprise that Tatts in its investor presentation focuses on Online results mainly when retail make up over 80% of sales! It shows you where they think their future is as this is what they are selling to potential investors.Online is a major focus for Tatts, the following is directly from their investor presentation for H/Y 17:
CATEGORY LEADING DIGITAL PERFORMANCE
à 13.5% of all lottery sales through digital channels vs 13.2% in H1 FY16
à Set For Life digital sales 23.1% vs 22.4% in H1 FY16
à Lucky Lotteries digital sales 19.0% vs 17.7% in H1 FY16
à ‘the Lott’ performing exceptionally well:
§ 1.5m active digital lottery customers
§ 1.6m app downloads
§ #1 lotteries website/app in Australia
• POWERHOUSE – RETAIL NETWORK
à 3,880 outlets
à New digital point of sale display – 428 outlets
à Convenience fuel – 181 outlets now operational
• KEY STATISTICS
à 2.8m visits to lotteries website per month
à 2.3m players registered on thelott.com
à 2.0m registered retail card members
à 118 new millionaires created in the half-year
à 48% of Australian adult population played a lottery game with ‘the Lott’ in the
last 12 months
It is business and I would be doing the same if I owned Tatts. Investing in online gets you right into peoples pockets and homes. Yes they do need to provide a retail framework that is consistent and fair across all sectors but the way I look at it is that Tatts sales are not to be factored into future business plans.
So you wouldn’t look at a business today that is financial because of the large commissions received from lottery sales. 10% decline this year but still 200k in commissions?
Matt the reality is that the majority of Newsagents make nowhere near $200k in commissions. The case for outlaying for the new Tatts retail image in your example is fine but not for the majority of smaller shops.
Matt when looking at a business to purchase, look at it’s overall profitability. That sets the value. Add to that where you can take it to determine the value of the business to you.
Matt – I would not buy a business that is dependent on Tatts to remain financial.
The decline in lottery sales isn’t really driven by online taking customers away from the retail channel. It does however remove the next generation of customers. Through natural processes the regular retail customer will stop buying lotteries.
From my experience seeing any lotto customer in store after Generation X is an extreme rarity. People under 35 have had access to online gambling in many forms since turning 18 and are conditioned to play online and seek instant results. Now that they can buy lotteries online just before a draw gives them access to that instant results feeling. You won’t see them going out of there way just to visit a store to buy lotto. The only chance to get them to buy (usually just jackpots) is to get them in store for another reason.
Lotto sales were always going to decline, online play or not, the potential customer base is totally different now. Generation X grew up watching their parents regularly buying lotto and watching the draws on TV. It was ingrained into them and the habit formed to buy in store. Some will eventually migrate to online probably through Lottoland when the US and such have massive jackpots. Also access to retailers will decline as smaller stores have to give it away due to image upgrades or just close from decline in other revenue. Forcing regular retail customers to use online for convenience.
When analysing a lottery retailer, you have to not only take into account the declining revenue stream but also the goodwill that will be eroded. Lottery sales and foot traffic it generated added a lot to a stores goodwill, just like a monopoly on newspapers and magazine sales did in the past. The easiest method for working out if an investment is worth it is to use Net Present Value. Set the salvage price (resale price of the business to at least 50% after 5 years, length of lease or lotto franchise agreement, I use 0) and assume a 10% annual decline in lottery, magazine and newspaper revenue. Rate of return should be at least 25% to cover risk and cash rate. If NPV > 0 then it is worth investigating further, otherwise find something else.
Pat the sales data from Tatts and from retailer do not agree with you.
Also, if use of the tatts app is similar to other app engagement then your demographic use assumptions are wrong.