LONDON (Reuters) - Bookmakers may be less recession-proof than in the past because new ways of gambling such as online poker and computerised gaming machines attract fewer habitual punters than old-fashioned horse and greyhound racing.
The industry has altered dramatically since the recession of the early 1990s and it has yet to be seen whether the new revenue streams prove as resilient or if the growing proportion of middle income punters continue to gamble when household budgets are stretched and discretionary spending is limited.
Although horse racing and greyhound betting are still important in terms of revenues, factors such as the emergence of online gaming, betting on a broader range of sports (particularly football), and the proportion of profits derived from machines, have fundamentally changed the businesses.
During the last recession, analysts say there was no material decline in UK betting revenue. Although profits did fall across the industry, this was due mainly to increasing costs as wages and rents rose with higher rates of inflation.
This time around, the UK economy has been hit by a global economic slowdown that started over a year ago with mortgage problems in the United States.
The Confederation of British Industry (CBI) said last month Britain is heading for a shallow recession in the second half of this year and next year’s economic growth will be the weakest since 1992.
But executives at Ladbrokes and William Hill, the sector’s two biggest companies, have emphasised the resilience of the industry.
The two companies say they have yet to see signs of a downturn and maintain that, as a low-ticket activity with average bets of less than 10 pounds, gambling could be seen by most customers as an affordable indulgence.
However, in August Irish bookmaker Paddy Power, which also has shops in the UK, gave the first indication that the consumer slowdown could be having an impact, warning on full-year profits and blaming a deterioration in trading on the effects of the weakening economic environment.
Analysts say spending on new products such as Fixed Odds Betting Terminals (FOBTs), which account for about 35 percent of gross win at the major bookmakers, may prove to be more discretionary than traditional over-the-counter horse betting.
“The increasing dependence on machine gaming introduces an additional unknown. Fixed Odds Betting Terminals were only introduced in 2002 and there is limited evidence on revenue performance through any slowdown,” said Investec Securities analyst Matthew Gerard.
In addition, gambling on sports such as football has captured a wider market, appealing to a broader customer demographic than that 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.
“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 spectre of rising white collar unemployment.”
Nathan said unemployment within sectors in which the bookies’ traditional customer base is employed, such as house building, is also a worry.
A slump in Britain’s housing market could cost up to 100,000 jobs, according to the National Federation of Builders in July. The CBI forecasts show overall unemployment breaching the 2 million mark in 2009, with housing and construction expected to be among the worst-hit sectors.
The share prices of Ladbrokes and William Hill are close to five-year lows, in anticipation of the slowdown starting to bite, 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 pounds of banking facilities before 2009,” Nathan said.
William Hill is currently trading at 6.0 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.
Blue Oar’s Nathan reckons online gaming does not inspire customer loyalty to the same extent as traditional gambling where punters will normally have 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. In online gaming customer churn is faster,” he said.
That would appear to be borne out by the most recent trading update from online gaming firm PartyGaming, which revealed the number of people playing its poker games fell in July and August, prompting downgrades to earnings forecasts.
Rival 888 reported flat revenues from its poker operation in the second quarter.
Irish stockbrokers Davy expects like-for-like 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 Davy analyst David Jennings.
Editing by Sue Thomas