UK Gambling Stocks Fall – Are Brands Under Threat?

Posted by Harry Kane on Friday, January 4, 2019

At first glance, you’d be forgiven for thinking that the gambling industry in the UK is poised for significant growth in the near-term. After all, the region’s total gross gambling yield (GGY) increased by 0.7% in the year ending September 2017, peaking at a value of £13.9 billion in the process.

Despite this and the industry’s reputation as a valued employer in the UK, however, there are storm clouds gathering on the market’s horizon. It’s not only new or independent brands that are under threat either, with established operators that are active across both off and online channels also braced for a period of potential hardship.

This is without considering the potential impact of Brexit, which will see the UK exit the European Union on March 29th, 2019. We’ve discussed this at length in previous blog posts, and while the UK government has managed to secure indefinite single market status for Gibraltar until 2020, there’s no doubt that the timing of Brexit could pose a significant threat to the nation’s gambling brands.

In this post, we’ll explore this uncertain future in closer detail, while asking why established, multi-channel brands like William Hill could suffer the most adversity.

Taking a Closer Look at the Industry’s Figures

Everywhere you look, there are significant portents of growth in the UK gambling market, each of which hints at a bright and prosperous future.

Quite aside from boasting an incrementally higher GGY, the market currently keeps an estimated 106,366 citizens in employment. The growth of the remote sector has also been eye-catching during the last 18 months, with this sector generating £4.9 billion in the year ending September 2017 and accounting for 35% of the industry as a whole.

Not everything that shines is golden, however, and some of these figures need to be considered in their true context if we’re to understand the true nature of the existing marketplace.

While the gambling sector remains a prominent employer in the UK, for example, the amount of people working in the market actually decreased by 0.8% between March and September of last year, while considerably more jobs may be lost over the course of the next two years or so (we’ll explore this further later in the post).

At the same time, the number of betting shops active in Great Britain also decreased by 3.2% in the year ending March 2017. This trend is expected to continue for the foreseeable future, particularly with a number of market leading brands looking to focus more of their attention online.

While it can be argued that these statistics are the result of nothing more than normal market fluctuations and transitions, they at least highlight the fact that there’s more to the industry’s growth than initially meets the eye. This is an important consideration, particularly given the challenges that the market and its leading operators will face in the near-term.

So Why Is the Gambling Market Under Threat?

In many ways, the numerous challenges facing the UK’s gambling market are combining to create a perfect storm on the shores of the market.

So while there isn’t one single thing that’s threatening the short and long-term growth of the gambling industry in the UK, there is a myriad of issues that could have a collaborative impact on the sector over time.

This started with the crackdown on fixed-odds betting terminals (FOBTs), of which there are 33,611 located across the length and breadth of UK high streets. Following a detailed investigation by the government’s Department for Digital, Culture, Media and Sport (DCMS), it was decided that the maximum betting threshold for FOBTs would be slashed from £100 to just £2.

The initial fall-out among bookmakers was considerable, as many high street brands had expected the cap to be far less severe. The concern among operators was also easy to understand, with FOBTs having generated £1.7 billion in the year ending September 2015 and currently accounting for 56% of all betting shop turnover.

Immediately after the £2 threshold was announced, bookmakers revealed that an estimated 9,000 betting shops would subsequently become unprofitable and potentially face closure by the end of 2020. Aside from costing thousands of jobs and impacting the profitability of individual bookmakers, this would also hit the gambling industry hard and change the dynamics of the marketplace.

Within four weeks of the cap being announced, however, the UK’s leading bookmakers announced that they have negotiated a deal with the Treasury to postpone the roll-out of the new legislation until 2020. Although this was met with ire by those who had lobbied for the FOBT betting threshold to be reduced, others argued that the delay would minimise the economic damage caused by the new regulations.

It can also be argued that this decision has been taken with Brexit in mind, as the government looks to optimise its tax revenues while the UK adjusts to its brand new reality outside the EU.

From the perspective of bookmakers, this represented excellent news. In fact, it’s thought that the decision would boost the coffers of high street brands by up to £4 billion, based on average revenues and the turnover generated by FOBTs on a regular basis.

However, there’s no doubt that the two-year delay will only provide a relatively short period of grace for the industry, after which time operators will see considerable reductions in their revenue streams.

This leads us onto the second major issue, which lies with the government’s strategic approach to recouping its lost taxation revenue. More specifically, Chancellor Philip Hammond has announced that he’s likely to offset the Treasury’s losses by increasing the Remote Gaming Duty (RGD) paid by online operators, with analysts suggesting that this could rise to 20% in time for the next financial year.

This would represent a 5% in RGD, which has been described as excessive by the Remote Gambling Association’s CEO Clive Hawkswood. In fact, it’s thought that a RGD rate below 20% would be sufficient to cover the shortfall created by the FOBT regulatory reforms, particularly given that the government has now delayed the implementation of the cap until 2020.

So while the increase isn’t necessary a surprise (the Chancellor has flirted with the idea of increasing the RGD rate for a couple of years now), the nature of the hike and the decision to roll it out so soon has caught operators by surprise.

Of course, this decision may also have been influenced by the looming spectre of Brexit, with the government obviously erring on the side of caution and aiming to create a financial contingency that can support them as they leave the relative comfort of the EU.

Regardless, there’s no doubt that online operators will bear the initial brunt of the impending FOBT cap, with high street bookmakers also preparing for a significant financial hit in two years’ time. Make no mistake; the combination of these factors is threatening both the short and the long-term future of the industry, with both on and offline brands facing considerable upheaval.

How Are Operators Being Affected and What Does the Future Hold?

Before we focus on the long-term market impact, it’s important to note that operators are already being affected in the wake of the Treasury’s announcements.

Most noticeably, UK gambling stocks have fallen considerably as the industry prepares for an increase to the RGD. Not only this, but these declining equities could lose even more value in the weeks ahead, particularly as investors respond to the official announcement in the Treasury’s recent budget.

GVC Holdings, Paddy Power Betfair and William Hill were the worst affected brands, with share prices falling by 7.43%, 6.62% and 5.82% respectively. These values were slashed in less than 48 hours, in anticipation of the budget and the 5% tax hike.

In real-money terms, brands have also begun to factor the impending RGD hike into their earnings forecasts for the next 12 months.

While these only represent rough workings at this time, it’s estimated that most operators will have factored in a 5% increase into their outgoings. This is certainly the case with Paddy Power, who recently predicted that each percentage increase in the RGD will have a £2.5 million ($3.25 million) impact on their earnings.

With a 5% hike on the table, it’s clear that market-leading brands like Paddy Power and William Hill could see their annual profits take a double-digit hit during the next 12 months and beyond.

When combined with the impact of declining investment and falling share prices, it’s clear that online betting operators in the UK will be affected immediately by the government’s budget plans.

Even by itself, this would be enough to create a concerted period of uncertainty and volatility in the marketplace. The market will barely have time to consolidate or recover from this before the FOBT cap is rolled out in April 2020, however, creating a double-whammy that will leave operators and the industry as a whole reeling.

Fascinatingly, it’s brands that operate both on and offline that will be the hardest hit, with this description applying to most betting companies in the modern age and all of the prominent market leaders.

This includes companies like William Hill, who retain a prominent online profile alongside their strong high street presence and a large number of active FOBTs.

While these companies typically boast large and multi-faceted revenue streams, they’ll also see their profitability reduced considerably by tax and regulatory reforms over the course of the next 18 months. The extent of the damage depends on the nature of each particular multi-channel operator, of course, and the respective strength of their on and offline platforms.

There’s no doubt that companies active in both markets will be heavily impacted, however, and this could have an adverse impact on the levels of growth, employment and investment within the wider industry.

In fact, it’s arguably the industry that will be the biggest loser as the proposed changes take hold, regardless of the hardship that befalls individual operators. Remember, it’s the online operators that are being asked to pick up the immediate cost of the FOBT cap, while the biggest and most prosperous brands will ultimately see their revenues decline by the biggest margins.

Aside from restricting the growth of one of the UK’s fastest-growing entities, these changes could also encourage some operators to consider relocating overseas. After all, tax-friendly nations such as Malta offer a viable alternative from an economic perspective, while relocating here would also enable operators to retain access to the lucrative single market.

While operators would have to pay a premium and additional levies in order to access the UK market should they leave, this may prove financially beneficial if the tax burden and the wider economic climate becomes too much to bear on these shores.

At the same time, there are also concerns that an increase in tax for legitimate businesses could trigger an increase in illicit gaming in the UK. The reason for this is simple; as the closure of unprofitable high street outlets and certain betting websites could well create gaps that rogue operators look to fill, and this is undoubtedly something that the UK Gambling Commission (UKGC) will need to prepare for in the months’ ahead.

This is a potentially serious issue, particularly with the UK regulator already looking to reform the behaviour of operators and enforce its core strategic objectives through 2021. The rise of rogue operators would also undermine the reputation of the industry as a whole, and this is already something that’s in need of repair in the eyes of consumers.

The Last Word

While the UK gambling industry is clearly in robust health and has continued to enjoy exponential growth in recent times, there’s no doubt that the market is braced for a considerable period of change and uncertainty.

The impending FOBT cap and RGD hike remain at the heart of this perfect storm, and one that could well create a multitude of issues in the industry.

This will be an interesting space to watch in the future, particularly as brands look to react to the new market conditions and develop new and more lucrative revenue streams for the future.