What’s Next for High Street Bookmakers?

Posted by Harry Kane on Monday, May 27, 2019

Even in an age where governments often set new standards in terms of inefficiency and ineptitude, it’s rare for them to pass and implement legislation that leaves both sides of a particular divide unhappy. However, the Tories have managed to achieve this with the controversial FOBT cap, which has raised eyebrows due to both its scale and how it has been unveiled.

This new legislation was finally rolled out at the beginning of this month, and bookmakers throughout the UK are now bracing themselves for a significant and potentially impactful financial hit.

In this article, we’ll consider how the FOBT cap is likely to impact on bookies, whilst asking how they’re likely to compensate for their financial losses in the short and longer-term.

Why Has the FOBT Cap Proved so Controversial?

While FOBTs have been a staple feature of the offline gambling industry for years now, they only recently piqued the interest of the consumer mainstream at the beginning of last year.

After all, it was at this time that the Department for Digital, Culture, Media and Sport (DCMS) announced a comprehensive review into the deployment of FOBTs, which allowed for a maximum betting threshold of £100 and enabled punters to wager up to £300 per minute in a largely unregulated space.

Led by the then-culture secretary Matt Hancock, the review recommended that the betting cap be slashed to just £2, sending shockwaves through the industry and triggering an angry response from bookmakers. Remember, the UK Gambling Commission (UKGC) had suggested an initial cap of £30 to provide a balance between regulation and profitability for bookies, and the sheer scale of the recommendation caught an entire industry off-guard.

The immediate forecasts were certainly stark, with bookmakers facing a hit of more than £200 million to their annual profits as a direct result of the cap. After all, the industry’s cumulative FOBT spend peaked at a staggering £1.7 billion in the year ending September 2015, accounting for 56% of all betting shop profits recording during this time.

At the same time, it was alleged that the cap could force the closure of more than 4,000 betting shops nationwide, creating a scenario where the industry declines and thousands of jobs are lost across the length and breadth of the country.

In contrast to the nation’s bookmakers, responsible gambling groups and lobbyists greeted the proposed legislation with genuine enthusiasm. However, the sentiment quickly shifted in the weeks following the announcement, particularly after the Treasury initially announced that the implementation of the betting cap was to be postponed for a period of at least one year.

At this point, it was revealed that the cap would be rolled out in October of this year, with the government claiming that it needed time to set-up, approve and ultimately roll out the legislation effectively.

However, it was suggested that the delay was the result of a negotiation between the Treasury and senior members of the British Bookmaker’s Association, with both parties looking to optimise their revenues prior to the cap being introduced. This argument makes perfect sense, not least because the government also stood to miss out on a significant amount of tax revenue as a result of the new betting threshold.

Initial estimates suggested that the delay could boost the coffers of bookmakers by up to £4 billion overall, whilst the Treasury would continue to bank tax revenues right up until Chancellor Philip Hammond unveiled his autumn budget.

This decision was met with scorn by those who had campaigned for the ban, whilst fellow Tory party member Iain Duncan Smith claimed that his Chancellor would be branded as “morally reprehensible” for postponing the implementation of the cap.

Make no mistake; Mr Duncan-Smith was in no doubt that the delay was a cynical move to boost government finances and maintain a lucrative growth industry, with only vulnerable gamblers and those who regularly wager on FOBTs likely to miss out in the near-term.

At the same time, the decision to postpone the implementation of the cap provided a stark contrast to the tenacity with which the DCMS department pursed the new legislation in the first place, and it was this apparent back-track and change in approach that angered a number of responsible gambling organisations.

Incredibly, the criticism sustained by the Treasury triggered a further U-turn in November, when it was announced that the FOBT cap would once again be moved forward to April 2019.

Whilst this may sound like a compromise, the lack of clarity by the government and its indecision has created significant uncertainty on both sides of the divide and arguably left everyone a little dissatisfied.

Counting the Cost of the FOBT Cap for Brands

Whilst it cannot be denied that FOBTs pose a significant issue in terms of encouraging high-stakes betting, the decision to immediately reduce their maximum stake from £100 to just £2 has sent shockwaves throughout the industry.

Of course, the betting threshold for FOBTs was always likely to end up at £2, especially given the pressure being applied by responsible gambling campaigners throughout the UK. However, most people anticipated that the government would gradually lower the maximum stake over time, with even the UKGC recommending an initial cap of £30 to the DCMS department.

With this in mind, the decision to reduce the maximum stake so quickly and dramatically has caught the offline gambling industry completely off-guard, whilst leaving them to count the potential cost of the new legislation.

We’ve already touched on the loss of revenue and potential store closures, for example, whilst even on a fundamental level brands will be forced to compensate for a 98% decline in their maximum betting stakes.

This must also be balanced against the fact that there are an estimated 32,956 FOBTs currently active throughout the UK, with this number excluding any machines that are installed in venues which remain unlicensed by the Commission. This translates into a significant reduction in the turnover generated by offline gambling brands, creating a scenario where operators will need to adapt, downsize or potentially close their doors.

There will also be a broader economic impact that comes from a maximum FOBT stake of £2, regardless of how operators adapt to the new legislation. More specifically, the worst case scenario could see up to 21,000 job losses nationwide, with the vast majority of these located within the offline gambling sector.

However, there will also be jobs lost in pubs and arcades in the UK, as these entities will also see their revenues impacted negatively following the betting cap.

In fact, all stakeholders that rely on FOBTs as a steady and lucrative source of income will be adversely affected, and this is something that the government must consider as it prepares for the fall-out.

Life After FOBTs – What’s Next for Bookmakers in the UK?

These effects notwithstanding, a number of the UK’s savviest operators will have already begun to prepare for a future without FOBTs, despite the fact, these high-speed gambling machines have been available to punters since 1999 in some locations.

In fact, some of the market’s most progressive brands had even began to move away from FOBTs before the new legislation was unveiled, as they recognised the social impact of roulette-based machines that enabled players to wager up to £100 per spin every 20 seconds.

Regardless of each specific operator’s outlook, it cannot be denied that the FOBT cap will force a change in approach and revolutionise the nature of the offline gambling market. Even on a fundamental level, multi-channel operators like William Hill are looking to increase their online and international presence as a result of the cap, as they look to focus on the most profitable areas for their respective ventures.

However, even this must be caveated by the fact that the Treasury has announced a 6% hike in the Remote Gaming Duty (RGD) to coincide with the FOBT cap. This means that online brands will have to pay a 21% RGD rate on their hard-earned profits after the autumn budget, creating a scenario where the virtual GGY will decline and operator’s margins are squeezed even further.

So, perhaps a more reasoned approach for operators would embrace the FOBT cap and focus on restructuring the offline betting verticals that they offer to punters. This is certainly the opinion of Jenningsbet’s Managing Director Greg Knight, who has welcomed the cap as heralding “a new chapter” for an industry that needs “to go back to its roots”.

This is certainly a persuasive argument and one that would see bookmakers eschew high-speed gambling machines in favour of a more collaborative relationship with sports that used to underpin the entire industry (namely horse and greyhound racing).

After all, whilst 97.4% of people who watch horse racing also wager on the sport, the overall number of bets associated with this discipline has continued to decline gradually over the course of the last few years.

This reflects the fact that the offline gambling market has gradually pulled away from its roots in the pursuit of short-term profitability, creating a scenario where both the interests of punters and the reputation of the industry as a whole have been unnecessarily damaged.

Paddy Power has echoed this sentiment, after responding in a relatively upbeat and positive manner to the FOBT cap announcement.

In fact, the brand touched directly on the “reputational damage” caused by high-stakes FOBT wagering, whilst also appraising the social impact of these machines. These refreshingly positive expressions of optimism also noted a desire to get back to basics within the industry, as certain brands look to redefine offline gambling and become ambassadors for responsible gaming in the UK.

Given the status of Paddy Power and the fact that they operate around 600 shops, this attitude could blaze a trail for other operators to follow and shine a light on how brands can react to the seismic FOBT cap.

Despite this and the obvious merits of enhancing the quality of markets and verticals available across both horse and sports betting, bookmakers will need to adopt a long-term approach to restructuring their business models.

This almost certainly means that the industry will experience a period of financial distress in the short to medium-term, particularly as factors such as Brexit, the RGD hike and the FOBT cap combine to create a perfect economic storm that only the most organised operators will survive.

More specifically, the smartest operators will analyse the viability of their business now that the FOBT cap has come into play, by carrying out revised projections and identifying detailed strategies that will enable them to overcome their sudden loss of income.

Such measures are arduous and time-consuming, however, whilst it’s inevitable that operators must also embrace the idea of sacrificing short-term profit in favour of more sustainable income streams in the future. This represents a huge commitment and one that will ultimately distinguish the successful brands of their future from their struggling rivals.

The Last Word

Despite continuing to record impressive growth figures (particularly in the iGaming marketplace), the gambling industry in the UK is poised for a period of sustained difficulty and uncertainty.

Whilst the timing of the FOBT cap could have been better from the perspective of operators, however, there’s an undoubted social need to tackle problem gambling in the UK and force brands to assume responsibility for the products that they sell.

After all, the Gambling Commission suggests that there are more than two million people in the UK who are either problem gamblers or classed as being “at risk” of addiction, and it’s imperative that regulators and key stakeholders within the industry collaborate to meet this challenge head-on.

Ultimately, there’s little doubt that operators in the UK will eventually thrive in the wake of the FOBT cap, so long as they adopt a proactive approach and fully embrace the need for this measure. Not only this, but they must also prepare for a short-term financial shortfall and prioritise the interests of their customers over profit.