Divisional overview
Retail
Sporting results and the economic climate made 2009 a tough year for Retail but we are focused on delivering the best customer experience on the high street to maintain our position as number one in this well-established and mature UK market.
Our Retail business delivered a robust performance in 2009 in the challenging economic environment. Average profit per LBO fell as the economy impacted amounts wagered over-the-counter (OTC). However, cost control was strong with costs increasing by only 3%.
Machines have continued to perform strongly, benefiting from continued product innovation, staff training and in-store promotions. Further growth is expected in 2010 with the roll-out of the new 22-inch HD ‘Storm’ cabinets.
2009 was a turbulent year in terms of sporting results, from a 100-1 winner on the Grand National in April to losses on football in May and August as the leading Premier League clubs kept winning and there was a dearth of draws. In spite of these fluctuations, the OTC gross win margin returned to 17.7%, within the normal 17%–18%. The 2008 comparator was above average.
Marketplace
Licensed betting offices (LBOs) are the single largest part of the UK gambling market, larger even than the National Lottery. It is a mature market numbering approximately 8,500 shops. The market was created in the 1960s when the Government legalised off-course betting and at the peak in the 1980s there were around 14,000 shops. Over time, this has consolidated to the point where there are now five major players accounting for around 80% of revenues. Of these, William Hill is the largest with approximately 25% of the LBOs in the UK.
The Retail market is characterised by steady underlying growth, broadly in line with GDP, with step-changes driven by fiscal and regulatory change. The last decade has seen unprecedented change with the move to a more favourable gross profits-based tax regime, the introduction of gaming machines and liberalisation under the 2005 Gambling Act. At the same time, gambling is becoming more socially acceptable and customer habits are changing. Customers demand constant product availability and have a new preference for ‘entertainment’ products, which has led to the rapid growth of football betting, gaming products on machines and virtual sports.
Retail provides a high-quality revenue stream from a business with high barriers to entry and, as a cash-based business, minimal working capital requirements. Increasingly, businesses require a significant scale to operate effectively.
High barriers to entry:
- Capital intensive estate management
- High regulatory compliance requirements
- Specialised trading infrastructure required
- Increasing costs for content
Strategic priorities
Our goal with Retail is to maintain our market-leading position, continuing to increase our market share by driving top line growth through management of the estate and our product range, and effectively controlling costs to maximise profitability.
Developing our estate
We have a well-sited and geographically diverse estate, which is critical given the importance of location in capturing customers. Typically, we invest around £40m in the estate each year with a target 15% average return on investment. We have four targets for our capital expenditure programme: new licences, refurbishments, re-sites and extensions. Between 2005 and 2009 we opened 210 new licences, increasing the estate by about 7%. With an estimated four LBOs a week going out of business at the bottom end of the industry, this investment incrementally increases our market share.
We continuously improve the quality of the existing estate through our 18-year refurbishment cycle, which involves minor improvements at years six and 12 and refurbishment at year 18. Our shops are modular and our designs use practical and durable materials, ensuring the shops are hard-wearing and the refurbishments are cost-effective. In 2009, we curtailed refurbishment activity while our balance sheet constraints were being addressed but plan to return to normalised investment in 2010.
Target returns on capital:
- Refurbishments 10%
- Re-sites and extensions 15%
- New licences 20%
We manage the tail of our estate very effectively, taking multiple factors into account when deciding whether to change or close a shop. Has there been a big customer win? Has the local high street or competition changed? Is it still covering the costs of the shop lease? Can we re-site it or redevelop it? These shops can be good candidates for investment. Overall, that is why we typically close only five to ten shops a year.
Offering a broad product range
Over the last five years, we have seen a significant shift in the product mix in the shops, reflecting changing customer habits. Today, machines are our lead product, being constantly available, easy to use and popular with younger customers. Now accounting for around 40% of Retail, our machine revenue has grown rapidly throughout the last decade, initially through increasing the average number of machines in our shops and subsequently through effective product management and innovation. Since 2007, we have effectively been at maximum density with an average of 3.8 machines per shop, the maximum number allowed being four. Since 2008, we have had relationships with two suppliers, Inspired Gaming and Global Draw, on a revenue-share basis, which is helping to drive innovation and to maintain standards while minimising capital expenditure by William Hill.
In 2009, we started rolling out new ‘Storm’ cabinets, a 22-inch HD dual-screen unit, replacing 6,250 older cabinets across the estate. We will complete the roll-out by the end of March 2010 and the units are already proving very popular with customers.
Horseracing remains a core and relatively stable product but the growth of other products means that it now accounts for about 30% of our Retail business whereas it was around 75% two decades ago. Football and virtual (computer-generated) sports in particular are becoming increasingly popular, now representing around 10% and 6% of Retail’s net revenue, respectively. Football’s rapid growth has been supported by a high media profile and virtual is an ideal product available-on-demand using exclusive content.
The changing product mix has led to a gradual improvement in our over-the-counter margin to the point where our normal trading range is now between 17% and 18%. This is primarily because the growth products deliver a higher margin than horseracing, particularly in football betting where multiple bets are more popular.
Managing our costs
Given the relatively high fixed costs necessary to operate this business effectively, changes in net revenue can have a significant effect on operating profit. We place considerable emphasis on cost control to maximise the bottom line benefit of any top line growth. In recent years, this has been challenging as we have been faced with additional costs such as a second supplier of television pictures from the racecourses. Our largest costs are employees and property, and we constantly review ways to improve our effectiveness. For instance, we are currently in the process of changing the shop staffing model to reflect our changing needs, which will help to contain staff costs over the coming years.
2,342
William Hill is the UK’s leading high-street
betting and gaming business with
2,342 shops as at the end of 2009.
8,700
Within the shops, we operate more than
8,700 machines offering casino-style
games such as roulette, blackjack
and slots.
40%
Although Retail’s customers are
older than Online’s, 40% of Retail
customers are under the age of 45.
93
In total, we opened 55 new
shops in 2009 and re-sited
another 38 existing licences.
Performance
Our Retail business, comprising OTC betting and gaming machines, accounts for approximately 80% of the Group’s EBIT. Gross win/net revenue1 in Retail was down 4% compared with 2008, comprised of a 12% decline in OTC and an 8% increase in gaming machines. In spite of fluctuating sporting results, the OTC gross win/net revenue margin for the full year returned to normal trading levels at 17.7% (2008 – 18.3%). Operating profit fell by 16%.
Gaming machines continued to perform strongly in 2009. The average number of machines grew by 2% to 8,716 (2008 – 8,549). The gross win per machine per week increased by 6% to £758 (2008 – £716). We continued to promote higher margin category B3 games and category C content and increased the gross win margin from 3.0% in 2008 to 3.1%. By the end of 2009, 3,375 of the c. 6,300 new 'Storm' cabinets had been installed in a total of 866 shops.
We have continued to control costs rigorously, including implementing an all-employee pay-freeze since March 2009. Overall costs increased by 3% compared with 2008, in line with management expectations, but by only 1% on an underlying basis excluding development and one-off impacts. The overall cost growth included higher energy costs, an extra month of fees under the Turf TV contract, which started in February 2008, and estate development.
We invested £14.4m in estate development and completed 93 projects, which included opening 55 new shops and re-siting or extending 38 existing shops. We increased the average number of LBOs by 1% to 2,324 (2008 – 2,299). The total number of LBOs at 29 December 2009 was 2,342 (2008 – 2,319).
1 In Retail, gross win and net revenue in OTC are the same. For machines, net revenue reflects gross win less VAT. VAT rate was reduced to 15% in 2009. Machine performance is reported on the basis of gross win which more accurately reflects underlying performance.
17.7%
Over-the-counter gross win margin
was 17.7% in 2009, within the
normal trading range of 17%–18%.
3.1%
Following the introduction of a wider
range of games, machine gross win
margin has increased to 3.1%.
+8%
Gross win from gaming machines
grew by 8% in 2009 and now
accounts for around 40% of Retail.
Outlook
Given the macro-economic position, we expect trading conditions will continue to be challenging in 2010.
As 2010 is a World Cup year, we would expect some benefit in terms of traffic and, subject to results, net revenue. The last World Cup generated an estimated £5-6m contribution OTC in Retail, net of marketing costs and assuming a level of substitution.
We also expect Retail to benefit from continued growth in gaming machines revenues following the roll-out of the new ‘Storm’ cabinets which will be complete by the end of the first quarter of 2010. The return to 17.5% VAT will cost us approximately £8m in 2010 predominantly from machines. We aim to keep operating cost increases in Retail to approximately 4%, including estate development.
Risk factors
These are the current key risks that could impact Retail’s performance in 2010:
- The challenging economic climate continues to impact trading
- Change to a gross profits tax on machines at a rate higher than our tax neutral position
To find out more about how we manage our risks, go to risks and opportunities.
Delivering best customer service
For the last 20 years, we have conducted regular customer surveys to understand customer behaviour. Throughout that time, location has been the primary reason for a customer choosing a particular shop. In 2009, however, customer service became the primary driver, reflecting changing customer requirements. Four years ago, we launched CBS, our Competition Beating Service strategy, throughout the estate, which focuses on friendly service and expertise, and we are focused on providing the best customer experience in high street betting. Our Retail business attracts a broad range of customers, with a different demographic from Online. Typically, customers are older in Retail, although 40% of customers are under the age of 45. Younger customers are being attracted by products such as machines and football, with the proportion of customers aged 18–25 years rising from 4% in 2006 to 11% in 2009. Retail customers are generally from social classes C2DE compared with ABC1 in Online. They are attracted by the community environment, the cash culture and the ability to bet anonymously. Cash is important in the shops: even Online customers use our shops to deposit cash into their accounts and to collect their winnings.
