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Are racino operations still viable investments? - JBK International

January 23, 2020by Brian Carlton1

Last August, owners of Churchill Downs went before the Illinois Racing Board with a list of issues. They said high taxes and a flooded gambling market made it financially impossible for them to add 1,200 slot and table games as promised. At the same time in Virginia, Colonial Downs reopened to a cheering crowd of 3,200 and a new on-site casino. Can these racino operations survive long-term across the country? And if so, what would it take to make that happen? 

Can horse race betting be profitable? 

When we say racino operations, we mean any horse race facility with gambling on-site. Visitors can either bet on the live races or gamble on historic ones through the machines. This trend, called Instant Racing, generates an estimated $1.4 billion in revenue each year. The gambler deposits his bet and then the machine picks a race from more than 60,000 in its system. You also can”t beat the system by searching the internet for a result, as you bet blind. The machine never tells you the location or the date of the race. You also don’t even know the names of the horses or jockeys. Instead, you examine charts on the screen showing information like the jockeys’ winning percentage. Once you go through all of these skill graphs, then you pick the projected order to finish or let the computer do it for you. 

But is this a sustainable investment? After all, Colonial Downs already shut down once this decade. Plus, as mentioned earlier in this story, Churchill Downs owners feel like it’s not a good time to expand operations. The answer, experts say, isn’t a simple yes or no. More than anything, it depends on the target audience. 

“This is largely going to be determined by population, but also how high demand is, given the population,” said Dr. Matthew Naven from Washington and Lee University’s Department of Economics. “For a given population size, it would make a big difference if 10 percent or 50 percent of the population was interested.” 

Advertising plays a key role 

This is why advertising is effective and important for racino operations, Naven added. Companies have to draw in potential gamblers from beyond the immediate area if they want to survive. Also, he pointed out that smaller crowds can lead to bigger payouts, reducing the overall profit coming in. 

“Firms that make their money off gambling are relying on the fact that the winning percentages are in their favor,” Naven said. “Imagine that you’re flipping a coin. It wouldn’t be crazy if out of 10 flips, 80 percent were heads, but it would be crazy if out of 1,000 flips, 80 percent were heads. So as the number of bets increase, the odds of the house winning converge to their true value.” 

That’s why there’s more risk for investors opening racino spots in small or rural areas. The city of Abingdon, Virginia wants to build an operation, for example, but it has just 8,191 residents in a rural area. By comparison, the city of Danville in the same state wants to also launch an operation, but there’s a much larger base to work with. The city has a population of 43,055, not including the students attending Averett University. By most metrics, the Danville operation has a better chance of constantly turning a profit. 

A case of diversification

Building a sustainable operation is about more than just finding a large population. It’s also about diversification. Gambling sites compete with full physical casinos and online venues for the same entertainment dollars. They have to provide enough to make a customer want to come back. 

“In Ohio, racing facilities now offer more traditional gaming as well as other entertainment opportunities [like] concerts [and] dining,” said Dr. Scott Boylan from Washington and Lee University’s Department of Economics. “Diversification is key in Vegas as well. Your pool of customers is limited if all you offer is horse racing. If you diversify, focusing on gaming [and] entertainment more generally, [then] the facility becomes appealing to a broader market segment.” 

In Cleveland, for example, Jack Thistledown’s racino operation brought in $557 million from April 2013 to December 2018 from slot machines alone. Over all Ohio, statewide racino revenue from slot machines keeps growing. From October 2018 to October 2019, revenue went from $83.4 million to $90.3 million, not including any money from the live horse races.

Racino operations find different audiences  

Before investing in a racino operation, you also have to understand that you’re appealing in many ways to a different audience than a typical casino. 

“Consumers think of live sports gambling as different than the type of gambling that takes place in casinos,” Dr. Naven said. “Gamblers and sports fans often think they have some “inside knowledge” that will allow them to beat the market when betting on live events. For example, a fan might know their team matches up well against the next opponent’s defense. As a result, they might believe their team is more likely to win than the betting line predicts.” 

Apply the same mindset to fans of horse racing, Dr. Naven said, as they follow particular horses and jockeys. If casinos can’t offer the same environment, then he doesn’t see them as competition for the same entertainment dollars. In fact, Dr. Naven argued, casinos could be seen as compliments to the racino operations, convincing some people to try gambling who otherwise might have avoided it. 

“If these consumers enjoy gambling but wish they felt like they had more control over the outcome, they might turn to live horse racing,” Naven said. 

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JBK International is one of the fastest growing high-end retained search firms in the global CasinoGaming Technology and iGaming markets. We empower our clients to drive lasting positive change and growth through leadership. We serve our clients as trusted advisors, providing customized solutions across executive search, leadership assessment and development, and culture shaping.

One comment

  • Cristie Guebara

    March 10, 2020 at 9:53 am

    Can horse race betting be profitable? Sure, depending on what your description of profitable is. I’m not ready to invest just yet into Colonial Downs. As the article said, it’s shut down once already. Why would I put money into something with no established track record of success? Look at our current issues as an opportunity. If Colonial, or any other operation really, can survive this stretch with the coronavirus, then I feel they’re worth looking at.

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