McKinsey Report 2018: A Situation Analysis for Thoroughbred Racing
Ian D. Highet James L. Gagliano
Ian D. Highet, Secretary-Treasurer,
The Jockey Club
James L. Gagliano, President and Chief Operating Officer, The Jockey Club

Stuart S. Janney III: As I noted earlier, we're going to hear some new recommendations from McKinsey & Company, but first Jim Gagliano and Ian Highet are going to jointly provide a state of the industry analysis. We'll start with Ian.

IAN D. HIGHET: Thank you, Stuart. When The Jockey Club first engaged McKinsey in 2011 to evaluate the state of U.S. Thoroughbred racing and recommend a strategy for growth, we were facing a challenging set of trends. Handle had declined 37% over the previous decade. Race days and starts per horse were down 14%. Attendance had dropped 30%.

There were some bright spots. Triple Crown and Breeders' Cup ratings were strong. Handle on graded stakes had grown, and core fans were adopting online wagering rapidly.

But we found that racing wasn't keeping pace with other sports in terms of coverage and fans. We were not keeping pace with other forms of gaming either. For example, casino wagering has grown 34% over the previous decade, and internet gaming was booming.

At the Round Table in 2011, McKinsey recommended nine initiatives to grow racing. Those initiatives addressed scheduling, innovation, television coverage, digital gaming, integrity reforms, and ownership initiatives.

We are pleased to report that as an industry we've made significant progress in many of these areas. But one of the areas in which we've seen the most progress since 2011 is on TV. In 2011, we were down to 43 hours per year of Thoroughbred racing on national television. The number of new fans introduced to racing through TV had declined.

Today, thanks to initiatives with the Breeders' Cup, Keeneland, NYRA, The Stronach Group, FOX, NBC and others, there are over 200 hours of racing on national television.

For example, NBC introduced the Road to the Kentucky Derby in 2012 and Summer at Saratoga in 2013; FOX added The Jockey Club Tour in 2014 and FOX Sports Saturday at the Races in partnership with The Stronach Group and NYRA this January.

According to McKinsey research, we are seeing strong improvement in fan metrics. For example, we are up 10 points in the number of fans who believe racing is well covered by the media. The number of new racing fans introduced to our sport by TV has grown by almost half.

We are also encouraged by improvements in the ownership experience. The Jockey Club and TOBA together created OwnerView and now host an annual owner conference during Breeders' Cup Week.

We're making some progress in race scheduling. We saw a 7% increase in overlapping stakes races in 2017, but we still have a long way to go. We continue to work toward racing integrity reforms including health, safety, aftercare, and medication and testing enforcement.

Again, the journey is far from complete. Seven years have passed since the 2011 McKinsey report, and we decided to take a fresh look at the state of racing and reset the strategy for growth.

The world has changed a lot since then. For example, Twitch, Snapchat, Instagram, and DraftKings did not exist in 2010. In 2011, 88% of U.S. households had a paid TV subscription, and now that number is 79%. Millennials watched 37% less TV per day now than they did in 2011. Ratings for the major professional sports -- NFL, NBA, MLB, NHL -- have been declining at over 6% a year.

Netflix had 10 million subscribers for streaming video in 2010; today that number is 125 million.

In terms of regulation for betting, the Supreme Court struck down the Professional and Amateur Sports Protection Act in May, opening the door for states to legalize sports betting. Eight states are preparing to open sports books in the next 12 months. Monmouth Park already has a thriving sports betting operation in full swing.

McKinsey projects U.S. legal sports books to handle $120 billion per year by 2023. In particular, McKinsey identified four major growth themes in sports and gaming that we believe have generated new opportunities and additional forms of competition for racing: innovations in sports venues and the game day experience; shift from traditional media to digital content, data and marketing; advanced analytics; and the legalization of sports betting.

Therefore, we decided to launch a 2018 refresh of the strategy to assess how well we have progressed in the areas we targeted in 2011 and what new initiatives racing should consider given the discontinuities of the last seven years.

After the break, McKinsey will present their 2018 strategy, but first Jim will take you through where Thoroughbred racing stands today.

JAMES L. GAGLIANO: Thank you, Ian, and good morning. In the five years before 2011, handle was declining at 6% per year. That decline was partly due to the Great Recession, but handle actually started declining in 2003, five full years before the recession.

Since 2011, we've seen handle stabilize at just under 11 billion, which is encouraging, relative to the period leading up to 2011. In those seven years, notwithstanding a steady, overall handle, we've seen a decline in several underlying metrics in the sport.

Obviously, we have fewer horses. The foal crop has been declining at about 1% per year, and total starters are down about 4% per year, to 51,000 in 2017. Although horses are starting about the same amount of times per year, fewer horses has resulted in a reduction in field size to 7.7 and less racing. The number of races in the United States declined to just under 38,000 last year.

If we look at all the gambling in the U.S., racing has lost a point of market share from 4% of all gambling in 2011, to 3% last year. This has happened while the overall gambling market has grown from 104 billion in 2011 to 125 billion today, primarily driven by the growth of slot machines.

But underneath the overall steadiness in Thoroughbred handle has been some significant shifts. There's been a bifurcation of handle performance across tracks. McKinsey segmented all U.S. Thoroughbred tracks into three tiers based on total handle, the number of graded stakes, and purses per day.

From 2011 to 2013, Tier 1 tracks have increased handle from 5.6 billion to 6.8 billion, or growth of 3% per year. Tier 2 and Tier 3 tracks have declined from 5.1 billion in 2011 to 4.2 billion, or decline of 3% per year.

So what is causing this? There are two factors at play here. The first is a reduction in races. Tier 1 tracks have slightly increased the number of races, from 9,375 to 9,517. But the number of races in Tier 2 tracks has declined significantly, from 42,731 to 34,459. Less racing translates to lower handle. But that's not the whole story.

It appears that handle is shifting to the highest quality races. Tier 1 tracks have 82% of all graded stakes races, and over the past seven years graded stakes races have been growing handle per race at 4%. At the same time, handle per race has been declining in other types of races, particularly claiming races.

The second underlying shift is the trend towards advance-deposit wagering. ADW handle has grown 14% per year since 2011 and is now 33% of all handle. There's arguably still significant potential for ADWs to grow. Just 22% of Thoroughbred racing fans McKinsey surveyed actually uses an ADW today, and only 28% have ever used an ADW.

However, there are some limits to that growth. ADWs are oriented to the highest-volume bettors. Just 6% of accounts generated 72% of the handle of one ADW that McKinsey was able to analyze. The experience of ADWs is optimized for the core bettor. As a result, many casual fans give the ADW user experience, in fact, a lower rating. In the McKinsey survey, only one ADW out of five earned a positive Net Promoter Score, which is a measurement of customer loyalty.

On top of that, and notwithstanding the growth and progress that ADWs have made since 2011 in getting credit card charges facilitated, fans still complain about the complicated payment processes.

A third but related shift is the growth of computer-assisted wagering, which is professional bettors using computer algorithms and automated bet placement software to place their bets. This activity has almost doubled in the past seven years at five tracks that McKinsey looked at and is now estimated to be between 16 to 19% of all handle.

Many experts that McKinsey spoke to believe that this growth has a natural limit, which they put at about 20% of overall handle.

You see, computer wagering players don't want to bet just against each other. They need recreational players in the pool to be profitable and continue betting. So we may be nearing the limits of the growth of the computer wagering that we've seen over the past seven years. If so, overall handle will decline again in the future, unless racing can grow to recreational bettors.

So that's what's happening with handle. It appears to be stable on the surface, but there have been significant changes to the composition, some of which are not sustainable unless the sport continues to grow its fan base.

So let's look at what's happening at some other key indicators in this sport. Unique starters and a number of registered owners are both down 4%. The foal crop has declined 1% per year since 2011. However, when McKinsey interviewed owners, most said they're largely happy with their involvement in the sport and described the thrill of winning a race as a lifetime highlight.

Yet owners consistently cite three areas of concern. First, the racetrack experience, which you'll hear about later on in today's program. Second, the perceived concern about the rise of what we call the "super trainer." We define a super trainer as someone who has at least 100 horses in active training in a given year, although a few had multiples of that number.

By definition, super trainers are the top 1% of all trainers. These trainers account for 33% of earnings, yet just 17% of starts. They also start their horses less often, about 10% less often, than other trainers. Hence the concern among some owners that the rise of the super trainers is hurting field size.

A third concern from owners was racing integrity. Specifically, the lack of unified regulation and accountability for medication and the cost of veterinary care.

Finally, let's take a look at racing's public perception. Among the general public, there have been minimal improvements in the perception of racing since 2011. Today, 22% of the general public has a positive impression of the sport, and that's up from 19% in 2011. 45% of fans would now recommend racing to others, and that's versus 41% in 2011.

But there remains a gap between racing in other sports for which about 70% of fans would recommend their sport to others. One of the big issues in racing's public perception continues to be on the matter of animal welfare. For example, McKinsey found over 50% of casual fans would stop betting if they knew horses were mistreated, and new fans specifically objected to the use of the whip.

In the survey of the entire fan base, the top concern was treatment of horses after retirement; followed by day-to-day treatment of horses in training; and, third, illegal doping.

We view these results as an important reminder that we need to see racing through the eyes of the general public and continue to act on the legitimate concerns they're raising about animal welfare and racing integrity.

So let's take a look at the fan base. There are 16 million Americans who are fans of Thoroughbred racing today, who are about 6% of the entire U.S. adult population. Five million of these fans are what we'll call casual -- for example, they bet between three and 11 times per year -- and 2.6 are avid, betting or attending at least once a month.

Racing fans are 63 years old on average, which, frankly, is in line with PGA TOUR, NASCAR, baseball and some other sports.

The average age of a TV sports viewer has been increasing for all sports over the past ten years, and racing is aging at a similar rate to other sports.

We looked at the differences between new and core fans, and two things stood out: New fans go to the track with large groups of friends, 45% of new fans versus just 17% of long-time fans go with large groups. 22% of new fans feel bets are too complex. But 55% of those avid fans enjoyed the complexity and thinking behind handicapping.

So that's the situation analysis as McKinsey sees it, and I'll throw it back to Ian.

IAN D. HIGHET: So let's recap McKinsey's findings on the situation facing Thoroughbred racing in 2018. Handle has stabilized. When we launched our 2011 strategy, handle had declined 6% per year for the previous five years. Since then, U.S. Thoroughbred handle has been essentially flat. The volume of racing is in slow decline.

The number of races, starters and owners continues to decline at 3 to 4% per year. The foal crop is declining at about 1% a year.

But the best racing is still growing. The top 12 tracks, which we call Tier 1, have grown handle at 3% per year since 2011, while handle at the Tier 2 and Tier 3 tracks declined at 3% a year.

Handle per race in allowance races, maiden races, and stakes races is growing, while handle per race for claiming races is in decline.

Bettors are switching rapidly to digital. Advance-deposit wagering is now 33% of handle, double what it was in 2011. Computer-assisted wagering has also doubled as well.

Progress on public perception: we're making some gains in terms of the general public's perception of Thoroughbred racing. We are also attracting new fans. Though it's interesting to note that they see a day at the races as more of a social experience than core fans do.

When we return from break, Dan Singer and Mike Salvaris will build on the situation analysis and take us through the 2018 strategy for racing.

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