Archives for September 2010

Most of the time a decline on the revenue side of a business or an industry is viewed with concern. An exception is depicted by recent data released by The Jockey Club pertaining to trends in North American Thoroughbred breeding.

Following is a summary of the Jockey Club information:

The number of stallions that bred mares was 3,130 in 2009 and 3,439 in 2008: or -9.0%

The number of mares bred was 49,404 in 2009 and 56,901 in 2008: or -13.2%

As of September 10, 2010, 27,233 live foals had been reported to the Jockey Club compared to 31,727 by the same date in 2009: or -14.2% (reports of live foals are typically about 90% complete for the year by early September).

Here are three key reasons that these developments are welcome.

First, there are too many mares with few or no redeeming qualities being bred to too many stallions with few or no redeeming qualities and, unsurprisingly, producing too many foals of the same caliber. This weakens the breed overall rather than strengthens it.

Second, with the supply of foals adapting to the demand for foals, price levels should stabilize or improve.

Third, an overproduction of foals that are not fast enough to become racehorses exacerbates the problem of unwanted horses. Therefore, a reduction in the number of Thoroughbred foals born assists in mitigating the problem.

A possible downside to the decrease in the 2010 foal crop from approximately 29,956 (27,233 reported as of September 10 plus another 10 percent will be reported later) from about 34,000 for 2009 is that it may affect the number of starters at racetracks two and three years hence…and the number of starters is a concern because bettors prefer large fields.

There are approximately 100 racetracks in North America (not counting the fairs, particularly in California). Assume that foreign buyers take 10% of the foal crop out of North America; that would translate into 27,233 foals left in North America in 2010 and 31,727 in 2009. The average per racetrack would be: 272 foals in 2010 (27,233/100) and 317  in 2009 (31,727/100). Nearly a decade ago, in 2001, the North American foal crop was 37,900. Take 10 percent out by foreign buyers and that left 34,110 foals in North America or 341 per racetrack. (Of course, not all foals are put into training and that further decreases the pool.)

It is impossible to say for sure that the decline in the foal crop–beginning in 2006– is accounting for racetracks having a problem filling races. My view is that it may be a contributing factor but not the predominant reason. The main cause is that there is a glaring shortage of owners. A foal crop of nearly 30,000 in 2010 should be sufficient to supply North American racetracks, even considering that foreign buyers will reduce the number by 10 percent or so. Moreover, the number of racetracks will likely decrease as the horse racing industry continues to downsize.

The decline in the foal crop may prove to be a case of less is more.

(Click here for the 2010 Jockey Club Fact Book that shows the annual foal crop.)

Copyright © 2010 Horse Racing Business

The California Assembly and the California Senate have sent a bill to Governor Arnold Schwarzenegger that increases the takeout rate on exotic wages and legalizes exchange wagering. The latter permits one-on-one betting on a horse to win or lose and at odds negotiated between the bettors. The takeout rate hike would go into effect when Santa Anita opens on December 26, 2010 and exchange wagering would commence in May of 2012.

The takeout-grab part of the bill could be accurately described as the attempted mugging of bettors in the Golden “Gouge-em” State.

The current takeout on win, place, and show wagers in California is 15.43% at the racetracks and 16.77% at the fairs. These are to stay at their current levels. However, the takeout percentage on exotic bets with two interests—such as the exacta and the daily double—would rise from 20.68% to 22.68%. The takeout percentage on bets with three or more interests—the trifecta, superfecta, pick-3, etc.—would move from 20.68% to 23.68%. Supposedly, this redistribution from bettors to purses would increase the latter by up to $70 million annually.

This optimistic estimate for purse enhancement apparently assumes that the price elasticity of demand for California exotics is inelastic, meaning that the percentage decrease in handle will be less than the percentage increase in takeout. The increment in the takeout percentage on an exacta bet is 9.7% (2%/20.68%). If exacta handle decreases by less than 9.7%, then to some degree demand is inelastic. Similarly, the increase in the takeout on trifectas is 14.5% (3%/20.68%) and handle would have to decline by less than 14.5% for demand to be inelastic.

Products and services with an inelastic demand curve have a strong competitive position:  they may be quasi-monopolies and have no close substitutes or they are perceived to be so much better than the competition that people are willing to pay more to obtain them. For example, insulin for diabetics has an inelastic demand and so do tobacco and alcohol products, which is why governments choose to tax tobacco and alcohol to build sports stadiums and arenas. Another example: People compete vigorously to pay dearly for the privilege of attending an Ivy League school because of the perception–right or wrong–that doing so is worth it (a Wall Street Journal feature article of September 13, 2010 reported findings from its extensive survey of major corporate recruiters concerning which 25 colleges and universities graduate students that these companies most prefer prefer to hire. State universities dominated the rankings with 19 of the 25 placings and Cornell was the only Ivy League school that made the list. Not one prestigious and expensive liberal arts institution was in the 25.)

The assumption that California exotics wagering has an inelastic demand is likely untrue because California exotics have close and readily available substitutes. With the exceptions of the Triple Crown events and some other premier races and race meets, the pari-mutuel product is largely fungible or interchangeable. Bettors generally don’t perceive significant differences in races offered at various racetracks. And the “whales” or the biggest bettors on horse racing are keenly aware of takeout rates and gravitate to where they can get the lowest takeout percentages and rebates on their accumulated betting dollars. In fact, many give up betting on racing altogether and opt for the more takeout-friendly sports betting and table games (the effect of cross elasticity of demand).

Unlike whales, recreational horse-racing bettors may not keep track of pari-mutuel takeout rates, but many eventually realize that they can get a better return on playing blackjack or placing a wager on an NFL game. Or they simply conclude that betting on racing is a sucker’s deal. Racetrack commissions of 23 cents or 24 cents on the betting dollar are obviously confiscatory and many recreational bettors come to recognize as much.

If demand for exotic wagers in California proves to be elastic rather than inelastic, then California purses will be lower than before the takeout percentages were increased. That could very likely turn out to be the case.

California’s betting exchange would accept wagers from California residents on races anywhere in the world. Out-of-state residents will be able to wager only on California races. Exchange wagers are typically accepted solely on win and place bets and the takeout is normally two to five percent, depending on how much a bettor wagers over a specified period of time. California is on the cutting edge with exchange wagering in the United States. Yet the takeout rate will have to be competitive in order for the exchange venture to be a success.

Copyright © 2010 Horse Racing Business

Once or twice a year, I drive about two hours from my home in Ohio to attend the races at Presque Isle Downs & Casino in Erie Pennsylvania.

Erie, Pennsylvania is an old industrial town on the south shore of Lake Erie, about 93 miles southwest of Buffalo, New York, 103 miles northeast of Cleveland, Ohio, and 38 miles due west of the venerable Chautauqua Institution in New York. It is the fourth largest city in Pennsylvania with a population of nearly 104,000. The General Electric plant in Erie is “one of the largest manufacturers of equipment for the railroad industries, including locomotives.”

Avid racing fans will immediately recognize the name of Erie’s most famous handicapper, Andrew Beyer, who grew up in “dreary Erie,” so called because of the lake effect that often causes overcast days.

Erie was once the home of Commodore Downs, a Thoroughbred racetrack that opened in 1973 and offered daily purses of just under $14,000. Commodore Downs folded but reopened as Erie Downs, which also went out of business, in 1987… and was replaced by an industrial park.

In 2004, Pennsylvania legalized slot machines at authorized facilities, including at MTR Gaming Group’s proposed Presque Isle Downs & Casino, named after a nearby beautiful recreational and wildlife area. MTR Gaming Group also owns and operates Mountaineer Casino Racetrack Resort in Chester, West Virginia and Scioto Downs in Columbus, Ohio.

Presque Isle Downs & Casino was built from the ground up and opened on February 27, 2007 with slot machines. A one-month race meet was held in September 2007.

Presque Isle Downs & Casino is directly off Interstate 90 going east toward Buffalo. The race meet currently runs Tuesday through Sunday beginning in early May and ending in late September. Races begin at 5:30 PM and end at 8:30PM. The racing surface is a Tapeta™ synthetic installed by former trainer Michael Dickinson.

Pennsylvania legalized table games in 2010 and they are now up and running at Presque Isle Downs & Casino. In addition to the racetrack, Presque Isle Downs & Casino presently “features a 140,000 square foot clubhouse with 2,000 slot machines, 48 gaming tables, and fine and casual restaurants and lounges.” The racetrack is adjacent to the clubhouse and has a wooded area as a backdrop.

In the first half of the 2010 season, the average number of horses per race was 7.5. This number will increase with the addition of additional stabling. Currently, the track has 500 stalls, but two barns will be built this year and in each of the next three years, thereby expanding the stalls to 1,000.

Presque Isle Downs & Casino substituted Tuesday racing in 2010 for the more popular Sunday cards, and nightly average attendance dropped from 828 in 2009 to 588. On-site handle averaged $32,735 and off-track handle was $374,294. The racetrack is disadvantaged in that it does not operate its own ADW and it has no OTBs. Presque Isle Downs derives 13.5% of its revenues from pari-mutuel wagering and 86.5% from other product lines, principally alternative gaming.

Average daily purses are $177,982 (through August). A bottom-level $5,000 claiming race has a purse of $13,000-$14,000–and possibly more from the Pennsylvania Breeding Fund. These payouts have been a magnet for well-known stables and trainers, especially from racing states that do not permit alternative gaming. The racetrack’s most lucrative race is the $400,000 Grade III The Presque Isle Downs Masters Stake for fillies and mares 3-years-old and up at 6 ½ furlongs. It will be run tonight (September 11). 

Presque Isle Downs & Casino serves up an inviting laid-back environment. The view here is that it is one of the better racetracks in terms of the overall customer experience  and is worthy of emulation. The paddock is easily accessible to fans, the frontline employees are friendly and helpful, the facility is kept very clean, and there is a variety of good food and drink available, ranging from concession stands to buffets to an upscale steakhouse. In addition, the track’s announcer (Ron Mullis) and on-air simulcast duo (Mullis and Katie Mikolay) are informative and personable. 

Without alternative gaming, the existing purse levels would not be remotely possible. However, a reputable study showed that between the time when racinos were legalized in Pennsylvania in 2004 through 2009, the Pennsylvania equine industry soared from $1.5 billion to $3.0 billion annually and is still growing at a rapid rate. Thoroughbred owners from as far away as California are buying farms in the Keystone State and others are taking part in the state-bred program.

Copyright © 2010 Horse Racing Business