Archives for December 2015

EMPIRICAL EVIDENCE FOR SLASHING TAKEOUT RATES

The conviction here is that the two strongest catalysts for a turnaround in stagnant pari-mutuel handle in North America are dramatically reduced takeout rates and fuller fields.  Particularly frustrating for those of us who want to see horse racing succeed as a sport and commercial enterprise is the unwillingness of upper-echelon racetrack executives to experiment with much lower takeout rates.

Actual statistics from Balmoral Park, a harness track near Chicago, Illinois, strongly indicate that reduced takeout can have a very salutary effect on handle.  Following are longitudinal data pertaining to Balmoral’s Pick 4 after the takeout rate was slashed from 25% in 2009 to 15% in 2010–an enormous 40% decrease.

Takeout Rate        Average Monthly Handle ($)

2009           25%                        8,827
2010           15%                      14,211
2011           15%                      23,675
2012           15%                      31,655
2013           15%                      32,254
2014           15%                      30,895
2015           15%                      33,176

Once Balmoral Park cut the takeout rate, handle grew year-over-year except in 2014.  The average price elasticity of demand over the seven-year period is 2.32, meaning that for every one percent reduction in the takeout rate, betting handle increased by a remarkable 2.32 percent.

While one cannot extrapolate to the entire North American horse racing pari-mutuel enterprise based on a single bet at a single racetrack, one can conclude that the response of handle to reduced takeout at Balmoral is positive and encouraging.  What needs to be done with alacrity is for racetracks in other venues to engage in similar experiments, not by whittling takeout rates by almost imperceptible percentages, but rather, by attention-getting percentages that boost returns to winning bettors.

The future of horse racing depends on such bold action.  Unfortunately, top managers at racetracks, for the most part, seem to cling to old ways of doing things, timid and virtually immobilized by the rapidly changing competitive landscape around them.

Copyright © 2015 Horse Racing Business

NORTH AMERICAN HORSE RACING, CIRCA 2025 (PART II)

Absent a positive catalyst that reverses the secular downward trend in pari-mutuel handle, the North American horse racing industry is on the path to painful downsizing.  The assumption here is that racino states will gradually withdraw casino gaming subsidies allocated to purses and the timetable for the downsizing depends on how rapidly this occurs.

This future is not set in stone and the grim outcome might be interdicted if the racetracks would experiment with strategic initiatives.  However, to date, racetrack executives have shown no such ability or a willingness to try.  (More on this in Part III.)

Following are overviews of two scenarios pertaining to what a greatly rationalized horse racing industry could look like.

Scenario 1.  Horse racing has largely become a weekend event in the United States and Canada, with races held on Fridays, Saturdays, and Sundays and on the holidays in the summer.  A number of small racetracks hang on but there are about a dozen racetracks left that account for the bulk of the pari-mutuel wagering.

Many of the former racinos have abandoned horse racing altogether, with the encouragement of state governments.  Even racing at Gulfstream Park was closed down, as Frank Stronach’s heirs were not interested in horse racing.

Saratoga, Del Mar, and Keeneland still hold short meets and Churchill Downs persists with the Kentucky Derby tradition.  The Preakness and Belmont are held at Laurel Park and Belmont (the old Belmont infrastructure was demolished and replaced with a 10,000-seat facility.)  Aqueduct is defunct, Santa Anita’s fate is uncertain, and cold-weather racing is mostly a thing of the past.

The bloodstock industry is a shadow of its former self, with most of the farms in Lexington and Ocala sold off for commercial and residential development.  The horse auctions at Keeneland and Saratoga are in business, but on nothing like the scale of 10 years ago.

Though aggregate pari-mutuel handle is much lower than it was at the beginning of the 21st century, handle and purses have been growing some, using a per-race metric, because there are far fewer races to bet on.

The advance deposit wagering companies have been pared to only a few, which survive by offering a combination of North American and foreign-based races.

Scenario 2.  North American horse racing has become very similar to steeplechase racing.  Thoroughbred breeding and racing is now primarily a hobby for affluent owners, who compete mainly for sport rather than for money.  One and two-day pari-mutuel meets are held on farms and facilities specially built to accommodate them, such as Percy Warner Park in Nashville, Tennessee and the Montpelier estate near Orange, Virginia.

Copyright ©2015 Horse Racing Business

Next:  Part III.

NORTH AMERICAN HORSE RACING, CIRCA 2025 (PART 1)

Forecasting the future predicated on what occurred in the past is often not very accurate because there can be many unseen catalysts that cause change to take place in a nonlinear manner.  However, it can be useful, from a decision-making standpoint, to project or extrapolate the status quo into the future to determine how satisfactory it would be for an industry or company if the current state of affairs prevails.

Accordingly, by applying simple regression analysis to key statistics (the known knowns) pertaining to Thoroughbred horse racing, I found that without some catalysts for change for the better, the North American horse-racing industry might look as follows in the year 2025:

North American pari-mutuel handle in 2025 U. S. dollars, assuming an annual 2% inflation rate, would equal $7 billion. This represents a decline of 47% in nominal dollars (i.e., unadjusted for inflation) since the start of the 21st century and a decrease of 86% in real dollars (i.e., inflation-adjusted) over the 25-year period 2000-2025.

If present conditions and trends continue unabated, the foal crop in 2025 would be about 9,900 and racetracks would hold 3,582 races.

Extrapolating purses into the future is meaningless because one cannot assume ceteris paribus, or that other conditions will remain the same.  The current arrangement in most states in which casino revenues subsidize purses is unlikely to survive the next decade.  If this proves to be the case, then the forgoing foal crop estimates are probably too high.  Subsidies are already under attack in such states as Florida, Pennsylvania, and West Virginia.

In the next couple of posts on Horse Racing Business, I continue to construct plausible scenarios for what the North American horse racing industry might look like in 2025, assuming that upper-echelon racetrack executives continue to refuse to address the problem of deteriorating pari-mutuel handle through substantial takeout reductions on bets.

Copyright © 2015 Horse Racing Business