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February 25, 2014 5:40 pm
Richard Glynn is pleading for time, but for the Ladbrokes chief executive there is precious little of it left.
“Wait,” he said, as the bookmaker posted a grim-looking set of numbers for 2013. “Wait until we get through the World Cup and wait until the second half of the year when we’ll hopefully show you some growth coming through.”
It is a lot to ask of the bookmaker’s investors who for four years have waited patiently for Mr Glynn to find a solution to Ladbrokes’ biggest weakness – digital.
Ladbrokes, overly reliant on retail shops for profit, has singularly failed to keep up with the rapid shift of the industry towards online gambling.
The group made about 85 per cent of its total 2013 earnings before interest and tax from its 2,300 UK betting shops, which are home to its money-spinning betting terminals.
European shops provided a further 10 per cent, leaving only 5 per cent of earnings coming from online.
Compare that to William Hill, which is expected to report a 2013 earnings split between retail and online of around 55 per cent and 45 per cent.
Ladbrokes has not ignored the problem. It has simply not solved it. Potential solutions, such as deals to buy online gambling operators 888 and Sportingbet, came and went.
Regulatory pressure also poses a threat to Ladbrokes business. Its share price has fallen 16 per cent since early January when prime minister David Cameron raised the prospect of action to curb the use of lucrative – and some say highly addictive – digital betting terminals
How those investors must now regret those missed opportunities, as they contemplate a 38.9 per cent fall in 2013 group operating profit and a 66 per cent slump in pre-tax profits.
Those missed targets would have shored up Ladbrokes’ online shortcomings. Shares in 888 have more than quadrupled since Ladbrokes abandoned takeover talks three years ago.
Sportingbet was snapped up by William Hill, enabling Ladbrokes’ rival to increase its market share of the online sports and casino market.
All that is what might have been. The size of the catch-up task facing Ladbrokes is considerable. Its share of that online market is a mere 7.7 per cent, behind not just William Hill, but Bet365, Betfair and Paddy Power.
“It’s not good enough,” said Mr Glynn.
The solution he eventually chose was to ape William Hill and sign a partnership deal with software provider Playtech.
The deal could not close until its rival’s alliance with Playtech was terminated, but Mr Glynn heralded it as an opportunity to “accelerate” the bookmaker’s progress over the next five years and more.
That was nearly a year ago. Since then, the partnership has created a digital marketing team based in Israel and a suite of 200 casino games on a new “Vegas” gaming tab.
But it has been hobbled by Ladbrokes’ painfully slow exit from its existing online contract with Microgaming. It will not finally say goodbye to Microgaming until the end of next month.
“I made a mistake,” said Mr Glynn. “I assumed we would be able to do a commercial deal to accelerate getting out of the Microgaming contract and moving to Playtech. That’s held us back.”
The delay has cost Ladbrokes about six months in delays and £18m in dual running of the Playtech and Microgaming contracts and the write-off of its mobile platform.
Will the pain be worth it? “We’ve got a flywheel, it’s started to spin,” said Mr Glynn, pointing to early signs of progress with mobile and its Live Dealer casino games.
The group is making much of its brand strength, and Mr Glynn said October should be the first sign of “some form of growth” online.
That depends on the transition of the remaining gaming products to Playtech, and with it a single back office system plus a single betting wallet for customers. But not everyone shares Ladbrokes’ confidence that it can complete the transition by the start of the World Cup.
James Hollins, Investec analyst, said “the company will struggle to complete full platform migration ahead of the World Cup.”
Even if the transition is completed on time, Ladbrokes must sell its new online operations into a highly competitive marketplace. Ladbrokes’ marketing spending has been consistently overtaken by its rivals, but Mr Glynn is undaunted by being outgunned.
“The combination of the brand and giving our customers product for the first time which is really truly competitive means that for the amount of money we are spending we should get a better return,” said Mr Glynn.
Pressure from Westminster
As if Ladbrokes’ online problems were not bad enough, the group must contend with gathering squalls around the mother ship of the business, the retail shops and their lucrative digital betting terminals.
Operating profits in 2013 at the 2,300 UK shops were down 25.9 per cent, in part because of a new machine games duty introduced last year.
But after years of growth in the machines’ income, performance of the terminals has begun to slow, as competition has intensified.
“The rate of growth of machines has slowed quite dramatically,” said chief executive Richard Glynn.
That is a difficult pill for investors to swallow at a time when the government and opposition are both talking up concerns about machine-related problem gambling and the need to consider tighter regulations.
That debate has fuelled volatility in the share price of Ladbrokes, William Hill and other operators. Ladbrokes’ shares have fallen 16 per cent since early January when prime minister David Cameron, pictured, raised the prospect of action to curb machine use.
“As things stand, the returns are not as compelling as they were,” said analyst David Jennings of Davy Research.
Ladbrokes has announced that it will close a net 40-50 shops in 2014, eliminating non-performing shops. That could be a signal to politicians looking at problem gambling that any decision on tighter regulations could also have consequences for jobs.
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