GB remote – has UK online growth evaporated?

dreamstime_xs_44132229

GB remote – has UK online growth evaporated?

The UK online gambling market has been the powerhouse of the European remote sector. Not only is it by far the largest market, approaching £5bn in revenue, it has also been growing at a recent CAGR of approaching 20% (RP estimates). If growth stalls in this market, it brings down the hopes, forecasts and possibly even the business structures of a large swathe of European operators. Understanding the size and growth dynamics of the market is therefore crucial, and one or two recent signs may be ringing alarm bells for executives, investors and other stakeholders. 

The negative case 
2017 was always going to be a relatively difficult year for growth, with no major summer football tournament – especially impacting Q2-3. However, the Gambling Commission’s Industry Stats suggested a major mid-2016 stall, with annualised revenue growth to September of only 10%, even with the Euros (betting +20%; gaming +4%). Further, elements of Q1 2017 trading also gave cause for alarm: Paddy Power Betfair only managed to grow gaming by 2%, Jackpot Joy didn’t appear to grow its UK JPJ brand revenue at all (growth concentrated in Spain). In H1, William Hill’s Q1 betting gains have been reversed (performance flat YoY), suggesting Q2 betting revenue down c. 20%, while Ladbrokes Coral’s Q2 UK betting revenue appears to be down c. 9%. Even former emerging growth champion Gaming Realms also appears to have hit a significant reversal in fortunes (H117 +5% YoY, 18% down HoH).It is also possible to make a top-down case for a growth stall: online gambling is now so big, further double digit growth is starting to ask consumers to fundamentally change their gambling spend as a proportion of HDI (whereas before much growth could be explained by channel shift) and add increasingly sizeably absolute sums (eg, 10% growth from here = c. £500m additional spend: half the landbased casino sector). Perhaps it is unsurprising therefore that some commentators are calling UK online double digit growth “a thing of the past” and William Hill can claim to investors that c. 4% UK online revenue growth represents clear market share gains. If these signs, or more accurately these interpretations of the signs, are true, then we probably all need to panic.

The positive case
The above picture is very selective and almost certainly misleading, in our view. First, Gambling Commission stats for remote remain relatively new and are prone to significant restating; they are an invaluable and improving guide, but need to be treated with care and considerable additional analysis. Second, Q1 saw reported UK-listed betting revenues up c. 24% on a weighted average basis, including the drag of PPB’s exchange (+3%); while this was partly helped by a c. 15% margin boost driven by positive results (largely Cheltenham), underlying demand strength is clear. Even reported gaming growth averaged 6%, including known UK underperformers such as JPJ (albeit recently), Stars Group (perennially) and GVC. So far, we only have a clear Q2 picture from LCL and WH, and while this looks patchy, weak margins and Euro comps also point to underlying growth: though WH ended the half flat in betting terms, we estimate LCL grew UK betting revenue by c. 5%. Reported gaming growth has also been relatively robust, with implied Q2 acceleration from LCL (to c. 14%, including with the drag of Gala) and WH (to c. 10%); GVC has also showed accelerating trends in gaming brands (to +15%), though with UK likely to be underperforming this.

Perhaps the most telling case for stronger underlying growth, however, is that two of the largest and most successful online gambling businesses – bet365 and Sky Betting and Gaming – both bigger than William Hill and LCL in betting terms (bet365 approaching bigger than the two combined), have provided no public visibility on H1 trading as they are private companies. The likelihood of WH or even LCL outperforming these operators is as good as nil, in our view, and they collectively represent c. 35% of the GB online betting market.

Putting this data together, we believe the overall UK gambling market grew by c. 15% YoY in Q1, with margin weakness and lack of a major summer football tournament holding back betting in Q2 to give an average overall growth rate of c. 5%. Overall H1 UK market growth therefore has a YoY run-rate of c. 11%: not the 20% clip of the recent past, but not bad at all for an ‘off year’ and still (albeit just) double digit.

We will provide a more thorough update of this trend once the H1 reporting season is complete, but the signs, we believe, are already clear.

Don’t panic – yet…
We hope we have clearly demonstrated that suggestions of significantly slowing growth, or that 4% growth can suggest anything but material UK market share losses, show a misunderstanding of the underlying market data. However, three themes are emerging. First, growth is becoming increasingly polarised, with once ‘good’ operators struggling and strong growth being concentrated into a small group of big (private) operators, and a number of UK market entrants (eg, Scandinavian gaming brands); we believe this is partly a symptom of a market changing to much more mass-market driven spend dynamics, for which few operator / supplier business models are equipped (average customer LTVs declining, average CPA staying the same or going up), while competition for increasingly discerning heavy users goes up in volume terms and becomes more patchy from a quality perspective (putting a premium on strong operations management, UX, value and differentiation). Second, while not stalling, growth does appear to be slowing from recent very strong rates, likely due to the normalisation of mobile adoption and also as the sector is affected by broader UK consumer softness. Third, the UK online market is now big enough for growth (or otherwise) to be really noticed: this is likely not only to increase cyclicality (as a consequence of being more mass-market) but also further increase regulatory-fiscal scrutiny and risk. Operators therefore need to plan for a more mass market and a more socially responsible future, or they will likely see their own growth and that of the sector stall spectacularly.