CHief executive's Q&A 2015/16

Delivering the future

How do you gauge the overall progress and performance of the business over the last year?

Overall I am satisfied with what we have achieved in the last year, but there are areas, both in terms of progress and performance, where I recognise we need to do better.

We set out at the beginning of the year to do a huge amount, and put in place the building blocks to transform our business. Some of this I would view as ‘catch-up’ – upgrading servers, putting decent wi-fi into our clubs, renovating some of our clubs that were long overdue. But much of it has been about giving us a genuine platform for growth: such as putting in place a modern digital platform, putting in place a vastly improved (retail) casino management system and investing in a new generation of electronic product across Grosvenor and Mecca. Additionally, we have invested in people: improving our digital and marketing expertise and creating a new data science and analytics team. So however you look at it we have delivered a lot over the last year in terms of those building blocks of growth.

Our Mecca venues’ business has seen an impressive last 12 months and is now on an entirely different footing. After many years of decline on the back of the smoking ban and an economic recession, we are now in like-for-like revenue growth and have grown overall customer numbers for a second consecutive year. It is a testament to every single member of  the Mecca team that not only have they achieved this, but their ambition for the future remains unbounded. Likewise our Grosvenor digital business has continued its stellar trajectory of the last few years with 37% revenue growth year on year, and shows few signs of slowing down.

Our Grosvenor venues’ business had three solid quarters, but had a disappointing Q4. Much of this was a result of gaming margin – with some of our higher staking customers winning – but we also felt a consumer softness that much of the leisure and hospitality sectors also witnessed. (Mecca also had lower relative admissions in Q4 than the other three quarters). Identifying the underlying causes of a seeming lack of consumer confidence, or time and money spent elsewhere, is difficult to pin down, but the good news is that admissions and staking levels seem to have returned  to normal levels for the start of this financial year.

Mecca digital had a frustrating year, with early growth which increasingly flat-lined as we prepared for platform migration and was then impacted by platform stability issues once we moved to our new Bede Gaming platform. On top of this we implemented a number of social responsibility measures and tools. Whilst we are wholly supportive of these measures, they impacted our Mecca digital revenues. Even though we are disappointed by the performance of Mecca digital, there is a lot that we  are doing and will do this year – from product to people to marketing – which we are confident will have a significant positive impact on the business.

What has been the experience of the new digital platform?

We migrated both Mecca’s and Grosvenor’s digital businesses onto the Bede Gaming platform at the very end of February. This platform migration was achieved within our timetable and budget.

Our previous platform, which was a legacy from the days when we owned Blue Square, had not received sufficient investment and had fallen substantially behind the market norm in terms of functionality, particularly with respect to bonusing and player management capabilities. We determined that it  did not make sense trying to retro-fit  a platform that had been built with sports in mind and at a time before  the explosion of mobile gambling. We therefore conducted a thorough review  of what new platform alternatives were available. At the heart of our decision making was the desire to be able to leverage our retail assets, which meant having clear control over our own platform development roadmap, and a desire to have a proposition that did not look and feel like many of our other competitors who had opted to work with the same supplier. In choosing to work with Bede Gaming, we felt we could achieve both these objectives and underlined what we felt could be a  clear competitive advantage by making  a small investment in Bede Gaming via a convertible loan.

Since launch, the Grosvenor digital business has benefited substantially  from the Bede Gaming platform and has continued to grow rapidly. We have also been able to add a new poker product and a sports betting product very rapidly and smoothly as a result of our new platform. Mecca has had significant stability issues, affecting both short-term revenue performance and our ability  to add new functionality.

This has been a source of great frustration and Bede Gaming faced financial penalties as a result. Bede Gaming has focused on resolving these issues to our satisfaction, but the net result is that we are behind schedule with our plans for Mecca digital and will have to work all the harder this year. There is a huge amount that we will deliver in the course of this year in terms of new games content and functionality and we have every confidence that we will see our digital business continue to grow.

How has the introduction of social responsibility tools impacted your business?

The first thing to say is that we are wholly supportive of the introduction  of social responsibility tools and are committed to being a responsible gambling operator. In March of this year, all digital operators licensed in the UK were required to introduce a number of customer tools on their digital services  to help counter excessive or problem gambling. These included: automatic self-exclusion from a website; ‘time-out’ functionality whereby a customer can elect to take a forced break from a gambling service; and ‘reality checks’, whereby a customer can receive an automated reminder of how long they have been gambling. At the end of 2015, prior to the introduction of these tools, we had undertaken a review of our higher spending customers across all brands and channels to ensure that we were comfortable as to their sources of funds. At the heart of this review, which involved putting in place a set of new processes, was a desire to continue to tackle money laundering, prevent the  use of the proceeds of crime and reduce problem gambling.

The combination of these two factors had an impact on the industry and specifically on the performance of our business. Whilst it is extremely difficult to quantify this impact, we believe that a failure to tackle problem gambling as an operator is not only morally wrong, but is also not a sustainable business strategy. In addition to our existing resources, we have recently hired a head of responsible gambling and have implemented a board responsible gambling committee (chaired by Lord Kilmorey), alongside our existing compliance and responsible gambling committee that I chair on a monthly basis. With three million customers coming through our doors and using  our digital services every year, we can’t guarantee we won’t make mistakes and people with gambling problems may access our services, but it won’t be through a lack of trying or a lack of commitment.

How has and how will  Brexit affect your business?

Other than preoccupying the nation and potentially directly or indirectly keeping customers out of our casinos and bingo clubs in May and June, so far Brexit has had little impact on our business. Beyond any longer term broader economic consequence, we see little negative impact of Brexit. We are predominantly  a UK business in terms of revenues (94%) and costs. We may benefit from foreign exchange rates with respect to our Enracha business in Spain and our two casinos in Belgium. Also, if London benefits from attracting more foreign visitors as a result of a weaker pound, then our London casinos may well see some benefit. However, overall there seems to be little direct impact.

What are the areas of focus for the year ahead?

Our focus is predominantly on improving performance and, in particular, ensuring that we see growth  in our Mecca digital business and putting the weak Q4 in Grosvenor behind us.

We are continuing to build our business through investment in tools, products and venues. Many of these initiatives will become a reality in this financial year.  On the venues side, we will complete significant refurbishments of our Leeds and Nottingham casinos and will launch our new format bingo club. In terms of tools, we will put in place a new data platform with a range of analytical tools; and product-wise, we’ll launch our single account and wallet which will allow customers to move seamlessly from one channel to another. There’s much more that we are doing that you can read about elsewhere in this report, but at its heart is a focus on driving growth and improving the customer experience with an emphasis on using technology to our advantage where we can. We are excited and optimistic about the year ahead, although we will undoubtedly be busy.

Henry Birch, Chief Executive

22 August 2016