Overall, we are satisfied with where we ended up for the year, with some obvious caveats and considerations. We suffered a dip in retail visits and performance last summer and struggled to recover, leading to a weaker first half of the year than we would have expected. But an improvement in performance in the second half of the year together with some cost reductions led to a much stronger second half, contributing £46.9m of operating profit1 compared to £36.6m in the first half.
Grosvenor applied a much more stringent application of customer diligence with respect to evidencing source of funds, which, together with lower gaming margins on our VIP activity, led to lower than anticipated revenues. Grosvenor also implemented what it termed ‘Project One’, changing and harmonising pay and benefits across the casino estate. This was a considerable upheaval which met with some employee opposition and undoubtedly had an impact on morale and performance. The business should now be in a much stronger and positive position with the project fully implemented.
Mecca suffered from declines in visits, but managed to outperform its main competitors and continued to maintain good cost control. More importantly, we have trialled a number of bingo variants – for example, Big Bingo Bash, Bonkers Bingo – which are showing promise, and, with the recently launched Luda, there is plenty to drive growth.
Our digital business had a strong year with profits up significantly. With 15% revenue2 growth we are outstripping UK market growth for digital gaming, with Grosvenor continuing its stellar trajectory and Mecca showing good progress in the lower growth digital bingo sector. We changed our digital operating structure, making way for a multi-brand approach, and made a number of new hires into key positions, such that we feel that we now have a very strong team. We also continued to develop our Sheffield Customer Solutions Hub, which has gone from strength and gives us real competitive capability.
In Spain, where the economy continues to recover, our Enracha business had a very positive year with revenues and profits1 up 23% and 72% respectively. Although just nine bingo clubs, with a digital service fully launching in 2017/18 and with possibilities on the retail side, we are excited about Enracha’s continuing growth potential.
We also continued to look at how we could best run the centre of our organisation, closing our central London office and moving to a larger and more modern Maidenhead headquarters. The resulting workspace has led to a much more unified organisation and a positive environment.
1 Before exceptional items.
2 Before customer incentives.
Beyond achieving performance targets and all our brands showing solid growth, we are focused on five specific areas which will help drive growth and long-term value. In the course of 2017/18, we will launch a single account and wallet product across our Grosvenor channels. It will see the delivery of a complex solution combining different systems and technologies from a range of partners and suppliers. The result will be a joined-up retail and digital business with customers being able to move seamlessly between the two, which should drive activity and volumes in both. We will also be launching a number of new digital brands this year, which should also help digital growth. Although Mecca and Grosvenor are strong, established brands, they appeal to a certain customer segment and having additional brands will give us an improved ability to ‘cross-sell’ customers into new brands and reactivate dormant customers.
Grosvenor’s nine London casinos generate approximately half of its profit. Whilst successful clubs in their own rights, they have historically been run fairly independently and have not utilised their combined benefit to full effect. Implementing a clear Grosvenor London strategy is therefore a priority for the year. We have just opened our first new Luda site, bringing bingo-led entertainment to the high street, in August 2017. Opening further Ludas and making the concept a success will also be an area of focus for the year. Finally, with rising operating costs, including increases in the National Living Wage and higher inflation, we are focused on keeping central and above-club costs disciplined whilst improving our support capability.
The whole gambling sector is waiting for the Department of Media, Culture and Sport (DCMS) to publish the recommendations of their review of stakes and prizes on gaming machines, social responsibility measures and gambling advertising: what has been termed the ‘Triennial Review’. The DCMS has delayed publication a couple of times, latterly because of the general election, and the Review is now expected in October or November of this year. There is media speculation that stakes on B2 machines or ‘fixed odds betting terminals’ in betting shops will be reduced, but curbs being placed on TV advertising are also a possibility. Neither of these issues would have a big impact on our business: we do not have B2 machines in any of our premises and we are not a significant TV advertiser.
As part of the consultation process, we, together with the rest of the casino industry, argued for a harmonisation of 1968 Act and 2005 Act casino licences, which would mean that 1968 licences (the vast majority of our licences) would be entitled to a higher number of slot machines based on a higher gaming machine-to-table ratio. Only 3% of the UK’s slot machines are currently located in casinos and we estimate that harmonisation of licences would only move this to 4%. We believe a harmonisation of licences would open the way for increased investment and further non-gaming amenity to be contained within casinos, more akin to the US or continental casino model.
From August 2017, remote gaming duty at 15% will be due on any bonuses or freebets given to digital customers. Based on last year’s numbers this would have translated to £3.3m additional gaming tax. There is always scope for the government to increase gambling taxes but, given this recent move, we would be surprised if there were any further changes imminent on the digital side.
Land-based bingo is taxed at 10% (reduced from 20% in 2014), casino table games are subject to a 15-50% tax scale based on volumes, and most slot machines are subject to 20% machine gaming duty. Changes to tax are impossible to predict but we do not anticipate that these rates will change in the short term.
Beyond regulation, we believe that the gambling industry has suffered a deterioration in trust in the eyes of customers, politicians and the media in the last few years. This has been reflected in the increased negative media coverage of the gambling sector. Whilst much of this criticism is justified and we support continued scrutiny of our industry, we believe that much is being done in and around the industry to promote responsible gambling and to minimise gambling-related harm that often gets overlooked. As this develops we believe the industry will regain some of that lost trust and be viewed in a more positive light.
In general retail terms, there has been an undoubted shift from much of the high street to the digital world with some high-profile casualties along the way. However, where that shift has been most marked is where customer interaction is predominantly transactional: where the convenience and choice offered by a digital transaction trump anything on offer on the high street. But when there is an experiential element to a good or service, the digital world often provides a less compelling proxy. In our bingo venues and casinos, we offer both transactions and experiences and have the added advantage that when it comes to gaming, many customers still want to play with or draw their winnings in cash. So, we have no doubt that both casinos and bingo venues will prosper long into the future but, to maximise their ongoing potential, they will need to focus more on the experiential side of things and continue to adapt and change their offer. We feel we are well positioned on both fronts.
With the exception of our Enracha business (4% and 7% of Group revenues and profits respectively), the majority of our revenues and costs are in pounds sterling and we have no direct benefit from a single European market. A significant number of our employees are non-British EU nationals, so their continued right to residency in the UK is important to us – something to which the UK government has now committed. Our digital operations are based out of, but not licensed in, Gibraltar (we hold both UK and Alderney digital licences), meaning that any change to Gibraltar’s access to the EU market would not impact us. Were the border between Gibraltar and Spain to close we would need to enact contingency measures, similar to other gaming companies, as many of our employees currently live in Spain rather than Gibraltar. However, we see no imminent threat of this happening and have appropriate plans in place.
We launched our STARS values in July 2016, representing Service, Teamwork, Ambition, Responsibility and Solutions. This is the first time that Rank has had a single set of values across its businesses and reflects the fact that our businesses are increasingly bound together by the same set of opportunities and challenges.
Since their launch we have tried to embed our values into our business processes and daily working lives. An example of this has been threading our values through the lifecycle of an employee: assessing potential candidates based on evidence of displaying our values; adapting our employee appraisal process, such that our people are assessed on their adherence to our values as well as their individual objectives; and incorporating a values assessment as part of exit interviews. But beyond this example, there are many different areas, both in our venues and at the centre, where our values now play an important part in our company.
We believe our values are key both to business success and to shaping an organisation that has the right culture and ethos for dealing with many of the complexities of gambling, including the sometimes negative impact it can have on customers. As such, we will continue to evolve how our values are used and embodied in our business and to try to track and measure our progress.
Henry Birch, Chief Executive