NZ Racing’s future entirely dependent on partnering TAB NZ

As reported in The Optimist, a poorly performing TAB NZ last week announced to the three codes that distributions would be reduced for the current season, a move that places the present low levels of New Zealand thoroughbred prizemoney in jeopardy and further undermines the future of racing in New Zealand.

If you thought that the New Zealand racing fraternity’s morale had sunk to record-low levels by the middle of this past year, then think again. This announcement has plummeted the outlook to Mariana Trench depth.

TAB CEO Mike Tod responded promptly to The Optimist’s request for an explanation for the reduction and the current state of TAB’s finances.

Tod said: “TAB NZ will reduce distributions by nine percent in the 2022/23 financial year (year ended 31 July 2023).

$175 million reduces to $160 million

“Total distributions to the thoroughbred, harness and greyhound racing codes are anticipated to fall from $175m in the 2021/22 financial year to around $160m million for this financial year. The $15 million decline will put overall distributions on a similar footing to the 2020/21 financial year.

“The drop in distributions is a reflection of multiple headwinds facing the business, not least the battle TAB NZ is in with offshore operators for New Zealand-based customers.”

Thankfully, NZTR has $24 million of stakeholders’ money on deposit and the current stakes level, as low as it is, will be maintained through to the end of the season. What happens after that is anyone’s guess, but it could be ugly.

Mike Tod does not specify the ‘multiple headwinds’ but those following TAB NZ’s progress from NZRB and RITA days through to TAB NZ which commenced with a new board on August 1st 2020, could have predicted this whirlpool of decline which is another nail in the coffin of domestic racing in New Zealand.

Worldwide wagering has metamorphosed in the past five years with mergers, the opening of the USA market and hundreds of millions of dollars spent annually by a plethora of aggressive corporates attempting to gain a competitive advantage.

Wagering scale was always the problem

Here in good old conservative NZ, we have lived in a wagering bubble, seemingly oblivious to the outside world and pretending we are doing nicely while stuck in reverse gear. Whatever wagering scale our TAB lacked five years ago, the gap has further widened.

Looking from the outside in and identifying our biggest problem four and a half years ago, the Messara Review urged NZ to immediately investigate partnering the TAB and predicted we could double prizemoney by enacting a suite of 17 recommendations. Racing Minister Winston Peters agreed until the Kiwi oligarchs got in his ear and scuttled the notion.

And now, with the highest inflation for over 30 years and a dramatic rise in the cost of living affecting the expendable dollar, the TAB’s profit has shrunk and it’s now a wounded animal cowering in a corner.

CEO Mike Tod inherited the demise

To be fair to CEO Mike Tod, his tenure commenced only in March of this year and his current problems come inherited from previous administrative regimes with the most damage done before his arrival. The turnover in August and September rose through aggressive promotions but profit fell in the same months compared to 2021, and the only figure that matters is the bottom line.

October figures posted on the TAB website this past Thursday came up ugly. The month produced a profit of only $12 million (-13%) compared to the $13.8 for October 2021, despite increased turnover. October was the first full month of the ‘no deductions’ promotion which can only increase turnover, but simultaneously can only lessen the profit line. Substantial losses could occur in some races where multiple late scratchings result from a track downgrade after rain.

The first quarter result for this season shows profit decreased by $2.8 million for the same period in 2021. If you believe the economists who say things will worsen by the middle of next year, that figure could easily blow out to $15 million or more by the end of the fourth quarter.

Tod: Inadequate regulatory settings

On the question of how he intended to tackle these problems, Tod told The Optimist: “Inadequate regulatory settings are seeing increasingly intense competition from much larger unregulated offshore operators, the tightening economic conditions are putting pressure on Kiwis’ discretionary spend, and there continues to be challenges with racing abandonments and small field sizes.”

Does Mike Tod understand that small field sizes are a direct result of inadequate distributions which delivers poor stakes money resulting in reduced ownership? – it’s called a Catch-22

I asked him if he agreed that a reduction of distribution to fund prizemoney levels would speed up the shrinkage of ownership numbers, foal numbers and consequently the number of racehorses in work. And when those groups reduce we will have fewer race meetings with smaller field sizes which result in decreased TAB turnover, thus strengthening the headwinds to which he refers.

He responded: “It is a matter for the Codes to advise on how they will manage the impact of a cut to distributions and any flow-on effects.”

Tod: cost pressures in this environment of global high inflation

Tod continued: “Alongside this, TAB NZ is facing significant cost pressures in this environment of global high inflation, while also needing to deeply invest in its customer experience, brand, infrastructure and gambling harm minimisation to ensure that it can compete against these behemoth offshore operators.

“We estimate that Kiwis are losing up to $150 million annually to those unregulated offshore operators. That is money that could be staying in New Zealand for the betterment of racing, sport and communities with a simple change to the regulatory settings. This is a matter that we are actively engaged with the Government on.”

Tod’s estimate of a $150 million loss annually might be ‘a long stretch of the bow.’ It’s impossible to calculate a figure because it’s private credit card information, and the only guide we have is the figure released by Kiwibank. They said last March they processed $30 million a month to online gambling sites, of which 80 percent is off-shore.

Online betting surged during COVID lockdown

Kiwibank represents only four percent of the banking market, so the total figure might amortise out to around $72 million annually for the entire country. The bulk of this figure is expected to be online casino-type gambling which surged to these levels with the onset of the COVID-19 lockdown.

Few people will know that TAB NZ has $85 million on deposit, and intends building it to $100 million. When I asked Tod why the TAB is compelled to hold a reserve fund, he responded thus: “We need to ensure that we hold appropriate balance sheet strength to ensure the long-term viability of the business.”

He also added: “Under the Racing Industry Act 2020, TAB NZ is required to operate in a financially responsible manner and if it were to maintain distributions at the current level, it would likely breach recommendations made by PWC and Grant Thornton to maintain a strong balance sheet. The advisory firms issued the recommendations at the time the Government provided funding support when the racing industry was brought to a standstill by the initial Covid-19 lockdown.”

I take issue with Tod’s above comment because, while the Act requires the TAB to be responsible about money management, it says nothing about retaining money that rightfully belongs to the entire racing industry. The TAB grew out of the need to financially support the thoroughbred and harness racing clubs, not to collect betting profits to invest and build wealth as a corporate entity might.

Tod: We are required to operate responsibly for a sustainable future

In a letter Tod wrote to the codes last week to announce the distribution reduction, he said: “Under the Racing Industry Act 2020, TAB NZ is required to operate in a financially responsible manner to remain a sustainable business for the long term.

“In 2020, during the first Covid-19 lockdown and in light of the Government’s $72.5m Covid-19 racing support package, the Racing Industry Transition Agency took advice from both PWC and Grant Thornton to ensure that the future TAB NZ business would have independent analysis on what the business’ adequate net asset and minimum capital requirements should be, in order that TAB NZ would be able to meet this statutory obligation.”

The above statement typifies an administrative attitude of governance by people with no stake in the industry they govern. They appear to lack interest in the preservation of the horse industry and are disconnected from the problems facing racing. They have sadly prioritised preserving themselves over the industry.

The letter further stated: “If TAB NZ was to maintain distributions at $175m for FY23, the business would likely breach these balance sheet recommendations and put its ability to withstand any future shock at risk.”

PWC and Grant Thornton don’t understand racing

The problem with the PWC and Grant Thornton recommendations is they make them not giving a toss about the future of the racing industry.

The three big issues coming up for Mike Tod soon concern his support for geo-blocking New Zealand punters, rebranding TAB NZ, and partnering the business with an overseas corporate.

Tod told me six weeks ago he believes the current brand of ‘TAB NZ’ is not trendy and that the younger demographic of New Zealand punters has deserted the TAB for the likes of Bet365. In view of the distribution reduction, I asked him if it would still proceed and how much would it cost.

Tod said: “Work on the future direction of the TAB NZ brand is well advanced and a decision is expected in the first quarter of next year.”

He made no mention of the cost but independent information supplied says it would be in the range of $12 million plus.

On geo-blocking which would require a legislative change to the Gaming Act of 2003, he stated: “We are actively engaged with Government on potential changes and are expecting an update within the next two months.”

TAB partnering crucial for sustainable racing

The third and most important item for Mike Tod comes up next week when he will meet with potential partners with the prospect signing a partnership arrangement for the TAB in 2023.  The success of this negotiation should be seen as the only long-term saviour for New Zealand racing.

If they do it right it will greatly enhance their income while substantially reducing costs, provide New Zealand punters with a vastly improved service, and potentially increase stakes money to a sustainable level.

Tod’s letter to the codes last week also said:

“Four international businesses will deliver proposals in person for a partnership with TAB NZ on 12 and 13 December. Our Board will meet before Christmas to decide whether to move into formal negotiations in the New Year with one or more parties.

“I have been deeply heartened by the level of engagement from the Chief Executive Officers and their due diligence teams over the past three months, and I am expecting to see distinctly different proposals from each party.

“If a preferred partner is identified, we are currently targeting the third week of January for a meeting of Chief Executive Officers from the Codes and representatives of the preferred party/parties.”

by Brian de Lore, reprinted in full with the permission of The Optimist