ADW's and their Racetrack Suppliers, Just Another Business Lesson

I was perusing the Financial Post today and there was a story about the supermarket-supplier relationship. 

Summarizing, as supermarkets get bigger and bigger (the top three have a 75% market share), they do things that are pretty uncompetitive to their suppliers, like added fees, extra taxes and hidden squeezes to fund their ecommerce pursuits. 

This allows them to have pricing power (and to get bigger market share), taking away from mom and pops, and the farmers and suppliers (ever notice the big dogs don't particularly gripe a lot about minimum wage hikes; it's for this reason).  The Post calls this industry, at this point, "dysfunctional". 

What this has accomplished, however, has provided the consumer with a ton of choice. We can buy more goods of different types, with more choice, more than ever before. We can buy online, get things delivered, or shop 24/7. 

Over in ADW land, it's kind of the opposite. There the suppliers (the tracks) are the ones squeezing the distributors (the ADW).  Host fees, increases in margin are all on the table of late. People on both sides have called each other "dysfunctional". 

Like the supermarket supply problem, though, it provides us with a pretty decent business lesson, and we don't need our MBA to understand it. 

If racing cut their supply fee (host fee) to 1%, we'd see a massive influx of distributor investment and activity, just like we've seen in the supermarket sector. At 1%, Draft Kings would likely expand an offering and open an ADW; small ADW's would spring up rapidly; prices would be cut spurring serious handle growth. R&D investment in the end user would be huge, with new technology innovating. Perhaps at 1%, OTB's would dot the landscape again (especially if they're seen as a possible vehicle for sports betting). 

But at 1%, like those folks supplying veggies and cheese and chickens, it's tough to see an uptick in volume that would warrant such a price. 

Similarly, with some host fees massively increased, the opposite occurs. Marketing budgets are cut for the end user, price breaks etc are lowered, and demand falls. There are fewer supermarkets offering great products, at good prices, open 24 hours a day or online. 

In racing we seem to want our cake and eat it too. We want all these distributors pushing the sport; pushing it to make it mainstream and grow handle; to have a betting vehicle on every street corner or in all areas of the web. At the same time they want the tracks to be able to charge 75% for their host fees because they "put on the show". This simply can't be done. It's an intellectual and business fallacy. 

Like with supermarkets there is a sweet spot where everything works best in this sport. Suppliers are paid and working at optimal efficiency, with a demand side pushing the racing product to new markets with new tech. But with no one minding the store, dysfunction is likely here to stay. 

Have a nice weekend everyone.