Horse Racing's Dangerous Margin Game

The margin for a product or service is a funny thing. It's a fine line between profit and loss, growth and stagnation, or success and failure. It's the building block, the foundation, for any real business, and it's something that's fought through each day.

In horse racing it tends to be none of those things, though. It tends to be a number that those in charge use not as a sextant or rudder guided by markets that tells you which way you're headed, but something they want to steer. 

Last weekend, Woodbine increased the takeout on Breeders' Cup wagers in Canada; some pools as high as a whopping 27%, which in real terms is 42% higher than what all other ADW's charged their customers. This was a function of the dangerous margin game.

Deals written between tracks and horsemen groups can take many flavors, but in Canada, for some time now, they've been written differently. Instead of giving 50/50 on simulcast wagering revenue, 4% for tris and 2% for exacta wagering went directly to purses. This is a monumental difference, because the funding came from not revenue, but margin.

Hypothetically, if a signal fee is 12% and a host track has, say, a 15% takeout on exactas, along with, say, a 1% tax to the government, there is no money left over for the receiving track to take the bet. They make nothing. It's a system built to fail.

This was needed to be changed recently in Ontario, because of the discontinuation of the slots at racetracks program. Good, right? They could expunge that strange system and replace it with a better one.

Nope. They ostensibly kept the same system. Now, 3% of margin from all wagers go to the "Horse Improvement Fund".

That my friends is how you get to a track charging 27% takeout for an event where everyone else gets 19%. It's also why takeout can really never be lowered. With margin the weapon of choice for racetracks and horsemen, it's a squeeze game, not a profit game.

And that's not good for horse racing wagering, well, if you want to see it increase, that is. As Vinod Kosla, one of the founders of Sun Microsystems once said, "Business is a strategy tradeoff; the lower the margin you take, the faster you grow." It works both ways.

Horse racing's dangerous margin game is so entrenched in the system that it cannot break free to grow. The effects are virtually endless.

Dunkin Donuts recently -  like other coffee shops - has started selling K Cups. They're cheaper for customers than buying a coffee in a store, so why would they do it? Well, they make profit on each K Cup sold and by increasing distribution points it means more profit, they get brand loyalty and they grow their in-store business, they allow a customer to have a Dunkin's at 7PM after dinner, without driving to a store, instead of having a Nescafe instant. If they used margin as their decision maker, like horse racing does, this never happens. The margin is too low for the slice or alphabet du jour.

Higher margin at the source, begets lower margin at the distribution point, which means fewer distribution points, which means higher prices and less choice for customers. For the horse racing industry, that means lower betting volume.

Horse racing needs to focus on maximizing profit, not their specific slices' margin. As Woodbine proved last week, this much-needed shift in strategy is no closer to being accomplished than it was a hundred years ago.

Have a nice Monday folks.