AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION
LOTTERY RETAILERS ASSOCIATION
REMUNERATION REVIEW SUBMISSION PUBLIC LOTTERY LICENCE COMMISSION REVIEW MECHANISM
ADVANCING OUR INDUSTRY IN PARTNERSHIP 2017
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SUMMARY
CHANGING LANDSCAPE: Newsagents and Lottery Retailers have been an integral and essential part of the Lott’s ‘select’ retail distribution approach for many decades. While this model has worked well, external threats to the legitimate lottery business model have now become real, and the expansion of sales into convenience retail environments, along with the growing mass online distribution of domestic lottery products, require a more strategic vision and partnership approach now to sustainably remunerating and recognising traditional lottery retailer’s investment and role in the overall business.
A genuine omni-channel partnership approach is required and this must be one that recognises, rewards and sustainably supports your retail partners role as both important retail distributors, but also that recognises your partners role in capitalising the high value lottery brand on every high street and in every shopping centre. Presently there has been a growing cultural wedge of unresolved issues between franchisor and franchisee which has hindered this important vision being achieved.
ADVANCING OUR INDUSTRY IN PARTNERSHIP
The Australian Lottery and Newsagents Association (ALNA) and the Lottery Retailers Association (LRA) (‘the associations’) aim in this submission is to provide an elevated pathway forward, bringing together franchisor and franchisee in partnership to achieve win-win outcomes; including growth, shared profitability, greater customer engagement, strengthened loyalty, market resilience and further innovation. To achieve this, the unresolved cultural issues between franchisor and franchisee must be fixed to jointly advance and achieve our individual and common business objectives successfully.
As such, there has never been a more important time for us to rectify current differences impairing our relationship and move forward together with a stronger unified culture aimed at achieving success, which aligns with other aspects of our relationship that are already strong. Such as our success in growing sales over recent years and our strong support of the official lotteries model.
To this end the associations want to propose a range of positive and constructive resolutions to issues that can unite our enterprises. This is in order that we achieve a more sustainable growth and partnership model for our industry that allows us to be more agile and united.
Historically, the associations have infrequently made important and very justified submissions to the Lott for an increase in commissions for retailers across the various jurisdictions. These were not coordinated, nor did they have a national view, and would often have a fairly narrow focus, primarily for a commission increase. These were akin to making a collective claim for a pay increase.
The time has come to revamp this outdated process and approach, and reframe these discussions to address a broader range of important issues including the retailer’s net revenue needs, the overall remuneration structure taking into consideration identified cultural and unresolved issues,
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 3 commissions, capital expenditure, fees and charges, etc., and to lay a platform for regular reviews and to constructively work toward achieving fair and sustainable net revenues for retailers and enduring mutually beneficial outcomes.
ALNA and its affiliated association (LRA) were already preparing a national submission for the Lott’s consideration addressing remuneration and partnership. The Victorian Lottery Licence has delivered a framework and timeline for a series of commission reviews by including a Commission Review Mechanism (CRM) in the Licence. As a result, the associations have taken this opportunity to combine the two into a national submission and reframed it as a wide-ranging remuneration and partnership review, with a focus on ‘advancing our industry in partnership’ and providing an elevated pathway and range of concepts for discussion and agreement for implementation nationally.
The associations are acutely aware that not all jurisdictions will be able to immediately align with national remuneration changes and concepts proposed and finally agreed following the consultation phase, which have been based primarily on arrangements in Victoria, however, we are committed to working with the Lott in developing an implementation plan to bring all jurisdictions into alignment over time.
Summary of subjects explored in this submission:
• REQUIRED REVENUE OUTCOME
• LOTTERY SALES - COMPETITION AND MARKET CHARACTERISTICS
• COMMISSIONS HISTORY
• LOTTERY RETAILERS COSTS
• RETAIL IMAGE
• PRODUCT DEVELOPMENT STRATEGY ALIGNED TO PRICE INCREASES
• FUTURE FRANCHISEE REMUNERATION, FEES & CHARGES REVIEWS
• CURRENT FEES AND CHARGES REVIEW
• OMNI-CHANNEL RETAILING: OPPORTUNITIES AND CHALLENGES
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REQUIRED REVENUE OUTCOME
Rather than make a request for an increase in just gross commissions in this submission, we are seeking through this submission to achieve a rapid 15.0% increase in nett lottery commission revenue for retailers from their sales after fees & charges, we are also seeking an additional 6% commission component for retailers on the gross sales received by the Lott for digital sales, along with biennial remuneration reviews moving forward.
To support this minimum required increase, we have provided analysis of the market and how retailers are contributing and being impacted, along with commentary and recommendations on what changes we believe the Lott can adopt, along with other appropriate changes to achieve this.
Importantly, we have also put forward a complimentary range of strong and innovative concepts and strategies for negotiation in the consultation phase of this review, which in variable parts can bring retailers back to profitability and growth, and deliver the required net revenue outcomes retailers need, whilst producing reciprocal benefits to the Lott.
LOTTERY SALES - COMPETITION AND MARKET CHARACTERISTICS
HOW IS COMPETITION AND THE MARKET CHARACTERISTICS OF LOTTERY SALES IMPACTING SALES IN
RETAIL OUTLETS?
Lotteries as a core product category is challenging. Retailers have no control over the pricing of lottery games. If sales decline so does income. Alongside the host business, lotteries are important to generate traffic and complimentary higher margin sales contributing to turnover and profits. In the same way, the newsagency channel (and other retail environments) also generate significant traffic for lottery sales.
The below summary highlights the current market characteristics for retailers:
Key Main Retailer Competition Market Characteristics Purchase Market Trends Drivers Advantages Retail Lottery Fixed costs and Consumer Dominant retail On line lottery Declining Tickets increasing, rigidly preference, lottery sales sales, synthetic demand and controlled, low Habit, outlet lotteries, other increasing margin product gambling competition Impulse venues, other entertainment.
As is the up and down nature of the lottery business, FY2016 provided a strong jackpot run and good sales growth for retailers, while in FY2017 sales retracted. Nationally, lottery sales overall have grown steadily, but instant lotteries appear to be relatively flat. Combined, they are growing in real terms by
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 5 about 2% per year1 and real per capita lottery turnover has grown 1.36%. Online internet lottery sales which were introduced several years ago, have now grown from about 5% of all Lottery sales in 2011, to 14.5% (16/17) and have now reached 16.4%2 of all lottery sales in the first quarter (17/18). These sales are growing much more rapidly than in-store sales and we expect margins in store may on trend now be declining overall. This online growth cannot be attributed to only new incremental sales, as it is also a redirection of the consumers gambling method as operator only online lottery sales have effectively become the biggest competitor in the retail network.
Alongside this online growth, we now have other online lottery options available through synthetic lotteries. While these bets on lotteries don’t appear to have yet impacted retailer’s revenues in a meaningful way, they are impacting customers buying habits and have high consumer awareness. It is likely that this will soon disrupt regular retail customers playing patterns and this will eventually show up in revenue outcomes.
Regulators of lotteries are aware of these issues and this review highlights some longer-term strategies for licencing lotteries and reviewing overall remuneration to retailers in respect of these changes.
1 Australian Gambling Statistics 2014/15. 2 Australian Financial Review 28th of November 2017
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COMMISSIONS HISTORY
In 2011 the then LAAV (now LRA) presented Tatts with a commission submission and supporting arguments for an increase in commission equating to 7% per annum over 5 years (9 – 12%), which was to be primarily funded through price increases. This resulted in a commission increase of 3.3% fixed for two years equating to a gross commission of 9.3% (effective November 2012). Tatts fees were also to be fixed at 1% of commission with no new fees to be introduced. Tatts offer at that time (increase of 3.3%) resulted in a 9.3% overall commission and equated to a small monthly increase for retailers after fees. For example, this equated to a $514 monthly increase for an outlet averaging $45,000.00 lottery sales per week, and we believe this was inadequate in comparison with cost increases over the period leading up to this and did not adequately address the net revenue shortfall being experienced by retailers then, and that is more evident and critical now. Since then, the Lott has benefited from the change from fixed terminal fees to fees based on a percentage of commissions, as it increases fees paid to Tatts if commissions grow, when Tatts costs would not reflect similar growth.
Our records suggest this was not in the spirit of commitments made at the time to cap
fees at 1% of commission.
Since that time there has been no increase to the 9.3% commission rate and only the following price rises have been implemented.
Date Game Price Change 7 Mar 2013 Powerball 10c Subscription increase to 85c per game 21 Oct 2013 Mon/Wed Lotto 5c Subscription increase to 55c per game 19 Jul 2014 Sat Lotto 5c Subscription increase to 65c per game 7 Aug 2015 Set for Life (New Commenced 3 Aug. Subscription price of 55c per game Game) 8 Nov 2016 Oz Lotto 10c subscription increase to $1.20 per game
These price rises have resulted in increases to gross game receipts for retailers over the last 5 years of approximately 8 to 8.5% (This is dependent on the product mix in individual stores), and have not kept pace with overall cost increases.
LOTTERY RETAILERS COSTS
HOW ARE RETAIL OUTLETS COSTS CHANGING?
By comparison to sales trends, trends in costs have been rising faster. The Consumer Price Index (CPI) is a measure of change over time in the price of goods and services. For the purpose of this submission and to analyse lottery retailer costs, we have broken up some of the CPI sub category numbers in Melbourne between 2012 and 2017 into weighted components for some typical lottery
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 7 retailers cost areas that are attributable to lotteries, such as occupancy costs (rents), electricity costs, other utility costs, borrowing costs, insurance costs, telco, financial services and other consumables and we have overlayed these with a Labour cost comparison from July 2012 to July 2017.
TheWeighted summary below Cost demonstrate Increases how 2012 these - costs 2017 have risen over the period.
Rental Borrowing - Labour % Rental Rental Weighted % Borrowing Borrowing - Weighted % Labour Labour Weighted Area Increase Weighting Component cost Increase Weighting Component Increase Weighting Component
VIC 9.58% 10% 0.96% 2.19% 5% 0.11% 16.47% 60% 9.88% % Consumables Assumed Weightings: Consumables Consumables Weighted Area Increase Weighting Component Rent 10% of costs VIC 10.56% 12% 1.27% Borrowing 5% of costs Insurance % Insurance Insurance Weighted Area Increase Weighting Component Labour 60% of costs VIC 13.88% 3% 0.42% Electricity 3% of costs Utilities % Utilities Utilities Weighted Area Increase Weighting Component Other Consumables 12% of costs VIC 27.72% 3% 0.83% Insurance 3% of costs Electricity % Electricity Electricity Weighted Area Increase Weighting Component Utilities 3% of costs VIC 26.44% 3% 0.79% Accounting 2% of Costs Accounting % Accounting Accounting Weighted Area Increase Weighting Component Telecommunications 2% of costs VIC 8.96% 2% 0.18% Telco % Telco Telco Weighted Area Decrease Weighting Component
VIC -11.99% 2% -0.24% Total Weighted Result for VIC 14.20%
As you can see, these component costs have grown by approximately 14.2% over the last 5 years and have compounded the large cost increases prior to this.
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While CPI Data is certainly a useful measure, it is not the only model for determining cost increases and we will look at a number of other cost factors below that impact lottery retailers and that are not as easily isolated in CPI data. CPI does however demonstrate that costs are rising faster than game price increases. By the time this review is completed in June 2018, based on CPI data alone, the likely total weighted cost increase since the last commission review in 2012 will be approximately a 17% increase. When we add in the other cost factors, it is substantially higher than this and does not take into account any cost increases that were not adequately recovered when the last commission increase occurred in 2012.
PAYMENTS COSTS AND THE RISE OF CONTACTLESS
Another area of rapid growth in retailer cost that is not as easily picked up in CPI data and is particularly attributable to lotteries is in accepting payments, in particular the percentage of payments made by debit, credit and contactless has risen substantially over the last 5 years.
Contactless payments that are available without PIN below $100 have made payment without cash more seamless for the consumer. While this is good for lottery customers, it has added significant costs to retailers as these payments are generally always routed to credit, which incurs higher interchange fees for the merchant than cash or EFTPOS.
NAB estimate3, that as a percentage of all card transactions, contactless transactions by NAB customers have risen from less than 5 per cent five years ago, to close to 40 per cent of all card transactions today. Similarly, Visa say 75 per cent of all face-to-face Visa transactions now happen on Visa payWave, which is contactless.
The abstract from the Reserve Bank’s triennial Consumer Payments Survey (CPS) provides a detailed snapshot of how Australian consumers make payments.4
The 2016 CPS recorded information on around 17 000 day-to-day payments made by over 1500 participants during a week. The data shows that Australian consumers continued to switch from paper-based ways of making payments such as cash and cheques, towards digital payment methods (particularly debit and credit cards). Cards were the most frequently used means of payment in the 2016 survey, overtaking cash for the first time. Contactless ‘tap and go’ cards are an increasingly popular way of making payments, displacing cash for many lower-value transactions.
The results of the 2016 CPS released this year show that by number, cash was used for 37 per cent of consumer payments in 2016, compared with nearly 70 per cent a decade or so ago. The median value of card payments at the point of sale continued to decline, from $40 in 2007 to $28 in 2016. This fits neatly in the thresholds for the most common range of payments in lottery outlets, which in
3 http://www.smh.com.au/business/retail/110bn-australias-contactless-boom-20160805-gqmg7j.html 4 https://www.rba.gov.au/publications/rdp/2017/pdf/rdp2017-04.pdf
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 9 surveys we have completed shows is in the $15 - $30 range predominantly. For lower-value transactions, particularly those of $10 or less, contactless payments have mostly displaced cash. However, for payments over $20, contactless payments have mostly replaced contact card payments. This highlights the cost impost for lottery retailers, as lower cost payment types like cash and EFTPOS have now been replaced in lottery outlets by higher cost payment types routed through credit.
New card surcharge standards mandated by the RBA, and that came into effect in 2017, have limited by law the surcharges small businesses are now allowed to charge for card payments. This is limited to just the cost of acceptance. This has meant that a significant portion of our retailers have dropped surcharging completely as this is what consumers are demanding and what is required now to compete and those that haven’t are only charging their average cost. In 2015 approximately 40% of our members surcharged customers, we believe this is now closer to 20% and trending down rapidly.
The cost of payments acceptance directly impacts retailer’s net revenues and retailers report this cost has nearly doubled over the last 5 years and is costing the majority of lottery retailers approximately $500 a month now. This equates to around 30-40% of the commission gains as a result of game price increases over the last five years, being lost just through rising payment costs.
LOTTERY RETAILERS BORROWING COSTS
The cost of borrowing for lottery retailers for shop fits is not easily aligned with CPI data for borrowing costs. The ongoing cost of funding shop fits is front of mind for all retailers completing retail image upgrades. Whilst interest rates are historically low, the type of borrowing required by lottery retailers is higher risk, as it is attached to required fixed assets (shop fits) that are not marketable assets post installation, as opposed to a car for example. Consequently, these assets attract much higher risk margins. Interest rates for purchasing or leasing shop fit componentry for our members sites is often in the low double digit % range. As a result, this adds significantly to the cost impacts experienced by retailers over the last few years.
WAGE COSTS
Newsagent and Lottery Retailers wage costs are the largest component cost in running their lottery franchise, usually followed by leasing costs. They are largely driven by minimum wage increases in award wages that are handed down by a tribunal, currently Fair Work Australia for businesses in the federal jurisdiction. Many factors are taken into account by the Fair Work Commission when this decision is being contemplated each year, however, the main factors are the state of the economy and the cost of living.
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In a low wage sector such as retail, it is common for employers to offer award wages to employees, and for employees to accept those wages. A summary of these minimum wage increase is in the table below:
Financial Minimum Year July to Wage June Increase 2010-11 3.4%
2011-12 2.9% 2012-13 2.6% 2013-14 3.0% 2014-15 2.5% 2015-16 2.4% 2016-17 3.3% 20.1%
The biggest impact of workplace legislation on newsagents and lottery retailers has been the introduction of Fair Work legislation, in particular clause 13.4 of the General Retail Industry Award 2010 which stipulates that staff must be employed for a minimum of three hours. As employers who rely heavily on casual labour, students have long been associated with newsagents. However, the three-hour minimum employment period has meant that newsagents who employ students, who would typically work a 4pm till close (5:30 or 6pm) shift, are faced with either paying for an additional non-productive “free” hour or ceasing employing the student at all. This situation applies to a range of employees who require flexible working hours and has increased costs.
Wage increases have also outstripped general CPI by 5.1% over the last 7 financial years and additional compliance that may now be required by the Fair Work Vulnerable workers bill will come with additional costs for retailers.
PRODUCTIVITY IMPROVEMENTS OFFSETTING THE EFFECTS OF WAGE INCREASES
Efficiency and productivity in lottery retailers has declined with the introduction of new processes including scan on sale for instant lotteries and the greater compliance costs of site surveys. The majority of members report that the percentage of work hours their employees are completing that are attributable to lotteries has increased over the last 3 years. Moving forward it will be important for us in partnership to find models that boost productivity in retail outlets to curtail this cost growth. This needs to be completed in partnership reviewing all processes and procedures and streamlining them, as well as addressing productivity challenges in all changes to shop fit and terminal designs.
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KEY RECOMMENDATIONS:
1. Payment Costs: Given the very large number of retailers in the lottery network and the operators own online retail business, as well as the wagering business, the volume of transactions is significant enough that it would be wise to consider options such as those utilised by Coles and Woolworths who have become acquiring banks from a payment acceptance perspective and have benefitted from much better interchange margins and lower rates for accepting payments. Any model to jointly broker a significant saving on payment costs would benefit both retailers and the lottery operator. This might also align with POS integration that we cover later in the submission.
2. Borrowing Costs: The cost for lottery retailers to borrow for lottery shop fits is very high and this could be reduced substantially through a more strategic model for borrowing between retailers and their franchisor therefore lowering overall shop fit costs.
3. Productivity Improvements: That the Lott commits to jointly develop and agree (with the associations) to implementing principles that seek to improve productivity outcomes in retail lottery environments through reviewing procedures, shop fit and terminal designs.
RETAIL IMAGE
Beyond the franchise establishment costs, the new retail image is the biggest financial undertaking made by retailers and some have been required to upgrade their shop-fit over successive terms of their Franchise Agreement. Traditionally retailers have paid for the shop-fits outright, however, due to the ongoing financial pressures on their businesses, coupled with the significant and increased capital outlay required, and more recently for the additional cost for the DigiPOS equipment, retailers are looking for ways to do this more economically through alternative ways that offset and manage these costs, such as leasing.
The associations understand the need for the Lott to periodically refresh the brand and retail image to portray the brand in a consistent manner and deliver an ‘on trend’ and functional retail image that allows retailers to capitalise on the latest technology and ultimately enhance the instore experience for customers and to drive sales. Most retailers understand this proposition too, but they believe they are disproportionally burdened with the costs associated with the Lott’s ever evolving retail image and brand development strategy.
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Since lotteries commenced, the retailers store branding and the retail image have underpinned the Lott’s brand development and their growth into the strong and trusted brands of today. Retail stores still remain the Lott’s most effective and important touchpoint for customers and the physical face of the Lott’s brands.
Currently retailers feel they are capitalising and advancing the Lott’s brands and your
competing online channel, without seeing a return on that capital expenditure. At the
conclusion of the current rollout of the new DigiPOS retail image and considering the
real cost of a shop-fit (Approx. $30,000.00 plus), the network will collectively invest
approximately $120 million dollars into the Lott’s brand inside and outside their outlets
and in every shopping centre, high street and regional town centre in Australia. When
you also take into account the interest component carried with this, it is substantially
more.
Furthermore, they are investing in a retail image when they have little or no say over its design in relation to the in-store workability and sales efficiency of the design, size, location or what is advertised on the new digital screens.
The majority of our member retailers who have completed the fit-out, report no increase in sales after completion of the full DigiPOS retail image. This is compounded due to the Lott not providing retailers with tangible evidence that the investment in the retail image will deliver them a satisfactory return via a commensurate increase in sales.
Given the significant capital expense and impost the retail image places on a retailer’s profitability and viability, this must be considered alongside this submission to help address the cultural wedge of unresolved issues referred to earlier. As retailers are at different points in the current rollout program (pending or completed, and considering the 7-year upgrade requirement), we do not intend to include any cost efficiencies achieved as a core component or ‘accounted outcome’ in this remuneration submission. Nonetheless, it remains an important cost factor that requires resolution.
This submission instead aims to speak to the lack of overall remuneration and to adopt a remuneration structure to properly address current retailer revenue shortfalls, whilst building in mechanisms for future reviews. Notwithstanding this, the associations believe there is an opportunity to consider the retail image in further remuneration reviews.
The associations believe there needs to be a paradigm shift in how the current shop-fit funding model is structured for new shop-fits and any significant enhancements such as DigiPOS. Retailers can no longer afford to solely carry these costs and new less expensive funding models need to be employed.
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ALNA has been encouraged by recent discussions about the retail image program and was pleased with the extension and review process that Tatts and ALNA committed to collectively in October this year following our meeting in Brisbane. During the meeting ALNA acknowledged the work done so far as we reviewed the Generation One Retail Image journey to date, but have suggested much more needs to be done to achieve a more mutually beneficial position moving forward.
ALNA does not intend to pre-empt the outcomes from the initial ideas or concepts agreed for further assessment and action i.e.
• Tatts will investigate the current ideas further to see how they can be implemented to deliver a positive impact for retailers. • ALNA to conduct focus groups with members to see what practical suggestions members have to further reduce the cost of the fit-out whilst preserving the look and feel and quality of the retail image. • Tatts committed to undertake a financial analysis on a range of lottery outlets which will include the investment retailers make in their retail image. • Accordingly, to allow time for this further exploration to occur, Tatts has decided to extend the required installation dates for the retail image.
The recent retail image discussions highlight the need for reviewing all aspects of the retail image program. Reviews should consider the ongoing and often dynamic industry changes and have a stronger emphasis on the impact on a retailer’s business, being flexible, and ensuring it ultimately produces quantified positive outcomes for each business.
In the same context that the associations believe the Lott needs to take a holistic and structured approach to reviewing the remuneration framework, the Lott should also take a similar approach to periodically reviewing the retail image program and supporting policies, as these retailer costs form a significant part of the remuneration equation, and currently undermine the Lott’s ability to foster a shared vision on the retail image program outcomes. It is hoped that the current discussions and review of some of the current retail image program requirements, processes and policies will deliver greater efficiencies, necessary cost reductions, more flexibility and alignment of shop-fit requirements to individual and differentiated retailer businesses.
Building on the Commission Review Mechanism (CRM) in the new Victorian Lottery Licence, the associations have developed the following Shop-fit Review Mechanism (SRM) and guiding Principles to provide the framework and commitment for regular, collaborative and structured reviews of the retail image program and to guide future rollouts or enhancements.
THE PROPOSED SRM REQUIREMENTS/PRINCIPLES DETAIL THAT THE REVIEWS SHOULD:
(a) Be conducted every three (3) years unless otherwise agreed; (b) Be genuinely consultative and take into account the views of retailers and their representative national body and:
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a. must include submissions and meetings with retailers, representatives of and representations from the national body and shop-fitters; b. be of a duration and appropriately timed as to not limit proper engagement in the review process by retailers, shop-fitters and their associations and accommodate any trials; and c. allow for suspension of the then current rollout program or review of completion dates while the review is implemented.
(c) Generally, take into consideration (but not limited to):
a. the proposed retail image rollout program (including additions or partial upgrades and realistic rollout timeframes) resulting in a more efficient and transparent processes;
b. the design to deliver cost reductions and provide greater flexibility for supply and adaptation to varying retail environments and improved efficiencies e.g. in-store positioning, size, traffic flows and staff efficiencies, etc.;
c. planned enhancements and new shop-fit concepts to ensure alignment and value is added to the existing retail channel e.g. Pop-up Stores and Click & Collect terminals, etc.
d. DigiPOS advertising/POS content and programming, retailer site specific customisation and future enhancements; and
e. all supporting manuals, policies, procedures and enforcement practices including dispute processes.
(d) Be supported by suitable analysis and demonstration of a positive return on investment (ROI) for retailers and:
a. ensure the shop-fit models are matched to sales thresholds and acceptable ROI levels and that they support and integrate into all retailers differentiated businesses (cost, design, location, customer flows, size, etc.).
b. review of the then current retail image funding model including effectiveness, cost apportionment (supply, instillation and any ongoing fees) and alternative funding models.
KEY RECOMMENDATIONS:
1. Retail Image: That the Lott and the ‘associations’ complete the review as mutually committed.
2. Shop-fit Review Mechanism: That the Lott commits to jointly develop and agree (with the associations) on the terms and timetable for establishing and implementing a Shop-fit Review Mechanism (SRM) and guiding Principles as proposed.
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PRODUCT DEVELOPMENT STRATEGY ALIGNED TO PRICE INCREASES
It is not evident to retailers that the Lott has a well-planned and proactive product development strategy for new games, existing game enhancements and price increases to drive improved jackpot activity, new customers, sales and commissions.
Over the last 10 years of the Victorian Licence, the Lott has only implemented 11 price increases and 1 new game (excluding Lucky Cat), which have resulted in only very modest increases in commissions for retailers. These have ranged from a 5 to 10 cent subscription price increase and have only averaged 1 game per year.
Retailers also believe the Lott is not doing enough to drive underlying growth, and rather, it is pinning its hopes on good jackpot runs to drive sales growth. In annual reporting the Lott often refers to lower than expected jackpot runs adversely impacting the lottery divisions performance...“Our lotteries team stepped up to the challenge of out-performing the all-time record 45 jackpots achieved in FY16 at or above the influential $15 million mark. The mission though ultimately proved impossible, with Powerball and Oz Lotto jackpots unfortunately falling short, with a credible but lower 31 equivalent jackpots. This outcome saw a significantly reduced total first division jackpot pool (for jackpots at or above $15 million) of $750 million compared to $1,295 million last year. This performance was further challenged with only two jackpots reaching (or beating) $50 million in the year, compared to six in
FY16.” (Source Tatts Group 2017 Annual Report)
When the Lott is questioned about its game development strategy the response is usually …“all games are under constant review and the Lott will not disclose its plans”. This leaves retailers thinking there is no plan and when changes are made, that they are reactionary or not well considered. This perception is another factor undermining the retailer’s confidence and trust in the Lott to properly despatch its obligations as a franchisor.
The associations understand the Lott’s proposition that price increases should be aligned to game enhancements to help justify and sell the increase to its regular customers, and limit any player leakage, however, we believe the Lott’s timetable for price increases is too infrequent, slow, cautious and reactive. In today’s world customers expect regular (usually annually) price increases as they experience with everyday expenses such as health insurance and utility bills, etc. Even if customers don’t expect them, ultimately, they now more readily accept them.
Furthermore, the Lott’s approach to game structure reviews and enhancements appears very sporadic, leaving retailers, customers and competitors categorising the games as being stale and the franchisor being lazy, and suffering from operating as a monopoly. Monopolies can be criticised because of their potential negative effects on the consumer including restricting output into the market, restricting choice for consumers, reducing consumer surplus and reducing consumer sovereignty. These factors are evident in our assessment of the Lott. This behaviour puts the industry at risk as it provides a platform, message and market opening for disruptors such as Lottoland.
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Since Lottoland launched in Australia in 2016, their message to governments, regulators and consumers frequently points to the lack of innovation of the incumbent monopoly State based lottery operator, by suggesting their products are stale, less interesting and not meeting consumer expectations. Furthermore, that this gap in the market has driven consumer demand and a need for Lottoland, and importantly, an opportunity for governments to earn additional (incremental) revenue through taxes. Lottoland have been agile in adapting to the market and in developing new game opportunities and promotions quickly.
It appeared that the Lott had not anticipated this new market entrant despite Lottoland operating abroad for several years, nor did it adequately respond with agility and in a timely way to these rapid market changes. This was partly because there had been nothing new or innovative in the product pipeline that could be launched to counter these claims or compete with this new market entrant. Lottoland has been able to exploit the Lott’s poor track record for new game development, innovation and preparedness to respond.
The Lott’s actions to support moves to bring about prohibition of these fake lotteries is described by many retailers as ‘too little too late’ and at best, reactionary. Much of this heavy lifting was left to the industry associations and their partners. The Lott has also struggled to garner the support of retailers directly in opposing Lottoland due to the cultural issues we raise in this submission, this made the work by associations harder, but was also due to the lack of tangible commission increases, and the cost of shop-fits, which are foremost in retailer’s minds and gives rise to them feeling ignored, used, undervalued, and in a financial crisis. Many retailers felt the Lott’s late actions on Lottoland mainly emanated from a desire to protect the exclusive on-line lottery business, which all lottery retailers are specifically excluded from and which has further alienated retailers.
Generally, price increases appear sporadic and are usually aligned to a major change to a game rather than a series of smaller enhancements. Historically, price increases have occurred almost annually, but usually only affecting one game, and this increase has sometimes been accompanied by these major, and more risky changes to the game structure (matrix and divisions, etc.), as we have again seen with the recently notified game changes.
The current costs and net revenue crisis is a direct result of too infrequent a reviews and retailer’s perception of the Lott’s lack of understanding of the financial reality for franchisees.
The current ‘infrequent’ approach to game enhancements and price rises results in games becoming stale and then needing to undergo more significant changes which creates greater risk and has resulted in long lag times before the game is again reviewed, even if the expected performance outcomes are not achieved. The Powerball changes and price increase implemented in 2013 is a case in point. Retailers identified immediately the changes made were in fact having a detrimental impact on the games performance, however, it is now almost 5 years on and the Lott has just announced a strategic review of the game has just been completed, and these changes are still subject to regulatory approval and will not be implemented until mid-April 2018.
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To address this very important issue, the associations believe the Lott needs to take a more proactive, innovative and less risk adverse approach to its product development strategy (more new game developments & price increases) with more nominal and regular existing game enhancements aligned with some of the recommended biennial (locked-in) game price increases(following). Ideally, this would take the form of a biennial game review program (all games) in consultation with broader groups of retailer stakeholders, not just a select few who may be less likely to challenge assumptions made. This would result in a moderate number of more innovative game enhancements delivered more regularly, and supported by commensurate price increases and new games.
This would have the power to help revive and sustain the financial viability of retailer’s businesses, ultimately to reverse their deteriorating profitability, and to simultaneously improve the Lott’s retail/product offer and its relationship with the network. It will also help close obvious gaps in the market which have led to the emergence of disrupters like Lottoland. Furthermore, this would help to smooth out the retailer’s remuneration levels to better keep pace with the ever-increasing costs of doing business. This should also condition customers for regular changes and price increases, and eliminate the inevitability of playing retailer catch up at the point of crisis.
If implementing a price increase without a game enhancement and coupled fear of customers reaction is a major impediment to the Lott adopting this strategy, then new and innovative ways to sell or soften the change with regular customers should be explored and implemented. For example, when a price increase without an enhancement is proposed this could be accompanied by a customer promotion or reward e.g. …when you purchase your next 50 game quick pick, you will be rewarded with a free Tatts Card to register your entries and protect your winnings. Already have a Tatt Card, don’t worry because we have loaded a free game (game upgrade or other incentive) to redeem when you make your next lottery purchase in-store...
The associations recognise that all new games and game changes need regulatory approval in each State and this presents some lead time challenges and requires a greater level of advanced planning.
Furthermore, that in the past game changes have needed approval by numerous BLOC members and a voting system was in place, thus making the introduction of new games and making game changes (price & matrix, etc.) more problematic and time consuming. However, since the consolidation of the lottery industry to just the Lott and Lotterywest, this poses less of an issue now, and either matter can be overcome with better long-term product innovation planning. The rapidly changing landscape and emergence of industry disruptors like Lottoland, demands the Lott takes a more dynamic, proactive, regular and well-planned approach to game reviews and new game releases.
Rather than single product reviews every so often resulting in an average of one game price increase annually, coupled with a larger number of game changes and a longer period between a price increase per game (approx. 4-5 years), as referred to above, the associations recommend the Lott adopts a more regular (biennial & ‘locked in’) approach to individual game price increases accompanied by more nominal, measured and less risky product innovations (or none and substituted by a one-off promotion/customer reward).
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Critically, and in addition, a greater number of new game releases with more new products in the pipeline to keep the portfolio constantly evolving, fresh and to provide an opportunity for additional revenue earning potential for retailers.
Importantly, more regular new games and existing product enhancements will provide an opportunity to re-energise, incentivise and refocus retailers. Furthermore, it will enable the Lott to proactively and positively market the changes to players more regularly and accustom them to more regular changes and price increases. This will also help address the perception (or reality) that the Lott has not been innovating by bringing new products to market, or it hasn’t done enough to keep the game portfolio fresh and expanding, to capture new market and player segments.
This approach will be a major contributor to delivering the necessary remuneration improvements put forward in this submission and will help to address the important issue of fairly rewarding retailers for their contribution to lottery sales and the Lott’s brand development.
KEY RECOMMENDATIONS:
1. Product Development Strategy: That the Lott implement more proactive, innovative and a less risk adverse product development strategy (new games and price increases) with more nominal and regular existing game enhancements aligned with some of the price increases. Ideally, this would take the form of a biennial game review program with locked-in biennial individual game price increases and be in consultation with broader groups of retailer stakeholders. a. That the Lott include in their product strategy when implementing a price increase without a game enhancement, new and innovative ways (promotions or rewards) to sell or soften the change with regular customers. b. That the Lott include in their product strategy a greater number of new game releases with more new products in the pipeline to keep the portfolio constantly evolving.
FUTURE FRANCHISEE REMUNERATION, FEES & CHARGES REVIEWS
MECHANISMS FOR REVIEW (REMUNERATION REVIEW PROGRAM (RRP) The main aim of this submission is to present a compelling business case for the Lott to address retailer’s remuneration (commissions, fees and charges) nationally and immediately where possible, however, it is also recognised it may take some time to achieve parity across the States due to some legacy issues impacting the current financial frameworks. This submission provides an elevated pathway to achieve this over time which will require further collaboration and agreement to realise.
To properly address this important issue, we believe the Lott needs to go well beyond the specific proposition of a one-off increase or review and establish a national mechanism or process to deliver future remuneration reviews and increases, and to phase in changes to bring all States into
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 19 uniformity. Governments and regulators see the need for a more formalised process for commission reviews which was evidenced by the inclusion of a Commission Review Mechanism (CRM - Schedule 4) in the Victorian Lottery Licence. The associations believe this provides a great framework to build on to establish a national framework.
It is also evident from the recent lottery licensing process in Victoria, governments are now more focussed on addressing the power imbalance between a national monopoly lottery operator and their retail network of small businesses i.e. the licence holder has significantly greater bargaining power than its retailers. Governments are favouring specific Lottery Operator obligations such as dispute resolution processes and regular commission reviews being documented and embedded into the Lottery Licence or Ancillary Agreements to ensure these obligations are reliably delivered throughout the full term of the Lottery Licence.
As we have seen in Victoria, these are deliberately accompanied by an overarching obligation to ‘act in good faith’ particularly toward its distributors (retailers), but this is general in nature and open to different applications and interpretations. Furthermore, lottery licences include obligations to implement responsible gaming Codes and to self-evaluate and report compliance, etc.
These obligations can be viewed in a broader context, from a perspective of Corporate Social Responsibility (CSR). Specifically, we believe large corporations (especially gaming businesses) operating under licence from government, and in a monopoly without competitive pressures and prescriptive regulatory frameworks that include CSR as a specific and well-defined requirement, have an obligation to implement and enshrine their own form of corporate self-regulatory framework and culture into the business model. More recently CSR has been found to be an imperfect way of aligning business results and social outcomes, and as a result it has been expanded or evolved to include a Social License to Operate (SLO).
CSR/SLO policies function as self-regulatory mechanisms whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national or international norms. In the best examples, implementation of CSR/SLO goes beyond compliance and statutory requirements, and engages in "actions that appear to further some social good, beyond the interests of the company and that which is required by law".
In addressing the cultural division which is evident now, we believe the Lott has an obligation to embrace this business philosophy and extend it broadly across to the retail network, and importantly, including how retailers are fairly remunerated.
The precedent being set in Victoria provides the foundations and opportunity for the Lott to take a proactive lead by adopting a national Remuneration Review Program (RRP) and registering it with State Regulators or the ACCC, in a similar way to how a voluntary Code would be adopted. There is a great opportunity to replicate and build on the Victorian example and provide retailers with increased capacity to negotiate a reasonable and fair outcome with the Lott. Constructed and implemented correctly, this type of process can help achieve an appropriate balance between the commercial interests of the Lott and the retail network.
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To achieve this, we believe the Lott needs to develop a mutually agreed RRP for regular and genuine national reviews of commissions, fees and charges. Amongst other things this should ensure that overall nett retailer remuneration after fees and charges adequately compensates retailers for their investment, and keeps pace with ongoing cost growth and reasonably rewards retailers for their role in the conduct of lotteries. It will also ensure remuneration levels reflect current market conditions (competitor & trading) and network performance, etc.
A process for ongoing remuneration reviews including a realistic timetable for these reviews and genuine consultation with retailers and their authorised representatives (the associations), will contribute significantly to tackling the very evident cultural division within the franchise system. This will also demonstrate the Lott’s commitment to ensuring the retail network remains its primary lottery channel with a clear focus on the retailer’s viability and the channels sustainability into the future. This will also provide retailers with some surety and transparency over future remuneration reviews.
In itself, a ‘review’ does not guarantee it will result in an increase in remuneration for retailers or that the Lott will fully consider market performance or the retailers specific trading conditions. Additionally, it does not preclude the Lott from increasing fees concurrently as part of the review, thus offsetting the actual increase achieved by retailers. This practice has been demonstrated in previous commission reviews by the Lott and would be viewed with the backdrop of the new Victorian Licence requirements as not ‘acting in good faith’ if it were an outcome here.
To address these issues, a key element of the RRP will be to detail how the Lott, on an ongoing basis, will review retailer remuneration to ensure the network remains appropriately rewarded by considering a range of relevant and current financial, market and economic factors, etc. Additionally, to ensure the RRP is transparent, trusted and more broadly accepted, it should provide some commitment or safeguards against any unjustified retailer fee increases offsetting any commission increase offered. The outcomes from the review should not be diluted on the assumption that retailers have enjoyed ‘organic’ increases in commissions just via game price increases over the period since the last review. It should be recognised that this is a ‘built in’ (locked-in) review mechanism but it aligns poorly with the needs of retailer’s businesses and lacks specific rigor around the legitimate business interests of retailers.
As mentioned above, the Victorian Government has opted to provide a set of guidelines to direct the development of an appropriate mechanism for regular commission reviews. Building on this example, the associations have prepared the following draft set of guidelines to provide the basis for development of a national RRP for implementation after this review is completed.
PROPOSED REMUNERATION REVIEW PROGRAM GUIDELINES
(a) Reviews are conducted every two years (biennial) unless otherwise agreed.
(b) Be genuinely consultative and take into account the views of distributors and their representatives by:
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a. including meetings, representatives of and representations from the representative bodies (associations);
b. the Lott inviting written submissions from the representative bodies and from individual franchisees who are not members of a representative body; and
c. being of a duration and appropriately timed so as to not limit proper engagement in the review process by retailers and the representative bodies.
(c) Be open and transparent such that representative bodies and individual retailers should be able to form a view as to the conduct of the Lott in making its review determinations; and
a. Full reasons for any decision by the Lott to be available to representative bodies.
(d) The Lott to have regard to a range of factors in making its review determinations (specified, agreed and reviewed following each remuneration review) i.e. the performance of retailers and importance of Lotteries to the viability of the business of retailers and other business and economic factors, and to publish reasons for any decision.
(e) Remuneration levels are genuinely reviewed and result in an increase in remuneration and are not wholly diminished by concurrent increases in the franchisors fees and charges levied on retailers, or offset by the enhancement of existing, or the introduction of new games, or dilution to online without involving retailers.
(f) The remuneration level fairly rewards retailers for their role and contribution to lottery sales and brand positioning.
(g) The remuneration level adequately compensates retailers considering the markets performance and trading conditions and includes analysis of all retailer costs to ensure remuneration is comfortably growing and well exceeding cost growth.
KEY RECOMMENDATIONS:
1. Remuneration Review Program (RRP): That the Lott commits to jointly develop and agree (with associations) on the terms and timetable for establishing and implementing a national mechanism or process to deliver future remuneration reviews (RRP) a. That the RRP includes a mechanism or process to phase in changes to bring all States into uniformity. b. That in adopting a national RRP, the Lott voluntarily register it with State Regulators or the ACCC in a similar way to how a voluntary Code would be adopted.
2. Social License to Operate (SLO): That the Lott review its existing or establish and publish a new corporate self-regulatory framework and policies (CSR/SLO) as a
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mechanism to monitor and ensure its active compliance with the spirit of the law, ethical standards and national or international norms.
CURRENT FEES AND CHARGES REVIEW
It is recognised that the evolution of the Lott’s franchise structure and regulatory environment has resulted in its financial model (commissions, fees & charges) being very different to many traditional and proven franchise models. What is evident, is lottery retailers achieve significantly lower gross and net margins, and net revenues than those experienced by more traditional ‘retail’ franchises.
The Lott suggests retailers enjoy a healthy 9.3% commission on sales, but this does not reflect the true retail commission outcome. Due to the number and natures of the Lott’s fees and charges, retailers commission is much lower and has significantly deteriorated over time, and is now more evident on products such as Instant Scratch-Its (est. as low as 3-4% after the Lott’s fees).
Some recent analysis over a range of outlets shows that gross margin for lottery sales after the Lott’s fees and charges is only approx. 6 - 7%, and after operating costs is only 5 - 7%. This is significantly lower than the 25% - 100% gross margin achieved on other core retailer products (e.g. magazines 25% and gifts 100%+ est.). Much higher margins are being achieved by other retail franchise systems which can justify the royalties being levied (est. average 8%). On the surface, these royalties appear much higher, but in reality, lottery outlets are comparatively much worse off due to the extremely low margins and net revenues being achieved.
A reduction in the fees and charges being levied is an area the Lott can bring about immediate relief for retailers and this will significantly contribute to meeting the remuneration objectives of this submission and help return outlets to profitability and growth.
A typical franchise system financial structure analysis vs. the Lott:
FEES & CHARGES TYPICAL FRANCHISE THE LOTT SYSTEMS Application Fee This should cover the $550.00 (change of ownership of existing outlets) franchisors cost in $825.00 (new outlets) processing the application. Franchise Fee and Franchise Fee - An Establishment Fee -$27,500.00 Transfer Fee (The upfront single payment Franchisee Fee (New Outlets) - 1.1% (Inc GST) Lott’s Franchisee that franchisees will of the value of Subscriptions sold at the Outlet Fee (Existing make for access to, during each Accounting Week of Year 1, 2 and 3 Outlets) and use of the name, (being the period of 36 months from the trademark and Commencement Date or part thereof) payable business system and twice weekly. initial training / launch Franchisee Fee (Existing Outlets) - 1.1% (Inc support. GST) of the value of subscriptions sold at the Transfer Fee - usually Outlet during each Accounting Week of Year 1 a percentage fee (being the period of 12 months from the based on the sale Commencement Date or part thereof) payable value of the franchise. twice weekly.
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Change in Ownership Structure - $550.00 Application Fee. Plus, if a changed ownership structure of the Franchisee is approved, 1.1% of the value of subscriptions sold at the Outlet during each Accounting Week for the previous 52 weeks X the percentage change in the ownership structure. Example: New shareholder acquires 20% interest in the business then the fee is 1.1% X Subscriptions for prior 12 months X 20%. Royalties (The Lott’s Maintaining and 1.1509% (exc. GST) of Subscriptions in respect of Charge in respect of investing in the the Pools; the sale of Lottery system. Franchise 1.1418% (exc. GST) of Subscriptions in respect of Products, excluding systems charge an on- the sale of all other Lottery Products, excluding Player Cards) going franchise fee Player Cards; and equivalent to 6-10% of $44 per week for the sale of Instant Scratch-Its gross turnover. On PLUS, an amount equivalent to 0.05% (exc. GST) average they are of Subscriptions for all Entries in all Public about 8%. Lotteries conducted by the Franchisor upon commencement of the operation of DigiPOS Equipment in the Outlet. Training Fees Included in the upfront The sum of $495.00 (incl. GST) per person is single franchise fee required for induction training attended by such payment. persons which will be applied by us to facilitate the training sessions and will be held by us. A further amount of $825.00 (Inc GST) per person for approximately 40 hours training conducted at an Endorsed Training Outlet payable to the relevant owner of such training Outlet prior to commencement of that training. Ongoing Training Fees $99.00 to $150.00 per day per person at our discretion. Marketing Fund Marketing the system. Not Applicable – the Lott does not operate such a Typically, franchise fund. systems that collect marketing contributions based on a percentage of gross sales range between 1% and 5%. On average they are about 3%.
ESTABLISHMENT FEE, FRANCHISE FEES (NEW & EXISTING OUTLETS) AND CHANGE IN OWNERSHIP
STRUCTURE FEE The Lott’s Establishment Fee of $27,500.00 imposed on retailers entering the franchise system has not been reviewed for many years, which is in stark contrast and inconsistent with the numerous fee reviews (increases) imposed on existing retailers. As such, we believe there is an opportunity for the Lott to increase the Establishment Fee to help fund the recommended removal of the Franchise Fee (New Outlets), Franchisee Fee (Existing Outlets) and the Change in Ownership Structure Fee. Assuming the Lott adopt most of the remuneration submission recommendations (price rises, on-line commissions, reduced fees & charges, etc.) and considering the brand and new profitability potential,
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 24 the franchisor’s cost of initial training, support and recruitment of the franchisee and comparable franchise fees and offerings in the marketplace, we believe the Franchise Establishment Fee can be increased to approximately $60,000.00. The rationale and key benefits resulting from these proposed changes are discussed following:
• Removal of the Franchisee Fees (New & Existing Outlets) will provide significant relief for retailers when they are trying to establish their new business in the formative and critical first few years of operation, or during the restructuring period for an existing business. The Council of Small Business Associations states that only 30% of new businesses fail during the first two years of being open and 50% during the first five years.
• Removal of the Franchisee Fee (New Outlets) will allow new outlets and new retailers to establish themselves in the market and invest the necessary funds into staff, marketing, promotions, and other key business development strategies, which are critical in the early development of a business or when restructuring an existing business. This is exactly when some financial relief and franchisor support is needed.
• The Franchisee Fees (New Outlets) alone equates to a saving of approx. $35,000 for a new outlet performing around $20,000.00 per week over the first 3 three years. This is significant when you consider new retailers already must fully fund or borrow for a wide range of significant establishment costs such as accessing property including property type, location and building size, lease/purchase requirements and equipment, fixtures (retail image), other fixed assets, construction, remodelling, leasehold improvement and decorating costs, etc.
• Other than the historical nature of these fees or an opportunistic revenue raising exercise, there does not appear to be any real justification for retaining these fees. These fees are charged at a time when a new franchisee is forming a relationship with the franchisor and an opinion about the franchise system culture is being formed i.e. this early experience should be very positive as it will influence how well they support the system, comply with the franchise requirements and how long they stay in the system. This is an important aspect of why it is so important to resolve business culture inadequacies now, so we can strengthen future interactions.
• An increase in the cost of a new franchise (Franchise Fee) will dissuade new entrants or existing franchisees from ‘trading in outlets’. There are many examples where a new franchisee (or existing) establishes a new outlet with a view to sell it in the short term and make a quick profit. This can be very disruptive and damaging to the network. There are also examples where the new outlet has not generated any incremental sales for the Lott, but it has cannibalised an existing outlet for an equal amount of sales. The Lott may have gained a franchisee fee, but the existing retailer has lost significantly (faith in the system and financially). The only winner is the new franchisee who sells for a short-term profit,
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without having really invested in or contributed to the franchise system over time. It is also evident that franchise changeovers increase the franchisors costs which ultimately flows to retailers. This can also be dealt with by the introduction of a ‘Sale of Business Transfer Fee’ - a business transfer fee which is payable in the first 3 years by the outgoing franchisee. This is used to discourage the franchisee from selling the business before its full development and compensates the franchisor for the inconvenience of having to screen, approve, induct and train a new franchisee e.g. year 1 = 50% of the current franchise fee and reducing to ‘0’ at 3 years.
A reduced number of changeovers will also provide some continuity for customers and help build their loyalty to the brand and specific retailer.
• The removal of this fee will act to incentivise existing retailers to take on more stores, whereas now it could be considered a penalty or disincentive.
• To alleviate any concerns the Lott may have about the increase to the Franchise Establishment Fee ($60,000.00) dissuading existing good retailers from expanding their number of outlets, this fee can be reduced or based on a sliding scale decreasing as a retailer takes on more stores e.g. the second outlet $40,000.00, the third outlet $30,000.00 and so on.
• These changes will also help to reduce or eliminate ‘nuisance’ new outlet applications and provide greater justification for the Lott to reject these quickly, rather than after a lengthy and disruptive review process involving submissions from surrounding outlets affected by the application.
• The associations also believe the change of ownership structure fee should be removed. The associations receive many calls for assistance from retailers, who for a range of reasons need to make a change to the ownership structure. Examples include where a parent has been involved and they are retiring, or a death in the family. Retailers are alarmed and concerned by the cost involved, especially when the change of ownership structure does not result in any substantial payments between the parties. In many cases, retailers are incapable of finding the capital to effect the change.
ROYALTIES (THE LOTT’S CHARGE IN RESPECT OF THE SALE OF LOTTERY PRODUCTS, EXCLUDING
PLAYER CARDS) This is a fee which has increased over time, usually to off-set any increase in commission for retailers. We believe this fee should be immediately reduced to provide some relief to the margin squeeze and ‘costs and revenue crisis’ being experienced by retailers. The associations believe this fee will need to be reviewed periodically and again reduced over time, but an initial and immediate reduction from
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1.1418% to an amount equal to or less than the fee level prior to the 2011/12 commission review is required. This would result in a much-needed revenue increase for all outlets.
$44 PER WEEK FOR THE SALE OF INSTANT SCRATCH-ITS The $44 (incl. GST) fee for Instant Scratch-Its, which was introduced following the departure of Intralot from the Victorian market and the transition to Tatts needs to now be removed.
At the time members felt this was somewhat opportunistic and unjustified of the Lott to charge a similar fee, especially given the considerable costs retailers endured with the introduction and subsequent exit of Intralot.
Since its implementation, we have been concerned about the detrimental financial impact on members businesses. In December 2014, the Lott provided the LRA with the following justification for Tatts fees and charges relating to the return of Instant Scratch-its tickets to the Tatts jurisdiction.
… “Tatts fees under the revised Category 1 Public Lottery Licence need to be assessed in relation to the fees charged by Intralot and also considering the specific matters outlined below:
• The structure proposed by Tatts represents a package of benefits to retailers including an increase in overall commission levels; • Intralot retailers are currently charged a $55 (ex GST) weekly service fee which is reducing to $40 (ex GST) under Tatts; A number of Intralot retailers have also been charged an annual fee of $825 by Intralot. Those Retailers will no longer be required to pay the $825 annual fee; • The fee based on sales of 1.1418% (ex GST) remains unchanged but is slightly higher than the comparable fee of Intralot of 1.00% (ex GST) of sales; Thus, as a package, from February 2015, the costs associated with selling instant lottery products will decrease for all lottery agents.
In addition, as fees relate to the Victorian lottery market:
• Instant Scratch-It’s are high cost but low margin products in Victoria • Tatts is incurring significant set up costs to help assist the industry to continue to make Instant Scratch-Its tickets available following Intralot surrendering its licence • Tatts Category 1 Public Lottery Licence expires in 2018 • Comparison of the Victorian commercial regime with other jurisdictions is not relevant because: o different fiscal and duty payment regimes operate in those jurisdictions through the applicable legislation and the licence conditions o longer term licences o no costs of migrating the product o higher margins in other jurisdictions. • Specifically, the $40 weekly fee (ex GST) to be charged by Tatts contributes to the initial costs of the additional products and the set-up costs and distribution of tickets.”
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As pointed out by government and the Lott, the costs may have decreased overall under the new arrangements (post Intralot), but this did not ensure the sales of Tatts Instant Scratch-It’s would be a profitable venture for retailers. This was more evident in the period soon after the transition when the range was depleted, and it took the Lott considerable time to return to normal ranging and supply arrangements, however, retailers were not given any dispensation on the fees charged.
Retailers are questioning now if they are achieving a suitably profitable outcome from the sale of Instant Scratch-It’s. Retailers (especially in Victoria as they have changed from Intralot) now view Instant Scratch-It’s as a separate product line (to lotteries) and expect them to be profitable in their own right just like any other product line should in retail.
The additional fee is a point of ongoing consternation for our members, particularly lower turnover and regional outlets. This has been compounded by an absence of a real commission increase for many years. Retailers place online sales, commissions (and fees), along with shop fit costs as the top issues adversely affecting their businesses.
During the discussions regarding this fee, the Lott maintained it was charging the fee to ensure it could recover its costs (transition from Intralot, start-up and ongoing costs), especially considering there was only a short period remaining on the licence to sell lotteries in Victoria (exp. 30 June 2018). As such, the Lott also indicated they will not review these fees within the current licence term. We are also not aware of the Lott’s justification for imposing the same fee in some other jurisdictions.
The LRA more recently advanced this issue once the Lott was awarded a 10-year exclusive Lottery Licence to operate the Victorian State Lotteries. The awarding of the licence meant many of the Lott’s justifications for the fee had been addressed or made redundant, and the fee should be removed.
In response, the Lott deferred further discussion on the $44 fee to the Victorian Licence Commission Review Mechanism timeline… “Furthermore, as part of the new Public Lottery Licence recently awarded to Tatts, there is a robust Commission Review Mechanism that will be implemented, and this process will commence over the coming months. As you would be aware the process will include inviting the LRA to provide a written submission at which point we will be very happy to discuss the current ISI fees as part of a submission from the LRA.”
As such, we believe the Lott now has an obligation to review and ultimately remove this fee from Victoria in the first instance, and all other jurisdictions where it is levied. There should be no impediment to this change as we believe it is only levied in the NT, Tasmania, Queensland and Victoria, but not in SA, NSW or WA (Lotterywest) and any setup costs have now been recouped. This represents a modest saving of approximately $2300 per annum which will assist affected retailers, especially country and regional outlets with lower turnover. This will assist, but the Lott needs to do more to ensure the best range (design and quality) is available at all times especially key gifting times such as Christmas, where design, quality and quantity have remained an issue. The symbolism of this fee removal may be more powerful than the actual financial benefit derived for retailers and will help resolve one area of retailer consternation and division.
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TRAINING FEES Traditional franchise systems normally include the cost of the initial training and launch support in the Establishment Fee. The Lott has a different framework where a new franchisee is required to invest approximately $2600 (depending on the number of attendees) in induction training ($495pp) and training at an endorsed training outlet ($825pp). Furthermore, there are Franchise Agreement clauses requiring the franchisees to attend additional training, as is reasonably directed by the Franchisor from time to time (ongoing training fees $99.00 to $150.00 per day per person at the Lott’s discretion). Franchisees who are in regional areas often incur significant additional costs for travel and accommodation as well as the cost of replacing staff in store while they receive training.
In consideration of the increased Establishment Fee proposed in this submission ($60,000.00) and to help justify the increase, the associations believe the Lott should cover the cost of all training including payment to the endorsed training outlets and any ongoing training required during the term of the franchise.
This change would help simplify entry into the franchise system and disclosure, etc., but importantly, it will ensure additional training costs are not imposed on a retailer throughout the term of the franchise. In addition to the other financial pressures highlighted in this submission, retailers are already incurring training costs for staff in other ‘unfranchised’ parts of the business. This change would better align the Lott’s franchise system to industry benchmarks and help deliver on one of the key advantages of being part of an efficient franchise system i.e. franchisees are provided with proven and efficient method of operation and support including management, business development, marketing and training (initial & ongoing), etc. This would be another example of the Lott backing its retail outlets and their ongoing development.
In addition to the above recommended financial structuring changes for training, the associations would also like to discuss with the Lott other measures to streamline current training processes which would provide further financial relief for retailers. Specifically, to ensure the training remains relevant and meets retailer’s needs (e.g. a greater focus on sales generation and service), that it is aligned and adds value across the whole business, and is cost effective and timely, and more flexible, particularly in relation to recognition of prior learning or prior experience and minimum requirements for outlets, etc.
MARKETING FUND Even though typical franchise systems collect marketing contributions based on a percentage of gross sales, at this time, the associations are not recommending any change to the way top-line marketing is currently funded, however, we believe there is an opportunity to mirror some of the ways a traditional marketing fund would be administered, particularly in regard to retailer consultation and feedback.
If a marketing fund is used, the Code imposes certain restrictions on how the franchisor deals with the marketing and advertising fees contributed to that fund. The franchisor must provide certain information to the franchisee about the fund. For example, the franchisor must prepare an annual
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By not implementing a marketing fund the Lott avoids the scrutiny, levels of transparency, consultation and disclosure mandated by the Code. This provides an outcome where retailers do not understand the Lott’s vision or strategy, which leads to a level of discord and lack of cohesion when supporting or delivering the Lott’s marketing, promotions and POS at a store level.
Proactive and collaborative franchisors will also conduct regular consultation meetings with franchisees to update them on how the marketing undertaken has performed (expenditure, key activities, target demographics, results, ROI, etc.) and elicit feedback from franchisees, along with presenting plans for the upcoming year and seeking genuine franchisee input. A similar strategy on marketing by the Lott might also leverage further investment in local area marketing initiatives by retailers, these investments are much riskier for the retailer than the Lott, the Lott benefits from every incremental sale, while the retailer must break even first.
This is an area the associations believe the Lott can be more proactive, consultative, transparent and structured. The Lott may deal with some elements of this consultation through its territory meetings and advisory groups, but advice to the associations from retailers reveals this consultation is generally regarded as sporadic and one way, and that it lacks detail, especially about performance, the future, and seeking genuine feedback.
The associations receive a lot of feedback from members, that despite the Lott’s supposed experience and large centralised franchise team, the same mistakes or miscalculations are made each year when delivering the marketing support at store level, particularly at peak trading times such as the Christmas and Megadraw trading period e.g. poor quality or design, insufficient Christmas trees, gift envelopes and Christmas themed Instant Scratch-Its, poor promotion delivery etc. It is difficult to quantify the lost sales opportunity these very avoidable mistakes or miscalculations cause, but at the busiest time of the year we know it is significant. Importantly, this also undermines retailer’s sales momentum and the Lott’s annual messaging to motivate retailers to capitalise on the year’s biggest predetermined Megadraw. In 2016 the associations congratulated the Lott on the quality and vibrancy of the Christmas Instant Scratch-It range, but instead of building on the this in 2017, the Lott inexplicably reverted to supplying poor quality and lacklustre designed Instant Scratch-It’s to the dismay of retailers.
Furthermore, and despite the Lott’s attempts to address this issue, poster quantities, range and delivery timing (especially jackpot posters) are another area retailers feel the franchisor consistently lets them down. As a result, and at their own expense, many retailers supplement in-store POS to make up for the Lott’s omissions or supply shortfalls. These are additional hidden costs affecting a retailer’s profitability when this should be fully covered by the franchisor.
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DIGIPOS
The new requirement for retailers to install the expensive digital POS equipment and pay for the ongoing content management through a 0.05% fee, plus repairs and replacement, etc., when they have no control over what is communicated on the screens is viewed by retailers as unfair and incongruous.
Retailers have contributed substantially by investing in and installing DigiPOS into new retail image shop fits, they monitor it, they provide feedback on it, especially on how it can be improved to benefit retailer’s sales, but they have no direct control over it as a sales tool.
We recognise that changes are being made all the time to make DigiPOS more effective, and we encourage this to continue so customers can benefit from the higher availability of the information they are requesting. Nonetheless, like the ongoing scratchie fee, there is no justification for the 0.05% fee in respect of DigiPOS remaining, as much of the initial costs to develop DigiPOS will have now been recouped by this fee already so it should be removed.
LOTTERY SYSTEM AND TERMINALS An area often not directly identified as a driver of cost efficiency and profitability is the central lottery system and retail POS terminals. A key role or responsibility of the franchisor is to provide and regularly innovate and update the retail POS system for franchisees and customer interaction. The Lott’s speed to market on updates and system reliability are well recognised, however, as in-store retail dynamics evolve in this new competitive digital and mobile world, retailers strive for ways to deliver greater in-store productivity and efficiency, while preserving the unique benefits derived from the physical shopping experience. This is very important, so traditional retailers can deliver their ‘personalised service’, a key point of difference to on-line, in a way that meets customer demand for convenient, efficient and friendly service.
The Lott is in a unique position where its franchise business sits within a larger host business and this creates multiple layers for interaction with customers and various POS and ancillary systems. To address this the Lott can either take an exclusionary or inclusive and integratory approach. The associations believe that the latter will drive greater in-store productivity and significant cost efficiency, as there are always integration, productivity, efficiency, sales maximisation and interaction improvements that can be made across the whole business to greater affect.
More specifically for the Lott, there are aspects of terminal design and integration, system and sales processes and policies (e.g. terminal allocations), that could drive cost efficiencies at a retail level. We do not intend to address all of these as part of this submission, however, we have highlighted several that we believe will help address some of the important issues highlighted in this overall submission, most importantly the number one cost factor for retailers of wage cost that we have highlighted earlier.
• POS Integration – the integration of the Lott’s POS system with the main store POS system and ancillary payment devices is an initiative that would deliver immediate and substantial resource and cost efficiencies at a retail level (staff costs, productivity, administration and business analysis) and deliver a more secure, seamless and efficient customer experience.
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The associations recommend the Lott conduct a genuine and priority feasibility study for this initiative with a positive predisposition and terms of reference for finding a solution for implementation as soon as possible.
• Terminal Allocations – there are two aspects to this issue relating to the minimum number of terminals allocated to new and existing outlets and the Lott’s annual terminal review policies.
The associations believe there is a strong case for the Lott to adopt a ‘retailers first policy’ with a default policy position where all new outlets and existing stores trading over an agreed minimum sales level (e.g. $10,000 AWS) are allocated a minimum of two terminals for the life of the franchise (unless one is requested by the retailer). This will ensure retailers can realise their growth strategies and maximise sales and service opportunities at all peak times, which can vary for every retailer based on their unique trading environment.
Furthermore, that the Lott reviews its current additional terminal allocation polices (thresholds) to deliver a fairer and more achievable model, and critically, that the Lott abandons its current annual terminal allocation reviews.
Despite the fact these annual reviews only deliver very little to the Lott’s bottom line and they may only impact a small percentage of retailers nationally each year, they produce a significant amount of stress and uncertainty for all retailers and bewilderment across the broader network, adding to the cultural division that we have discussed. The associations have on numerous occasions explained to the Lott the detrimental impacts of these polices and outdated practices on retailers e.g. undermining their ability to meet sales demand over the busy Christmas/New Year or jackpot periods, staff utilisation and productivity, customer convenience, the potential to significantly undermine a retailer’s growth strategies and potentially devalue their business, etc.
Terminal design, systems, processes, integration and policies is an area that needs regular focus and innovation beyond the limited recommendations above. As such, the associations believe this is another area the Lott can be more proactive, consultative, and structured in delivering a range of prioritised initiatives to drive mutually beneficial outcomes and continually deliver greater cost efficiencies at store level.
SITE SURVEYS The associations recognise that compliance is an important part of the franchise system and the results being achieved through the Lott’s site surveys demonstrate that retailers already understand this and do their best to maintain the high standards being achieved.
Although these surveys are not a direct cost to retailers, the time taken is and they are a significant cost to the Lott, which is inevitably passed to retailers through the current fee structures, or by the Lott diverting other revenue driving expenditure or investment away from the lottery business to cover these costs e.g. marketing, promotions, no fee reductions or a commission increases, etc.
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Considering the financial pressures on retailers as established in this submission, the significant frustration of retailers resulting from these surveys, and no evidenced positive impact on sales, it is appropriate as part of this submission to question the high cost of these surveys and look for more cost-effective alternatives with an assumption any savings will be passed through.
There is significant concern from retailers over the way the surveys are administered, particularly in relation to breach notices being issued for minor infractions such as an incorrect poster. Inappropriate timing of surveys is also a concern for retailers i.e. they are conducted just on opening or when they are very busy. All of this is adding to the cultural division issues we have discussed in this submission and feeds the perception the Lott has developed ‘a breaching culture’. Retailers feel the surveys are designed to catch them out rather than have a more collaborative and positive educative approach such as rewarding them for high compliance scores. Many of these model retailers have never received a breach before. It is a big concern to them when they do and challenging the breach distracts them from other positive sales driving activity.
The associations have urged the Lott to implement a ‘warning system’ to alert retailers to an area of non-compliance and only issue breach notices for major or repeated incidents of non-compliance. As an example, a major regulator we met with recently who has a statutory obligation to audit for enforcement, said their approach is always “engagement, education and finally enforcement” in that order.
The current method of engaging a third-party supplier to conduct these surveys nationally is a major investment, and you also need to add the cost of the Lott’s staff administering the program and the management of a large number of breach notices. The cost for each survey could be anywhere between $50 and $200, so for this submission discussion we have split the difference and estimated the cost at $125 per survey.
That’s approximately 4000 outlets x $125.00. That is a $500,000 investment each time the surveys are conducted and $1,000,000.00 for Cycle 1 & 2.
The associations are not aware of any increased compliance reporting requirements for the Lott, so this is a significant investment to measure an already known high level of compliance. Based on our knowledge of other franchise systems, the Lott’s compliance rates are already very high (over 90%). The reality is (in the real world) it would be highly unlikely the Lott could achieve 100% nationally. It’s just not feasible when you consider how things just happen in retail and surveyors will also get it wrong, etc.
Consequently, we would like to suggest some alternate solutions for compliance models so that this money might be better spent more positively and effectively elsewhere e.g. in local area marketing or contributing to a retailer’s shop-fit and sharing this significant investment for mutual benefit or increased commissions, etc.?
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Advances in technology make it is possible for these surveys to be conducted by the retailer via an efficient electronic self-audit process (app). If photos are required, this functionality can be built into the app as well as submitting the survey and signing to certify their compliance. If additional verification is required, the Lott’s Retail Territory Managers can complete this as part of their call cycle. There are some significant benefits that could be derived from a self-audit system.
• Retailers would learn more about their compliance requirements by conducting the surveys themselves and staff training can be incorporated into the process. • Retailers can determine what day and time they conduct the survey to limit disruption to their business, resulting in a time reduction to complete the surveys and staff cost savings. • It will take less time and be less disruptive for the retailer and remove the current aggravation being experienced. • It would result in less administration for the Lott and the retailer i.e. reduced need to issue so many breach notices, and less distraction and frustration through retailers challenging the current survey results and breach notices. • It will improve culture.
KEY RECOMMENDATIONS:
1. Establishment Fee: That the Lott increase Establishment Fee (to approx. $60,000.00) to help fund the recommended removal of the Franchise Fee (New Outlets), Franchisee Fee (Existing Outlets) and the Change in Ownership Structure Fee. 2. Sale of Business Transfer Fee: Introduce a business transfer fee which is payable in the first 3 years by the outgoing franchisee. 3. Charge in Respect of the Sale of Lottery Products: That the Lott implement an initial and immediate reduction from 1.1418% to an amount equal to or less than the fee level prior to the 2011/12 commission review. 4. $44 Fee for Instant Scratch-Its: That the Lott immediately remove this fee from Victoria in the first instance, and all other jurisdictions where it is levied. 5. Training Fees: That the Lott in consideration of the increased Establishment Fee, cover the cost of all training including payment to the endorsed training outlets and any ongoing training required during the term of the franchise. 6. Marketing Fund: That the Lott implement regular consultation meetings with retailers and the associations to update them on how the marketing undertaken has performed (expenditure, key activities, target demographics, results, ROI, etc.) and elicit feedback from stakeholders, along with presenting plans for the upcoming year. 7. DigiPOS Fee: The Lott should now remove this fee.
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8. POS Integration: That the Lott conduct a genuine and priority feasibility study for the integration of the Lott’s POS system with the main retailer store POS systems and ancillary payment devices. 9. Terminal Allocations: That the Lott to adopt a ‘retailers first policy’ with a default policy position where all new outlets and existing stores are allocated a minimum of two terminals for the life of the franchise. a. That the Lott reviews its current additional terminal allocation polices (thresholds) to deliver a fairer model and abandons its current annual terminal allocation reviews. 10. Terminal design, systems and processes: That the Lott proactively and regularly reviews the terminal design, systems, processes, policies and integration opportunities via a structured and genuinely consultative process with retailers and the associations.
OMNI-CHANNEL RETAILING: OPPORTUNITIES AND CHALLENGES
DELIVERING A GENUINE OMNI-CHANNEL MODEL AND REWARDING RETAILERS FOR THEIR CONTRIBUTION
TO THE LOTT’S BRAND DEVELOPMENT
Retailers must be rewarded for their investment in, and their development and reinforcement of the Lott’s physical brand, and for building brand credibility, which has been crucial in creating the public’s view that it is safe to buy the Lott’s products on-line. A survey conducted by the ‘associations’ revealed that retailers feel their work in brand promotion and assisting to train customers is essential to on-line succeeding with retail, and they should be financially rewarded as part of the critical role they play in building customers’ trust in the Lott’s overall business both instore and online.
Examples include:
• Our staff explain the details of the games that are often much harder to understand on line. We do the face to face promoting and training to develop trusted products.
• We answer customer queries and build relationships.
• Newsagents engage with their customers better than any other channel and the failure of other retail channels and success of online is testament to the quality of customer service, rapport and support that Newsagents have been able to deliver to customers.
• Most customers need questions answered and moving the conversion to apps will not be as successful as when agents are involved, we are an important point of difference to other online only gambling and entertainment competitors.
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• We need an Omni channel approach, everyone along the channel should be rewarded for the work they do to help promote the overall business.
• Online and retail must come together to give lottery customers everything they need.
Under the current arrangement retailers strongly believe the Lott unfairly competes with them with on- line sales, evidence of which is the many marketing examples that seek to take retail customers into on-line, where retailers are at a significant disadvantage. As on-line sales are conducted exclusively by the Lott, retailers have no doubt this is in direct competition with the traditional retail network. Despite this, retailers are compelled (by the Lott) to promote the on-line channel in-store via posters and the like, but are excluded from selling on-line or receiving commissions from on-line sales.
The associations are not aware of any other franchise systems that asks retailers to promote online and to invest in significant brand exposure and technology, yet conducts on-line sales in competition to their own retail network and specifically excludes the retail network from an opportunity to participate in and engage with their customers on-line and to earn additional revenue outside their normal operating hours as they can do with most any other product they sell. This is particularly harmful to the Lott’s corporate brand and social licence, culture with its distributors and future position with State governments. It also leads to damaging customer trust, as the side effect of this approach is that the relationship retailers have with the brand is being continually damaged and ultimately customers will not benefit as they should from a genuine overall omni-channel experience. This must be fixed.
Marketing has significantly increased over recent times with the introduction of Autoplay and other marketing to drive customers on-line. Furthermore, retailers are not afforded the same suite of services to offer customers in order to effectively compete with on-line sales, and they are not permitted to market directly to customers using the Lott’s loyalty card database.
Retailers are therefore understandably very frustrated that their retail presence legitimises the Lott’s online presence which has become the largest retailer in the network, but they cannot equitably compete with it, or receive any return from it and which cannibalises their sales. This has most starkly been demonstrated with the arrival of on-line bookmakers like Lottoland, whom retailers have absolutely no levers to pull to compete against. They don’t even have access to online selling! Their franchisor needs to be their partner in meeting this challenge both instore and out.
The majority of researchers agree that the establishment and reinforcing of the brand, allied to customer service, are the most important factors in franchise success.
The associations continue to present compelling arguments to the Lott demonstrating the mutual benefits of allowing retailers to share in commissions and support the on-line sales channel, or as a minimum to provide a more even playing field to allow the retail network to compete more fairly, but to date these requests have been ignored.
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The associations are encouraged by Tabcorp’s more genuine omni-channel approach by deciding to pay commissions to TAB agents when punters bet on their smart phone in their venues (Source Herald
Sun article on Friday 3 February 2017). In an encouraging news article about Tabcorp and featuring their Chief Executive David Attenborough, it explains how Tabcorp is backing their retail wagering outlets and implementing a strategy aimed at innovating the in-store digital offering to return stores to growth. This has been seized on by retailers as an opportunity to end one of the biggest hurdles impacting the Lott’s relationship with its retailers.
There is a clear opportunity for the Lott to embrace this new philosophy, move with the tide or even lead the change after the merger. A well-constructed model of including retailers in the on-line sales process could quickly address the current net revenue crisis and cultural division across the business, which is crippling the Lott’s ability to develop a proper omni-channel model and undermines many of the Lott’s other strategies with retailers i.e. the trying to arrest the significant decline in loyalty card sign-ups.
It is clear why the Lott holds its on-line sales business closely as it generates mega profits for the group, but retailers believe it is at the expense of the retail channel which still generates 83.6% of lottery sales. The Lott benefits significantly from the unprecedented growth in this exclusive national on-line sales channel, but without the significant overheads experienced by small retail businesses. Retailers receive a very modest 9.3% inc. GST commission on sales but must carry the cost of the Lott’s extensive list of ongoing fees and charges i.e. franchise establishment fee, ongoing franchise fees calculated as a percentage of the sale of lottery products, an Instant Scratch-Its weekly fee, training fees and the cost of the complete retail image including digital signage requirements (est. average cost $30,000+) and insurance, etc. In fact, a retailer’s gross commission after the Lott’s fees and charges is closer to only 6 - 7%. On the other hand, the Lott treats the on-line channel like an outlet thus benefiting from the 9.3% commission and the Lott’s normal take of approx. 3.8%.
Tatts Group continually promotes and spruiks its digital channels performance without any mention of how it will combine its strategies with the retail channel… “We saw excellent traction in our digital channel, with digital sales lifting to 14.5%1 in the reporting period (up from 13.5%1 last year). This was a world class result and is all the more impressive given the lower jackpot run – recognising that a greater proportion of sales are typically achieved via our digital channel during periods of stronger jackpot activity. Our online sales performance is category leading when compared to our global lottery cohort. Other measures reinforcing our strong digital performance in the year were:
• 1.7 million active lottery accounts across our digital channels (FY16: 1.4 million) • 2.5 million registered online customers (FY16: 2.2 million) • 2.0 million ‘the Lott’ app downloads – up from 1.3 million in FY16 • #1 lottery website/app in Australia with 82% traffic share (FY16: 77%) • Set for Life achieving 24.2% of its sales via digital channels (FY16: 22.9%)
• Lucky Lotteries achieving 19.9% of its sales via digital channels (FY16: 17.5%)…” (Source Tatts Group 2017 Annual Report)
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During the recent Victorian licensing process, the financial windfall the Lott is benefiting from through on-line sales did not go unnoticed by the government. The government indicated in the Registrations of Interest document it was considering whether the new licensee may be required to pay an additional premium payment for commission paid for online sales. It should be noted that the LRA strongly opposed this as we believed it could adversely affect any possible consideration by the Lott to include retailers in the on-line sales process. The mere fact the government considered this is a clear indication that they believed the current licencing structure was not equitable.
It is also evident that the Lott’s more recent new game releases are tailored for younger on-line players which has reinforced the Lott’s digital performance resulting in the benefit of these games being diminished for traditional retailers.
• Set for Life achieving 24.2% of its sales via digital channels (FY16: 22.9%) • Lucky Lotteries achieving 19.9% of its sales via digital channels (FY16: 17.5%)
(Source Tatts Group 2017 Annual Report)
At 16.4%(1st QTR 17/18) (FY16/17: 14.5%) (FY16: 13.5%) of total lottery sales, the on-line channels gross sales are approximately $330 million and this equates to gross total commissions of approx. $43 million to the Lott. A partnership approach to online sales and a share of these commissions could contribute significantly to the net revenue outcome proposed in this submission.
We believe retailers have earned a 6% share of the gross commissions currently received by the Lott for digital sales. This would be fair reward for retailer’s current investment in capitalising the physical brand and recognised involuntary support of the Lott’s digital channels, and importantly, for their increased support and participation as proposed following.
It is expected this strategy alone will lay the foundations for delivering a truly genuine and successful omni-channel business model and herald an unprecedented era of ‘partnership’, with both franchisor and franchisees having a shared purpose to jointly build the digital and retail channels in unison. This will without doubt deliver a significant uplift in on-line sales, new online registrations and boost all the Lott’s digital platforms, but importantly, it will signal that the Lott is backing their retail outlets and implementing a strategy aimed at creating a new strong omni-channel digital offer that includes the traditional retailers to help return stores to profitability and growth. Any model adopted to allow participation of retailers and to reward them for their contribution must be transparent and fair. There are several models (or a combination) that could be used to achieve this strategy.
• The simplest model and our preference would be based on a percentage of commissions based on a retailer’s contribution to the network over sales. Once an agreed total percentage of on-line sales to be pooled for retailers is agreed, it can be allocated based on a retailer’s contribution. If a retailer contributed 1% to the Lott’s total lottery sales, they would be allocated 1% of the pooled funds from on-line sales revenue. This provides retailers an incentive to increase sales and their total contribution. • Retailers could be paid a fixed level sign-up commission/reward for all players they sign up to the on-line omni-channel. Any future on-line purchases made by the player would result in a
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commission being paid to the outlet based on a percentage contribution. This would also encourage retailers to sign up players and increase sales and their total contribution. • There are models where customers (as part of the on-line sign up process) must nominate a retail outlet that will benefit from their on-line purchases. If adopted existing online customers could be required to update their account by nominating a store and all future signups will include this step in the signup process. This model will be less effective as it relies on a customer’s choice which could be less equitable for retailers. • Models where players purchase lotto on their smart phone in-store and are allocated a commission could be used (like the TAB example), but this is likely to be less effective as it is unlikely players would use the app in-store. If the app location functionality however could be used to assign the purchase to the nearest store and to develop a supporting relationship with that retailer, this would be much more effective and a significant point of difference to any competitor to engage customers and increase loyalty. Example: Imagine you are on your phone and the App says, “Hey, I noticed you have been searching our games for a while, have you been down and met Dave and Sue at Lotto Luck in Albany, they are your nearest store, if you have any questions on any of our games or just feel like a chat, they’d love to help you. They are open now. Click here for directions. Dave is a mad Footy fan and loves a chat about the game! OR I noticed you have been looking at Lucky Lotteries, did you know Dave and Sue at Lotto Luck Albany, which is your nearest store, have a locals only promo on today? Click here to take part in this exclusive locals only special promo and you could win bigger than ever!
There are lots of other examples, but this is what omni-channel should become, it’s the comfy supporting armchair of digital and physical coming together to support your customers and make them feel special.
• Allowing retailers to include a prominent well branded link on their website connecting directly to the Lott’s website, and rewarding retailers with an agreed commission on all sales generated through the link. This would give the Lott greater visibility of retailers’ websites and provide a range of business development opportunities through advice on how to improve their site, or in some instances, to provide an incentive to develop a site. It might also be a better way for the Lott to work with retailers to access new opportunities available, as these businesses have commercial relationships with over 25,000 other businesses, who often use these websites for small stationery orders and the like. The majority of retailers are already very active on Facebook and other social media platforms, which provides an opportunity for the Lott to further integrate and align its broader social media strategy with the retail network, and for the retail network to generate their own incremental online sales from their significant customer base out of hours.
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KEY RECOMMENDATIONS:
Delivering a Genuine Omni-Channel Model – On-line Sales: That the Lott in conjunction and agreement with the associations develop a well-constructed model of including retailers in the on-line sales process.
1. That the Lott collaboratively review all of the possible models proposed by the associations in this submission to deliver a model that financially and fairly rewards retailers for the critical role they play in building customers’ trust in the Lott’s overall business both instore and on-line.
2. That retailers be provided a guaranteed minimum 6% share of the gross commissions currently received by the Lott for digital sales.
3. That the Lott to further integrate and align its broader social media strategy with the retail network as part of this process e.g. Facebook, etc.
CONCLUSION
It is evident that lottery retailer’s overall margins have been squeezed substantially through cost and fee growth. It is our strong belief that through bringing together our shared interests in partnership to resolve these challenges and to achieve the revenue gains required by retailers outlined in this submission, that we can jointly advance and achieve our individual and common business objectives successfully.
This submission process has outlined the challenges and other obstacles for retailers, and has also laid the groundwork for further discussion in the consultation phase of this review.
With effort from both parties, we can resolve these and achieve win-win outcomes; including growth, shared profitability, greater customer engagement, strengthened loyalty, market resilience and further innovation.
We look forward to your further positive engagement with us on these important challenges.
On behalf of all ALNA and LRA members.
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ABOUT US:
Australian Lottery and Newsagents’ Association (ALNA) – Advocate, Advance & Advise ALNA’s aim is to Advocate for, Advance & Advise our members to assist them in re-invigorating the channel to achieve a positive growth trajectory in both sales, profitability and sites. Our changed name and focus along with our strong affiliation with the Lottery Retailers Association (LRA) recognises the core importance of lotteries to member’s businesses.
Our shared industry wide communication, proactive engagement and well recognised advocacy to government and regulators is achieving results, along with complimentary training, professional development, compliance support (ATO, ACCC, IR) to further enhance retailer’s businesses and industry cohesion.
CONTACTS:
Australian Lottery and Newsagents’ Association (ALNA) Level 1, Suite 1.7 & 1.8 56 Delhi Road, North Ryde, NSW 2113 Email: [email protected] D +61 2 9978 3400| F +61 2 9978 3499
Lottery Retailers Association (LRA) c/- Suite 32, 456 St Kilda Road Melbourne VIC 3004 Email: [email protected] Phone:(03) 9562 1130 Fax:(03) 9560 3262