KEENELAND’S DILEMMA

The Fasig-Tipton yearling sale in Saratoga Springs, New York, was once the premier Thoroughbred auction in the United States and arguably in the world. Man o’ War is its most famous graduate. However, during World War II, in 1943, the federal government restricted rail transportation and Kentucky breeders sold their yearlings at a Fasig-Tipton sale held in a tent on the grounds at Keeneland in Lexington, Kentucky. This fortuitous foothold allowed Keeneland to start its own auction company. Keeneland eventually supplanted Fasig-Tipton as the premier venue to sell Thoroughbreds and it has not relinquished that unofficial title. Factually, based on several performance criteria, Keeneland can legitimately claim to be uno numero.

Now, that claim is being challenged by a new sheriff in town, a high roller of immense proportions.

In 2008, Fasig-Tipton was sold to Dubai-based Synergy Investments. This company is headed by a close associate of Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister and Vice President of the United Arab Emirates and the Ruler of Dubai. Sheikh Mohammed of Darley Stud is one of the two leading Thoroughbred owners and breeders in the world, along with the John Magnier-owned Coolmore empire headquartered in County Tipperary Ireland. Sheikh Mohammed has spent astronomical sums for racing and breeding stock that have been purchased at public auction and privately. His ownership of farms spans several continents.

Executives of Synergy Investments have been quite open and adamant that Synergy will return the Fasig-Tipton Saratoga sale of select yearlings to its place as the foremost auction of its kind. Synergy has commenced to expand and remodel the auction facilities, is aggressively  promoting the sale, particularly to international buyers, and is recruiting higher quality yearlings.

Opening night at the 2009 Saratoga Selected Yearlings sale in August was more crowded than I have ever seen it and the environment was electric with Sheikh Mohammed himself in the crowd. In spite of the economic malaise that has driven down prices at Thoroughbred sales around the globe, the Saratoga auction’s gross revenue, average price and median price were up over 2008 by 45.6%, 11.1%, and 9.9%, respectively. The revenues and average figures were the second highest in the Saratoga sale’s storied history and the median was a record. The percentage of yearlings not sold fell from 25.6% in 2008 to 22%. Hall of Fame trainer D. Wayne Lukas commented that the overall quality at this year’s sales was the best he has seen at Saratoga.

John Ferguson, Sheikh Mohammed’s bloodstock agent, bought 12 yearlings that constituted 22.6% of the auction’s gross and included four of the sale’s five seven-figure yearlings. (Ferguson was also the leading buyer at Fasig-Tipton’s July 2009 select yearling auction in Lexington.) In addition, buyers closely aligned with Sheikh Mohammed, such as his brother Sheikh Hamdan, made significant purchases. International connections bought yearlings that accounted for 43.1% of the gross revenues, up from 20% in 2008. This may be indicative of how strongly Sheikh Mohammed will support Fasig-Tipton and of how well the company’s muscular sales and marketing strategy is working.

As corroboration of Fasig-Tipton’s already growing cachet, Forbes magazine’s special issue (October 19, 2009) on “The Richest People in America” cites the 2009 Fasig-Tipton Selected Yearling Sale (rather than a Keeneland sale) as a barometer of what Forbes calls “The Price of Ultraluxury.”  Forbes wrote:  “Our price index of luxury goods rose [since 2008] 1% versus a 1.5% drop in inflation.  Here are the items that have the largest percentage changes.”  Under “Biggest Percentage Increases,” were four items, including the aforementioned Fasig Tipton sale:  “With roots back to 1917, this auction had total proceeds soar 46% to $52 million.  That is the second highest in its history, behind the $62 million posted in 2001.”

The powers that be at Keeneland privately have to be looking at these developments with trepidation. Sheikh Mohammed, the best customer that Keeneland has ever had, is now part of a contingent that has openly declared its goal to have the Fasig-Tipton Saratoga Selected Yearling sale displace Keeneland as the leading venue to sell the most fashionable bloodstock. Fasig-Tipton in Lexington, long a second banana to Keeneland, will undoubtedly join the fray.

Keeneland’s dilemma: How does its management and sales force handle the nascent onslaught by a deep-deep-deep pocketed competitor that also happens to be its most important buyer ever? When the Keeneland people go out to recruit yearling sellers they will, as sales reps, have to persuade these sellers that Keeneland is a better choice than Fasig-Tipton. Keeneland may not explicitly comment negatively on Fasig-Tipton, at least not initially, but at some point it will have to do so when it tells sellers of the pros and cons of Keeneland vis-à-vis Fasig-Tipton. That is fundamental to personal selling 101.

A duopoly—a market dominated by two major players—can be as dog-eat-dog as any. Keeneland vs. Fasig-Tipton has the potential to be the Coca-Cola vs. Pepsi of Thoroughbred auction sales. When Fasig-Tipton begins to increase its market share of the most regarded yearlings, competition will naturally escalate accordingly.

Sheik Mohammed (and his friends and associates) will no doubt continue to patronize Keeneland for top-class yearlings. But he will also do a lot of business at Fasig-Tipton, and this should have a domino effect as shown by the dramatic increase in buying by international interests at the 2009 Saratoga select yearling sale. Fasig-Tipton has already begun to establish the reputation as being the “Sheikh’s sale.” This name recognition is a powerful magnet for global yearling sellers and buyers.

The winners in the upcoming Keeneland/Fasig-Tipton battle royal will be yearling sellers and buyers, who always benefit from strong competition for their business. Long-time loyalty to Keeneland or Fasig-Tipton will matter not, as sellers gravitate to where they can do the best business.

The folks at Keeneland are in close to a catch-22 situation in that they can’t win for losing. Businesses cater mightily to their best customers and forcefully battle their competitors. This is the prototype unless the best customer and the leading competitor happen to be one and the same. Keeneland and Fasig-Tipton may declare their intent for “cordial competition” but the devil will be in the details.

A day will come, sooner rather than later, when both groups covet an impeccably bred yearling with upper-seven-figures potential…and the gloves will come off.

Over the next several years, look for Keeneland’s market position to weaken and Fasig-Tipton’s to strengthen.  Then the two auction houses will settle in near parity like Christie’s and Sotheby’s in the fine art business. 

Copyright © 2009 Horse Racing Business

Potpourri

1. David Logan, the chief executive officer for USA Track and Field since July 2008, recently was the featured speaker at the convention of the dietary and healthy foods industry. His speech, titled “Braiding the Noose,” was a blistering attack on performance-enhancing drugs and the people who provide them. Much of what Logan said could and should be said about horse racing.

Following are a few salient and verbatim excerpts:

  • …in many ways, the supplement industry has been assisting in braiding the noose.
  • Performance-enhancing drugs are threatening to choke the life out of the sport that I serve and love.
  • …it seems that nearly all the top stars of the last 10 years have been caught using drugs, were strongly suspected of using drugs, or were in prison. Marion Jones, Justin Gatlin, Tim Montgomery: These once-great sprinters continued the poisonous legacy of Ben Johnson. In track and field, if your 100-meter superstar isn’t clean, the sport isn’t clean. Ninety-nine percent of athletes could be clean, but it wouldn’t matter. Their transgressions overshadow and overpower the accomplishments of even Edwin Moses and Michael Johnson, in the memories of most.
  • While this battle for “clean” supplements rages on, I focus on waging the battle for the hearts and minds of our athletes, coaches, agents, and support staff to win the culture war against drugs. I am a person who likes simple concepts. This is pretty simple. I have two words for any person who uses, promotes or tacitly endorses the use of drugs by any athlete. GET OUT! Get out of our sport and out of our competitions.
  • I am personally committed to doing our part to reverse this cultural perversion. Our partners in this war, USADA and WADA, are waging the battle with ground-breaking science and techniques. The supplement industry can do its part in assisting us in the fray. The next time, do not be so quick to oppose reasonable and responsible federal regulation of your industry. Those who conduct ethical and legal businesses will ultimately benefit from the tightening of laws and increased scrutiny. If you say you can self-regulate, then, by gosh do it…We are cleaning our house; get your brooms out and clean yours!
  • It is an era when the best man or woman–not the best chemist–will win.

(Logan’s passionate admonition “GET OUT! Get out of our sport and out of our competitions” is similar in content and tone to what the outspoken Barry Irwin, CEO of the highly successful Team Valor partnerships, said in the February 14, 2009, issue of the Blood-Horse about trainers who repeatedly violate medication regulations:  “Don’t just give them a fine or suspend them, get rid of their asses, kick them out.”)

USA Track and Field has a “Zero Tolerance Plan,” complete with a 24-hour “Whistle-Blower Hotline,” where athletes, coaches, and the public are invited to call in confidence with tips on illicit drug use.

2.  In a related matter, on February 5, 2009, USA Swimming suspended Michael Phelps, who earned eight Gold Medals in the 2008 Olympics, for three months from competition and cut off financial support, even though his infraction of allegedly smoking from a marijuana pipe at a party was not a violation of the organization’s anti-doping rule.

3.  Major League Baseball is another sport plagued by drug-use issues.  Boston Red Sox slugger David Ortiz weighed in this week about the League’s pervasive and embarrassing steroid problem:  “I would suggest everyone get tested, not random, everybody.  You go team by team.  You test everybody three, four, times a year…”  MLB currently suspends a player 50 games for testing positive once, 100 games for testing positive twice, and  imposes a lifetime ban for testing positive three times, albeit he can appeal after two years.  Ortiz says to “ban ‘em for the whole year” for the first violation.

4.  My article of February 14, 2009, titled Racing’s Misguided Muhammad Ali Philosophy of Publicity, evoked reactions ranging from hostility about what I wrote to full agreement with what I said.  Contrary to what some readers posted, I never said or intended to imply that controversial issues in racing should be covered up.  In fact, I wholeheartedly agree with Barry Irwin’s unequivocal comment in item 1 above.  Make no mistake:  habitual medication cheaters in racing should be sent packing permanently (a metric is needed for an unambiguous definition of  “habitual”). 

The theme in my article is that racing’s many favorable aspects should be conveyed to the public (accentuate the positive or put your best foot forward), while racing’s shortcomings should also be addressed by industry participants but in an unemotional and factual way and presented to the public without sensationalized titles and copy.   Coverage of racing’s negatives that does otherwise tends to lapse into abusive ad hominem arguments that solve nothing and leave the public with unflattering impressions.   An example of how a negative might be addressed:  On February 16, 2009, the Portland Oregonian carried an article about breakdowns.  The reporter wrote:  “Nationally, some experts point out that 30 years ago, a fatal breakdown at a track was almost unheard of.”  Is this factual?  If not, the way for racing insiders to clarify the record  is to obtain hard data from 30 years ago and then dispassionately present the findings, rather than to counter with emotional assertions with no evidence to back them up. 

5. The recent announcement that Bessemer Trust (the wealth-management subsidiary of Bessemer Group) would no longer be a title sponsor of the Breeders’ Cup was a body blow to racing. Bessemer Trust began as an investment- management vehicle exclusively for the family of Henry Phipps, who was a partner of Andrew Carnegie. Bessemer Trust is now available to anyone who has at least $10 million to invest with the company.

The storied Phipps family legacy in racing goes back to Mrs. Henry Carnegie Phipps, Henry Phipps’ daughter-in-law. Bessemer Group’s present chairman is prominent racehorse owner Stuart Janney III, whose mother was a Phipps. His cousin is Jockey Club Chairman Ogden Mills Phipps. The fact Bessemer Group is abandoning the Breeders’ Cup sponsorship that it has funded since 2001 says a lot about the cost-cutting taking place in investment firms and about the Herculean task of selling sponsorships that the Breeders’ Cup management faces in the current recession.

6. Another key indication of the toll that the economic turmoil has had on horse racing is contained in the news release by W. Cothran Campbell’s Dogwood Stable on February 5, 2009. It read, in part:

Because of the current economic climate, Dogwood Stable, the pioneer in the field of Thoroughbred racing partnerships, has announced a 2009 marketing policy that will offer smaller ownership units, less markup, insistence on lower maintenance charges, and anticipated purchase prices of 60 to 70 cents on the dollar from previous years.

Dogwood president W. Cothran Campbell said that “We think we can buy at 60 or 70 cents on the dollar from previous years…And Dogwood Stable’s markup on these reduced prices will be lessened by 20 to 40 percent on the horses purchased.” Campbell went on to say that veterinarians, trainers, and suppliers will also be forced to reduce their fees.

If one of the handful of premier racehorse partnership organizations is drastically rationalizing its operations, look for a shakeout in the number of partnership companies, especially among marginal players.

And now two items on the lighter side…

7. The Fifth Racing Congress was held in Las Vegas from February 2-6, 2009. It was a joint effort of the Thoroughbred Racing Associations, Harness Tracks of America, United States Trotting Association, and affiliated groups. Besides the racing topics covered in the speeches and panels, one of the highlights was a luncheon address by Oscar Goodman, Mayor of Las Vegas, who is a character right out of central casting.  I have never heard a politician be so amusing and candid about his background–as a mob lawyer–and how he ran for office –against the wishes of his own family–and won despite plenty of media opposition in Las Vegas, San Francisco, and elsewhere. Goodman told the audience about how he bought into a racehorse named after him (Oscar the Mayor) and that his investment was a loser.  Goodman annually attends the Del Mar meet.  When asked a probing question about Las Vegas, Goodman said: “I take the fifth.”  Maybe what happens in Vegas really does stay in Vegas.

8. Thoroughbred breeding and racing has a roundabout connection these days to Harvard University. Dr. Drew Gilpin Faust is Harvard’s president, inaugurated in 2007. She has a doctorate from the University of Pennsylvania and is an expert in the U. S. Civil War and the American South. Her grandfather is the late Kenneth Gilpin, who was a prominent Virginia Thoroughbred breeder and the first president of the Virginia Horse Breeders Association, which was the forerunner to the present-day Virginia Thoroughbred Association. He bought Fasig-Tipton auction company in the 1940s and revived the Saratoga Yearling Sales in 1946. His son, Tyson, succeeded his father at Fasig-Tipton when the elder Gilpin died in 1947. The late Tyson’s daughter Drew was raised among some of the renowned owners and breeders of Thoroughbred racehorses. However, she rebelled against life as a Virginia society belle and set out on an academic career track that took her to the presidency of Harvard. Ironically, Dr. Faust’s ancestors include two past presidents of Harvard’s Ivy League rival Princeton, including Aaron Burr Sr. (father of the third vice president of the United States).

Copyright © 2009 by Horse Racing Business