KEENELAND’S DILEMMA

October 10, 2009 by

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

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CRAFTING AND TAILORING RACETRACK CUSTOMER VALUE PROPOSITIONS

April 4, 2009 by

(This is the final segment of a three-part series. The first two articles were: “Why Horse Racing Declined,” Horse Racing Business, March 21, 2009 and “In Search of a Future,” Horse Racing Business, March 28, 2009.)

Last week’s article discussed the concept of a business model. A key component, in fact the sine qua non of a business model, is a customer value proposition (CVP). A CVP encompasses the benefits an organization is offering to potential customers if they purchase or consume its products and services. For example, Wal-Mart focuses on utilitarian value, as defined by product quality vs. price. By contrast, Tiffany & Company tenders something quite different, as it provides the finest products, a strong dose of prestige, and lofty prices.

The CVPs developed by individual racetracks can and should be quite different, as local conditions dictate-consider New York Racing Association’s summer racing at Saratoga as compared to its winter racing at Aqueduct. Moreover, all racetracks have separate CVPs for their on-track patrons and for their advance deposit wagering customers. These are as different as stock brokerage services packaged by Merrill-Lynch and E*Trade.

Well-meaning people, ranging from fans to longtime industry participants, are wont to express their convictions that racing’s fortunes would be enhanced if racetracks were only to adopt, say, the Keeneland CVP, or the European CVP, or the Hong Kong CVP, etc. This is equivalent to saying that all retailers would improve their lot if they were to follow the highly successful Wal-Mart CVP, or the Nordstrom CVP, or the Target CVP.

In reality, each racetrack has to craft its own CVP around the circumstances in which it operates: the demographics of the target market, the weather, the economic profile of the market area, and so on. Trying to force a Monmouth CVP into a Hawthorne environment would not be a good fit at all.

The nomenclature”the racetrack industry” is much too broad for purposes of crafting and tailoring CVPs to market areas. Simply put, there is no generic CVP-or one size fits all-that will work across racetracks. There are tracks that are successful providing ambience, others that are working people’s tracks, some that are racinos, and a number that are basically television studios supplying simulcast signals. An executive of a major racetrack told Yours Truly that his company could make a better profit if it had no live racing at all and operated as a bare-bones simulcasting and advance deposit wagering facility. A West Virginia legislator recently remarked that state law could be changed to enable Charlestown and Mountaineer to abolish live racing and have the tracks concentrate on alternative gaming and off-track betting. A proposal like this has also been introduced as a bill in the New Hampshire legislature.

Another often-heard opinion is that racing needs a commissioner (or even federal regulation) to oversee the sport in the United States, which is wishful thinking.  In the first place, under federalism, the states have the power to regulate commerce within their boundaries. Additionally, as with the major sports leagues, a commissioner must have real legal power to enforce conformance by franchisees.  Independently-owned racetracks are unlikely to cede their authority to a league office.

Because racing is a decentralized industry, the job of tailoring a winning CVP rests with the individual racetracks. In fact, that is where racing’s fate will be determined…in the trenches, so to speak.

Elements comprising a racetrack’s CVP include the level of racing, the takeout on handle, facilities and creature comforts, customer service, parking, food quality, and prices. One track can be successful blending these in a certain way, while another track is profitable by deemphasizing on-track amenities and instead focusing on gamblers who bet remotely.

Some racetracks will craft their customer value proposition around both gambling and the sporting aspects of racing, others will mostly emphasize gambling and cater to people so inclined with handicapping contests and the like, whereas a very few tracks may gloss over horses and gambling altogether and instead offer a setting to congregate and socialize, say, “where the surf meets the turf.”

The debate about whether horse racing is a sport or gambling is a forced and unnecessary dichotomy. Ideally, to aficionados, racing would be presented as a sport. To estimate if this appeal would work or not one only has to go to horse shows, where there is no legal gambling, to typically find sparse crowds. Las Vegas attempted to promote itself as being as much about family-oriented entertainment as gambling…and retreated to a “What happens in Las Vegas stays in Las Vegas” message. The degree to which a particular racetrack promotes racing as a sport, or as gambling, is a key aspect of the business model it develops for its circumstances, so there is no pat answer, but gambling must always be an attraction of the CVP.

Part and parcel of a racetrack’s CVP is its approach to dilemmas that are public-relations landmines and can and do turn people off to horse racing. The way that each track handles such issues is critical to its success over the long term. For instance, Presque Isle Downs in Erie, Pennsylvania, has put a premium on the safety of racehorses and jockeys by installing a Tapeta racetrack designed by former trainer Michael Dickinson, who has a deserved reputation for putting the welfare of the horse first. (I once heard him say that Thoroughbred races should be started like harness races, behind a moving vehicle with a gate attached, because the Thoroughbred starting gate is the most perilous place for horses and jockeys.)  Another example:  Suffolk Downs has made a statement about horse slaughter by instituting a zero-tolerance policy of banning any trainer caught shipping animals from the racetrack to a slaughter house.

Racetracks devoting more than lip service to reform-like Presque Isle Downs, Suffolk Downs, and others-will honestly and credibly be able to communicate to the public that they are sincerely addressing the underbelly issues of racing.  That will enhance their CVPs.

Even here, though, there are important distinctions to be drawn and generalizations are inappropriate. Every track, for instance, should not be painted with the same negative brush concerning such problems as catastrophic injuries and breakdowns. While breakdowns during races plague Thoroughbred racetracks, they are much less of a concern for harness and Quarter-Horse tracks. Standardbreds and Quarter horses don’t break down in the midst of races to the degree that Thoroughbreds do. Further, all Thoroughbred racetracks do not have the same incidence of breakdowns.

People who care deeply about horse racing and the animals involved are rightly concerned with catastrophic injuries, drugs, and slaughter.  If these black-eye issues are to be mitigated, racetracks will need to address the problems head on, for two reasons.  First, it is the ethical/moral course of action.  Second, doing so is good for business–companies that behave in a socially responsible way have a lot to offer and promote.  By acting in the interests of horses and jockeys, the racetracks will put a patina on their CVPs that will appeal to customers who might otherwise spurn the sport.

What about racetracks that primarily run low-level claiming races? If they crack down on the practice of medicating unfit racehorses, will there be enough entries to put on the show? The answer is very straightforward: If a racetrack has to rely on sore and gimpy racehorses whose ailments are masked by drugs, then its CVP is so weak that it may not be sustainable, or at least not very profitable.  From the standpoint of equine welfare and racing’s image, this is a case of addition by subtraction. 

Racetracks that are able to craft CVPs attractive to their target markets, beginning with a laser-like focus on customers and including a zeal for the safety of the stars of the show, will do well. The free market works and it rewards companies that provide what the target market wants…and punishes those that don’t.

Copyright © 2009 Horse Racing Business

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IN SEARCH OF A FUTURE

March 28, 2009 by

(Continued from “Why Horse Racing Declined,” Horse Racing Business, March 21, 2009.)

Andrew Grove, chairman emeritus of Intel, explains the term strategic inflection point:

… a strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end. Strategic inflection points can be caused by technological change but they are more than technological change. They can be caused by competitors but they are more than just competition. They are full-scale changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient. They build up force so insidiously that you may have a hard time even putting a finger on what has changed, yet you know that something has. Let’s not mince words: A strategic inflection point can be deadly when unattended to. Companies that begin a decline as a result of its changes rarely recover their previous greatness. But strategic inflection points do not always lead to disaster. When the way business is being conducted changes, it creates opportunities for players who are adept at operating in the new way. This can apply to newcomers or to incumbents, for whom a strategic inflection point may mean an opportunity for a new period of growth. You can be the subject of a strategic inflection point but you can also be the cause of one.

Horse racing in the United States is either at an inflection point or on the downside of one, all but certainly the latter. The sport could plug along for a while with sustenance from a loyal but aging core of fans–and in some places from alternative forms of gaming–but wither away. On the other hand, with the right business models, horse racing could solidify itself as the 21st century progresses, even though a return to its previous greatness is unachievable.  Which scenario eventuates will ultimately determine the fate of the entire bloodstock business because wagering handle is ultimately the economic raison d’être for all else.

The most likely scenario is that racetracks offering an attractive value proposition will do well and vanilla tracks without one will perish. Another way to say this is that only racetracks with a distinctive business model will survive.

In the racing press and at racing conferences, there are often comments that racing needs a new business model. When you examine what is being said, most of the time the term business model is intended to mean a profit model. A business model is broader and encompasses a customer value proposition, a profit formula, strategies, and the human resources and processes that deliver value to customers.

A recent Harvard Business Review article titled “Reinventing Your Business Model” did an exceptional job of explaining the term, which consists of several interacting parts or elements.

First, a business model starts with a customer value proposition…or what benefits customers in the target market are getting out of consuming the product or service. Put differently, what need and/or want is being satisfied. Why does one prefer to go to a racetrack rather than bet online-and vice versa? Clearly, these are different value propositions.

Second, a business model contains a profit formula, which, in turn, consists of a revenue model, a cost structure, and a margin model. Racing has multiple profit formulas, depending, for instance, on whether wagers are made on track or off track and on whether a wager is a straight win, place, show bet as opposed to an exotic bet. Further differences depend on whether an at-the-track wager is made on a live race or a simulcast race and whether the person who bets through an advance deposit wagering service lives within a certain distance of a racetrack.

Third, a business model encompasses key resources “needed to deliver the customer value proposition” and the key processes that “make the profitable delivery of the customer value proposition repeatable and scalable.” In the case of racing, key processes and resources are, for example, information and communications technologies and the skilled professionals in charge of them.

Following are some business models that have proved to be successful in horse racing:

Del Mar, Keeneland, Saratoga, and to some degree Oaklawn and Monmouth are racetracks with a high probability of ongoing profitability because they have well-defined and proven business models, and in particular attractive customer value propositions. These are boutique lifestyle racetracks that have short meets and a pleasant on-track ambience. The high quality of racing contributes to the profit model by enticing off-track wagering.

Churchill Downs Inc. has at least two business models that sustain it. The first one is built around the customer value proposition and the profit formulas associated with its signature event, the Kentucky Derby, which is a single weekend per year. The other Churchill Downs Inc. business model is based on year-round racing from its four racetracks and from alternative gaming.

Mountaineer Casino Racetrack and Resort, Philadelphia Park, Indiana Downs, and others, offer a racino business model. So far, this is a successful approach utilizing a different customer value proposition with a different profit formula. This inherent risk, of course, is that state governments may decide to forgo subsidizing horse racing with gaming income.

Another useful business model is employed by racetracks that have essentially opted to be television studios for the purpose of sending out signals to off-track sites. These racetracks have live racing at odd hours and often on Tuesdays to fill out simulcast schedules during these slow times. They usually try to avoid head-to-head competition with more popular racetracks. Their strategy is to “be where they aren’t” and to provide a low-cost commodity signal to gamblers.

The European and Asian racetracks also differ in terms of customer value propositions, but, unlike most racetracks in the United States, they prefer short meets. Whether the European and/or Asian customer value propositions could be successfully transplanted to the United States is unanswered, but might be experimented with to see. Keeneland has two short meets per year and does spendidly.

Each racetrack must carve out its own business model, built around its particular external environment and internal strengths, in order to continue on in business. In other words, racing does not have a business model per se, but rather, it has business models, just as Wal-Mart, Nordstrom, Target, etc. have their own templates that made them outstanding. The profit formula is similar across racetracks, whereas customer value propositions are very different. Importantly, it is a fallacy to think that a business model that works well in one venue can be cloned in another location and the results will be the same.

Examples are easy to find of racetracks that do not have a clearly-articulated business model formulated around an attractive customer value proposition. Such tracks with a generic approach will likely vanish. In addition, a few racetracks have a winning business model, but they are too valuable as real estate plays to survive as racetracks.

Forecasting and predicting are always risky propositions because the future is unknowable. With this disclaimer, if present trends can be extrapolated, the most likely outcome for horse racing in the United States is a downsizing–just how severe is indeterminate.

Based on the assumption that more racetracks will be closing than opening in the United States, there will be fewer racetracks: marginal racetracks without a compelling customer value proposition won’t be able to survive. Ohio, for instance, with seven racetracks will surely have attrition and, likewise, California and Kentucky have tracks on the bubble.

This rationalization should translate into a reduced bloodstock component. The market for well-bred racing prospects with good conformation should remain strong, but, as the shakeout in racetracks occurs, demand for pedestrian racing stock will probably see a precipitous decline, as the law of supply and demand works. A beneficial offshoot would be fewer unwanted horses.

While the number of racetracks and the bloodstock industry in the United States should shrink, total betting handle and purse averages may actually increase because of remote wagering on the surviving North American racetracks, as well as  on international signals. In my view, the racing industry in the United States will be considerably smaller as the 21st century progresses but will have a more solid economic foundation than it does today. 

Next week’s (April 4, 2009) article “Crafting and Tailoring Racetrack Customer Value Propositions” explores this all-important subject in more depth and looks at such issues as positioning racing as a sport or gambling, customer service, horse slaughter, breakdowns, medication, and handle takeout. It is the third and final article in the Horse Racing Business series of March 21, March 28, and April 4, 2009.

Copyright © 2009 Horse Racing Business.

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