All work and no play: The impact of the cost-of-living crisis on discretionary spend

No sooner had the cost-of-living crisis become real for UK consumers at the start of April with the rise in National Insurance coinciding with the increase in the energy price cap, that the CEO of Entain, Jette Nygaard-Andersen, was dismissing the potential impact. Speaking on a call with analysts to discuss the betting and gaming giant’s first-quarter trading statement on 7 April, the Dane noted that Entain’s average stake level across its main UK brands of Ladbrokes and Coral was £10. Gambling spend, she said, was “not the first thing that impacts households”, before adding, “but of course, we follow these things closely”. It was an attempt to reassure investors that the gambling sector was better insulated than some from the macroeconomic factors affecting the UK consumer. But it might have been more believable if, on the same day, 888 hadn’t highlighted exactly the same backdrop as part of the reason for the £250m price cut it had negotiated with Caesars Entertainment for the sale of William Hill’s largely UK-driven international business. And then there is the evidence from a recent poll undertaken by YouGov on behalf of newly launched affordability solutions provider Department of Trust (DoTrust). The survey of 700 gamblers conducted in mid-March found 32% of respondents plan to cut down on their gambling spend in the coming months, while 18% will stop entirely. According to 59% of these consumers, this was directly related to pressure on their finances, with 43% saying they were consciously cutting back on essentials.

The confidence issue

These figures are no surprise when compared with data from YouGov’s consumer confidence survey that it conducts in conjunction with the Centre for Economics and Business Research (Cebr). The survey’s most recent data shows that confidence among UK consumers is “cratering”. When asked how their household financing situation was compared to a month ago, the score fell to 62.8 (where 100 equals a neutral score) and, when it came to the outlook for the next 12 months, the score fell to 49.1. Oliver Rowe, global head of leisure and entertainment at YouGov, says that historically such data points to a leisure and entertainment spending decrease as consumers tighten their belts. “People will withdraw discretionary expenditure,” he notes. A well-established assumption about the gambling sector is that it is recession-resilient; that it can weather the worst of any economic downturn. It is likely that Nygaard-Andersen was referring to this theory on the Entain analyst call, and it helps explain the subsequent comments from John DeCree, analyst at CBRE, that Nygaard-Andersen had highlighted “the potential resilience” of Entain’s customer base. “The lower range of that average is relatively inelastic, and the upper range is likely skewed from higher-end VIP players, who we believe are more insulated from economic impacts,” DeCree wrote. Yet there are a number of other factors that might mean that this time is different. As Charles Cohen, founder and chief executive of DoTrust, points out, the cost-of-living crisis isn’t actually a recession, not as yet. “This is an inflationary crisis,” Cohen says. “It undermines everyone’s ability to pay their bills. That can be very dangerous for player protection. We are not human Excel spreadsheets; most of us can’t calculate precisely what amount of our income we spend on every aspect of our lives like that.” It means that many people, even those who don’t ordinarily see themselves as being financially insecure, can easily find themselves suddenly having to make pretty drastic changes. “As our YouGov survey shows, gambling spend would appear to be every bit as sensitive to issues within the wider economy as other leisure sectors. The online industry in particular has succeeded in making gambling a more recreational pastime – but that means it is arguably less recession-resilient than before,” Rowe explains. Gavin Kelleher, analyst at Goodbody Stockbrokers, believes the question going forward will be how the current economic uncertainty affects the gambling habits of consumers, rather than if. “It will have a bigger impact on frequency and spend levels as opposed to people reducing or stopping gambling altogether. Instead of it impacting active numbers, it will likely have a bigger impact on yield,” he says. The response from operators will be illuminating. Lee Richardson, a veteran executive running his own consultancy, Gaming Economics, highlights that a time-worn route during periods of financial pressure has been to focus on the players you already have rather than acquiring new ones. “You would imagine there will be much more focus on loyalty schemes. I’ve seen some examples of that recently,” he notes. One such example comes from Rank, which owns the Mecca Bingo business. David Williams, director of public affairs at Rank, says that for its land-based operation the company has “stripped away a lot of the surrounding messaging in Mecca” to focus exclusively on a key value proposition. “Better prizes, lower prices; those four words encapsulate almost everything we are setting out to do in the weeks and months ahead. If that sounds simple, we’re more than comfortable with that,” he explains. Generally, Williams argues that consumers are “going to be more discerning than ever” about their leisure spend. “News outlets, consumer affairs sites and every form of traditional and social media are going to be searching for brands and businesses that can make your recreational money go further, and Mecca is looking to be front and centre in that space.”

Heading into choppy waters

The added benefit from a regulatory and compliance standpoint of a concentration on customer retention, suggests one industry insider, is that this could mean a slashing of acquisition marketing. “From a compliance point of view, that’s great because new customers are typically somewhat higher risk because you know less about them,” the source adds. This brings us to the UK government’s Gambling Act 2005 review white paper, which is now long overdue. Alongside the macroeconomic factors referenced by 888 in its William Hill sale renegotiation was the UK’s pending regulatory overhaul. As Kelleher at Goodbody suggests, the cost-of-living crisis is only one of the headwinds facing the sector right now and the review’s delay adds a layer of further uncertainty over the sector’s future. The intersection between whatever measures are finally proposed and the potential downturn in revenue and profits across the sector is destined to be one of the central issues in the coming year. As one source put it, if industry profits fall subsequent to the imposition of whatever measures are proposed, then does the government get to say at this point, “job done”? To put it another way, will consumer gambling spend be self-regulating before any affordability measures are introduced in perhaps 18 months’ time? It seems unlikely. Kelleher adds that while the cost-of-living crisis might be temporary, the likely measures around the area of affordability “won’t go away”.

Here to stay

Cohen from DoTrust cautions that the cost-of-living crisis poses some very real questions for the sector at what is acknowledged to be a crucial time. “I think the gambling sector in particular needs to tread carefully. Whatever measures are finally proposed by the government will take some time to come into force, meanwhile the sector will continue to remain under pressure from its regulators over compliance failures,” he says. The cost-of-living, high-profile campaigning from MPs and lobby groups, as well as the continuing news-flow over compliance failures are, as Cohen stresses, a “toxic combination”. “To hope that the problem will somehow solve itself by people voluntarily reducing their spend is gaslighting the public, making it their failure if they overspend,” he says. “In fact, the opposite is equally likely; with so much pressure on disposable income, the risks are multiplied to players. The focus on operators to have conscious, and conscientious, affordability measures in place is more likely to increase.” It is likely true that whatever measures the government does finally propose will have a more long-lasting effect on the sector and its prospects than the cost-of-living crisis. But the coincidence of the two happening contemporaneously will be the cause of much angst among industry execs. That brief on the part of Nygaard-Andersen and Entain might soon find itself overwhelmed by evidence of deteriorating trading conditions.