AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION LOTTERY RETAILERS ASSOCIATION - 2017 ADVANCING OUR INDUSTRY IN PARTNERSHIP
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AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION LOTTERY RETAILERS ASSOCIATION REMUNERATION REVIEW SUBMISSION PUBLIC LOTTERY LICENCE COMMISSION REVIEW MECHANISM ADVANCING OUR INDUSTRY IN PARTNERSHIP 2017
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 2 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 CHALLENGESSUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 4
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 bySUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 5
1
about 2% per year 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,
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to 14.5% (16/17) and have now reached 16.4% 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.
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Australian Gambling Statistics 2014/15.
2
Australian Financial Review 28th of November 2017SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 6
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 lotterySUBMISSION - 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.
The summary below demonstrates how these costs have risen over the period.
Weighted Cost Increase 2012 - 2017
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.SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 8
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.
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NAB estimate , 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
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detailed snapshot of how Australian consumers make payments.
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.pdfSUBMISSION - 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.
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 10
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.SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 11
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.SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 12
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.SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 13
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:SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 14
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.SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 15 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.
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 16 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.
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 17 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).
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 18
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 intoSUBMISSION - 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.
SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 20
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:SUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 21
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 aSUBMISSION - AUSTRALIAN LOTTERY & NEWSAGENTS ASSOCIATION - LOTTERY RETAILERS ASSOCIATION 22
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.You can also read
