JOHN WHITE, Deputy Director of Finance, New Jersey Lottery
How will the world be different when we come out of this crisis - and how will the lottery industry, retailing, consumer shopping and recreational behavior be different?
In New Jersey we already have experience with a recent event, Superstorm Sandy. So we have a general idea of what to expect in the not-too-distant future. In that event our retailer network was severely crippled. Retailers along the Atlantic coast and flood-prone areas were out of commission for some time and many never reopened. Sales fell off precipitously and were slow in recovering, particularly for the multi-state jackpot games.
This environment, although similar to Sandy with its impact of reducing sales and the number of retailers, has another aspect that sets it apart from the natural disasters that many lotteries had to cope with in recent years and that is the social distancing necessary to control and eradicate the disaster. It is this factor that presents the greatest challenges to lotteries in recovering from the pandemic, especially given the prognostications of public health experts that COVID-19 will return in cycles multiple times in the next few years.
The social distancing mandated in response to COVID 19 has compelled many employers to have more of their employees work from home. Many are finding that despite some initial logistical obstacles, that productivity has not been significantly hindered. That said, it is highly plausible that COVID 19 has accelerated many employers’ plans to increase telecommuting as a means of increasing productivity while reducing overhead (decreased facility and related utility costs). If this theory holds, there will be fewer people out and about on week days and these same people will be less likely to frequent brick and mortar establishments during their “business” day.
In New Jersey and New York, almost everyone knows someone who suffered from or died from the pandemic. This factor alone will give lottery players caution about their purchasing habits, whether they minimize visits to retail establishments or how they socialize publicly. Both behavioral modifications are of concern to lotteries. The former for the obvious reason, but the latter because of the increasing number of lottery products that lend themselves well to bars and restaurants such as keno.
In New Jersey we are particularly concerned because as recently as Fiscal 2017, we had no social space games in our portfolio. In Fiscal 2021 we were anticipating very robust sales from our keno style game Quick Draw and its sister game Cash Pop which was successfully launched in September 2019. In view of all these factors, New Jersey will need to reassess its expectation. Lotteries are a business, but they are a government business. As such they must be managed in a way that foster positive externalities and public health is definitely a positive externality.
What might lottery operators be doing to position ourselves for success in the post-coronavirus world?
To be successful in the post COVID-19 world, lotteries must not only offer a diverse portfolio, but more importantly, diverse methods for players to play our games.
At the start of the pandemic, New Jersey only had one registered courier. There may be market opportunities for more couriers in the state. Increased competition will guarantee that players are not paying exorbitant fees to play the lottery without going to the store.
Lotteries for some time now have been developing online or ilottery games and some are much further along than others in their deployment. Given the expectation that players are not going to leave their homes as frequently as in the past, the demand for such products is only expected to increase. Furthermore, the dearth of sporting events in this pandemic and the potential for further suspensions of professional sports in future pandemics, those lotteries with well-developed online portfolios will be better poised to benefit from a gambling option that should be immune from social distancing protocols.
In the years prior to COVID-19, consumers have been using less and less cash and more plastic to pay for purchases. Younger consumers are more likely to carry no cash on their person and pay for all their needs through a credit or debit card. Faced with an aging player base, younger consumers are of course the most sought-after demographic for lotteries. COVID-19 is only expected to hasten the shift from cash to credit/debit as cash is seen to be an easy way to spread germs, whereas, credit and debit cards can easily be sanitized.
Thus lotteries must work to make the use of credit and debit cards a viable option for players wanting to play their games. This will require working with banks and financial institutions and possibly state regulators on the fee structure for such cards and determining who will bear the costs for such fees - retailers, players or lotteries themselves.
This is a very important question, because lottery retailer networks are going to suffer significantly from COVID-19 and may never quite recover from its impact. Historically, brick and mortar retailers have been the lifeline of the lottery industry and must continue to be an important part of the industry’s continued success moving forward. What lotteries decide to do with credit and debit cards will determine how successfully their retail network will be in the years to come. Depending on what lotteries decide to do with the associated banking fees may also help to put retailers on an equal footing with the courier services with whom they are in increased direct competition.
Lottery has performed better than other sectors in past economic recessions. How severely will the economic repercussions of coronavirus impact Lottery?
In the short term from a state revenue perspective, the lottery is at least bringing in revenue where tax collections have been postponed and other state revenues such as motor vehicles fees have been slowed due to staff not being available to process receipts.
With regard to the economy as a whole, New Jersey can again point back to its recent history with Superstorm Sandy. In a natural disaster and now a pandemic, consumers have to refocus their priorities. Ensuring they have the essentials of food, clothing and shelter take precedence to entertainment consumables such as lottery tickets.
In the wake of Sandy, jackpots that previously sent casual and committed players alike running to stores were no longer that important. Games such as Powerball and Mega Millions saw sales decline. Under COVID-19, both games have already had to restructure top tier starting jackpots and mandatory increases downward due to insufficient sales. This will result in further declines when jackpots reset. Subsequent to Sandy, the matrixes changes enacted a few years later remedied the situation and generated the record growth in the period from 2016 to 2019.
Powerball and Mega Millions have already experienced declines due to COVID-19. This may compel their governing consortia to make adjustments. Given that these games usually make or break lotteries from having a bad or so-so year to having a great year, it is important that the governing consortia weigh forthcoming adjustments very carefully prior to enactment.
Lotteries may also need to consider adjusting their respective portfolios of in-state, regional or multi-state games to increase their attraction to players. One such consideration is taking regional games that are performing well and expand them into another nationwide multi-state game that can help reclaim lost sales.
One such possibility is Cash4Life from New Jersey’s portfolio, a nine-state game that expanded from twice a week to daily at the onset of Fiscal 2020. Sales increases have exceeded expectation and even with the adverse effects of COVID-19, the game is still poised to finish well above budget expectations. Because of its “for life” payment component, the game does attract the desirable younger demographic. The expansion of games such as Cash4Life may help to fill the sales void left in the wake of COVID 19.
How lotteries address their jackpot games, couriers, in-lane opportunities, online play, struggling retailer network and payment methods will determine how well the industry as a whole fairs in the overall economy. The one thing the industry will always have going for it, is that we peddle in hope. The chance for life-changing money will always attract consumers to play our games.
Often times, when discussing lottery revenue projections with state officials, we like to say the lottery is like the major sports leagues, it is always going to make money but some years it is not going to make as much money as projected. Just like professional sports, when we do not make as much as anticipated, it is often-times due to outside or unforeseen factors such as COVID-19. Conversely, how much we do not make when such force majeure occur is up to each lottery whom through proper planning and learning from events such Superstorm Sandy or COVID-19 can take the necessary steps to mitigate against impacts on its revenue stream.
What opportunities will emerge in the post-coronavirus world? For instance, won't people be travelling less, and if so, might that be an opportunity to appeal to locally-grown forms of recreation like Lottery and casino gaming? For instance, in spite of months of social distancing, can't we expect that humans will quickly return to our natural state as highly social animals?
Necessity is the mother of invention. There is no question that COVID-19 will bring about increased innovation throughout the industry. Lotteries will be working with the vendor community to look for innovation and properly harness it.
As previously discussed, COVID-19 will compel lotteries to accelerate innovations already started with online gaming, in-lane, courier services and the use of debit and credit cards by players. Once these initiatives are maximized, lotteries will be better insulated from the effects of the next pandemic. If/when it occurs, sales will certainly drop off but not by the levels presently seen with COVID-19.
With regard to lotteries being in competition with locally grown forms of recreation, this may certainly be the case. Lotteries are currently not in competition with sports betting due to the suspension of operations by the major sports leagues, but some lottery jurisdictions may be in direct competition with online casino gambling. This will certainly continue in the post-COVID-19 world.
As for how quickly humans will return to pre-COVID-19 social norms - that will be dependent upon the overall severity of the pandemic. One would expect that after weeks of being cooped up in their homes, that people are going to go wild as soon as restrictions are eased. However, if the severity is such that the death toll is high and the number of surviving victims is high, then no one is going to want to relive the experience anytime soon. In historical terms the United States has not seen a pandemic of this magnitude since the Spanish Flu of 1918, more than one hundred years ago. A good part of the reason it took a hundred years to have a similar disaster is because the people who lived through it took precautions that prevented it from happening again in their lifetime.
How might we reinforce and build upon the symbiotic relationship that Lottery has always had with its retail partners?
There is no question that our retail partners are suffering from the adverse economic effects of COVID-19. As previously discussed, it is likely that they will be suffering for some time afterwards. In spite of the inroads from courier and online games, brick and mortar retailers will always be a critical part of the lottery industry’s sales. It is imperative that lotteries realize this and not neglect their relationships with retailers.
The New Jersey Lottery has always been very supportive of its retail network and will continue to do so in the post-COVID-19 world. Through our management services agreement for sales and marketing with Northstar we continually run promotions to help generate sales at the retail level. Most promotions are games specific. Bonus hours for Quick Draw directly benefit social places such as bars and restaurants. All promotions for scratch-offs directly impacts brick and mortar retailers since couriers are not permitted to sell scratch-offs in New Jersey. Even promotions that are specific to games couriers sell, directly benefit retailers since couriers are not eligible to participate in such promotions.
Legislators and regulators will have a lot on their plate over the coming months. Even so, what can we do to push harder than ever to get approval to make Lottery products available online, i.e. iLottery? And to push for authorization to invest in new games categories, and new technologies like in-lane sales and cashless transactions?
Lotteries must be proactive within their jurisdictions to effectuate the changes necessary not only to be relevant in the 21st Century but in the post COVID-19 world. To do this effectively, lotteries must look to their mandate for existing in the first place. For the most part it was legislatures that created the mandate. Since legislatures will have significant issues to address when they reconvene, it is incumbent upon lotteries to begin the relevant dialogue with all stakeholders that will lead to the changes that will best enable lotteries to achieve their mandates.
Lotteries must be able to assess the impact of COVID-19 on their revenues and thus the impact on funding their legislative mandate. Simultaneously, lotteries must remind all stakeholders that although revenues were off, the lottery continued to be a source of revenue. This at a time when other form of revenues were suspended or dried to a trickle.
By identifying their lottery’s revenue decline, a lottery can point to either a shrinkage in programs associated with the mandate or the increased need to divert other state resources to prevent a reduction in programs.
Conversely, the lottery must be able to concisely identify the means to mitigate this loss of funding in the future while stressing that these means will lessen the need to divert other state resources or actually increase revenues in good times and thus increase program funding. Thus lotteries must develop a written plan for growing revenues and with the industry’s assistance, include the data necessary to substantiate the need to enact the plan.
Lotteries have different mandates. Some are education-based, some are senior citizen-based. Regardless of a lottery’s mandate the recession that is resulting from COVID-19 will certainly impact all the funding sources that underwrite the mandate. Many such revenue sources such as business or income taxes may take years to recover from this event. Lottery revenue which is more inelastic will be somewhat more stable. Nonetheless by working with all stakeholders, including legislators, lotteries can begin to take the steps to rebuild their revenue stream, ultimately grow revenues and better insulate themselves from future disasters.
What are some of the new challenges and obstacles that we will need to adjust to?
For the most part we have addressed new challenges.
One additional challenge we faced in New Jersey that may have impacted other states, is our very labor-intensive draw processes. This is driven by our significant reliance on ball draw machines rather than random number generators (RNG’s).
We have worked very diligently to keep our draw teams in a sanitized environment and to keep our employees and our vendors (auditors and broadcast/livestream personnel) safe from COVID-19. Thus far we have been successful.
Moving forward we recognize it as a vulnerability that must be minimized prior to the next pandemic. We have already looked to reinforce our contingencies for business continuity and shifting some of our games to RNG’s. Such measures will better enable our lottery from having to discontinue sales due to staff safety.
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