Patrick McHugh, Chief Executive, Lottery Group, SCIENTIFIC GAMES

Re-Imagining Our New World

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? 

First, I really want to thank our global lottery customers, business partners and our Scientific Games employees for everyone’s support as we navigate this crisis together. Maintaining the healthy safety of our employees is our top priority. Our customers were very supportive of the early steps we took to protect our employees while continuing to serve their business. I can’t thank everyone enough. It says a lot about the people and values of our industry.

To answer your question, I believe life after the COVID-19 crisis will be quite different, both during protracted recovery phases and longer term after the underlying health issue is finally solved. The health issue aside, changes in consumer habits and retail operations we had already seen pre-COVID-19 will accelerate, and the post-COVID economic conditions will create pressure on all parts of the lottery value chain. As a result, it will be difficult for stakeholders not to support investment in digital sales channels to modernize lotteries and sustain beneficiary funding.

On the economic front, lottery beneficiaries will face a funding shortfall. Many lottery retailers will be financially challenged—posing a threat to lotteries’ primary sales channel. The lottery supplier community may shrink. Lotteries will face natural government reaction to focus on cost control and may miss the greater opportunity for increased profits through investment. That said, lotteries’ broad distribution network, large consumer base, brand recognition and integrity make our products very resilient and uniquely positioned to continue to entertain consumers and deliver critical beneficiary funding.

To protect our industry post-COVID, the lottery community will need to advocate for investment in the value chain to realize growth, as we have consistently done after previous economic downturns. This will include working to maintain advertising and marketing funds, prize payouts, and investment in products and sales channels that will return greater profits. I just saw a small, but great example with one of our Asian lottery customers…the Lottery temporarily increased retailer commissions post-COVID openings as a stimulus means to support their valued retailer partners and restart sales of lottery products. It was a smart investment for multiple reasons.

With a view to the future, Scientific Games has been bullish on parallel investments in expanding our capacity in both retail and digital products and services. Our programs have led the industry by creating the most profitable programs for each channel. We remain very bullish that post-COVID lotteries can recognize significant growth through complimentary retail and digital strategies.

To help our lottery customers navigate the immediate impact, during the COVID pandemic, Scientific Games has been monitoring consumer opinions with our own ONEVoice™ national consumer panel as well as research partner panels. This has given us a wealth of information to help our customers re-imagine their lottery business.

Naturally, the general population is now going to be far more conscious of pandemic risks and will face a challenging economic impact for some time. Our consumer research indicates that gas station trips will be more focused on gas and less on going inside the store. While many old routines will be lost, new routines will be found. More people will continue to work from home, buy groceries and other products online, and save money by cooking and making their coffee at home—which means fewer visits to retail shops and convenience stores, therefore less impulse buying. Our research shows that many consumers plan to continue ordering items online even after stay-at-home restrictions are lifted, which will also impact store traffic.

Grocery will be interesting to watch as to whether traffic increases with more people cooking from home verse the traffic reduction from home delivery services. I think we’ll see less traffic at customer service desks, making our product initiatives for secure expansion of instant games in-lane even more important.

What should we be doing to position lottery operators for success in the post-coronavirus world?

Focus on the consumer offering, continue to invest in the core retail products, and accelerate complimentary digital strategies. We can’t stand still.

Although no mainland U.S. lottery sales were suspended during the global COVID-19 crisis, 30% of the lottery retail network was closed. We saw MEGA MILLIONS and POWERBALL® do away with guaranteed starting jackpots and minimum jackpot increases. Lottery markets outside the U.S. were hit far more severely. Instant products have stood out during the crisis—both at retail and online. While the initial U.S. declines were alarming, there has been a bit of a comeback and instant game retail sales performance in late April and early May has been strong in many jurisdictions.

Our iLottery customers saw huge increases in new players and sales helping to partially offset the brick-and-mortar loss. Not every lottery is fortunate to be growing their instant category. We must continue to effectively manage and keep focus this important area as an industry—there are still substantial instant growth and improvements opportunities out there, particularly with logistics systems and enhanced category management—and of course with expanding to digital sales.

Despite essential retailers remaining open, every state lottery reported a drop in total retail sales, and subsequently far less revenue for the vital state programs they fund. This crisis is a wake-up call for those lotteries that haven’t yet modernized their business model.

Lotteries already selling online are seeing a huge lift in players and sales. Currently, only 12 of 46 U.S. lotteries allow lottery games to be purchased online, but only six of those including Pennsylvania offer eInstant games. The others are selling only draw games or draw game subscriptions online and missing the real sales impact of digital instant games. Also many states still allow only cash purchases—yet lottery is one of the largest consumer product categories on the planet in terms of retail sales. Almost every other consumer product can be purchased online and delivered directly to the home, or can be purchased in store through cashless transactions.

The Pennsylvania Lottery, which already had the highest performing combined retail and digital program, continues to break records experiencing an 80% jump in iLottery revenues (current weeks vs. pre-COVID weeks) and a 200% uptick in first time players. While Pennsylvania’s program is relatively new, current sales are tracking to over $1 billion dollars annually. The state’s iLottery sales hit a record $4.2 million in online/mobile sales in a single day and is currently averaging over $3 million per day.

Consumers are ready, and it’s been proven that online sales lift brick and mortar retail sales.

Lottery has performed better than other sectors in past economic recessions.  How severely will the economic repercussions of coronavirus impact Lottery? 

That depends on how lotteries and their stakeholders react to the situation, and whether the industry can successfully advocate for growth investment over cost cutting. Cost cutting will pull value and profits out of each Lottery’s business. Investment will lead to more funding for beneficiary programs. We’ve proven this after every previous economic downturn when beneficiaries were facing funding shortfalls.

We are very fortunate to be in a resilient industry that has some resistance to economic downturns. Overall, during the Great Recession of the late 2000s our industry went from hot to flat. The growth slowed but did not decline massively. With that said, when you get into the details, there were some states hit very hard by the housing crisis during this recession that resulted in bigger lottery industry hits.

The coronavirus situation is somewhat similar, except for a more aggressive and quicker pullback due to the nature of the COVID event, which more resembles a natural disaster. The initial sales declines were particularly alarming, and we are thankfully experiencing some stabilization. The rate of declines has slowed, and in some categories like instant products, we are now seeing signs of substantial improvement and even cases of strong recent year-over-year growth. And we can’t ignore that having a well-established iLottery program would have helped any lottery generate significant sales during the crisis.

We remain cautiously optimistic because it is unclear whether this growth will be lasting or if it is being propped up by temporary events. But on average in the U.S., for instant game retail sales, the average lottery is down only 1% pre/post COVID impact, and the overall instant game impact is down by closer to 9%. The overall impact is more due to several states with large populations that have experienced greater rates of decline.

Unlike the Great Recession, coronavirus has sheltered people in place and outright closed certain sectors of the economy, such as bars and restaurants. This in turn has substantially damaged lottery products like Keno and other monitor games.  On average in the U.S., for monitor game sales, the average lottery is down by 40% pre/post COVID. For other categories, bloc lotto is down 9% on average pre/post COVID, and other draw products are down an average of 7%.

The situation is very dynamic and there are still many unknowns. Again, we are cautiously optimistic that things will continue to improve, but we are appreciative and cognizant of the many complex factors and challenges at work.  

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, despite months of social distancing, can't we expect that humans will quickly return to our natural state as highly social animals?

The lottery industry’s broad appeal and diverse retail distribution network is an asset. Augmenting with a strong digital channel adds even more value. Our COVID consumer panel research tells us that significantly more American lottery players will buy instant games in a new location, buy online, play instants outside of the store, plan instant game purchases ahead of time, and utilize instant ticket self-service machines after the pandemic ends.

Gaming will go through many changes. Online gaming of all types will grow quickly in jurisdictions that have been holding off.  Casinos will still be in business, but only the strong will survive. Slot machines and table games may utilize antimicrobial materials for touch surfaces. Games might be separated by shields

There will likely be fallout from the government’s use of mobile location data to track whether people are respecting social distancing and shelter in place restrictions.

How might we reinforce the symbiotic relationship that Lottery has always had with its retail partners?

It’s very important for the industry to recognize the value of our retail partners. Although COVID has caused significant health and economic challenges throughout the world, through it all retailers have stayed the course. In the U.S., essential retailers­—grocery stores, convenience stores and drug stores – remained open and their staffs continue to weather the storm. It’s natural that lotteries will, and should, focus on digital sales channels post-COVID. However, this should be done with a strategy that compliments each lottery’s retail strength and doesn’t compete against it. We need to demonstrate that our industry is also willing to invest in retail innovation.

Throughout the pandemic, retailers are seeing fewer customers coming through their doors and driving up to the gas pump. They have had to adjust product offerings in different areas and put new procedures in place to ensure both staff and customers are safe. The pandemic has also hastened the launch of new services such as home delivery, and in some cases store pickup. These new services and new procedures to ensure stores are clean and sanitized require the retailer to add more staff. And these additional in-store operations can occupy store associates’ time and reduce engagement with and management of the lottery category.

When we reach the other side of this, retailers will look to make up ground on lost revenues and how to adjust to the “new normal.” To maintain a symbiotic relationship with the retailers of today it’s critical to understand the challenges they face.

As corporate chains continue to grow and independents continue to lose ground, lotteries must address the operational, security, and pain points retailers have selling lottery products. Raising retail commissions to a level acceptable to retailers will forever be an unmet goal. However, focusing on instant products and modernizing how they are sold, merchandised and managed at retail is of paramount importance to furthering the lottery/retailer relationship. Our SCiQ® system accomplishes this—and we captured great analytical insights from consumer habits during COVID that would not have been visible without this technology.

Shapers of public policy will have a lot on their plate over the coming months.  Even so, shouldn't we expect that commercial operators, in a spirit of "not letting a good crisis go to waste", to push even harder to open markets and further marginalize lotteries? What can we expect on the regulatory front, and what might we do to defend the interests of government lottery stakeholders? What are some of the new challenges and obstacles that we will need to adjust to?

Yes, commercial operators will advocate for their business. And it’s not simply opportunistic, it’s survival. With such a global economic crisis, any commercial business needs to adapt to changing conditions—our industry included. As you said, we will face increased competition for our consumers’ entertainment choices. During COVID, we even saw sports betting suppliers expanding to take wagers on lottery drawings. We can’t sit still. The lottery industry will need to engage with policymakers. As we’ve seen in the news, this pandemic has highlighted the limitations and vulnerabilities of the lottery industry’s primarily all-cash, in-person business model. Lotteries must modernize to weather future crisis, as they inevitably occur.

Annual U.S. state revenues from traditional lottery are $24 billion. That’s a big number and it funds vital programs for education, seniors, health and welfare, veterans, the environment, and infrastructure. The COVID crisis has resulted in a devastating 20% to 40% declines in this crucial funding.

As both state and lottery revenues trend downward in the U.S., we expect the number of lotteries with online offerings to increase. As you have seen, Governor Lamont of Connecticut and Governor Scott of Vermont both already proposed an expansion of their state lotteries online.

In states where players can purchase lottery games via online/mobile, we have seen increases in first-time players, overall sales and online revenue. Players are choosing to play at home while they stay at home, if they have the option.

In the few states with mature iLottery programs such as Kentucky, Michigan, North Dakota, Carolina and New Hampshire, state revenues were already increasing 27% to over 100% year-over-year.

What’s inspiring to states looking to launch online/mobile lottery sales, is that during its first full fiscal year of iLottery, Pennsylvania traditional lottery sales grew 7.2% over the prior fiscal year and Scratch-Offs alone grew 5.9%. This can be credited largely to the effective management of the entire game portfolio, delivery of exciting iLottery content to the market, and tools to enable retailer support, while continuing with the strategic management of all traditional lottery products sold at brick-and-mortar retailers.

Lotteries should be cautious in choosing the right iLottery business partner. It must be a company that can not only technically launch an iLottery program quickly, but also make it commercially successful.   This requires experience in retail and digital game portfolio management, consumer research, player acquisition and retention programs, and omni-channel platforms. To be truly successful, the program must be supported by marketing experts who know how to effectively use powerful CRM tools and bonusing programs that can engage and retain their players.