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C O N F I D E N T I A L | www.oliverwyman.com
Creating and capturing new value in the lottery industryLessons from Illinois...and beyond
November 16, 2010
Lottery Expo 2010 – Las Vegas
2CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Introduction: Value Transformation in Lottery
We believe that many Lottery assets significantly underperform relative to their absolute potential – do not focus on how well you are doing relative to others, but rather how well you could be doing relative to your real potential
Our experience across industries, including Lottery & Gaming, suggests that there is an ‘playbook’ that winning operators deploy to drive a virtuous circle of cash generation, selective investment, and growth
Step 1: Identifying, quantifying and prioritizing ‘plays’ that will enable sustainable value creation, increasing returns to the State / Province
Step 2: Making the plays and realizing the value
…we’d like to share two examples of very different approaches to realizing value once it’s been identified
–A US Lottery, who is going through the process of moving to a Public-Private-Partnership to lock in cash generation potential
–A European Lottery, who is preparing for the next wave of growth and a disruptive set of new competitors
3CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Before we begin: Who we areOliver Wyman is the strategy & operations consulting arm of Marsh & McLennan Companies
$1.5B in revenue
2,900 staff in 40 offices globally
Ranked #1 in quality / consistency by our clients
Growing faster than any other top 10 consulting firm
4CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Our approach to Value TransformationOur model focuses on combining industry knowledge with functional expertise and capabilities from across a broad range of industries
Capabilities
Industries
Industries Automotive Aviation, Aerospace & Defense Communications Energy Financial Services Health & Life Sciences Industrial Products & Services Lottery & Gaming Media & Entertainment Retail & Consumer Products Surface Transportation Technology Travel & Leisure
Capabilities Corporate Finance & Restructuring Customer Value Management Finance & Risk Leadership Development Sales & Marketing Optimization Organization & Change Offer Design & Pricing Operational Improvement Privatization, P3 Strategy & Business Design
Innovation Strategic IT & Operations
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The importance of the broad context…and lessons from abroad
Lottery
Gaming
Media & EntertainmentNorth
AmericaInternational
6CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Bottom line impactUltimately, we focus on delivering impact, with a long, proven track-record of substantial bottom-line results of our core team
Entertainment business
Oliver Wyman attendance
growth initiative
Full marketing transformation based around new strategic segmentation and pricing to drive attendance growth
Annual resort attendance
Media subscription business
Pricing portfolio changes, customer retention / development programmes, and marketing ROI to drive to profitability
EBITDA
Initial Plan(before Oliver Wyman program)
Actual(after Oliver Wyman program)
Revenue
Oliver Wyman marketing and pricing initiative
Leisure operator
Customer segment prioritization and pricing & promotions optimization to grow revenue
Advertising business
Yield management, customer segmentation & sales force effectiveness, asset profitability, value sourcingto restore EBIT level
Oliver Wyman program
EBIT
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What we mean by Value TransformationRestarting and/or reinventing stalled growth and cash engines and equipping businesses to drive sustained returns over time
Growth Cash
Upgrade the Core
Proposition
Drive Growth Beyond
the Core
Expand the Footprint
Drive Relentless Operational
Improvement
Drive down overheads
and indirects
Drive CommercialPerformance
1 6
3 4
2 5
8CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
The winning players’ PlaybookThe lesson of the long term winners is that there is a playbook to drive growth over time as well as a playbook to drive cash to fund it
The key to success in lottery & gaming is to be able to execute the right sequence of growth and cash plays over time, to the right standard
Growth Plays Cash Plays
9CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
The Lottery Playbook to drive Value TransformationWe have codified the lottery playbook to aid operators in selecting and prioritizing the right set of initiatives to drive profitable growth
1.0 Expanding the footprint
1.1 Retail network expansion and format reinvention
1.2 Vending machines
1.3 New technology (in-aisle, at-pump)
2.0 Upgrading the core proposition
2.1 New game options
2.2 Marketing and branding
2.3 Customer engagement
3.0 Drive growth beyond the core
3.1 New game types
3.2 Internet
3.3 Mobile technology
3.4 Alternative revenue streams
4.0 Driving commercial effectiveness
4.1 Sales force effectiveness
4.2 Channel management
4.3 Product portfolio optimization
4.4 Value based management
4.5 Marketing ROI
5.0 Drive relentless operational improvement
5.1 IT performance
5.2 Supply chain excellence
5.3 Operational labor optimization
6.0 Drive down overheads and indirect costs
6.1 Value Sourcing
6.2 G&A
Growth Cash
10CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 1: Identifying and quantifying value leversSpecific value levers, their potential impact, and what needs to be in place for them to be flexed, will be very different in each case
Performance impact
Consumer behavior
Value drivers
Value enablers
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Step 1: Value at stakeIn this example, we were able to quantify – and prioritize – several value levers that could drive significant upside in Lottery performance
Potential revenue upside in the Lottery (Today vs potential future ‘end-state’)
Today Loyalty Program
Prize Opp.
Dist-ribution
Fulfill-ment
Marketing SFE Comp from
EGDs
Lotto/ Mega-millions
only
Remain-ing
games
New platform
SSGs1 Keno TotalTotal
+ ~60%
+ ~90%
12CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 2: Applying the PlaybookThere are then different approaches to realizing the value, depending on the extent of regulatory obstacles and level of internal capabilities
External partnership with committed objectives
Internal program of focused efforts
When more significant changes and / or a broad set of capability upgrades are required
Requires Regulation / legislation
Philosophy / culture change
De-risk value realization
Case-study: Illinois Private Manager Transaction
Performance diagnostic
Opportunity review
Transformation journey
Case-study: Francaise des Jeux (French Lottery)
A question of prioritization to drive the most effective gains, enhancing capabilities to drive sustained growth
13CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 2: Illinois – playbookWe deployed the playbook to identify the priority levers to focus on
1.0 Expanding the footprint
1.1 Retail network expansion and format reinvention
1.2 Vending machines
1.3 New technology (in-aisle, at-pump)
2.0 Upgrading the core proposition
2.1 New game options
2.2 Marketing and branding
2.3 Customer engagement
3.0 Drive growth beyond the core
3.1 New game types
3.2 Internet
3.3 Mobile technology
3.4 Alternative revenue streams
4.0 Driving commercial effectiveness
4.1 Sales force effectiveness
4.2 Channel management
4.3 Product portfolio optimization
4.4 Value based management
4.5 Marketing ROI
5.0 Drive relentless operational improvement
5.1 IT performance
5.2 Supply chain excellence
5.3 Operational labor optimization
6.0 Drive down overheads and indirect costs
6.1 Value Sourcing
6.2 G&A
Growth Cash
Growth of the retail network
Not exhaustive
Optimization of network, and
network management
Sales force management
and incentives
True customer understanding
Enhanced marketing
spend
New distribution
options
Loyalty programs
Potential for Internet Pilot
Program Marketing optimization
14CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 2: Illinois - key deal elements
SCOPE
THE ‘WHAT”
GOVERNANCE
THE ‘HOW’
INCENTIVIZATION
THE ‘WHY’
What will the Private Manager
be responsible for?And the State?
How will decisions be made and approved /
disapproved?
How will costs and bonuses be paid? How will the State
be protected?
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Step 2: Illinois - value creation
$362 M
$172 M
$638 M
$1172 M
Actual Net Income CommittedIncremental Net
Income
ProjectedIncremental Net
Income
Projected Net Income
$1.1 B $0.7 B
20162009
Incremental NPV over 5 years $1.8 B
Illinois Lottery Growth in Net Income and Value, 2009 to 2016
+83%
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Step 2: FDJ contextFor 30 years, FDJ has grown, thanks to the continuous development of new offers…however, still saw the potential/need to seek new value
Revenue breakdown
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Passive lottery
Numbers
Mixed lottery
Sports betting
Instants
Rapido
Euro Millions
€ 9,3 bn stakes in 2007
29 millions players
#2 lottery in world
€ 9,3 bn stakes in 2007
29 millions players
#2 lottery in world
CAGR1978-2007
11%
17CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 2: FDJ - playbookWe deployed the playbook to identify the priority levers to focus on
1.0 Expanding the footprint
1.1 Retail network expansion and format reinvention
1.2 Vending machines
1.3 New technology (in-aisle, at-pump)
2.0 Upgrading the core proposition
2.1 New game options
2.2 Marketing and branding
2.3 Customer engagement
3.0 Drive growth beyond the core
3.1 New game types
3.2 Internet
3.3 Mobile technology
3.4 Alternative revenue streams
4.0 Driving commercial effectiveness
4.1 Sales force effectiveness
4.2 Channel management
4.3 Product portfolio optimization
4.4 Value based management
4.5 Marketing ROI
5.0 Drive relentless operational improvement
5.1 IT performance
5.2 Supply chain excellence
5.3 Operational labor optimization
6.0 Drive down overheads and indirect costs
6.1 Value Sourcing
6.2 G&A
Growth Cash
Loyalty program2 to 5%
additional sales
Not exhaustive
Indirect distribution5% of lottery
turnover
Mass merchant8-10%
additional turnover
Indirect value sourcing4-6% of
spendings
Sports betting From 7 to 14% of FDJ sales
(online from 0 to 25% of total)
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Standard
Advanced
Competitive advantage
Step 2: Capability enhancementsFor sustainable competition against very nimble new competitors, FDJ needed to move up what we call ‘capability staircases’
World-class
Key Question: How good do you have to be, at what, when?
Each step up the staircase– Represents a tangible operations improvement– Can be tied to a distinct bottom line impact
In reality, more a ‘downward moving escalator’– The name of the game is to deliver sustainable
improvement at a faster rate than it goes down
Capability& Value
19CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com
Step 2: FdJ - value creationManagement was able to commit to future targets that continued value growth despite the market opening to competition
$1,853
$2,461
$12,424
$16,740
Actual revenue Growth in traditionallottery business
Growth in newbusinesses (incl.
Digital)
Projected Revenue
20152008
FdJ Business Plan Revenue, 2008 to 2015
+35%
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Thinking ahead: what does your future hold?We see huge opportunities for the industry…but it will require guts to go after them and realize the potential in a sustainable fashion
The continuing financial crisis
Pressure to increase contributions to Lottery causes…but a culture of ‘cutting our way out of trouble’
An uncertain political climate
Increased open-mindedness to privatization and public-private partnerships…but short-terms, transitions etc. make strong strategic plays difficult
The Internet (and its extensions)
Huge opportunities to reach customers when and where it is convenient for them…but requirements for completely new business models, not incremental add-ons
Dynamic, disruptive competition
Potential to increase the scope of offerings into new territories…but a host of dangerous, proven, and often ‘gray-market’ competitors to worry about
How well are you really performing vs. potential (not just peers)?
What are the right ‘plays’ in the playbook for your lottery and what value could they create?
How to best realize ‘plays?’ Where do you need to upgrade capabilities?
21CASECODE-FILENAME (YYYYMMDD Descriptor).ppt© Oliver Wyman www.oliverwyman.com