Kentucky hits the jackpot with lottery

With more games and bigger prizes, state sees record revenue for year

jpatton1@herald-leader.comAugust 6, 2012 

If horse racing is looking to attract new patrons, track executives might want to spend a little time at a gas station.

Last week, the Kentucky Lottery Corp. announced record sales of $823.5 million for fiscal 2012, which ended June 30, and announced a sales target of $853 million for 2013.

Kentucky isn't the only one; Pennsylvania, Maryland and Massachusetts also reported record lottery results for the past year.

Compare that to pari-mutuel wagering, which has posted some gains this year after almost a decade and more than $4 billion in losses.

How has the lottery been able to attract players when horse racing has struggled?

Part of the answer is where customers buy: Lottery tickets are sold primarily in retail outlets across the state, giving it a major competitive advantage even with the advent of online wagering on racing.

As the economy improved and gas prices eased from record highs, lottery sales perked up.

"We do sell 75 percent of our tickets to convenience stores that sell gasoline," said Arch Gleason, president and CEO of the Kentucky Lottery Corp. "It's a pretty common occurrence for people who buy gas to buy lottery tickets. So the fact that they have a bit more money in their pockets does help."

But the lottery still has to entice that money out of their pockets. To do that, Kentucky and other states have deployed several important strategies:

Small bets, enormous prizes at long odds: "Having big jackpots was a significant factor," Gleason said. Sales on "draw" games, where players bet on numbers that will be drawn to determine the winner, soared last year and are expected to keep rising.

In March, when the multistate Mega Millions game hit a jackpot of $656 million, it was national news, and players across the country went crazy. Three winning tickets were sold for $1 each in Maryland, Illinois and Kansas.

With its potentially life-changing windfall, the world-record jackpot persuaded even non-players to risk a buck or two.

"It's not that people play more. More people play," Gleason said. In Kentucky sales were up almost 20 percent, or $7.6 million, he said.

"That Mega Millions jackpot was a game changer," said Ken Adams, a Las Vegas-based gambling analyst for CDC Gaming. "When it gets that big, it changes people's purchasing patterns."

Players from Nevada, which doesn't have the lottery, created traffic jams near the state line with California, which does, as they rushed to get in the game, he said.

"And while people were there, they probably bought more scratch-offs as well," Adams said.

Expect to see more of that: Powerball has doubled its price to $2 a ticket to boost jackpots, and Illinois began selling lottery tickets online in the spring.

"Wait and see what that does," Adams said.

Constantly update games: Although the big prizes are from "draw" games, the meat-and- potatoes of lottery sales come from scratch-offs, which also had record sales of $505.9 million in Kentucky last year.

To keep drawing players, Gleason said, Kentucky's lottery will offer about 70 types of scratch-offs each year, ranging from $1 to $20 a ticket, with prizes increasing commensurately.

Even this has evolved to explore new niche markets: 20 years ago, no lottery sold a ticket for more than $2, Gleason said. Now a few have experimented with $50 tickets.

Most of the money comes from cheap tickets that offer big prizes: For a $1 scratch-off, you could win as much as $500.

"It's a small purchase, a relatively cheap form of entertainment," Gleason said. "Players tend to keep their purchases modest. ... Most people don't spend more than the price of a couple of movie tickets. Those are the kinds of things that appeal to players. For a low investment, you could get a big payoff."

The appeal is in the suspense.

"It's short, but it's there," Gleason said.

Evidence: All cards have a bar code, so a player could get it scanned and find out right away whether it's a winner. But almost no one does, Gleason said. Instead, they take them out to their cars or home in their purses to scratch off.

It is no coincidence that bingo-style games, which have the most areas to scratch off, are the most popular.

Spend big on advertising: Because it has a state-backed monopoly on that type of gambling, the Kentucky Lottery keeps more money from players (44 percent) than other forms of gambling would ever be able to consider. Kentucky racetracks, for instance, generally keep 20 percent or less of bets.

That results in a huge ad budget for Kentucky Lottery, which spent $41.4 million last year on marketing and operations. It also gave $50.9 million to retailers in incentives.

That's hard for racing to compete with, said Alex Waldrop, CEO of the National Thoroughbred Racing Association and a former Churchill Downs president.

"And they can advertise that they benefit education," Waldrop said. "That's enviable."

Listen to customers: A few years ago, the lottery went to a "free card" instead of giving $1 back when players won $1.

Most players would do that anyway, but they didn't like having the choice made for them, Gleason said.

So the lottery is going back to the "getting your dollar back" option. Although it means $56 million in free tickets could be cashed out, lottery officials expect that the change will increase sales again next year.

Learn from competition: This year, Gleason said, Kentucky will become the sixth state to implement a loyalty program, as casinos and racetracks have done. That will let players type in a code number off each card, register points online that can be redeemed for merchandise, and enter cards into a secondary drawing with prizes based on the amount of the original ticket (a $20 scratch-off will have a bigger prize than $1).

"We think it will be a real benefit and add value to their purchases," Gleason said. "It's been a trend in the retail segment for a decade."

Lotteries have found ways to take advantage of the psychology of customers, something racing — plagued with image problems of horse breakdowns and rigged betting — finds difficult.

The dynamics of lottery and racing are very different.

"It's hard to take the lessons from one and apply it to the other," Waldrop said. "But it's an interesting question that needs to be studied more. ... The multistate effort has really catapulted lottery, and that would be something worth considering."

Janet Patton: (859) 231-3264. Twitter: @janetpattonhl.

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