Earlier this month, Churchill Downs Inc. president Robert Evans gave the keynote address at the University of Arizona Race Track Industry Program Symposium on Racing and Gaming in Tucson where, among other things, he discussed the challenges that go into making horse racing profitable.
With handle declining steadily across the nation, Evans presented a hypothetical 10-year model for how Thoroughbred tracks could generate a 5 percent return on investment — a model that would result in the current number of tracks being cut by more than half.
In a follow-up interview with the Herald-Leader, Evans expounded on some of the points of his speech and further delved into the possibility that racing might have to contract to endure.
Question: What is the Cliffs Notes version of some of the key points in your keynote address?
Answer: The presentation was kind of in three pieces. The first piece was looking at some of the more interesting trends as opposed to the year-to-year changes about the demand and supply for the business. Demand has been falling; supply hasn't been falling by the same amount. Therefore we have way more supply of races and race days at racetracks than there is demand for.
The middle piece was, where does that go? If you go out, say, 10 years, where does that leave you? So we built a little financial model of the racetrack industry in 2020. And I made the point about 16 different times that I'm not forecasting this, I'm not predicting this, I'm not calling for this. It's a math problem and it's a pretty good math problem in the sense that we have a pretty good idea what the costs are.
What we concluded from that is, in order to be economically self-sustaining, if we make the requirement that racetracks have to earn at least 5 percent pre-tax return on their investment capital, what that leads you to is a world where you have about half as many racetracks in the future as you do today. And the number of races and race days sort of fall by similar percentages.
The good news is that at that point in time, you have a business that is economically viable. The bad news is, it's smaller. That's the challenge of the future, is how do we make the business successful realizing it is probably going to get smaller as we go through time.
Q: Just to clarify, you aren't saying the industry needs to cut X amount of racetracks?
A: I'm not calling for action. I'm saying if you solve the math problem of in order for tracks to operate, they have to at least earn their cost of capital. Otherwise, you're taking money from your shareholders, you're taking money from the banks at 8 percent and you're investing it at 6 percent, and that doesn't work. What we have is not a viable model.
Someone grabbed me after the speech and said, "Well how do you know that?" I said, "It's obvious." NYRA (New York Racing Association) just went through bankruptcy, Magna just went through bankruptcy, NYOTB (New York Off-Track Betting) just closed. That's telling you these entities are not earning at their cost of capital.
I have a breeding farm in Versailles. I don't want to see it get smaller, but it doesn't do me any good to stay big and lose money. Those are the big messages, trends, what the industry looks like as a math problem.
Q: Do you think down sizing is where the industry is headed regardless, just because of the mathematics of it? If things don't turn around and get better, are we going to be in danger of losing more racetracks and farms?
A: It's already happened. If you look at the Jockey Club data, the number of race days this year is down about 7 to 8 percent. Between my brother and I, we used to have typically between 160 and 170 horses on both farms. Now we have 70. And it's no secret there are horses leaving Kentucky going to Pennsylvania, going to Indiana, going to other states. The number of race days in Kentucky is down.
Q: Do you think we might see more of those boutique-type meets like what Monmouth tried this year?
A: Maybe. I think the jury is still out as to whether the Monmouth elite-meet experiment was an economic success or not. It was a success in the sense that the amount of handle that it generated went up. Considering the total amount of handle in the industry went down, I conclude that what they did was they took handle from other tracks. I don't know where else it would come from.
Just because the handle numbers went up doesn't mean they operated successfully as an economic model. I don't have any way to know that, I don't have any data from them that would tell me that. But my guess would be that while handle went up by a huge amount, it probably wasn't enough to pay the higher purses they paid, and I believe they got this year approximately a $30 million subsidy from the casinos in Atlantic City.
Q: One of things you mentioned during your speech was that you thought handle has bottomed out.
A: I do think we're probably close to the bottom. We've gone from $15.2 billion back in 2003 to about $11.4 billion this year. I don't think there is much more downside left. That's about $3.8 billion of handle that has disappeared over the last seven years, so we're probably closer to the bottom. It may go down another half a billion or something. But I don't think we're going to go another $3 to 4 billion down.
Q: Do you think we might see some sort of an upswing soon?
A: I don't know about that. I think the thing that is really hurting us right now is twofold. On the demand side, we just need to get people back to work. People who don't have jobs are not going to spend a lot of time and money betting on horse racing or anything else. So until we see significant improvement in employment, we're not going to see any big upswing. We might get an up year, but I don't think we'll see four consecutive years of growth. On the supply side, the number of horses of racing age between 2010 and 2013 and 2014 is going to drop by about 28 percent. We know that because those foals are either on the ground or they're in utero. So on the supply side ... I don't know how we're going to get races filled at many, many racetracks. And until employment turns around significantly I don't think we'll see consumers with disposable income to spend on racing or anything else.
Q: You also talked about finding ways to break the cycle that racing has put itself in. Do you think some of the things the industry is going through now are what have to happen for it to make some long-term change?
A: I think people are starting to come to grips with that. Three years or four years ago, I did a presentation with the Kentucky Farm Managers Club, and in that discussion I talked about how there was far too much supply in the industry. And people didn't want to hear it, didn't want to deal with it. I think you're starting to hear people talk about things like less is more and we need to reduce the supply side. We're probably getting in that mode.
But if you have an industry that is supposedly dying, there is no market for any product, I don't care if it's high quality. Our high quality product is actually selling better than it did in 2003. If you look at handle on the top 25 races, that is actually up 18 to 19 percent even while total handle is down. That is a very positive sign. It says if you put a quality product in front of our consumers they buy it, they spend more on it than they used to. The problem is we don't have enough of it. As we get smaller, the trick will be to focus on producing quality product.