Good odds that bookies win out

Paddy Power and Boylesports have taken the gloves off in recent months and are now openly engaged in a price war, writes Barry O’Halloran

WHEN THE Aidan O’Brien-trained Duke of Marmalade won the International Stakes at Newmarket two weeks ago, there were audible groans from the trading floors in the Irish bookmakers’ chains.

That morning, leading players such as Paddy Power and Boylesports had offered even money against him winning; when the starting gates opened that afternoon, he was so heavily backed that his price shrunk to two-thirds of that, to 4/6.

Duke of Marmalade is the highest-rated racehorse on turf, meaning he is the best in the world. Thus offering evens against the Duke looked like a giveaway and the wave of money that shrank his odds to the more realistic odds-on price of 4/6 indicates that people took full advantage.

It was a giveaway of sorts. Irish bookmaking chains, particularly Paddy Power and Boylesports, have taken the gloves off in recent months and are now openly engaged in a price war in a bid to bolster turnover in their shops and betting channels.

Offering enhanced odds on fancied horses such as Duke of Marmalade is part of that strategy.

The price war has been brewing for some time. Paddy Power, already known for money-back specials and other incentives, could claim to have fired one of the first salvoes by offering to pay out to seven places on each-way bets on the British Open golf tournament, and by consistently giving better odds than its competitors on the eventual winner, Pádraig Harrington.

On the other hand, Boylesports chief executive Daniel O’Mahoney argues that his firm was the first to guarantee horseracing odds.

Either way, the battle has been intensifying since last month. With the national hunt racing, English Premier League soccer and rugby seasons all looming, it could soon be raised to a further pitch.

The bookmakers are reacting to the slowing economy.

When Paddy Power published its interim results last week, chief executive Patrick Kennedy said the company had independent research demonstrating that people bet less in a slowing economy.

Alongside that, betting returns from last month’s Galway Races showed that both the bookmakers and the State-owned Tote were down considerably on 2007.

The only route to growth in these circumstances is to woo more punters with special offers and enhanced odds. The difficulty is that since the bookies began stepping up their assault during the summer, results that were running their way more often than not suddenly turned and began favouring their customers.

O’Brien and horses like the Duke have been a big factor. The Tipperary-based trainer has won 18 races at the highest level in Europe this year. Irish punters tend to back Irish horses abroad and they tend to back O’Brien to the exclusion of all else, so he is proving to be very costly indeed.

The result is a squeeze on margins. Paddy Power acknowledged this last week and lowered its profit forecast for the year. Kennedy added however that gross win margins would continue to be within its long-term guideline of 11-13 per cent.

Irish bookmaking chains operate on a high-turnover, low-margin basis. When bookies offer odds on a given event, they factor in a margin for themselves.

The system, known as the over-round, is designed to ensure that over time, bookmakers win more than they lose. In fact, their business depends on their customers winning, but not as much as they lose. By enhancing odds on the horses, football teams and golfers that punters want to back, bookmakers are eating into, but not obliterating, their margins.

This will hit profits and earnings. David Jennings, analyst with stockbroking firm Davy, has cut his forecast for Paddy Power’s earnings before interest and tax for 2009 by €4.6 million to €73.4 million. Nonetheless, these companies will continue to make a profit.

Clearly there are some extra risks associated with shaving margins in this way, but the likes of Paddy Power and Boylesports have sophisticated risk-management operations. In fact, it’s core to their businesses. Not only that, both companies are well resourced. O’Mahoney says that Boyles is debt-free as of this year, while Paddy Power always generates healthy amounts of cash.

Why then are they trying so hard? Jennings says they are trying to squeeze competition in a slowing environment. Some of their rivals are vulnerable and taking them on means they will wind up with a bigger slice of the cake.

Those vulnerable competitors include British chains Ladbrokes and William Hill, which have operations here. They are loath to get involved in a price war here. If they start offering Irish customers enhanced terms, they will have to do the same for their British punters, which they do not want to do.

So, for how long are the Irish players going to maintain their price war? “Indefinitely,” Kennedy says adamantly. O’Mahoney agrees. “It could become standard, customers are going to come to expect best odds and guaranteed prices, and switching back could just put them off,” he says.