Takeout hike gets rise out of players

The criticism came fast and furious. And not unexpectedly.

“A step to ruin,” one Twitter user said. A Twitter user going by the handle mylifemyrules99 said, “The rich get richer and we pay for it.” Twitter user Greg Hartman wrote that he “would never bet Keeneland again” and claimed that the track was “railroading horse players.”

The cause of all the social-media sturm and drang? Keeneland’s decision to raise its takeout rates across the board to the maximum allowed under Kentucky law – 17.5 percent for win, place, and show wagers, up from 16 percent, and 22 percent for all other bets other than the pick five, up from 19 percent – effective with the fall meet at the track.

Horseplayers were incensed for all the obvious reasons. Takeout is the percentage of money extracted from the parimutuel pools before payoffs are distributed to winning bettors. Any increase to the rate depresses payoffs and makes it harder for bettors to break even or post a profit while increasing the amount of money flowing to the racetrack. In this case, a win bet that paid $10 last spring will pay $9.80 this fall. An exacta that would have paid $18 will now pay $17.30. A trifecta that paid $75 will pay $72.20.

Apart from the dollars and cents, the decision stung in another way. To many, it was a betrayal.

Through its own efforts, Keeneland has carefully cultivated a customer-friendly image over the past two decades. The decision to raise the takeout, ostensibly to fund purse increases, has cracked a fan-friendly veneer that once seemed impregnable.

Those cracks also appear to extend to the association’s financial health, once a matter never in doubt. While track officials maintained this week that the takeout hike was not due to any pressing financial needs, the company has taken several steps recently to improve its cash flow, including, just two months ago, putting in place a minimum commission for each horse sold at its auctions, six years after it bumped up its sales commission rate.

With horseplayers threatening to boycott the fall meet, Keeneland’s decision to raise its takeout has the potential to backfire, turning fans and their bankrolls away at a time when Keeneland is looking to bolster its coffers. However, to the consternation of those fans hoping to extract a pound of flesh from Keeneland for its decision, the impacts of a takeout change do not often follow the path suggested by the most broadly accepted economic theory, largely because the racing industry at large has adopted, somewhat clumsily, a business model in which a small, big-betting slice of the horseplaying public is insulated from most of the effects of a takeout hike.

In fact, real-world evidence suggests that Keeneland’s decision will pay off, at least in the short run, if the association’s intent is to raise revenue. It’s another matter entirely whether Keeneland will be able to weather the long-term effects of alienating a portion of its fan base that is increasingly accusing the racing industry of ignoring its concerns.

Decline in revenues

While there is no overt evidence that Keeneland is encountering serious financial difficulties, several of its revenue streams have been under strain over the past decade, at a time when the association has also made major investments. Those two trends have occurred against the backdrop of a major contraction in the racing and breeding industries.

The stage was set in 2006, when Keeneland announced and completed a major renovation between its spring and fall meets. At the time, auction receipts for the company’s sales that year had surpassed the $800 million mark for the first time. The renovation project entailed reconfiguring Keeneland’s main track and rebuilding it from the sub-surface up, to accommodate a synthetic surface. The project also included a major investment in video and timing equipment, and the installation of a new infield odds and video board that remains the most state-of-the-art in the industry. Keeneland officials have never disclosed what the project cost.

In 2007, auction receipts hit a record of $815.4 million. But the next year, in September, the stock market collapsed, and auction receipts dropped to $600.3 million. Two years later, auction receipts had dropped to $381.6 million, less than half the 2007 total. Over the next several years, bloodstock prices recovered, hitting $534.5 million in 2013. But the totals have remained stuck at that level since then, indicating that Keeneland is now facing a new normal, even if recent auction results have suggested that the market may

be on an upswing.

Other large cash outlays have occurred in the past three years. Keeneland ripped out the artificial surface in 2014 and returned to a dirt surface; a typical estimate for a project of that type is $3 million to $5 million. That same year, the association announced a partnership with a Lexington harness track, The Red Mile, to open a gambling parlor housing nearly 1,000 so-called “historical horse racing machines,” devices that closely resemble slot machines. The parlor, which required a $45 million renovation of The Red Mile’s grandstand, opened in late September 2015.

According to KHRC records, the partners earned commissions of $10.5 million on $137.3 million in fiscal year 2016. In the just-completed fiscal year, the partners earned commissions of $18.4 million on $250.3 million in wagering, according to the records.

Bill Thomason, who was hired as chief financial officer for the track in 2010 and elevated to chief executive upon the retirement of Nick Nicholson in 2012, declined to discuss details of Keeneland’s financial operations earlier this week. But he said that Keeneland believes that wagering at the parlor will

continue to grow for several years, along the same lines as the growth rates posted by other parlors in Kentucky offering the machines. Kentucky Downs, which first installed the machines in September 2011, had total wagering handle of $519.8 million in the justcompleted fiscal year, earning commissions of $41.5 million.

“That will grow, and it will continue to grow for the next three to five years,” Thomason said.

In response to a question about the company’s general financial health, Thomason said: “Keeneland has always been conservative, and Keeneland will always be conservative.”

In Keeneland-speak, that likely means the company is far healthier than most companies and is still sitting on large cash reserves. However, it also means that Keeneland has likely spotted some weaknesses in its hull and is intent on patching those flaws before they begin leaking.

This is an abridged version of an article appearing on DRF.com which contains additional details about Keeneland’s financial condition, an analysis of Keeneland’s decision to raise its takeout, and an examination of the issues surrounding the economics of takeout rates and their impact on racing’s customer base.