C O N F I D E N T I A L | Creating and capturing new value in the lottery industry Lessons from...

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


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


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


The importance of the broad context…and lessons from abroad

Lottery

Gaming

Media & EntertainmentNorth

AmericaInternational


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


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


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


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


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


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%


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


Step 2: Illinois – playbookWe deployed the playbook to identify the priority levers to focus on










3.1 New game types

3.2 Internet








4.5 Marketing ROI


5.1 IT performance




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


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?


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%


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%


Step 2: FDJ - playbookWe deployed the playbook to identify the priority levers to focus on










3.1 New game types

3.2 Internet








4.5 Marketing ROI


5.1 IT performance




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)


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


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%


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?

C O N F I D E N T I A L | Creating and capturing new value in the lottery industry Lessons from...

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