Could Covid-19 present an opportunity for Zeal?

Having shifted its focus to Germany, a market where online lottery penetration is particularly low, the lottery brokerage business could potentially benefit from the crisis, reports Joanne Christie.

Zeal Network is not only well positioned to weather the coronavirus (Covid-19) outbreak, but early signs show the pandemic could even propel the company closer towards its goal of reaching a 50% online market share in Germany.

In a conference call on Thursday to discuss the company’s annual report for 2019, CEO Helmut Becker and CFO Jonas Mattsson were cautiously optimistic about the company’s ability to navigate a path through the crisis.

“Fortunately, it has so far not had a measurable negative impact on us,” said Becker.

Though in Spain Zeal subsidiary Venture24’s partner ONCE and also state lottery operator Sociedad Estatal Loterías y Apuestas del Estadostate have stopped selling lottery tickets due to the outbreak, Becker said he thought the risk of this happening in Germany was “very small”.

When pressed to explain this optimism, Mattsson said: “What gives us confidence is that we are in touch with the operators of these lotteries and we know that they are determined to keep operating these lotteries. They are setting up the draws with multiple redundancies, so that is redundant locations, redundant teams, redundant machines. That is true for the German state lotteries, it is also true for EuroJackpot.”

In fact, the crisis could see more German players migrate online. At present, online penetration in the lottery market is very low in Germany at just 14% in 2019, compared with 26% in the UK and 41% in Sweden in 2018.

But with the lockdown and store closures, more players could move online as retail sales fall.

“What we see is that there is a decrease of around 10-20% in billings sold offline in Germany and in other countries that have implemented similar anti-corona measures as Germany,” said Becker. “We see a risk that the lottery product may be less top of mind for our customers than in usual times. On the other hand, the online channel is even more attractive these days.”

Indeed, on March 20 in a statement on the impact of Covid-19 on its business, French lottery operator Française des Jeux (FDJ) flagged the possibility of a 50% reduction in retail sales, which it said could impact revenues by €55m per month. However, it said it continued to “post good results for its online lottery game”.

Becker said Zeal was currently seeing strong acquisition numbers at its Lotto24 and Tipp24 brands, but added that it was difficult to ascertain if these were related to the coronavirus or the high EuroJackpot – the jackpot was at almost €90m at the time of the results announcement.

Ramping up marketing
In any case, the company has been adjusting its marketing to take advantage of the situation, particularly by advertising on online news sites

“We are present in the relevant channels, for example, in the news sites where people inform themselves about the corona crisis, so we are visible there; basically they can see that they can continue to play the lottery from the comfort of home by using our brands,” said Mattsson. “We have always been flexible in terms of ramping up our marketing spend, taking advantage of these kinds of situations, and that is already what we are doing.”

And that increased marketing spend – a key plank of Zeal’s strategy going forward – is easier to justify under its new business model, said Becker. The company abandoned its lottery betting business last year to focus solely on brokerage after the acquisition of its former subsidiary Lotto24, moving its office to Germany at the same time.

“In a business where you spend once for customer acquisition and then monetise those customer cohorts for many years, the sustainability of that business model is critically important. We concluded that the future of the lottery betting business and therefore the future growth and monetisation opportunity was very much in doubt.

“Now we are in a stable environment and can safely harvest the value of the customers that we acquire. Our aim is to earn back the upfront customer acquisition cost within the first two years or less of a customer lifetime, thus creating a strong customer lifetime value,” said Becker.

Since switching its business model, Mattsson said its cost per lead has already been reduced by 7% due to it having access to more efficient marketing channels, social media and Google in particular.

He said marketing was an area where brokerage has a clear advantage over lottery betting. “The key issues that they have is that Lottoland and secondary lotteries have lost most of their marketing channels, almost all of their marketing channels, and that enforcement is even increasing and has increased over the last months and years. And that is enforcement on the secondary lottery providers but also on the marketing channels, the marketing companies themselves.”

The bottom line
Of course, while marketing may be more efficient under the new strategy, the switch to brokerage has impacted Zeal’s bottom line significantly. The company largely confirmed the numbers released in its interim results last month, reporting revenue of €113.5m in 2019, which was down 26.7% on the previous year.

EBITDA was increased slightly from the interim figures, to €29.4m, though this was still a 38.5% drop on 2018.

It also released details of its dividend policy for 2019, with a total payout of €17.6m proposed for 2019, equating to €0.80 per share. By 2022, it aims to increase this to €1.00 per share.

Zeal’s guidance for this year confirms the huge margin disparity between its old business model and its new one. Despite expecting billings to rise to between €550-570m this year, from €466.7m in 2019, it anticipates revenues will fall to €70-73m, from €113.5m in 2019.

Further, EBITDA is expected to fall to between €5-8m (from €29.4m) and its gross margin is expected to more than halve to 12% from 24.3%.

Despite this, Mattsson said. “I’ve never been so convinced that switching business model was the right decision for Zeal and for our shareholders. By leaving the legal uncertainties behind us we can now instead focus on building and growing a sustainable business in Germany.”

One way it plans to do this is simply by increasing its customer numbers and therefore its revenues – it currently has a 35% share of the online lottery market. “We want to take advantage of the rising online penetration in the Germany lottery market. The total size of that market is €7.3bn for just the state lottery products, or €9bn if we include other lottery products,” said Becker.

“Long term, that means we are looking at a €9bn market that is moving towards 50% online penetration and we want to own 50% of that online market.”

But Zeal also sees opportunities to move back into higher margin products. Although the company has taken a hit after discontinuing sales of the high-margin instant win games offered in the old betting on lottery business, Becker sees potential to re-enter this area.

“What we have as an opportunity right now is instant win games and the first type of instant win game that comes to mind are scratchcards that we can offer now in more and more states in Germany and that have a higher margin. I believe that we can go beyond scratchcards in certain states going forward but that is something that we are working on right now,” he said.

He added that the recently agreed gambling treaty in Germany could also open up new products for the company, though also acknowledged that competition in the market may increase. “We see some opportunities in improved marketing regulations and the potential to add other gambling products to our portfolio, however, likewise, other gambling companies could also add lottery to their business model. To do so that would require a broker licence, of course.

“There are some risks and some opportunities in the law but overall it gives us a very stable environment to operate in with no major changes to our business model or market environment.”