Higher Payout Scratchers

Transcription

1 Lottery Bulletin Higher Payout Scratchers Product Improvement Means More Money for Schools

2 Higher Payout Scratchers Product Improvement Means More Money for Schools For most of the 1990s, the California Lottery s Scratchers sales were among the very lowest in the nation on a per-capita basis. Beginning in 1997, sales of the games took a dramatic upturn, more than doubling in just 20 months. What happened? What happened is the California Lottery began to implement a game strategy that had already been proven successful in other states--adding more prize money to the Scratchers games. 1 Since beginning this program, the Lottery s weekly Scratchers sales have risen from just under $10 million in the fall of 1997 to over $20 million in the summer of That sales increase produced $44 million more for public schools in just two fiscal years than would have been generated by the Lottery if higher payouts had not been implemented. By the end of the current fiscal year, , the additional money for schools from higher payout Scratchers will come to over $118 million. 2 With the current fiscal year, however, the ceiling on growth has already been reached. The projection for the year is based on maintaining sales (actually holding them down by slightly lowering 1 Called Scratchers in California, these games are generally referred to as instant games or instant tickets in the U.S. lottery industry. In this paper, we will use the California name. 2 See Charts 1-3 and Table A. the payout) at the pace of the end of the previous year, about $21 million a week. Future growth in sales and in money for education will be possible only if the Lottery Act is changed to allow additional sources of prize funds. The problem faced by the California Lottery is that the only way it can increase the prizes above the statutory 50% is by taking the additional prize monies from administrative funds. Most state lotteries have enabling statutes that allow higher prize payouts. 3 The paradox is that although the Lottery could increase Scratchers sales more and could make more for education, it cannot afford to do so because it does not have the necessary prize funds. The state shot itself in the foot by deciding to keep a larger share of the pie. The pie shrank... Austin American-Statesman, January 10, 1999, on the Texas Legislature s decision to cut Lottery prizes. 4 Beginning in 1997, the Lottery streamlined its business processes and cut its workforce by nearly 30 percent. The result of the cuts and of the growth 3 See Table B. 4 See attached Texas news stories. Lottery Bulletin

3 in Scratchers sales from the higher payouts has been a reduction in the Lottery s administrative budget ratio from the statutory maximum of 16% to 13.5% 5. Administrative funds were invested in Scratchers prizes, with the sales results described above. Further cuts are not possible without seriously jeopardizing the Lottery s operations and security. While Scratchers sales were growing in California, in Texas they were plummeting. The Texas decline occurred because in 1997 the state legislature reduced the Lottery s prize payout. As a result of the prize payout reduction, the Texas Lottery experienced a 30% decline in sales of the games, costing their beneficiary $100 million in one year. This June the legislature reversed itself and the new games with higher payouts are expected to go on sale in the fall. Re-building sales will, of course, take longer than the decline took. The reasons for the growth in California and the decline in Texas are related: Improving the Scratchers product by adding more prize money leads to higher sales, while damaging the product by reducing prize money costs sales. An analogous situation might be a candy company that decides to add more nuts and chocolate in order to sell more candy bars. While the cost of ingredients goes 5 While the Lottery Act allows for an administrative budget equal to up to 16% of sales, in the three years preceding the higher payout strategy the Lottery s actual administrative spending averaged 15.5%. up, they sell more candy bars because the candy bars have more of what makes them good. What the candy company must do is to find the ratio of higher cost to higher sales that yields a higher profit. That is what the entire U.S. lottery industry has done with Scratchers-type games beginning in the late 1980s. Lotteries were able to increase the net profit for their beneficiaries by adding more of what makes the games good for players, prize funds. California was the last U.S. lottery to take this step, years after other lotteries had demonstrated its effectiveness in increasing sales. 6 A review of the experience of a few other Western states bears this out. Washington and Idaho took a gradual approach, increasing the prize payout on instant games incrementally over a number of years. 7 For example, the Washington State Lottery began to increase the payout in 1993, raising it first to 55% of sales, and then in 1995 to 60%. Sales rose correspondingly, from an average of $12 million a week in 1992 to $14 million in and to over $19 million in The Colorado Lottery made the change more recently, in 1996, and much more rapidly, with strong results. Colorado raised their prize payout from 50% directly to 65% and their monthly instant game sales doubled, from $5 6 While prize payouts above 50% have been found to increase sales and beneficiary payments on instant games like Scratchers and keno-type games, higher payouts are not necessary to maximize benefits on other games like lotto. 7 See Charts Lottery Bulletin

4 million per month to over $10 million, in just 18 months. California s Scratchers sales followed Colorado s path. California s first higher payout games were introduced in the fall of 1997, with sales for the fiscal year increasing by 30% and for the year by another 40%. It should be noted that the prize payout was raised on Scratchers games alone, not on SuperLotto or the other games, 8 which resulted in a total prize payout on all Lottery games of 51.5% in fiscal year and 52.5% in fiscal year Retailers have seen a 100% increase in their Scratchers sales since the games have more prize money. Pamela Williams, Vice- President, California Retailers Association. Scratchers sales for the third year of higher payouts, fiscal , are projected at $1.075 billion. While that will amount to a 13 percent increase over the previous year, it does not represent an increase over the sales rate at the end of that year. Allowing Scratchers to grow more would require more prize funds than can be taken from the administrative budget without seriously impairing operations and security. If the California Lottery Act were changed to allow the Lottery to apportion more of the sales pie to prizes, then even though the percentage going to education would be smaller, the schools would receive more money from the Lottery. The way to grow education s share is to grow the pie. The Lottery industry has proven that offering Scratchers games with higher payouts is an effective way to grow the pie. 10 The impact of the higher payout strategy builds over time, with about six months from the initial launch required before the new improved games make up nearly all of the mix. 9 As players have an experience of the change, the sales growth continues. The second fiscal year, , saw higher sales and education revenues than the first and even higher levels are expected for the third year. 8 While prize payouts above 50% have been found to increase sales and beneficiary payments on instant games like Scratchers, higher payouts are not necessary on other games like lotto. 9 See Chart See Chart 9. Lottery Bulletin

5 Higher Payouts Produced Dramatic Increases in California Scratchers Sales Scratchers Sales in Millions $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $539 $566 FY 93/94 FY 94/95 $596 FY 95/96 $525 FY 96/97* $677 $605 FY 97/98 $953 FY 98/99 $635 Actual Estimated (w/ 50% Payout) Note: FY 96/97 sales dropped because vending machines were removed from 4,000 of 19,000 retail locations. The machines were returned the next year and their sales are included in the actual and estimated figures. Chart 1 $44 Million More for Schools from Higher Payouts in Just Two Years $1,700 $1,593 $1,637 $1,600 Education Contribution for FY 97/98 & FY 98/99 in Millions $1,500 $1,400 $1,300 $1,200 $44 Million $1,100 $1,000 Estimated (w/ 50% Payout) Actual Chart 2 Lottery Bulletin

6 $118 Million More for Schools from Higher Payouts by End of Fiscal Year $3,000 Education Contribution for FY 97/98 thru FY 99/00 in Millions $2,500 $2,000 $1,500 $1,000 $2.388 Billion $118 Million $2.506 Billion $500 Without Higher Payouts With Higher Payouts FY 97/98 FY 98/99 FY 99/00 Projected Chart 3 States with Higher Prize Payouts Sell More 70% 65% CA % Instant Game Prize Payout 55% 50% 45% CA % $0 $20 $40 $60 $80 $100 $ data Annual Instant Game Per Capita Sales Chart 4 Lottery Bulletin

7 Idaho Sales Rose with Prize Payout $70.0 $60.0 $57.4 $ % 64% Instant Game Sales in Millions $50.0 $40.0 $30.0 $20.0 $31.3 $ % 60% 58% Prize Payout on Instant Games $ % $0.0 FY 93 F Y 94 F Y 95 F Y 96 54% Instant Game Sales Prize Payout Chart 5 Washington Sales Followed Payout Increase Avg. Wkly Instant Sales in Millions $30 $25 $20 $15 $10 $5 $0 10/90 50% Payout 55% Payout 4/91 10/91 4/92 10/92 4/93 10/93 4/94 10/94 4/95 10/95 60% Payout 4/96 10/96 4/97 10/97 4/98 10/98 Chart 6 Lottery Bulletin

8 Higher Payout Boosted Colorado Sales Monthly Instant Sales $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 Some 65% games All 65% games $0 1/95 3/95 5/95 7/95 9/95 11/95 1/96 3/96 5/96 7/96 9/96 11/96 1/97 3/97 5/97 7/97 9/97 11/97 Chart 7 Higher Payouts Doubled California Scratchers Sales Average Weekly Scratchers Sales in Millions $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 Jul-97 Sep-97 Some Higher Payout Games Nov-97 Jan-98 Mar-98 May-98 Jul-98 All Higher Payout Games Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Chart 8 Lottery Bulletin

9 Chart 9 34% of a Bigger Pie Is More for Schools 34% $2.5 Billion 37% $2.39 Billion $7.34 Billion Sales with Higher Payout Scratchers FY 97/98 - FY 99/00 Education Prizes Administration $6.54 Billion Sales with 50% Payout Scratchers FY 97/98 - FY 99/00

10 Table A: Impact of Higher Payout Scratchers 3-Year Total 3-Year Total with 50% Payout with Higher Payout Difference Scratchers $1,907,000,000 $2,705,877,881 $798,877,881 On-Line Games $4,635,441,792 $4,635,441,792 $0 Total Sales $6,542,441,792 $7,341,319,673 $798,877,881 34% to Education $2,224,430,209 $2,496,048,689 $271,618,480 Administrative Savings to Ed $163,735,026 $10,627,819 -$153,107,207 34% + Admin. $2,388,165,235 $2,506,676,508 $118,511,273 Higher Payout Scenario FY 97/98 FY 98/99 FY 99/00 Projection Scratchers $677,102,459 $953,775,422 $1,075,000,000 On-Line Games $1,617,321,363 $1,543,120,429 $1,475,000,000 Total Sales $2,294,423,822 $2,496,895,851 $2,550,000,000 34% to Education $780,104,099 $848,944,589 $867,000,000 Administrative Savings to Ed $5,708,002 $1,913,681 $3,006,137 34% + Admin. $785,812,101 $850,858,270 $870,006,137 Prize Payout 51.52% 52.29% 52.50% Administrative Ratio 14.23% 13.64% 13.40% 50% Payout Scenario FY 97/98 FY 98/99 FY 99/00 Projection Scratchers $605,000,000 $635,000,000 $667,000,000 On-Line Games $1,617,321,363 $1,543,120,429 $1,475,000,000 Total Sales $2,222,321,363 $2,178,120,429 $2,142,000,000 34% to Education $755,589,263 $740,560,946 $728,280,000 Administrative Savings to Ed $38,031,721 $58,703,668 $66,999,637 34% + Admin. $793,620,984 $799,264,614 $795,279,637 Prize Payout 49.92% 49.11% 48.85% Administrative Ratio 14.37% 14.20% 14.02% Notes In assessing the impact of the higher payout strategy, it is necessary to estimate what Scratchers sales would have been without higher payouts. Looking at Scratchers sales trends for the three years preceding the introduction of higher payouts, it can be seen that there was an annual growth rate of about 5%. Assuming that same rate of growth, without higher prize payouts, Scratchers sales would have been about %605 Million in FY 97/98 and $635 Million in FY 98/99. That brings Scratchers sales for the two years to $1.24 Billion without higher payouts, compared to the actual $1.63 Billion with higher payouts. To get to what the results for education would be, one must first add the same level of on-line game sales to both scenarios, since higher payouts are not used for SuperLotto or the other on-line games. That brings total Lottery sales for the two years to $4.44 Billion without higher payout Scratchers and the actual $4.79 Billion with higher payouts. The education contribution is calculated at 34% of total sales, plus unspent administrative funds. The Lottery's contribution to schools for FY 97/98 and FY 98/99 combined would have been $1.593 Billion without higher payout Scratchers, but was actually $44 Million more, or $1.637 Billion, with higher payouts. Figures for FY 98/99 and FY 99/00 are based on estimates presented to the California State Lottery Commission on 8/27/99. Lottery Bulletin

11 Table B: Instant Game Prize Payouts in U.S. Lotteries Lottery Annual Per Capita Sales Prize Payout Texas $ % Ohio $ % Vermont $ % Connecticut $ % New Hampshire $ % Maine $ % Kentucky $ % Minnesota $ % Idaho $ % New York $ % Colorado $ % Florida $ % New Jersey $ % Virginia $ % Missouri $ % Maryland $ % Iowa $ % Kansas $ % Pennsylvania $ % Washington $ % Nebraska $ % Louisiana $ % Rhode Island $ % California $ % New Mexico $ % Avg. 59.4% Source: LaFleur's Lottery World, 1996 Lottery Bulletin

12 The Dallas Morning News: Archive Document Associated Press Senators call for lottery prize changes Sales have dropped since cut in payouts. AUSTIN Lottery officials told them it wouldn t work. But Texas legislators cut overall prizes last year as a way to increase the state s share of revenue from the numbers games. It hasn t worked. Lottery sales have been slower since the prize cuts took effect Sept. 1,1997. The state now expects a $328 million shortfall in proceeds during the budget year. Noting the potential result, Sen. Ken Armbrister, D-Victoria, on Tuesday said lawmakers should consider returning prizes to where they were - about 57 cents of every dollar in sales - or allow the Lottery Commission to determine how to best maximize profits. It was a bet trying to get us to the same place, Mr. Armbrister said of the prize-cut decision. We didn t have that expertise and now it is costing us, it seems. Sen. Gonzalo Barrientos, D-Austin, agreed. I think we made several mistakes, he said. One would have to be oblivious to reality if one didn t think the cutting of prizes didn t affect [sales]. The bottom line is that we have to bring in some revenue to the state and be fair and generous to the people who participate in our lottery, he said. Mr. Barrientos said he likely would support returning prizes to the 57-cents per $1 level if the lottery could prove its sales would rebound as a result. Before doing it, state officials acknowledged that cutting prizes to about 53 cents per $1 in sales would drive some players away. But they said enough players would remain loyal. That hasn t been the case. Texans have told the lottery that they have either stopped playing or reduced the money they are spending in part because prizes were cut. Executive director Linda Cloud showed lawmakers the difference the cut made to just one game, the lottery s Valentine s Day instant game. In 1997, before prizes were cut, the game peaked at more than $5 million in sales. Prizes for the game at the time amounted to about 60 cents on the $1. This year, with prizes at 50 cents per $1, the game peaked at less than $3 million in sales. That was lower than the starting sales of the game in While the prize cut was a major contributor to the drop, Ms. Cloud said other factors included negative publicity because of lottery controversies unrelated to the games, the age of the lottery, a cut in advertising and a nationwide decrease in lottery sales. She added, though, that returning the prize payout to its original level could solve much of the problem. Ms. Cloud said Georgia also cut its prizes last year, saw sales drop and raised prizes back up. While sales rose after prizes were returned to their original level, they did not return to precut figures, she said. Indiana officials did the same thing. But their sales after returning prizes to their original level were higher than sales before the cuts were made in We re somewhere in between, Ms. Cloud said. We probably would get our sales back. Lawmakers can t act on prizes until they meet again next year. Until then, Harriet Miers, chairwoman of the three-member lottery commission, said the agency will introduce new games, keep players informed and wait. ### 1998 The Dallas Morning News All Rights Reserved. Associated Press, , pp 20A.

13 Monday, April 24, 2000 What they're grappling with: Texas Lottery Page: 1 Home News Select a channel Austin High-Tech News Yellow Pages Best Austin Sites Local Issues Government Media Traffic & Weather Search Austin and the Web Web/Austin360.com Austin Yellow Pages News in cooperation with the Austin American-Statesman Published: Jan. 10, 1999 What they're grappling with: Texas Lottery Reviving Texas Lottery sales The issues Looking for more? Search 1,000,000 of the world's best sites. Search tips Submit your favorite Austin Web site. Powered by LôôkSmart. Lowe's How-to Tips Choosing patio furniture Remodeling pitfalls Butterfly gardens Efforts to pump up ticket sales, which fell by 18 percent last year. The 1997 Legislature reduced the prize payout and cut the lottery's advertising budget. Players: Texas Lottery Commission members, Sen. Gonzalo Barrientos, D-Austin, House Appropriations Chairman Rob Junell, D-San Angelo. Lottery retailers. Gtech Corp. Analysis: Though some blame the sales drop on the inevitable plateau that lotteries hit after the initial hoopla, state lottery officials are convinced the cut in prize money contributed mightily to the decline in sales. Players have to win, at least occasionally, if they are to keep playing. Outlook: The numbers speak for themselves. The state shot itself in the foot by deciding to keep a larger share of the pie for itself. The pie shrunk, as did the amount of money flowing into state coffers. back to top of the page Education Budget & Taxes Regulatory/Business Health/Human Services Central Texas issues Government Operations Criminal Justice Environment Gambling Texas Lottery The Border Extended coverage Talk Back: What is the most important issue the Legislature is facing in this session and why? Live from the Capitol The Texas House of Representatives Committee hearings The Texas Senate On the Web Links to the Legislature, the Capitol and more. Contacting lawmakers , phone numbers and addresses. About us Feedback Help Advertise here By using Austin360.com you accept the terms of our Visitor Agreement. Please read it Cox Interactive Media Job opportunities Privacy statement Registered site users: edit your profile