12/07/2010 2:11PM

Churchill chief: Downsizing possible

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TUCSON, Ariz. – A significantly smaller North American racing industry with half as many major racetracks and twice the average purse per race would make racing profitable for both racetrack operators and horse owners by 2020, Robert Evans, the chief executive of Churchill Downs, said during the opening presentation on Tuesday at the University of Arizona Race Track Industry Program Symposium on Racing and Gaming in Tucson.

Evans, the chief executive at Churchill since 2006 and the owner of small breeding operation in Kentucky’s Woodford County, repeatedly stressed during the presentation that his hypothetical view of a dramatically smaller racing industry a decade from now was not a prediction or a call to action, but rather the solution to a “math problem” that would enable racetrack owners to generate a 5 percent return on investment. He called that level of return critical to attracting new investment and providing incentives for current operators to stay in business.

“It’s a smaller business, but it’s a healthy business,” Evans said. “It’s an economically self-sustaining business.”

Despite the doom and gloom that would seem to be engendered by the loss of more than 20 major racetracks over the next decade, Evans said that he was optimistic about racing’s future, citing his belief that handle on U.S. racing has “probably bottomed out” after two straight years of precipitous declines that have accompanied the recession. He also said, however, that he did not believe that racing would experience any significant growth in handle for several years because of persistent problems in the U.S. employment sector that will depress growth in disposable income for the next three to four years.

Evans listed five reasons why the racing industry could become healthier over the next decade: continued growth in alternative gambling like slot machines at racetracks; the improvement in the balance sheets of racetrack operators because of debts that have been wiped out through the bankruptcies of Magna Entertainment Corp., the New York City Off-Track Betting Corporation, and the New York Racing Association; the exploitation of technologies that underlie account-wagering platforms; the persistent strength of handle numbers on high-profile races; and the competition that has erupted between racetrack and account-wagering operators, a race that has driven those businesses to seek ways to serve their customers better.

Although Evans said that revenue from slot machines should not be used to mask the financial problems facing racetracks, he said that subsidies from the machines and other casino gambling games can give the racing industry a critical reprieve as it seeks to right its crumbling foundation.

“We need time and dollars to get our economic house in order,” Evans said. “This is the best source I can think of.” Churchill Downs Inc. has lobbied aggressively for slot machines in jurisdictions where it owns racetracks, and it already operates casinos at its Fair Grounds in New Orleans and Calder Race Course in Miami.

Under the hypothetical 2020 scenario that Evans outlined, handle in 2020 would grow from $12.3 billion this year to $15.5 billion ten years from now, and purses would grow from $1.2 billion to $1.7 billion. However, because of a significant contraction in foal crops and racing opportunities, races would fall from the present number of approximately 56,000 races a year to 31,000, while race days would be cut by more than half, from 6,600 this year to 3,100 in 2010, at only 26 major racetracks, compared with 55 major tracks in operation today.

Using those figures, average handle per race would skyrocket, from $230,000 today to $495,000 in 2020. Purses, meanwhile, would average $55,000 per race, up from $22,000. Field size would leap from 8.2 horses per race to 12 horses per race in the model. With those figures, both racetrack operators and “good, focused” racehorse owners would be able to sustain their investments in racing, in large part because the slightly higher total revenue generated by the industry would be spread among a much smaller number of participants.

The assumptions underlying the scenario presented by Evans would obviously create a number of hardships for the employees of existing track owners and the trainers, owners, and breeders who would be driven out of business by the pressures created through the present “self-reinforcing” cycles that begin with lower handle and lead to lower purses, revenue, and bloodstock prices. Evans said those cycles must be broken if the racing industry is going to emerge from its current troubles and transform itself into an industry with a solid economic foundation.

“We have to find some way to break these self-reinforcing cycles,” he said. “Otherwise, we’re just going to spin to the bottom.”