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Takeout Shakeout
Friday, May 13, 2011 - by Evan Pattak

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When Tioga Downs needed an innovative way to increase handle and perhaps create new fans, it hit upon the idea of reducing takeout, the amount withheld from each wagering pool before distributions to winning bettors. Thus, in 2010, Tioga dropped its takeout rates for all wagers: from 18 percent to 15 percent on win, place and show; from 20 percent to 17 percent on doubles and exactas; from 25 percent to 21 percent on other exotics.

Tioga’s risky bet was a winner, resulting in across-the-board increases in handle.

“Most racetracks are seeing steady declines of 10 percent or more. We’ve realized an 8-percent gain, so one way to view that is an 18-percent positive swing,” said Jason Settlemoir, vice president of racing and simulcasting for Tioga and Vernon downs. “Our philosophy always has been to listen to horseplayers; without them, we don’t have a sport. We responded to the horseplayers’ call.”

Photo by Mark Hall
More and more tracks are turning to reduced takeout, resulting in higher payoffs to horseplayers.

Time was when racetracks regarded takeout percentages as sacred numbers that dare not be disturbed. Takeout, after all, is their principal source of revenue. It’s how they pay their bills, remunerate their employees, operate and maintain their physical plants and make their profits. Suggesting that tracks modify takeout was like asking Colonel Sanders if he wouldn’t mind calling his product Kentucky Fried Tofu. You didn’t mess with the formula.

But with handle and attendance plunging, more tracks are turning to reduced takeout — and the corresponding higher payoffs — to reverse the downward trends. The result is a veritable takeout shakeout, with tracks customizing new takeout schemes to fit their particular needs. Many of the largest Thoroughbred tracks lowered takeout years ago, but it was the more recent success of Tampa Bay Downs that inspired small- and mid-sized players in all breeds to take a look. 

“Tampa Bay was a catalyst for the industry to lower takeout rates,” Settlemoir said. “Look at what they’ve accomplished in a short period of time. Their handle was among the lowest; now they’re one of the big fish.”

When the Horseplayers Association of North America (HANA) formed in 2008, it established reduced takeout as one of the key planks in its platform, helping to popularize the notion. HANA President Jeff Platt says the organization’s position is based on member surveys.

“It’s crystal clear in the responses that the No. 1 factor that keeps players from betting more than they actually do is that takeout is too high,” Platt said. “Pool integrity, that is, the possibility of past-posting, and drug integrity rank second and third. We’re primarily a Thoroughbred-player membership, but we have a harness working group. We asked our harness players the same questions, and they said the same thing — high takeout followed by pool integrity and drug integrity.”

Platt heads a betting syndicate that he estimates wagered more than $2 million in 2010, qualifying the group as a “whale,” industry parlance for a megaplayer. But they don’t invest any of that load until they takeout shop to find the best bang for their bucks.

All forms of gambling feature takeout. Play a 50-50 raffle and you understand at once the takeout is 50 percent. Try your luck in a state lottery and you’re betting into a pool where nearly 50 percent may be taken out. When you bet with a bookmaker, legal or otherwise, the vigorish or “juice” usually is 10 percent, but it’s charged on losing wagers only; you can beat the takeout by winning all your bets. Casinos usually return more than 90 percent of slot machine volume to players, meaning takeout is less than 10 percent.

Takeout in harness racing is at once more complicated and less visible. Because takeout rates vary among types of wagers, it’s useful to weigh the different percentages and come up with a single figure, called the “blended takeout rate.” In racing, irrespective of breed, the blended takeout rate typically is a bit more than 20 percent. From that gross amount, tracks must allocate percentages to horsemen, state government and often to their tote companies. When all those shares are paid, tracks may net about 8 percent of their handle.

But that applies only to on-track handle. In this era of simulcasting, another rate applies to signals that are exported, still another to signals imported. When Downhill Downs sells its signal to another track for simulcast, Downhill charges a “host track” fee that generally is about 3 percent. Horsemen are paid from that 3 percent gross, which leaves Downhill with as little as 1.5 percent of all handle bet on its exported signal.

On the other hand, when players on site bet on simulcast races that Downhill imports, Downhill enjoys that blended takeout rate of 20 percent (except where state or local law stipulates otherwise), but it must pay the host track its 3-percent fee. After mandatory allocations, Downhill realizes about 5 percent of handle on imported signals.

Consider this example. Let’s suppose on a typical day, Downhill Downs handles $250,000 on its live product — $50,000 bet on-track, $200,000 at simulcast sites not controlled by Downhill — and another $20,000 on simulcast signals it imports. Here’s what Downhill Downs might net: 8 percent of $50,000, or $4,000; 1.5 percent of $200,000, or $3,000; 5 percent of $20,000, or $1,000. Thus, of that $270,000 in play, Downhill Downs keeps $8,000. Since other sources of net revenue — food, beverage and program sales, for instance — generally are modest, takeout is a track’s sole source of significant income.
That’s why setting just the right takeout level is so crucial. Keep them too high and you may depress wagering; lower them dramatically and you may boost handle, but lose money on the deal because you’re taking out less.

“Experts hired by the racing industry have determined that blended takeout rates of 20 percent-plus are higher than what the optimal rate should be,” said Platt. “There’s no magic number, but the models would suggest that somewhere in the 13-to-14 percent range would optimize revenue for tracks and purses.”

Most tracks haven’t reached Platt’s optimal range, but some are approaching it. In March 2011, Plainridge Racecourse pared its takeout to 15 percent for all wagers. The Isle Casino Racing Pompano Park reduced takeout rates across the board in 2011. Win/place/show takeout now stands at 19 percent, down from 20.5 percent; double/exacta/trifecta and superfecta takeout rates are now 23 percent and 25 percent, respectively, while Pick-4 takeout held steady at a competitive 15 percent.

To complement its lower takeout, Pompano rolled out a Wednesday Pick-4 with a guaranteed $5,000 pool. David Crupi, racebook manager at Pompano, reports that handle for that wager, which used to languish in the $1,500 to $2,000 range, now can exceed $17,000.

“We’re not crushing it, but we’re doing OK,” Crupi said. “We haven’t stepped backward, so we’re doing something right. The process is evolutionary; it has to walk before it runs. We felt that if we offered competitive racing with full fields and a reduced takeout rate, we would give ourselves every opportunity to grow our sport.”

Northfield Park recently lowered takeout for its Pick-5, Pick-4 and Pick-3 wagers to 14 percent. Northfield President and Chief Operating Officer Tom Aldrich predicts that players will notice the difference even if they don’t fully grasp the intricacies of takeout.

“The whales matter; that’s evidenced by the rebate shops that have sprung up,” Aldrich said. “But it matters to other levels of bettors, too. They may not know it intellectually, but if they spend enough nights betting on a track with 34-percent takeout, their billfolds will tell them.”

Meadowlands Racetrack has offered 15 percent Pick-4 and superfecta takeout for years. Even as it struggles for survival, the track isn’t backing off its lower takeout rates.

“Our Pick-4 handle has grown year over year in the face of declining handle here and everywhere else,” noted Alex Dadoyan, Meadowlands assistant vice president of racing development and distribution. “I’m not ready to say it’s entirely based on takeout, but I’m sure that contributes to it. The pool size is good and the takeout is fair and reasonable. That produces attractive payouts and makes people want to take a shot at it the next time.”
A number of tracks have reduced takeout for one or two exotic pools, rather than across the board, and coupled them with pool guarantees or reduced-minimum wagers. Cal Expo, to cite one, dropped its Pick-4 takeout from 24.1 percent to 15 percent and saw handle on its late Pick-4 jump 37 percent.

“Of all the promotions we’ve done, this is the one where you can measure the results in dollars and cents,” said Cal Expo Director of Racing David Elliott. “You get readable, tangible results.”

Similarly, Western Fair Raceway slashed its Win-4 takeout from 23 percent to 15 percent, and some months later, began guaranteeing a $4,000 pool.

Photo by Claus Anderson
Western Fair general manager, Ian Fleming, views guaranteed paid pools as important as takeout.

“It’s probably not a game-changer, but it’s a start,” said Ian Fleming, Western Fair general manager. “In my mind, guaranteed pools are as important as takeout. People will bet more into a bigger pool. They need to know there can be a pot of gold at the end of the rainbow.” For some tracks, that glitter at the end of the reduced takeout rainbow is fool’s gold. Resistance is especially high at tracks without a slots revenue stream; guess wrong on takeout there and you could plunge your operation into a death spiral.

“Reduced takeout is a good idea in theory if you have the sustainability to take the risk,” said Stacy Cahill, general manager at Scioto Downs. “Why not take a shot and make your customers happy? If you have revenue coming from different areas, you can take the risk. If you rely on handle to pay the bills, it might not be a good idea.”

Echoes Ken Marshall, director of racetrack operations at Hazel Park Raceway:

“We’re one of the fundamentalists; all our revenue is based on live and simulcast handle. There’s not a heckuva lot to work with after costs. If we were in a better position with more options, we’d have a more liberal approach on takeout. It’s a good idea, but we just don’t have the luxury for that kind of effort.”

Marshall added that he does expect Hazel Park to introduce this year some form of reduced takeout for an exotic wager.

The risks are more than hypothetical, as Mohegan Sun at Pocono Downs discovered when, in mid-2010, it reduced takeout on its superfectas and trifectas from 35 percent to 25 percent. According to Dale Rapson, vice president-racing division, before the reduction, trifectas accounted for 29 percent to 31 percent of handle. That range didn’t change following the takeout adjustment.

“We didn’t lose much money, and it’s kind of a goodwill policy,” Rapson said. ”I think we have to give it a whole year.”
The approval tracks must win from their takeout partners — state government and horsemen — is another potential obstacle. State legislatures and commissions often establish legal ranges for takeout. Strapped for cash as they are, states may be reluctant to authorize reduced takeout which, in the short run, at least, could mean less revenue for them.

“It’s difficult to do,” Platt acknowledged. “You need an agreement with your horsemen. You have to go in front of the racing board and, in states like New York, the legislature. If you can get your takeout changed, you may have to get it changed for an entire meeting or year.”

Vernon Downs never did get that agreement from its horsemen when it wanted to join sister track Tioga in lowering takeout. When horsemen objected, Vernon had no recourse but to maintain existing takeout levels.

“Our board didn’t feel handle would go up enough to get us even,” explained Rick Papa, president of the Harness Horse Association of Central New York. “The pools at places like ours are too small. If you look at the demographics of our region, people are not big bettors. I’ve never heard one of them say, ‘I don’t go to Vernon because of their takeout.’ I don’t believe takeout drives the small gambler.”

Simulcast partners also may grumble if a track reduces its takeout, since they’re stuck with the lower rate when they import that track’s signal. In fact, they might drop a signal entirely if the host track’s takeout dips too low. This phenomenon can act as an unwritten, but effective brake on takeout reduction.

“If we cut our takeout to 9 percent, nobody would take our signal,” Dadoyan said. “You can do it on a given pool. The Pick-4 comprises a couple percent of the entire pool for the card. Your partners won’t put up much of a fight if you lower takeout on that wager only.”

When Tioga reduced its takeout, it also trimmed its host fee to many of its simulcast partners, generally from 3 percent to 2 percent, to help compensate for any short-term losses. Plainridge went beyond that, shaving its host fee to 1 percent for racetrack partners.

The impact of reduced takeout may be limited if bettors don’t appreciate the benefits. To casual players who don’t understand it, falling takeout is like the proverbial tree in the proverbial empty forest; it makes no sound.

“Most bettors think if they won, the track lost. It doesn’t seem that customers understand takeout,” said Duke Johnston, Maywood Park president and general manager.

For that reason, Maywood has opted for richer loyalty rewards, rather than reduced takeout, as a way of remaining competitive.

Because bettor awareness is limited, tracks that lower takeout often support the measure with advertising campaigns. Tioga touted its new takeout figures as “the lowest allowed by New York law,” a catchy slogan even more effective because it’s true.

Finally, even the most ardent enthusiast of lower takeout would admit that where pools are small, as they are at many harness tracks, the immediate impact can be negligible. Imagine a takeout reduction from 20 percent to 15 percent for a pool of, say, $3,000. That reduction, substantial though it seems, would produce an extra $150 for bettors, a barely discernible amount when spread over all winning tickets.

Despite these significant barriers, some observers believe that the reduced takeout trend will continue.

“I do think we’ll see more of it,” Platt said. “Everything you buy — shoes, auto parts, bets on a horse race — has an optimal price. If you seek it out and get somewhere close to it, you end up maximizing your revenue. Tracks cost themselves money by setting their takeout too high.”

Expect tracks to get more creative as they seek that optimal price. For its Saturday late Pick-4, Cal Expo has begun returning the takeout, styled as a bonus, to winners who bet on track or through the TwinSpires platform, meaning the wager has an effective takeout rate of 0 percent. Aldrich foresees the development of preferred takeout rates, with on-track players enjoying a lower rate than those who play at simulcast sites.

“Some people might think, ‘That’s not fair. Why am I being punished?’ The answer to that is, do the math,” he said. “See if it saves you more to come to the track, and if it does, get in your car and come.”

Preferred rates? Bonus givebacks? They’re part of the takeout shakeout, coming soon to a track near you.

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The views contained in this column are that of the author alone, and do not necessarily represent the opinions or views of the United States Trotting Association.