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Creating and capturing new value in the lottery industry Lessons from Illinois...and beyond

November 16, 2010. Creating and capturing new value in the lottery industry Lessons from Illinois...and beyond. Lottery Expo 2010 – Las Vegas. Introduction: Value Transformation in Lottery.

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Creating and capturing new value in the lottery industry Lessons from Illinois...and beyond

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  1. November 16, 2010 Creating and capturing new value in the lottery industryLessons from Illinois...and beyond Lottery Expo 2010 – Las Vegas

  2. 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

  3. 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

  4. Industries Capabilities Our approach to Value TransformationOur model focuses on combining industry knowledge with functional expertise and capabilities from across a broad range of 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

  5. The importance of the broad context…and lessons from abroad Media & Entertainment North America International Gaming Lottery

  6. 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 Media subscription business Leisure operator Advertising business Full marketing transformation based around new strategic segmentation and pricing to drive attendance growth Pricing portfolio changes, customer retention / development programmes, and marketing ROI to drive to profitability Customer segment prioritization and pricing & promotions optimization to grow revenue Yield management, customer segmentation & sales force effectiveness, asset profitability, value sourcingto restore EBIT level Annual resort attendance EBITDA Revenue EBIT Actual (after Oliver Wyman program) Initial Plan (before Oliver Wyman program) Oliver Wyman attendance growth initiative Oliver Wyman marketing and pricing initiative Oliver Wyman program

  7. 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 3 4 Drive Growth Beyond the Core Drive CommercialPerformance Upgrade the Core Proposition Drive Relentless Operational Improvement 2 5 Expand the Footprint Drive down overheads and indirects 1 6

  8. 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 Growth Plays Cash Plays 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

  9. 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 Growth Cash 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

  10. Value enablers Value drivers Consumer behavior Performance impact 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

  11. 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’) + ~90% + ~60% Today Dist-ribution Marketing Loyalty Program SFE Prize Opp. Fulfill-ment Comp from EGDs Total Lotto/ Mega-millions only Remain-ing games New platform SSGs1 Keno Total

  12. 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 • 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) When more significant changes and / or a broad set of capability upgrades are required A question of prioritization to drive the most effective gains, enhancing capabilities to drive sustained growth

  13. Not exhaustive Step 2: Illinois – playbookWe deployed the playbook to identify the priority levers to focus on Sales force management and incentives Growth of the retail network Growth Cash 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 New distribution options Optimization of network, and network management Enhanced marketing spend Loyalty programs True customer understanding Potential for Internet Pilot Program Marketing optimization

  14. Step 2: Illinois - key deal elements SCOPE THE ‘WHAT” GOVERNANCE THE ‘HOW’ 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? INCENTIVIZATION THE ‘WHY’

  15. Step 2: Illinois - value creation Illinois Lottery Growth in Net Income and Value, 2009 to 2016 +83% 2009 2016 Incremental NPV over 5 years $1.1 B $0.7 B $1.8 B

  16. Passive lottery Numbers Rapido Mixed lottery Sports betting Instants Euro Millions 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 CAGR 1978-2007 11% € 9,3 bn stakes in 2007 29 millions players #2 lottery in world

  17. Not exhaustive Step 2: FDJ - playbookWe deployed the playbook to identify the priority levers to focus on Mass merchant 8-10% additional turnover Growth Cash 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 Loyalty program 2 to 5% additional sales Indirect distribution 5% of lottery turnover Sports betting From 7 to 14% of FDJ sales (online from 0 to 25% of total) Indirect value sourcing 4-6% of spendings

  18. Step 2: Capability enhancementsFor sustainable competition against very nimble new competitors, FDJ needed to move up what we call ‘capability staircases’ World-class Competitive advantage Advanced Standard Capability& Value • 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 • Key Question: How good do you have to be, at what, when?

  19. Step 2: FdJ - value creationManagement was able to commit to future targets that continued value growth despite the market opening to competition FdJ Business Plan Revenue, 2008 to 2015 +35% 2008 2015

  20. 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?

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