Camelot UK Lotteries Ltd – Supplementary written evidence (GAM0111)

Camelot is proud to have operated The National Lottery for the past 25 years. Our overriding objective is to raise the maximum amount of money for National Lottery Good Causes in an efficient and socially responsible way.  As such 95% of National Lottery revenue goes back to players and society (in the form of prizes, returns to Good Causes, Lottery Duty and Retailer Commission), one of the highest percentages of lottery revenue back to society in the world. This has resulted in over £40 billion being delivered to National Lottery Good Causes, an additional £17 billion to the Treasury in Lottery Duty and £6.5 billion paid in commission to retailers on high streets across the UK.

In 1994, a clear and complementary distinction was established between smaller traditional society lotteries, fundraising for local good causes and The National Lottery, offering life-changing prizes in order to deliver large returns to Good Causes. This distinction is one of the main reasons behind the success of The National Lottery. This ‘single national lottery’ model has been reviewed several times and it remains the most efficient way to maximise returns to Good Causes and society. However, the single national lottery model has been eroded by the growth of industrial-scale society lotteries which operate across Great Britain (society lotteries in Northern Ireland are subject to separate legislation) in competition with The National Lottery.

The extraordinarily fast levels of growth we have seen in the industrial society lottery sector can be attributed to the removal of the expenses cap in the Gambling Act 2005. This means that industrial-scale society lotteries can spend virtually uncapped levels of revenue on expenses, as long as a 20% minimum is returned to good causes. Much of these expenses are spent on marketing, meaning that The National Lottery is competing for advertising share of voice in a market designed around the economically-efficient model of a ‘single national lottery’, inflating its marketing costs and driving a cycle of inefficiency. The result is that the People’s Postcode Lottery’s advertising spend is now approximately 75% of that of The National Lottery, even though they are only 5% of The National Lottery’s size by sales (£365.3 million vs £7,206.8 million respectively).

As the Committee prepares its recommendations from this inquiry and the Government begins its review of the Gambling Act, I reiterate my call for an expenses cap on industrial-scale society lotteries of between 5-10% of sales. For the avoidance of doubt, I am not suggesting that the expenses cap should apply to traditional society lotteries.

The context and potential for future growth is also important, as the Government intends to raise the sales limits and jackpot sizes for society lotteries this summer. We are concerned that this will have a further detrimental impact on National Lottery sales and therefore returns to National Lottery Good Causes.

In response to the Committee’s request for further information on the breakdown of National Lottery expenditure, including advertising costs and to illustrate the points I have made above, we have prepared the following information.

Advertising spend data analysis

Source: Nielsen AdDynamix[1]

At the Committee hearing, I said that between 2010 and 2018 the advertising spend of the People’s Postcode Lottery increased by 556%.  This figure is based on data from Nielsen AdDynamix which analyses the advertising spend of companies in the UK. The AdDynamix tool includes analysis of advertising that consumers see by means of television, press, radio, digital, out of home, cinema, direct mail and door drops. It does not include agency spending, advertising design or staffing costs.

As detailed below, Nielsen AdDynamix analysis shows that the People’s Postcode Lottery spent £41.4m on advertising in 2018 versus £6.3m in 2010 – representing a 556.5 percentage increase.

Revenue and Expenditure: Breakdown of the ‘Lottery Pound’

The National Lottery portfolio consists of draw-based games (such as Lotto and EuroMillions), Scratchcards and online Instant Win Games. Lottery Duty at 12% is paid on sales of all National Lottery products and retail sales of National Lottery products pay commission for retailers of 5% for draw-based games, 6% for Scratchcards and 1% on certain prizes paid out in store. As discussed at the hearing, the People’s Postcode Lottery does not sell Scratchcards or Instant Win Games and as their lottery is sold online and by telephone, no retailer commission is due.

For these reasons, in our portfolio we would consider National Lottery draw-based games sold digitally to be the most comparable product to that offered by the People’s Postcode Lottery. For National Lottery draw-based games sold digitally in the financial year 2018/19, 35% of revenue was returned to Good Causes and 12% returned in tax as Lottery Duty, representing a 47% return to society as compared to 32% for the People’s Postcode Lottery in 2018. The total cost of operating The National Lottery represents 4% of revenue and profit to the shareholder at around 1% compared to 28% in total for the People’s Postcode Lottery.

Due to rounding totals may not add up to 100%

As detailed in the most recently published People’s Postcode Lottery annual report[4], the lottery’s revenues in 2018 were £365.3m and expenses were £102.3m, representing 28% of revenue. We understand this includes a 4% licence fee to Novamedia along with an additional 1% management fee.[5] £116.9m was returned to good causes (32%) and £146.1m (40%) paid in prizes to players.

Camelot UK Lotteries Limited accounts 2018/19:[6]

Due to rounding totals may not add up to 100%

Additional points to note

• VAT: Sales of lottery tickets are exempt from VAT. Therefore VAT is not normally recoverable on the Camelot’s costs and is a charge against profits. The VAT cost for the year, including that arising on capital expenditure, was £41.2m.
• Marketing expenditure: According to the terms of the Third National Lottery Licence[7], Camelot spends 1.07% of revenue on marketing. Due to the increased competition for marketing share of voice we have seen in the last decade, The National Lottery’s marketing cost base has been inflated. Following full regulatory scrutiny, the Gambling Commission approved additional marketing investment for Lotto and EuroMillions from the National Lottery Distribution Fund (NLDF) of £73.4 million over a two-year period, with the first instalment of £39.0 million paid in 2018/19. Over 2018/19 and 2019/20 the NLDF is expected to see net increase in funds of £114.6 million as a result of this investment, a 150% return on investment.
• During the year, Camelot has maintained the infrastructure to run The National Lottery and at the end of the financial year 44,235 lottery terminals were in operation across its retail footprint.
• Capital Expenditure: Since the start of the third National Lottery Licence, our shareholder has invested £228.6m in capital expenditure to date, £141.8m (+163%) more than was set out in the third Licence business plan.

I hope the above is helpful and please do not hesitate to be in touch if you have any further questions. My thanks again to the Committee and we look forward to the publication of your report later this year.

NIGEL RAILTON, CHIEF EXECUTIVE

Explanatory Note: Competitor Advertising Spend Data Sources

1. Nielsen AdDynamix

Camelot’s analysis of competitor advertising spending uses information gathered by the Nielsen AdDynamix media monitoring tool. Camelot monitors competitor spend in this market because it affects our ability to advertise The National Lottery and the costs associated with doing so. 

In the absence of public reporting by the People’s Postcode Lottery on their advertising spend (see point 2), the information provided by Nielsen is the best data available to us. By contrast, National Lottery spending on marketing is made in accordance with the terms of the Third National Lottery Licence and the level of spending is detailed in Camelot’s annual reports.

Nielsen analyse the advertising output of companies in the UK in order to come to an estimated spend level. The AdDynamix tool analyses trends, brands, advertisements and campaigns across all media sectors. It looks at advertising directed at consumers by means of television, press, radio, digital, out of home, cinema, direct mail and door drops. Cost estimates are made using among other sources, industry and trade association supplied average rates, rate cards and campaign activity and station revenues. The tool cannot supply exact figures due to private negotiations undertaken by the advertiser. Likewise, the figure provided does not include agency spending, advertising design or staffing costs.

For the Committee’s reference, we attach a summary short summary provided by Nielsen on their methodology.

2. Transparency in relation to advertising spending 

From 19 December 2019 to 12 March 2020, the Gambling Commission ran a consultation on Society Lottery Reforms, which included “looking at the current regulatory requirements to ensure that issues related to the fair and open licensing objective, regarding transparency to consumers, are addressed. [They were] seeking views on strengthening some aspects of the Licence conditions and codes of practice (LCCP) and producing guidance related to information available to consumers.”[8]

Camelot’s response to the consultation reiterated our long-held concerns around the operating costs of ‘synthetic’ national lotteries, particularly in relation to marketing costs. Our submission called for these large-scale operations to publish full details of the allocation of their proceeds so that they are easily available to players, ensuring that clear information is available relating to operating costs, specifying the amount spent on marketing versus other operating costs. We hope that the Committee will support our calls for greater transparency requirements on ‘synthetic’ national lotteries.

2 April 2020