A consultant for the Arkansas Scholarship Lottery envisions ticket sales steadily increasing from $450 million in the current fiscal year to $615 million by fiscal 2021 and net proceeds for scholarships rising from $85 million to $109 million in the same period.
Camelot Global Services' self-described "ambitious" five-year business plan proposes many changes, including overhauling the portfolio of scratch-off and draw-game tickets, increasing the lottery's $5 million marketing budget to $7.5 million by fiscal 2020 and hiring five full-time employees to help implement the plan. Camelot also said the state should consider allowing the use of debit cards to buy tickets.
If the lottery makes no changes, Camelot projects ticket sales stagnating at about $425 million a year during the next five years, with the amount raised for scholarships sticking to around $74 million a year.
The lottery started selling tickets Sept. 28, 2009. Its net proceeds have helped finance Arkansas Academic Challenge Scholarships for more than 30,000 college students during each of the past six fiscal years. But scholarships have been cut in size three times during the past several years because of declining revenue and net proceeds. On Nov. 30, the lottery signed a contract with Camelot to develop and help implement a business plan.
"We have enjoyed collaborating with Camelot over the past 2½ months and look forward to working with them to increase scholarships for Arkansas students over the next five years," said Lottery Director Bishop Woosley.
Lottery revenue and net proceeds have dropped each of the past three fiscal years, after revenue peaked at $473 million and net proceeds peaked at $97.5 million in fiscal 2012. Revenue and proceeds have rebounded so far in fiscal 2016, which ends June 30.
Woosley and Camelot differ on their projections this fiscal year. Woosley is projecting revenue at $411 million, while Camelot said the latest estimate is $450 million. The director estimates net proceeds for college scholarships at $79.5 million in the current fiscal year; Camelot said the latest forecast is $85 million.
Camelot, which has offices in London and Philadelphia, submitted the draft business plan to the lottery last week. The lottery now must provide Camelot with either a written notice of its acceptance or rejection of the business plan, and "we don't anticipate that the business plan will not be implemented," Woosley said Friday.
So far, the lottery has paid Camelot $55,877.37 for base compensation and expenses, the director said.
"The plan that Camelot recommends... is to grow sales by recruiting new players, increasing the frequency of less committed players and protecting the play of those who play regularly," Camelot said in its report.
Over a five-year period ending in fiscal 2021, "the business plan delivers proceeds to scholarships of $486 [million], compared to $369 [million] in the base case," under which the plan's initiatives wouldn't be implemented, according to the draft plan.
The world-record Powerball jackpot in January and the growth in scratch-off ticket sales has boosted the lottery in fiscal 2016 and that's "good news for scholarship funding, which will increase transfers to scholarships" to approximately $85 million in fiscal 2016 — up from $72.4 million in the last fiscal year, according to Camelot.
But "the lottery cannot rely on exceptional rolling jackpots to hit targets, which is why the five-year business plan and execution is especially important," the company said in its draft.
Gambling competition in Arkansas "is growing and competes for disposable income," the plan says. Arkansas "gamblers had previously made trips across state [lines] to Mississippi casinos until severe flooding closed Tunica resorts and casinos in 2011. This diverted gamblers to in-state [Arkansas] racinos."
Camelot's five-year plan would:
- Increase the marketing budget from $5 million to $6 million in fiscal 2017 and track the result from the increased budget with a "target" of $6.5 million by fiscal 2018, $7 million by fiscal 2019 and $7.5 million by fiscal 2020. The lottery's $5 million marketing budget is insufficient to cover the state, the consultant said.
- Deploy about an additional 600 lottery terminals. Lottery retailers now number nearly 1,900.
- Introduce a pre-launch scratch-off game development program and recruit an assistant product manager "to ensure that all games are high quality and deliver the fastest rates of sale."
- Create a key account manager position "to interact with chain stores at a head office level, promoting the value of [the] lottery."
- Establish a "consumer insight" position to better understand the players and effectively implement the business plan; a public relations post to implement the brand initiatives in the plan; and a commercial finance post to "provide sales analysis, business case support, cost control (e.g. use of options with vendors)."
- Start "a consistent winner awareness program to increase win belief and give less frequent players more reasons to play."
- Develop a new, larger in-state jackpot game.
- Create "a responsible play program" focused "on vulnerable play — underage and excessive player behavior."
In addition, Camelot said the lottery should consider seeking legislative approval for "cashless payments [allowing] retailers to sell lottery products like any other good/service," and creating "a digital channel (iLottery opportunity)."
With "cashless payments," "players could play and pay via their phones, via other in-store methods of payment even via debit cards using retailers' infrastructure," the company said. A bill to allow the use of debit cards died in a House committee in the last regular session in 2015.
The cashless payments and digital channel "are listed as opportunities for growth that the lottery could consider should a statutory change be made to allow those items" and aren't factored into the sales projected in the business plan, Laura Pearson, a spokesman for Camelot Global Services, said Friday.
Debit cards may be used to purchase lottery tickets in 41 states and Washington, D.C., but the retailers decide whether they are accepted in 28 of these states, Pearson said. Lotteries in Maryland, Oklahoma, South Carolina, Tennessee and Wyoming don't allow the use of debit cards to purchase lottery tickets, she said.
Camelot says the lottery should study placing electronic monitor games in bars and restaurants but the games shouldn't be considered for installation until 2020. In a 2014 special session, the Legislature enacted a law putting a moratorium on such electronic monitor games until March of 2015.
Under Camelot's contract, the consulting firm will receive base compensation and expense reimbursements up to $750,000 a year, but it also will be eligible for incentive compensation of at least 12.5 percent of the lottery's adjusted operating income above $72.28 million in a fiscal year.
Camelot won't receive incentive pay if the business plan is rejected by lottery officials, according to the amended contract. "If the plan is rejected, we'll be obligated to pay restitution for any services provided by Camelot, with a maximum amount of $200,000," Woosley has said.
The contract also calls for Camelot to help the lottery renegotiate contracts with vendors; the savings would be used to help pay for Camelot's services. The contract will run through June 30, 2020, with options for two one-year extensions.
Camelot will get a percentage of any "adjusted operating income" of the lottery above $72.28 million in a fiscal year. The company will keep 12.5 percent of that income between $72.28 million and $80 million; 13.75 percent of that income between $80 million and $90 million; and 15 percent of any adjusted operating income above $90 million.
The contract defines "adjusted operating income" as operating income before charging any expenses relating to services provided by the state Department of Higher Education, the Arkansas Legislative Audit, legal and professional services, and depreciation. Adjusted operating income measures the performance of the lottery without consideration of expenses that are deemed beyond the lottery's control, according to finance department spokesman Jake Bleed.
In September 2014, the Legislative Council voted to hire Camelot Global Services, without seeking bids, to review the lottery at the request of Sen. Jimmy Hickey, R-Texarkana. The consultant received $169,500 for its work for the Legislative Council. In February 2015, Gov. Asa Hutchinson and the Legislature passed laws to put the lottery under the control of the state Department of Finance and Administration and eliminate the nine-member Arkansas Lottery Commission that oversaw its operations.