The Journey to World Class Racing and Success via Customer Centricity
Winfried Engelbrecht-Bresges
Winfried Engelbrecht-Bresges, CEO, The Hong Kong Jockey Club

Stuart S. Janney III:

After hearing that report, it's evident that the UFC takes anti-doping very seriously and is taking the necessary steps to ensure the integrity of competition and the health of its athletes. Thank you, again, Jeff, for an excellent presentation.
The Hong Kong Jockey Club is widely considered one of the leading racing organizations in the world, and anyone who has experienced Thoroughbred racing in Hong Kong would surely agree with that sentiment.

Today Winfried Engelbrecht Bresges is going to tell us a little bit about the past, the present and the future of Hong Kong Jockey Club. Winfried, thank you for coming a long way.

I'm sure your body doesn't know what time zone you're in, but you're in our time zone and we're very pleased to have you here.

Winfried Engelbrecht-Bresges:

Stuart, Jim, ladies and gentlemen, good morning, and in Hong Kong it would be now good night. But Iím still awake, and I think Iím excited to be here. And I would like to thank The Jockey Club for the kindness to invite me. I would like to congratulate The Jockey Club for its visionary leadership of the horse racing industry in the U.S., and if I look only at a study done five years ago with McKinsey, who really provided important thought leadership for development of the industry. And I only can say that this is necessary in a very fast‑changing, economic and political changing world.

We did a similar exercise in the Hong Kong Jockey Club around 17 years ago, and I would like to share the story of how we in a way tried to improve the quality of racing in Hong Kong, and how we in a way besides a global sports product of racing, how we focused on customer centricity to turn around a business which was in decline.

A little of our history. If you look at 1841, the Crown provided kindly money to have a malarial swarm drained. What the Crown in England didnít know, that people in Hong Kong do the racehorse in the center of the Island in Happy Valley. The Jockey Club itself was founded 1884 and was an objective to improve horse racing. Itís interesting enough that The Jockey Club from the beginning was founded as a not‑for‑profit organization. If one looks in the real development of horse racing in Hong Kong from a global perspective, I think a historic date is 1971, when The Jockey Club decided to go from amateur racing with ponies to professional racing with Thoroughbreds.

The development paved the way that 1973 there was only before betting allowed on the racetrack, but there was a huge illegal market outside of the racetrack. And 1973 the Hong Kong government permitted The Jockey Club to run off‑track betting centers. We started with around 20, and we have now around 110 on the island of Hong Kong and the new territories in the Sha Tin area.

At that time, Hong Kong had 400 horses, all of which were trained in Happy Valley, and if you have the chance to go to Happy Valley, youíll see the horses came down from the top of the hill, had to walk through narrow streets to be trained at the track.

In Ď78 is another milestone in the development of the club, where we opened up Sha Tin, which is in the new territories, which in a way provided us really†with growth opportunities. The Happy Valley racecourse was designed for holding around 20,000 to 25,000 people. Sha Tin is a racecourse that can hold over 85,000.

We relocated the training from Happy Valley to Sha Tin, and the impact of this development is shown. Sha Tin was a village with 30,000 people. The whole infrastructure to connect the city with the racetrack was instrumental that now Sha Tin has grown to one of the big towns in Hong Kong, with around 700,000 people living there.

What we have done in a way always as a club is that we see ourselves for the betterment of Hong Kong. We always in a way want to do this by providing world‑class racing, sporting entertainment, and, last but not least, philanthropy. What I think is interesting is when you look at our values which are structured beside world‑class racing and serving the community where we want to always continue to develop in the organization, and last but not least, uncompromising integrity.

We have a completely vertical, integrated, not‑for‑profit business model, where we have practically four elements. One is our world‑class racing and training ─ everything around an end‑to‑end process. The second is our membership club. Then we have a significant wagering and lottery business. And the charity and community aspect we stand for.

To give you a brief overview of the dimension of our organization, we have 5,600 full‑time employees and 25,000 part‑time employees. Every race meeting we have around 12,000 people working during the race meeting to provide a wonderful show. The membership: we have one of the premier membership clubs in Asia. We have 24,000 members, and it is in a way a privilege to be a member of the club and is highly sought after. Therefore we have put processes in place to ensure a due diligence and integrity check of everybody that wants to become a member. And the reason is the ownership in Hong Kong is linked with the membership of the club, and we want to have only fit and proper people who have the right to own horses in Hong Kong.

If you look at our wagering and lottery business, we are, as a sole operator, we have†─ as mentioned before, since 1973, are permitted to run betting activities outside of the racetrack. And in 1974 we got the right to get the Mark Six lottery, and in 2003 due to a rampant illegal market related to football, we got the permission of football betting.

Horse racing is conducted as a pari‑mutuel product. Football betting, we have fixed‑odds betting. And we have 4.3 million customers in Hong Kong. This is 78% of the adult population in Hong Kong. If you look at our account base, we have 2.2 million of these customers have betting accounts with us, and we distinguish ourselves always that we are not for profit, so that we channel gaming demand for community benefits.

Looking at our total turnover, last year we had a total turnover of 24.8 billion in U.S. dollars. $13.8 billion in horse racing, with around 780 races, $10 billion in football, and $1 billion in relation to lotteries.

So why in a way does the government give the club the right to channel it? They think that we have the most effective way of doing it. And if you look at the tax contributions last year, our tax contributions were 2.54 billion U.S. dollars. Horse racing is a major share with 1.6 [billion U.S. dollars]. We pay the highest gross profit margin tax in the world. 75% of our takeout rate is taxed by the gross margin tax to channel this gaming demand for community benefits.

But I think it is very important that this income for the government, which is approximately 8% of the income the government has, helps to reduce tax rate in Hong Kong by around 30%, and thatís why I think the financial secretary is probably one of our biggest admirers.

Looking at us as an organization, we are the largest charity benefactor in Hong Kong, and if one looks at our contribution, it reaches from schools, hospitals, it goes into football stadiums where people can enjoy. We have University of Chicago relocate to Hong Kong in a way to have their business school there for the Asian region, and I think we are really reaching every day around 75% of the population in Hong Kong was touched by one of our charity projects.

We focus even more going forward on strategic initiatives on software capability building, because we think itís not only hardware that changes the life of people. We are ranked now the No. 6 in the world as a charity trust. Last year we donated 496 million U.S. dollars to the community directly by our charity projects.

So we think in a way that is one of our major roles, but our soul, our heart is definitely in horse racing, and some people may think we are a sole operator so we are a monopoly, so we have the luxury of being in a way not competitive. And I only can say, if everybody knows Asia, where we have to compete with a half hourís boat ride and in future with a bridge with the biggest casino‑operating institutions in the world, which last year had around 28 billion U.S. dollars turnover of revenues, and if you compare this with Las Vegas, itís around $8 billion.

We compete with a massive illegal market. Most of the illegal market is focused and centered in the Philippines with the illegal exchanges on sports betting, which is a massive integrity issue which we want to tackle. The illegal turnover on our races is likely, in this area, similar to us.

So we in a way were still able, despite the significant increasing competition, to ensure business growth, but let me only briefly share about our racing side in a way how we started international racing. The first international race was in 1988 with six runners, three from Malaysia and Singapore. We then started directly opening up some races where we had in the end three international races, and in 1998 we had only one horse in the international classification called Johan Cruyff. At that time, Hong Kong racing was only a betting racing product. No ambition to become a world‑leading organization or to have really racing as a world‑class sport.

If we fast forward to 2015, I think the results we have achieved of our strategy we think are satisfying. We have now in a way, if you look at 1998, we had one horse in the international classification, we have now 23. We have now two of the top horses in the world ranking in Hong Kong. And if you see that 11% of the worldís racing population, with a total horse population of 1,200 horses, is based in Hong Kong, we think in a way we have achieved significant progress in this respect.

If one looks at our top races in the world, we have a similar statistic that we have six of our races of our open group races are in the top 25, which means 25% of the 25 best races in the world are in Hong Kong.

Our flagship event is the Hong Kong International Races, and the quality in a way and the worldwide attraction of the races is really best demonstrated by the success of this event. We have four races†─ the sprint, a mile, a 2,000 and 2,400 meter race. The sprint, the mile, and the cup have the highest prize money in the world, and the 2,400 meter races are No. 5. We attract every year 30 horses from all around the world, southern and northern hemisphere to participate. And let me in a way show you a short video to show you how the International Races are run in Hong Kong.

[Video.]

I think the question that would be interesting to ask is how we in a way went within practically 18 years from a regional racing organization to one of the world leaders, and I think the strategic mission and leadership, especially of our chairman at that time, Alan Li, was essential, who in a way under his leadership where we articulated the strategy. And one has to put this under the background that there was a change in sovereignty from being a British colony to become a Special Administrative Region in China, so we decided to strategically position us as Hong Kong, which is really in the interest of Hong Kong, and in a way to have a profile which allows us future global growth.

So we in a way had a 10‑year strategy, which we were very focused on: we wanted to make Hong Kong a global center of excellence in everything we do. We wanted to provide customers with unlimited access to information. We wanted to have the highest integrity of the racing product, and definitely a smart and a key element is we wanted to have a prohibited substance‑free racing to ensure a level playing field for every participating horse. We did not want to have the result of races influenced by medication.

In our strategy in the race planning, we focused on races on turf, distances between 1,200 to 2,000 meters, the clear focus on distances from 1,400 to 1,600. We had the majority of the races on as group races. But in a way we have for OS handicaps, the group races we have every three, four weeks, major races in a way to have our top horses participating regularly. And to optimize the business results, we focus on field sizes between 12 and 14, which are ideally for Happy Valley and for Sha Tin.

To drive this performance, we created significant owner incentives, because owners are the key stakeholders and the key drivers of development. So we increased the prize money by 30%. We introduced our special premium racing events to stimulate owners to invest into horses, and we invested heavily in ownersí facilities and services.

We have now probably the highest prize money in the world on average per race. And if you look in a way only at the prize money we have now for the Derby, which is 2.3 million U.S., is the key driver in a way for our owners to import 3 to 4‑year‑old horses.

One of our restrictions is we can import only 350 horses per year, which are allocated by ballot. And the average waiting time now to have a horse in Hong Kong is three to four years. So how we still drove the quality is that we introduced special replacement permits where people can bring in a horse of Group 3‑quality plus, anytime they had a horse to really drive the performance. We are very clear that unlimited access of information about horses is important: the health status, how the horses are treated. What is the training? If itís swimming, if itís on the track, everything has to be transparent to the customer.

The highest level of integrity is that we think we employ one of the best integrity teams in the world, being the racing control, being on a racing level. We have developed digital tools which are probably unprecedented if you look at horse monitoring of a race.

But I think one of our key foundations to ensure integrity is our lab, and our processes we have to ensure that we have an end‑to‑end process, similar to what was mentioned before, to ensure a level playing field for all who participate in the sport. We have introduced processes for in‑training competition testing, we have in a way a split between regulatory vet and clinical vet, and everybody who treats a horse in Hong Kong is an employee of the club. We have in a way invested heavily in our racing lab, which some people say is probably the best or among the three best equine labs in the world. We test for all equestrian competition worldwide too, and in a way we were responsible for testing of the Beijing / Hong Kong Olympics where four athletes or horses were found with foreign substances which were never detected before.

We have a significant pre‑race check environment, and especially in a way with our significant program in relation to in‑training checking, we think that therefore we have so much processes in place which discourage anybody to do something which will be against the integrity.

To drive the performance people are important, we introduced performance criteria for trainers. If you do not fulfill certain performance criteria, you have to show cause why you stay as a trainer in Hong Kong where we have a limited space. We did the same with jockeys. Jockeys in a way have to perform to a performance standards to get re‑licensed, because everything we do is to drive quality. We in a way try to attract really the best horsemen in the world and we do the same with our management team and our staff. We have furthermore for our local staff, we have a comprehensive training program, and for apprentice, we have an academy which, I think in a five‑year program, tries to nurture some of the best jockeys.

But if you look then at all the efforts we did, we still found ourselves in a difficult situation from the business side because our pricing we think was wrong. We saw a significant dip in our turnover after the Asian financial crisis. We had another issue with SARS. So if you look at the business results you could argue why put all this effort in to the turnover if itís reducing. What we found in a way definitely was that we had significant competition from Macau and the illegal market, and especially the illegal market was what concerns us, because they were offering rebates to attract the top players to play with them. We could convince the government to change the turnover tax to a gross margin tax, and we introduced a rebate of 10% of bets on standard bets over an amount of 1,200 U.S. dollars. This immediately showed the price elasticity, that we could turn around the decline we had in racing, and we in a way were able to capture a significant first part of the illegal market.

But looking at this, we still thought this is not sufficient. We did probably the most comprehensive study to understand our customer base and the potential customer base. We found what is in a way very clear that where we all in the racing industry have similar findings, that this ďas-isĒ assessment showed that those who were already in the game we had, and they were aging; among racing customers with a gaming propensity found racing not relevant and too difficult to understand. We especially did not appear to the younger segment, and most important, the middle class. We had all the top people who were interested, and we had the mass, but the middle class, which is a growing middle class, we didnít reach, and we faced a significant competition of the casinos, etc.

So we had to change in the way our offerings to a lifestyle offering. In the end we came up with nine different customer segments, which I think is from the racing and lifestyle seekers, which are mainly the owners, the racing hobbyist is our middle‑class people, who have a gaming propensity and want to spend a little bit of money, but they were not connected to the difficult‑to‑understand sport and the money-driven regulars which could be sometimes professional handicappers or in a way those who enjoy racing but look mainly to win money.

With this exercise, we were very clear what the customer value proposition for every of the segment is, and that found the basis for our strategy of our investment in facilities, in services and in technology. And especially in a way, if you look at the 25‑ to 45‑year‑olds, they didnít understand racing information. We have 48 newspapers in Hong Kong who every day have coverage of six pages of racing. But it is like you give somebody the Wall Street Journal and say youíve become an investor, it is too difficult. And we understood that the younger generation have a completely different way how they process information.

So we came up then with a plan. One is in a way our racecourse master plan where we invested US$800 million into facilities to create customer experiences which we think are unique in the world. I can show you some examples where we in a way for the different segments, and hereís one of the owner segments, where we create an experience, which I think is a really prestigious luxury experience where people want to bring their friends when their horse runs.

We have a customer relationship program. When you enter your horse, your table is reserved. You get an email saying this is the table. You have a table for eight people. Do you want to have the same table? Do you want another table? So everything we do is focused on our customers, on our owners, to create such an experience.

We created other, much more younger facilities, for members and for the public who are interested in a certain event experience. And, again, we used world‑class designers to create these experiences which are extremely contemporary. But not forgetting the hard‑core customers because they still provide around 70% of the turnover, so we in a way created these kind of experiences for our hard‑core customers. With this in a way we made already significant improvements, but the key, I think, to connect to the younger segment is improved digital connectivity. And we know this must be much richer, much more attractive.

One example is we created a race simulator. You can actually simulate every upcoming race where you have four different factors for a younger situation to do form. We had within four weeks 350,000 downloads, and on every race meeting we have around 30,000 to 40,000 younger people who use these in a way simulation.

Then we wanted to combine everything we have, graphics, live videos, form study, and we had significant data, but to connect these data on a platform was a massive exercise, and we created a project which we call the IBU. Thatís the first interactive betting unit. Itís like an iPad of the size of around 4 meters, and people, younger people can play and easily understand in a way how you can explore horse racing.

This was practically the mother ship for our future technology development, and we have now around 70% of our turnover is on mobile and interactive platforms. This has completely converted our connectivity, and, again, an example of how graphically rich and how easy in a way customers, especially the younger segment can do this, so that is created in a way for the newcomers who can with graphics study form, gets the right information. Then if you then mature to a more regular customer, we have a mobile app which I think is then the next phase of the development.

But all these are tools. But you have, in our opinion, to present the young generation racing as entertainment. So we in a way have the unique opportunity to have a racecourse in Happy Valley which is practically like you would have built a racecourse in the middle of Manhattan. So that gives us a unique chance for the urban population in Hong Kong to attract them. Happy Valley is now in a way one of the most sought‑after tourist and business entertainment venues. Itís a must‑go on a Wednesday, and weíve created the so-called Happy Wednesday brand, which is something we, I think, have really changed our positioning and branding of racing as not a sport for racing ďunclesĒ and those who are in a way a little bit aged.

So we have around 18,000 people every Wednesday night in Happy Valley. We have around 50% of the attendance of average age under 35, and this is in a way a massive change. Now we reconnect them that they come for the big racing events in Sha Tin, so that in a way from there we can grow our customer base.

If one looks at the Happy Wednesday brand, itís best that I donít talk about it and that you have the chance to see a video to give you an impression. But donít be afraid. I would not suggest that you do the same with Saratoga.

[Video.]

You can see we care really for our customers, our horses. If you look at the business outcome, we think that we are able to revitalize racing, we could increase our customer base and we could connect to the younger generation, we could connect to the middle class, and I think the results speak for itself that we are able to go from $7.69 billion in 2005 to $13.83 billion turnover [betting handle] in racing in the last season.

What is the way going forward? We still believe that world‑class racing is the right approach to go forward and customer centricity, and we will invest significantly in further technology.

We plan now a new customer wagering system for around 500 million U.S. dollars. Our current system is three times faster than the stock exchange. We could theoretically handle all racecourses in the U.S. at the same time and it would be only at a 30% capacity.

The dimensions of all transactions in this respect are enormous, but we think technology is part of our business and this is why we have to invest more. I would like to focus on three events.

One is what we want to do with commingling.

The other is our our Conghua Training Center, which is a development where we built a training center in China.

And last but not least, which is the basis for everything we do, we think it's prohibited substance-free racingÖWe think we have a unique chance to leverage our world‑class product.

We have the highest pool size in the world, around $15 million U.S. dollars per race, and that is a wonderful attraction for customers due to the liquidity. We convinced the government that the bets would be taxed in the country with the customers and come tax free into Hong Kong.

And it took us†─ I made a presentation in 2007 in Dubai, it took me a little bit of time to convince our government, but in the end we were successful, and we have now in a turnover of around nearly $500 million U.S. coming from commingling, a gross of 30% in the last year, and it's now 3% of our turnover.

We would like to bet in other pools and to give you a dimension of even for non‑Hong Kong races, our racing fans are really astute.

So if you bet, for example, in a race like the Arc de Triomphe or the Yasuda Kinen, the turnover is around 2.6 million and 4.8 million U.S. dollars, so we think we could make in a way a contribution to really increase the international coverage of racing.

But we need a technology investment, which is a worldwide effort, because we need a new protocol who will facilitate this going forward. One of our most ambitious and difficult plans is building a training center with the potential to become a racecourse in China.

Our problem is Hong Kong has no land. We have the problem that we have 40‑year‑old stables, we're at maximum capacity with 1,200 horses. We need a significant renovation of stables, and to do so we had to go outside of Hong Kong into China, and we bought 210 hectares of land on the basis after we supported the Asian Games in China.

So, theoretically, we can expand our training to an additional 1200 horses, and it can help in a way Hong Kong investors who invest more and more money to keep most of their horses as empire to create breeding value.

We could in a way leverage definitely the increase of number of horses we have to increase the number of race meetings. We have at the moment 83 race meetings, Wednesday, Saturday, Sunday in the period from September until mid of July. And we have some blends in the program, especially Wednesday nights. We could fill now. We could convince the government to go to 88 race meetings.

We had to establish the first disease‑free zone in China. We had to overcome significant issues that our vets and everything we do in Hong Kong we can provide with the same standard in China, and we were successful in this.

Furthermore, we have the strategic alliance with the China equestrian association and the China Horse Racing Industry Association, and want to help them to develop systematically a racing industry.

Racing with betting in China is still far away, and we give the advice they should not go this way because they have not the integrity and systems in place to really to do this.

But the cornerstone in everything we do is what we see is prohibited substance free racing. Because we feel it is essential to our sport. It is essential for the public support. It is essential for customer confidence. It is essential to ensure a level playing field. And being a little breeder myself, I feel it's essential when it comes to the selection of horses for breeding.

We have to ensure that racing follows best principles and practices in other sports to be credible and sustainable.

In Hong Kong, as outlined before, we adopted those principles as an end‑to‑end process, and we think in a way that this has really guaranteed the customer confidence.

What I think is important is the hardware, too. We invested, therefore, as outlined before, in our racing lab, because we think this is absolutely essential that you always try to be on the forefront to capture those who want to manipulate the results.

So going forward, we'll invest even more into research development capabilities to have even more powerful tools to detect attempts to membership races.

We firmly believe that the philosophy of prohibited substance‑free racing, and applying best practices to ensure implementation should be adopted by all leading racing jurisdictions, especially in the U.S., as one of the world leaders, with the marvelous Thoroughbred history and wonderful bloodlines.

We should apply these best principles and practices when it occurs, especially to the best horses around and best races around the world to determine which are the best horses in the race and not who has the best lab.

Only in a way internationally accredited labs should be able to test in these Top 100 or 150 horses in the world these races. I think it's in the interest of the sport globally to do so.

Internationally, we've made some progress over the last years, especially, I think, in Asia and Europe. Unfortunately the racing industry in the U.S. is seen as being not a leader, and is lagging behind for various reasons. In the industry of sport globally, I urge all stakeholders in the U.S. to unite and implement what is necessary to safeguard our sport.

The thought leadership provided by The Jockey Club is I think essential for this transformation and process in the U.S., and I really urge everybody to support the vision of the club and the leadership given in all the other fields, especially in this one. Thank you very much.


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