In Pursuit of Your “Dream” Customer

Posted 10-07-14 – Imagine a customer who visits your retail locations more often than your average customer, who spends more than your average customer, who purchases from some of your key categories more often than your average customer and who is more loyal to a particular retail outlet than your average customer. Can you imagine that customer? Well, you don’t have to: That customer is a regular lottery-playing customer.

After having worked for a multi-state convenience retail chain for over twenty years and now consulting in the retail channel for another 16, the customer I just described above is my idea of a “dream” customer.  But the total value to your revenue stream of the customer who plays the lottery on a regular basis has been poorly understood and under appreciated by the retail community for years, myself included.

I speak all over the country to retailers about category management issues and when the discussion is around lottery I hear the same comments I used to make when I sat on the retailer advisory board of a major state lottery commission over 20 years ago (maybe you’ve made these comments yourself): “the commission’s too low” or “the lines are too long” or “they (lottery customers) don’t buy anything else.”

My purpose in writing this article is to offer some facts around these issues in order that you can make better informed business decisions. While I don’t deny the commission (or gross margin) issue is real, I do teach in my category management seminars that there are two ways of generating gross profit dollars (which, as the saying goes, is what we take to the bank). As you well know the formula for GP$ is simply

Number of Units multiplied by Gross Margin Dollars = Gross Profit Dollars

Therefore, many units at a relatively lower gross margin dollar amount can be equal to fewer units at a higher gross margin dollar amount. For example:

Think of it as “fast dimes versus slow nickels” as one retailer recently shared with me. And this is without considering the carrying cost of inventory, space taken up in your store and other activity based costs. So a key component to total gross profit dollar generation is high volume which lottery can produce.

In terms of long lines: As we all know these occur during times of increased draw game jackpots, i.e. Powerball and MegaMillions and the inconvenience this causes to non-lottery playing customers cannot be ignored but it can be managed. And while the occurrences are temporary the ongoing business the lottery players bring to your store is not.

Consider this question that I’ve posed to retailers around the country: Can you imagine any other time you would complain about having people lined up in your store to buy something? Think about it: These are people with money to spend and they’re already of the mindset to buy. Savvy retailers find ways to leverage that for additional purchases either on that buying occasion or future visits by those customers, or both. One smart retailer I spoke to said she hands out free bottles of water to every customer in line and thanks them for their business and patience: A small investment that can reap large returns.

As for the total value of that lottery customer: Based on surveys my company conducted this year on behalf of Scientific Games in the convenience channel of trade four out of five retailers reported that during “large jackpots” their total stores sales increased upwards of 5%, 10%, or more. And these increases show up in key categories such as cigarettes, tobacco, beer, candy and snacks.

In addition, according to research conducted by The NPD Group “Lottery Tickets are a driver of traffic/revenue – high incidence of purchases and higher average checks.” In fact, all the research I’ve conducted or read has consistently shown lottery players to over index in key categories and they spend more on average even when their purchase occasion doesn’t include lottery.

Finally, there is no other category that puts cash into your customers’ hands while they are in your store. In fact, based on national averages, 88% of the dollar value of prizes are redeemable at retail locations (for example, $88 out of $100 worth of winners). What a golden opportunity for additional sales.

I would be remiss if I did not mention the growing concern in some retailer circles about internet sale of lottery tickets. Quite honestly while we are still very early into this development, the record both from the few states in the U.S. that are selling this way and the long history in Europe where tickets have been sold online for years is this:

• The total amount of sales over the internet are comparatively small
•  The sales appear to be incremental, i.e. not cannibalizing in-store sales
• This avenue of purchase currently appeals primarily to players who are infrequent in-stores buyers if they have played previously at all

From my perspective I would recommend that you keep yourself current on the facts regarding this issue and be thinking about ways to position your stores for a competitive advantage by leveraging the internet.

I’ll conclude by saying this article is not intended to be a “sales pitch” for lottery. In fact, like many (if not most) of you I was suspect of lottery, both as a category manager and for many years as a consultant, seeing it as a “necessary evil” (yet another comment I hear often) but I have determined, based on the facts, that this category has the potential to contribute to increased total store sales and profits for many retailers. And that’s my bottom line: Helping retailers find ways to enhance their business performance. It is in that spirit that I offer this information to make of it what you will. And I offer my best wishes for your business success.