The destruction in shareholder value from industry disruption by overseas and online rivals have featured prominently in our market over the past few years. Is Tatts Group Limited (ASX: TTS) the next to face this firing line?
The market has either not quite caught on to this threat or is not too concerned as the share price of Tatts has held up reasonably well with the stock delivering a 4.2% gain over the past year – modestly underperforming the S&P/ASX 200's (Index:^AXJO) (ASX:XJO) 7.5% return.
The underperformance may be disappointing to shareholders but it doesn't come anywhere near the plunge in businesses facing the threat of Amazon.com like Myer Holdings Ltd (ASX: MYR) with a 46.4% tumble over the last 12-months or JB Hi-Fi Limited (ASX: JBH) with its less severe but still painful 23.8% decline.
We don't need to talk about the media sector. Just look at Ten Network Holdings Limited (ASX: TEN).
Is a similar fate waiting for Tatts as offshore rival Lottoland appears to be rapidly stealing market share in the local lottery market?
The success of the Gibraltar-based online lottery company has probably taken Tatts and the industry by surprise as the Australian Financial Review reported that Lottoland made a pre-tax profit of £1.35 million ($2.2 million) from £9.8 million in revenue ($16.2 million) in the 2016 calendar year.
Lottoland allows Australians to bet on the outcome of overseas lotteries in the US and Europe where the prize money is often multiples of local lottery programs.
This means Lottoland has probably managed to become profitable in just its second year of operations. That is incredibly fast and it's little wonder that Tatts is becoming incredibly nervous.
You can tell the level of Tatts palpitation. When a local incumbent knows it can't effectively complete with an offshore disruptor, it turns to government to help tilt the playing field back in its favour. Look at the taxi industry when Uber arrived and remember when the chairman of Harvey Norman Holdings Limited (ASX: HVN), Gerry Harvey, campaigned to get the government to impose the GST on all overseas purchases as he cried about being unfairly treated?
There's still lots of water to go under the lottery bridge before we know for certain how big an impact Lottoland will have on Tatts, but I won't be betting on a positive outcome for the local market leader.
Tatts isn't the only one that is likely to feel the pain either. Jumbo Interactive Ltd (ASX: JIN) is another that is exposed to the sector.
On the other hand, there's one thing going in favour for Tatts at the moment – and that's the issue of trust. The local lottery program is heavily regulated and winners can always be certain that their prize check won't bounce. It's government guaranteed!
I am not sure what level of protection consumers have when playing the lottery with Lottoland, although I am sure there are things this foreign player can do to build trust.
Worried about other stocks that are facing a darkening outlook? Click below to get your free report from the experts at the Motley Fool on the stocks you should be selling or avoiding.
