The Trainer's Business Model: “Spiraled Out of Control”

Adam Smith, the so-called father of economics, once said this about the slickly oiled business machine: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

In other words, the more vested the butcher, the brewer or the baker is in the overall fiscal health of his or her own enterprise, the better the overall product for the rest of us.

Smith died in 1790, and so, quite what he would have said of the business model used by the average American trainer today is anybody's guess, but it's probably fair to assume he wouldn't be particularly lavish in praise.

“It's a tough system that has kind of spiraled out of control,” said Kiaran McLaughlin, the former leading trainer who retired earlier this year after some 25 years with a license. “It needs to be closely looked at.”

Of course, no two individual trainers run their barns identically, but the typical business approach is such that, like a house of cards, they're none too resilient to ill winds.

And so now that the industry's economic wheels have rusted to a slow grind under the onerous weight of a global pandemic, it seems as good a time as any to indulge in that necessary bit of introspection–as other industry sectors have–and ask this question: What, if anything, can be done to make this business model a healthier, more efficiently run affair?

“Every month is up and down”

For this story, I've shared the thoughts of three trainers–two current, one former–from the West Coast, the Midwest and the East Coast, and spoken with a suite of other industry figures (primarily for background). From these conversations, two main avenues for reform emerged: day rates and the matter of deferred monthly bill payments.

The former garnered attention recently when Thoroughbred Owners of California (TOC) director Gary Fenton, managing partner of the Little Red Feather Racing syndicate, explained in a TOC conference call that he had discussed with his trainers the idea of a day rate reduction to ease the burden on owners during the suspension of live racing at Santa Anita, especially if the trainers proved successful in their federal Paycheck Protection Program loan applications.

None of the trainers approached for this story said they worked with any margins on their day rate–indeed, some explained how it often failed to cover even the routine daily costs associated with running a barn.

“Every month is up and down,” said Sean McCarthy, the Grade I-winning handler who last year took a sabbatical from training to assist Michael McCarthy (no relation), only to pick back up where he left off earlier this year.

According to Kim–McCarthy's wife and bookkeeper–his day rate works out to $100, accounting for the everyday labor costs like groom, exercise rider, hotwalker, workers' compensation fees, feed, and tack costs. McCarthy's exact day cost works out to $96.67, which leaves an estimated $70 a month for the miscellaneous items that invariably arise–nothing, however, towards what might be construed a salary.

That a public trainer doesn't draw a monthly salary is hardly a novel invention–the argument that has existed for eons being that in lieu of a reliable monthly check, trainers put food on the table primarily through the earnings they make on the track (augmented by things like sales commissions and the odd covering fee).

While this may have been a workable system back when the racing calendar was a bulging book, with a downward trend in the number of races per year–and when racing opportunities post-coronavirus promise even fewer rewards–is it time to increase the day rate to provide trainers a monthly salary?

Some, like Kentucky-based William VanMeter, believe that owners are already over-burdened and that increasing day rates presents just another barrier towards greater owner participation in the sport.

“Training has always been a financially tough business,” explained VanMeter. “If you're only in this for business gains, I don't think that's the purpose of the whole endeavor. I think we just all want to be around nice horses, and whatever costs or whatever losses it takes to do that, I think we're willing to do it.”

For McLaughlin, his day rate was $120, “and I still lost money,” he said. “It's a huge problem.” And while he doesn't disagree in principle with the idea of raising day rates to ease the financial toll, such a change would have to be done uniformly among all trainers if done at all.

“The problem with going up in your day rate is you're going to lose owners and you're going to lose owners who go to the next trainer that's doing it 10 dollars cheaper,” he said.

“I'd rebate that money right back if it wasn't used”

When it comes to the issue of invoices, aptitude for change appears warmer. While some trainers invoice their owners bi-weekly, it appears that in the majority of cases, these invoices are submitted at the end of the month, meaning that trainers are required to cover everyday expenses for a minimum of 40-45 days before reimbursement–and that's with the proviso that payments are prompt.

The cascading effects from late remittance–impacts on everyone from the feed, hay, and straw companies to the farriers and stable staff–is a well-worn narrative among backstretch communities. But if the invoicing cycle is to be revised, two possible scenarios were broadly raised. One is that a certain portion of the monthly costs is invoiced at the beginning of the month.

The other is that the entire monthly invoice is submitted up-front. “That's the cleaner, simper way to do it,” said McCarthy, adding that, given the unpredictable nature of training racehorses–injuries that can occur at any point during that pre-paid month, for example–such a system would have to be predicated upon an owner-trainer relationship built solidly on trust.

“If the horse had to go back to the barn within two weeks or be turned out, I'd rebate that money right back if it wasn't used,” McCarthy explained.

Some highlighted how the up-front invoicing model is a staple of other industries. That's the case even in other equine sectors, explained Amy Hess, who runs a successful hunter and jumper business. Nevertheless, Hess–formerly married to trainer Bob Hess–remains of two minds as to whether horse racing should replicate it.

Like McCarthy, she stressed the uncertainty that training and racing fragile racehorses brings to running a business, but floated a possible fix in how, should one of the horses in her care get injured, she pro-rates any shortfall.

Rather, Hess sees the philosophical differences between the two equine disciplines as key to why the model might not translate.

“There's more personal involvement in the hunter-jumper world–more horsemanship among the owners generally,” Hess said, stressing the closer “emotional” attachment that owners, mostly women, have to their horses in her discipline. Indeed, part of her $1,400 monthly charge includes client lessons and training rides.

In horse racing, “you're dealing mostly with men, so you're dealing with a whole different dynamic,” Hess said, in explanation of why she thinks owners might not be receptive to the idea of either raising day rates or paying monthly fees up-front, or both. “Before I got into racing, I didn't think that would make much of a difference, but it's a very different dynamic.”

“Once people are in, they tend to stay”

The economic thumbscrew of training racehorses is an international phenomenon–trainers the planet over bemoan the struggle of staying afloat. But there's one major jurisdiction that has removed those thumbscrews and replaced them with plush velveteen mittens.

“It's our well-kept secret,' said Bill Nader, the Hong Kong Jockey Club director of Racing Business and Operations. “Compared to anywhere else around the world, it's quite enticing.”

The tightly controlled Hong Kong system comprises 22 current trainers, all of whom receive a steady salary that comes via a monthly per-horse fee: HK$1,000 per horse for trainers with a string at Sha Tin only, and HK$1,600 per horse for a trainer with a string split between Sha Tin and Conghua on the Mainland.

At Sha Tin, trainers average about 60 horses, said Nader. Given the current exchange rate, that works out to a monthly salary of around $7,500 in U.S. currency. On top of that, trainers and their families are provided free housing near Sha Tin or else offered a subsidy if they choose to live elsewhere, along with free medical care.

What's more, trainers receive 9.2% of all prize money earned. When we spoke nearly two weeks ago, Nader explained that earnings per trainer up to that time in the season averaged out to HK$45 million, 9.2% of which is more than $0.5 million in U.S. currency.

Nader added, that, come season's end, trainers at the top end can make nearly US$2 million from earnings, with prize money increases forecasted for next year.

Perhaps the most interesting facet of the Hong Kong arrangement, however, is how trainers aren't burdened with monthly invoices, and therefore, “don't have to worry about collection of fees,” said Nader.

That's because the Hong Kong Jockey Club collects owner dues and takes responsibility for the payment of things like payroll fees, hay, straw, and feed suppliers, along with workers' compensation and veterinary bills.

The Jockey Club also supplies the personnel–from the veterinarians, farriers, and assistant trainers to the work riders and other stable staff–many of whom have graduated from the club's own training programs.

While the Jockey Club assigns staff to each barn, trainers can personally select specific members, like their assistants, said Nader. They also have the latitude to individualize their programs other ways, like choosing specific feeds, bedding and other items, which are all procured and delivered by the Jockey Club, Nader added.

And is the program popular? “Once people are in, they tend to stay,” said Nader. “But you've got to be good enough to get in.”

“The ease of the transactions”

Of course, the Hong Kong system couldn't be more diametrically opposed to the one Stateside, the latter of which is attractive to some purely because of its laissez-faire economic framework.

“That's the nice part of the business, the ease of the transactions,” VanMeter said, warning that “any time you try to nickel and dime the owners, the less that are going to come into the sport.”

As such, keeping red-tape to a minimum is imperative, VanMeter added. “The reason I conduct my business in Kentucky and Arkansas is the cost of doing business is relatively cheap,” he said. “The equine infrastructure is fantastic–seems like the governments here want to support those in this industry, help to promote it and make it easier to operate.”

In the same vein, the nation's labor laws are in urgent need of reform, beginning with the “coast-to-coast” re-labeling of stable staff as “agricultural” workers, said McLaughlin.

“We are dealing with live animals and it requires 24-7 help,” he added. “If we were agricultural, we would not have to keep every minute on a time-clock and pay two people to tell me how much to pay somebody in this county this week, and that county next week. It's crazy how difficult it is.”

Another potential complication, said McLaughlin, surrounds the issue of syndicates, and the financial arrangements pushed by some of these influential groups.

“Many, many horse owners today are in syndicates that don't want any bills,” said McLaughlin. “Many syndicates say, 'you pay all the bills, we'll give you 60-40 [from earnings] to train.' So, when you open up that can of worms, talk about disastrous when there's no racing. You can't earn enough to pay any bills.”

According to McCarthy, the licensing requirement for trainers could be tweaked to include a financial component, providing new applicants a crash course in business fundamentals, from marketing in the age of social media to basic bookkeeping.

“Kim is a huge advantage to me,” said McCarthy, emphasizing the role his wife plays in keeping his ledgers balanced. “But I'm not sure how many trainers have a Kim supporting them.”

An idea that Hess floated concerned a possible “escrow” account–a form of insurance in the event of delinquency–into which new owners place a portion of funds per horse, controlled by the racing office.

“It doesn't have to be a fortune, just enough to cover a month's bill for the trainer, the vet and the farrier,” she said. “I think it could be hugely beneficial to the horsemen–gives them a small sense of security.”

Of course, any appetite for reform on this issue is couched upon this central concept: how receptive are the owners themselves to the ideas and topics raised? Indeed, the TDN will be following up this story with a reaction from a prominent owners' group representative.

For McLaughlin, the time for piecemeal change in the way trainers operate has long fled. “It's a tough business right now,” he said. “I feel for everybody, and now is a good time to talk about things that could be altered.”