2003: Stage set for shakeout
Wednesday, October 5, 2011
For most of the past several years, the golf equipment industry seems to have been acting out a scene from “Waiting for Godot.” That’s the Samuel Beckett play in which one character says in exasperation, “I can’t go on like this,” to which another replies, “That’s what you think.”
What has made it difficult for manufacturers to “go on,” of course, are general business conditions. Product demand was flat, and there was an overcapacity at retail and manufacturing as well as intensifying competition from new entrants. But the club and ball makers hung in there, believing that golf participation would boom as it began to thrive as a spectator sport. Some of those manufacturers were propped up by money from Wall Street, venture capitalists and deep-pocketed corporate parents.
The curtain, however, appears to be coming down on that act, and fast. The great hope of
growing profits as TV indexes climbed has turned out to be a chimera, and many manufacturers are facing harsh economic and market realities as a result. Staying the course is no longer a financially viable option for them, and that means the much-discussed – and some would say much-needed – equipment-maker shakeout has indeed arrived.
“It’s Economics 101, and a commingling of several issues,” says Wally Uihlein, chief executive of Acushnet Co., the parent of Titleist, FootJoy and Cobra.
“We have excess capacity and falling demand. Throw in geopolitical instability, economic recession, significant drops in the number of rounds played, the fact that the game is not growing, horrendous spring weather, regulatory pressures and compressed margins, and there is little wonder that people are having serious problems. Consolidation is a byproduct of all those factors, and the only way out of the forest for many is to link up with someone else. Otherwise, they die.”
The immediate effects of all that bad news have been bankruptcy or insolvency for some, and sales or mergers for others as the industry realigns. It also is likely that a few well-known names – including companies that were sitting atop the industry only a decade ago – actually may disappear from the golf bus-iness in the process. Golf is not far from the day when it is dominated by a small group of major equipment companies, with the smaller, less-capitalized concerns fighting over whatever market-share scraps remain.
Consider the recent news. Spalding is considering the sale of its golf business after shedding its footwear and nongolf divisions, and Wilson Golf is talking about the need to hook up with another golf company if it has any hopes of surviving. Orlimar has folded and Never Compromise agreed to be acquired by Cleveland Golf. At the same time, Callaway Golf is considering closing its money-losing ball plant and outsourcing that part of its business.
And Acushnet recently announced it will close one of its three ball plants and lay off as many as 185 employees over the next 15 months. That move does not portend a radical change in structure or strategy. But it does demonstrate how tough the market has become and shows why the stalwarts look for new efficiencies as the current business climate wreaks havoc among the weaker links.
The chief issue confronting the industry is stagnant participation and declining rounds played. In a troubling sign, the number of avid golfers, defined by the National Golf Foundation as those who play 25 or more rounds annually, has dropped the past two years. The NGF said that fact is largely responsible for the 3 percent decline in rounds played in 2002.
The inevitable result is “a major fight in which only pushed out of the picture,” says Casey Alexander, special situations analyst for Gilford Securities in New York.
Investors realized this several years ago, when the titanium-metalwood surge that drove the industry to new heights in the mid-1990s began to fizzle.
“The access to outside money just isn’t there any more, and that has hurt those who have long relied on it,” says Scott Hennessy, chief executive of True Temper Sports, the Memphis, Tenn., company best known for its steel and graphite golf shafts. “The days of the IPO for smaller companies are gone, and venture money is not nearly as accessible to those types of businesses as it was in the past. So with lenders of all kinds being more prudent, it makes it more and more difficult for those operations to stay independent.”
Retailers say club manufacturers have not helped their own cause. They have not hit upon a breakthrough, next-generation technology that will jumpstart sales in the same way that the shift from steel to titanium metalwoods did in the mid-1990s. There is broad agreement that companies are churning out equipment that is better than anything seen before. But there also is a strong sentiment that consumers have not been presented with a compelling reason to buy.
“There needs to be a perceived benefit, and consumers will pay anything for a perceived benefit,” says Scott Peters, owner of three Golf & Ski Warehouse stores in New Hampshire. “People say consumers have not been willing to support the $499 price point for drivers. But consumers believe the manufacturers are just trying to get an extra $100 out of the same club that they were selling at $399. Today, there’s not enough differentiation among product to convince them to pay an extra $100.”
Even worse, an inventory glut of premium product has led to fast discounting. A driver introduced at $399 often gets closed out at $199 after only a few months, so “(consumers) don’t see a negative in spending less,” says Peters. “Unfortunately, they can spend less and get a top-end product because of the inventory problems that manufacturers are in and the problems they’re putting us in as retailers.”
This shakeout, to which most industry executives see no end in sight, permanently will change the golf industry’s landscape.
“What we will have is the Big Four, with Acushnet, Callaway, TaylorMade-Adidas and Nike dominating the business, while everyone else fights for what’s left,” Alexander says. “Not even a good, well-run company such as Cleveland will find it easy staying the size it is. It will be left to the companies that can be totally global and that have the resources to compete on every level, from research and development to marketing and advertising.”