2004: Distressed Japanese market labors to get back on course

By Gene Yasuda

Tokyo

There are roughly 2,400 golf courses in Japan. And more than 1,700 – or 71 percent – have balance sheets stained with red ink.

Explaining how this nation’s course market reached such a disastrous state is no easy task.

But Michael Cooney – general manager for Pacific Golf Management, a U.S.-financed course operator in Japan – sums it up succinctly.

“This market was way out of whack,” he says.

Flush with unprecedented prosperity in the early 1990s, the Japanese invested wildly in real estate, the stock market and course memberships – the latter coveted as the ultimate status symbol. As a result, private clubs account for 90 percent of all golf facilities in the country.

Supply far exceeded demand, especially because many wealthy Japanese purchased multiple memberships as investments, rather than with an intent to play. So when the nation’s economy collapsed, many courses stood vacant, mired in debt and deprived of revenue.

Now, the market is enduring a painful correction, but it is spawning fundamental change – an expansion in daily-fee play – that may help resurrect the game in Japan. These developments also are creating new business opportunities for entrepreneurial course operators and Internet tee-time providers.

Cooney and his company, PGM, are among those seizing the moment.

Operators such as Pacific Golf are rapidly acquiring the roughly 700 “bubble courses” that have emerged since the end of Japan’s boom. These facilities, which paid peak prices to come on line, had no chance to cover their costs when the market nose-dived, and many of them already have filed for bankruptcy.

Pacific Golf, with a portfolio of 50 courses, is aggressively marketing some of these properties to golfers-at-large.

“Because of all the over- inflation that was in the marketplace, you took the game away from a lot of people,” Cooney says. “But with green fees coming down you’re going to have access to a much broader population. This is going to be healthier longer term, and I believe the golfing population is going to begin moving back up again.”

The economic crisis has forced nearly all private clubs in Japan to “get rounds any way they can,” Cooney says. “This is a very strange market. You can’t go out and segment, saying this is private or that’s public. Those terms really don’t have much meaning any more. Now, you can call almost any course and get a reservation.”

During the past decade, green fees have fallen roughly 30 percent. A typical weekend round that would have cost 30,000 yen – or $300 – now can be booked for $200. And the farther golfers are willing to commute to courses, the lower the fees drop. At golf clubs two hours outside Tokyo, weekend green fees are available two hours outside Tokyo, weekend green fees are available for as low as $100.

A similar price freefall has occurred at private clubs, too. In 1990, the average membership peaked at nearly 40 million yen – or $400,000. Today, that figure is $30,000, according to the Kanto Association of Golf Membership Brokers.

But membership fees aren’t the only things that have changed at private clubs. Some, including PGM’s Miho Golf Club, are meant to be true golf facilities, not investment vehicles.

In the past, Japanese bought memberships and then monitored their values, which were published in golf publications, much like stock charts are listed in U.S. newspapers.

Though memberships are still bought and sold via brokers, Cooney hopes Miho members will focus on the club’s amenities: diagnostic swing testing, free use of practice facilities and league competitions against neighborhood clubs. Though such perks may be common in the United States, they are still novel in Japan. In addition, Miho, with memberships selling for $22,500, collects annual dues of $1,200, but no green fees. By comparison, private clubs of the past charged green fees, but only had nominal dues because members who rarely played balked about paying up front.

“Ours is a great deal if you’re going to play a lot at Miho,” Cooney says. “That’s who we want. Otherwise, this membership is not for you.”

The bulk of Japan’s courses, however, still cash starved, will try to boost revenue by courting public play. And the Internet may become their biggest ally.

Golf Digest Online (which has no affiliation with the U.S.-based magazine) is a fast-growing, one-stop shopping Internet commerce site in Japan. It provides editorial content, sells equipment, and partners with courses to book tee times on their behalf, says CEO Nobuya “Mike” Ishizaka, who recently filed an initial public offering for his company.

He is particularly bullish on the prospect of his tee-time business.

“When you have an economic downturn, typically businesses would downsize, but in the Japanese golf course industry more courses actually came on line,” Ishizaka says.

Which, he says, should spur intense competition and send course operators running to GDO.

Just how many courses will survive is an unknown, but it is safe to say operators will be saddled with revenue issues for years to come. Two critical reasons: Course owners are struggling to pay back loans used to build their facilities and are dealing with escalating land lease costs.

Construction for 2,000 of Japan’s courses was financed primarily by their future members who provided “yotakukin” – which were essentially 10-year loans granted to their developers. But when Japan’s economy collapsed, the builders defaulted.

About half of these yotakukin courses are in some level of financial distress, having declared for bankruptcy, undergone acquisition or relinquished control to government regulators, according to Sadao Furuhata, a course market analyst and president of Golf Management Research in Tokyo.

“Another 700 will declare bankruptcy in the coming years, not related to (bad loans), but because of cash-flow problems,” Furuhata predicts. “In the end, only 700 courses in Japan will escape unscathed.”

So many courses are expected to struggle, in part, because they haven’t learned how to adjust expenses. Many, for example, still retain caddies as full-time employees. Another endemic issue: land leases.

Approximately 70 percent of Japan’s courses lease at least a portion of the land on which they operate. Arcane land-lease laws protect lessors for 20 years, but at the end of that period, landowners can take back their property. To avoid such disruption, course operators typically renegotiate their lease every three years.

“The balance of power is heavily skewed toward the landowner,” Furuhata says. “In spite of the fact that we have a deflationary economy, because of their strong position, landowners have been able to maintain, even increase, their rates.”

But Ishizaka and Cooney are among the many who say these factors, though clearly challenging, will eliminate the oversupply and create a healthier market for industry players and golfers.

“The way I sum it up is, ‘It’s the golf, stupid,’ ” Cooney says. “We’re no longer talking about investments or prestige. We’re talking about enhancing the golf experience, and that’s the way we’re going to rebuild this industry.”

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