2005: Business - Showdown in big D

Standing in front of a map of Dallas-Fort Worth, Clay Smith placed his right hand along Route 75, his left hand on I-35, with his palms coming together to form a “V” on this city’s downtown. Then he ran his hands northward along those two highways.

“That’s the golden corridor right there,” Smith says. “That’s where all the high-dollar growth has been.”

As executive vice president of The Staubach Co., headquartered in Addison, Texas, in the heart of the “golden corridor,” Smith’s job is to help retailers find the best available real estate for new stores. And the real estate doesn’t get much better than the plains just north of Dallas – particularly, it seems, if you’re selling golf equipment.

Golf’s three largest specialty chains – Edwin Watts Golf Shops, Golfsmith and, just recently, Golf Galaxy – have established beachheads in this area, competing head to head in the same market for the first time. (In late March, Golf Galaxy opened its first stores in Dallas and Houston, the only other market where it now competes directly with Edwin Watts and Golfsmith.)

These retailers didn’t arrive here by happenstance. Demographics – household incomes, population growth and residents’ affinity for golf – made this area appealing to Edwin Watts and Golfsmith, and now to Golf Galaxy.

All three companies, backed by large investment funds, have grown in part by taking business from smaller, less efficient retailers. And the race is on to emerge through this consolidation as the golf industry’s first, true national retail power. Their aggressive expansion plans make it inevitable that Dallas and Houston are just the first of many markets in which all three will clash. What happens here likely will be a precursor of how their rivalry will play out over the next few years.

As is true in any major city, the population here has been extending outward to the suburbs and further, to the “exurbs.” More than 1 million people have moved to the Dallas-Fort Worth area in each of the past two decades, nearly doubling the metroplex’s total population to 5.2 million residents.

According to Staubach, the median household income in the northern suburbs of Plano and Frisco is about $85,000, more than double that of Dallas city residents.

Matt Corey, Golfsmith’s new vice president of marketing, says that “only three years ago, Frisco was out there in the cow pastures.” Now that town 30 miles north of Dallas is perhaps the region’s hottest shopping destination.

In addition, research commissioned by Golf Galaxy indicates that Dallas, with its 112 golf courses, is the nation’s 13th-largest market for avid golfers – that is, golfers who play 25 or more rounds annually. And 20.7 percent of Dallas residents, according to the company, play golf.

So it’s hardly surprising that the showdown between golf’s three biggest specialty chains would come on this terrain.

“Good retailers are going to follow the population density and the demographics,” Corey says.

His words could be heard over the sound of hammers pounding and fixtures being moved in Golfsmith’s Plano store, which was being renovated in anticipation of a re-grand opening this month. Over the past three years, the Austin, Texas-based chain has been undergoing a massive overhaul under chief executive Jim Thompson.

“We knew we had very good real estate, but we also knew that we had a somewhat outdated retail concept,” Thompson says.

Golfsmith has cut its typical store size in half, to about 14,000 square feet, seeking to generate a bigger return on investment. But it also has adopted what Thompson calls a “hub-and-spoke” strategy, renovating a handful of its large-format stores like the one in Plano.

Thompson says the volume and profit levels have improved at remodeled stores, helped along by synergies with its catalog and Internet businesses and services such as a 90-day playability guarantee. But Golfsmith, which had interest payments of $11.2 million in 2004, reported a $4.8 million net loss for the year.

Surveying the renovation-in-progress in Plano, Fred Quandt, Golfsmith’s vice president of merchandising, says, “Each department has been put on steroids.”

That includes an increased selection of brands, a much larger area for preowned clubs, a large club-building area in the center of the store – an homage to the company’s roots in club-making – an instruction area operated through a partnership with GolfTEC, a club-fitting section run through a separate alliance with Hot Stix Golf, and a large practice and short-game area. Corey describes it as an effort to “upgrade the entire shopping experience.”

It’s not been lost on golf industry executives that just a mile to the north of Golfsmith’s hub store on I-75, Golf Galaxy just opened a new location, presenting an immediate challenge. The same morning that Quandt and Corey were overseeing the store renovation, Ron Hornbaker, Golf Galaxy’s senior vice president of sales and operations, was handing out hats and golf balls to customers entering his company’s Plano store.

“This is what a typical Saturday would look like, and it’s a Friday,” says Hornbaker, clearly pleased with the store traffic.

That morning, Golf Galaxy had run a two-page spread in the Dallas Morning News trumpeting blue-light specials on old Adams, Nike and Callaway drivers for less than $100.

“We’ve got to get noticed and create some excitement, and there’s nothing better than great value,” says Randy Zanatta, Golf Galaxy’s chief executive, who emphasized that advertising closeout specials didn’t detract from the company’s in-store focus on new, name-brand products.

Golf Galaxy is in the midst of the fastest expansion in its eight-year history, with plans to open at least 15 stores during the current fiscal year after opening 10 and launching an e-commerce site the previous year. The privately held company does not disclose financial results, but Zanatta says the company has been profitable the past four years and is funding store openings from cash flow. A former senior executive at Best Buy, Zanatta talks of building the “dominant national retailer” in golf, pointing to Guitar Center’s position in the music industry as his model.

The company’s decision to take on its primary rivals clearly reflects its growing confidence.

“As a board, we decided that now was the time we could compete with them, and we were willing to compete with them,” said Howard Romanow, principal at FdG Associates, one of three investment firms backing Golf Galaxy.

Much like Golfsmith, Golf Galaxy subscribes to the theory that golf retailing, not unlike consumer electronics or home improvement, will undergo a consolidation, with the emergence of a small group of dominant national chains that will overwhelm local golf shops.

“The local neighborhood hardware store has diminished significantly over the past 10 or 15 years,” says Gregg Newmark. “And look at the local book stores that have given way to Barnes & Noble and Border’s. I see the same thing happening in golf.”

“This is a market-share game, big picture, in the U.S. market,” echoes Noel Wilens, managing director of First Atlantic Capital Ltd., which acquired Golfsmith in October 2002. “All the growth that we’ve had and Galaxy has had had to come from somewhere.”

When visiting these retailers’ stores, it’s hard to escape the differences between the new guard – Golfsmith and Golf Galaxy, both run by executives with extensive experience at big-box retailers – and the old guard at Edwin Watts, one of the original golf specialty chains, having opened its first store in 1968.

Though Wellspring Capital Management LLC, a New York private-equity firm, bought a majority stake in Edwin Watts in December 2003, the company still is run, as it always has been, by brothers Edwin and Ronnie Watts, with active participation of several family members and a team of long-time executives. By its own account and that of some of its vendors, Edwin Watts is one of the industry’s most profitable retailers, all the while clinging to a decidedly different approach than its competitors.

“We don’t believe you can open stores anywhere, a big box, and be successful,” Edwin Watts says. “The golf business is a limited sport business – only 5 to 10 percent of the population play golf. It’s a very specialized business, and you have to treat it that way.”

That became quickly evident one recent afternoon at Edwin Watts’ Alpha Road store in north Dallas, where manager Steve Stowe fielded a call from a customer, saying, “I got that Scotty Cameron putter. It’s the only one in the store. It’s got your name on it.”

Later, he waved to a regular customer, noting to a visitor that this man also shops at Edwin Watts’ Stemmons Trail store in north Dallas.

“If you don’t know 80 percent of your customer base, something’s wrong,” Stowe says.

Such a sentiment might seem outmoded in a world in which big-box retailers in many industries have made the idea of the neighborhood store seem quaint, even anachronistic. But it’s the central reason that Wellspring bought Edwin Watts. When assessing whether to make that investment, Greg Feldman, Wellspring’s managing partner, says he found that, on average, Edwin Watts store managers had spent 14 1/2 years with the company, assistant managers seven years.

“For a retailer of any kind, that’s extraordinary,” Feldman says.

That experience is one reason that Edwin Watts gives his store managers an unusual amount of purchasing autonomy, with minimal oversight from headquarters.

“It’s a very strange thing,” George Whalin, a retail consultant whose clients include Edwin Watts, says of that strategy. “I’ve only seen it in two companies. When it works, it works great, but I don’t think it works often.”

Feldman is the contrarian, challenging the theory held by the investors backing Golfsmith and Golf Galaxy that golf lends itself to big-box retailing and its economies of scale.

“If I thought golf was a self-service business, I wouldn’t be in it,” Feldman says. “Wal-Mart can do self-service.”

And he says that view has been reflected in the 10 stores that Edwin Watts has acquired over the past 15 months in Birmingham, Ala., Charlotte, N.C., Jacksonville, Fla., and San Antonio, Texas.

“We’re looking for guys who are simpatico to our way of thinking, which means they’re traditional retailers rather than big-box retailers,” Feldman says.

All three retailers are loathe to talk about one another publicly. They downplay their competition, insisting they simply are executing their game plans, not unlike coaches who are afraid to give opposing teams bulletin-board material.

“Our strategy in Dallas and Houston hasn’t changed from the onset of competition,” Thompson says. “I’m not going to lose sleep over competition. I’m going to lose sleep if we execute poorly.”

At Golf Galaxy, Zanatta says, “We focus on winning, we don’t focus on trying to make our competition lose.”

But in an industry constantly grappling with flat sales, there inevitably will be winners who capture market share, and many losers. Edwin Watts, Golfsmith and Golf Galaxy have grown at the expense of many small retailers around the country who have gone under in recent years.

Now, in this city, comes the bigger challenge for these three specialty chains. They have to beat up on each other.

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