Competition in the Golf Equipment Industry in 2008

By: Dan McLindon Kyle McDaniel Jeremy Smiley Tom Anderson Ray Moorman

Golf Equipment Industry Key Question

• Can golf equipment manufacturers continue to be profitable while still conforming to the increasingly tightening rules developed by the USGA and R&A?

Golf Equipment Industry Additional Question

• How can club manufactures produce equipment that makes the game fun and easier for the beginning golfer so they stick with the game and become a core golfer?

• How do premium equipment manufactures create products that appeal to existing core golfers and how do they grow the market of core golfers?

• What is each golf equipment company’s competitive advantage?

• How do golf club manufactures plan for the future with the uncertainty of further new rules limiting club and ball technology?

• Is the timing right to pursue international expansion? Will the popularity of golf rebound in the United States?

A Very Brief History of GolfOrigin 1452 in Scotland, as a game played

by both Royalty and Commoners

Growth In Europe Established game by 18th Century in British Isles with tournaments, rules and golf clubs (St. Andrews)

Growth In USA Started being played in late 1700’s, mostly as a game for wealthy. Rapid growth in popularity with TV coverage in 1950’s and the emergence of golf stars Palmer, Nicklaus, and Player. Peak in popularity in 1998, 2 years after Tiger Woods turned Pro.

Governing Bodies United States Golf Association and Royal and Ancient Golf Club

Evolution of the Golf Equipment Industry

• First equipment manufactures began in Scotland during 1700’s• Over time building materials changed, but types and design of clubs did not

– Wood to steel to graphite shafts but still same club head designs– More durable and consistent golf balls

• Mid to late 1990’s a period of great innovation began by premium golf equipment manufactures– Ping, Callaway, TaylorMade, Fortune Brands (Cobra and Titleist)– Innovations centered around game improving features

• Larger Driver heads (ex. – Callaway Great Big Bertha) • More forgiving oversized irons• Deeper grooves in irons and woods to promote spin• Putters with larger sweet spots, face inserts• Multi-piece golf balls allowing for both distance off tee and feel around

greens

– Resulted in record industry profits

USGA and R&A Step In

• In 2004 USGA and R&A begin regulating golf clubs and balls in an effort to preserve integrity of the game

Type of Equipment Regulation Year effective

Drivers 0.83 COR 1998

Drivers 5x5 inches, not to exceed 460 CC

2004

Drivers 5,900 g-cm MOI 2006

Irons and Wedges No more U grooves 2010

Golf Balls Restrictions on distance Still in discussions

What is changing in the external environment?

PEST Analysis of the Golf Equipment Industry

Category Issue Threats/Opportunities Ranking (1-5)

Political USGA and R&A rules on equipment

Threat 5

Economic 2008 Economy Sours

Rising incomes in BRIC countries

Threat

Opportunity

3

3

Social Healthier, more active lifestyles

Concern for environment

Multiracial golf star Tiger Woods

Opportunity

Threat or Opportunity

Opportunity

2

2

5

Technological New metals/alloys for larger, lighter clubs

Computer technology for customer fitting

Opportunity

Opportunity

3

5

What is happening in the Golf Economy?

Overview of the Golf MarketTotal Number of Golfers 22.7 million in US, 2 million European, 17

million Asia (2007)

Target Market 1/3 of golfers, about 7.5 million in US, considered “Core” and account for 91% of rounds played and 87% of equipment sales

Growth Rate Number of golfers in America has declined 17% since peak in 1998 (from 27.5 to 22.7 million)

Key Items Purchased Drivers, Irons, Wedges, Putters, apparel, shoes, golf balls, golf bags

4 Key Barriers for Consumers Too difficult to play

Length of time it takes to play a round

Too expensive

Older players have health concerns

Breakdown of US Golf Population1998 2007 Percent

Change

Men 20 million 16.2 million -19%

Women 5.8 million 5.1 million -12%

Children 2.4 million 1.4 million -41%

• Steady decline over last decade of number of golfers in USA

• People who picked up the game with the boom in popularity in late 1990’s but did not stick with it

• Too difficult to get good and did not become “Core” golfer

What is the environment of the industry?

Fundamentals of the Industry

• Innovation limited by USGA regulations• Merchandise manufacturing is outsourced• Early bird really does get the worm• Marketing and endorsements are vital• There are strong, established leaders in most

golf equipment categories• # of golfers in the USA declining over the past

decade

What are the changes in demand?

Porter’s Five Forces

Threat of Substitutes

Threat of New Entrants

Supplier Power

Buyer Power

Competitive Rivalry

HIGH

LOWHIGH

LOW

MED-HIGH

Porter’s Five ForcesFactor

Rank 1=lowest5=highest

Threat of New Entrants 1

• Costly and takes time to build reputation• Huge learning curve....technology-driven• Current name brands are very strong• Acquisitions may be the only way ($$$)

Power of Suppliers 1-2• Relationships are well established• Raw materials are abundant• Other manufacturing sources are readily available

Threat of Substitutes 3-4• Customers have a wide variety of sports and leisure to spend their time and money on• buy used items, internet, auctions

Power of Buyers 4• # of recreational players declining• buyers forcing new pricing strategies• buyers are price sensitive now more than ever

Competitive Rivalry 4-5• Intense between the top dogs• Established brands have difficult time entering new areas of golf equipment and supplies

Where are all the golfers going?

Golfers1996

23.1M2002

200722.7M2%

Running 22.2M 24.7M 30.4M ↑37%

Tennis 11.5M 11.0M 12.3M↑7%

Fitness Clubs 22.5M 28.9M 33.8M↑50%

# of participants in selected sports in millions

Strategy

Strategy of Major Golf BrandsProduct Price Endorsements Innovation

Callaway DiverseDrivers: 4 lines incl. Big BerthaPutters: Odyssey and premium black seriesIrons: X series (high end), Bertha, Hogan, Top Flite (low end)Other: Fairway woods, hybrids, footwear, balls

DiverseWell defined price ranges on driver, putter, iron lines.

Tight price ranges on fairway woods and hybrids

Low12 Staff Pros7 Contract Pros

MediumTwo Ball putter

Perimeter weighted irons, prepositioned weights on drivers, interchangeable shafts

Slow to react to changes in regulation and consumer preference (driver size and hybrids)

Fortune(Titleist/Cobra)

Diverse but focusedFocus on Balls and Footjoy apparel. Drivers, Woods, Hybrids, Irons: Titleist line for pros and highly skilled rec. Cobra for rec and game improvement.Putters: Cameron (high end) and Cobra

Diverse, well-defined High vs. low endBalls: Pro VI to Pinnacle (value brand)Clubs: Titlest, Volkey, Cameron vs. Cobra

High100 PGA pros to use V1 ball

MediumPush limits of USGA regulations with Cobra L4V brand

Perimeter weighted irons

Strategy of Major Golf BrandsProduct Price Endorsements Innovation

TaylorMade/ Adidas

DiverseDrivers, hybrids, woods, Irons: r7 and Burner linesPutters: 11 modelsApparel: Adidas BrandBalls:

DiverseClubs: r7 vs. Burner (low end

Putters: Why have 11 models in tight price range?

High70 Pros for driver, 11 clubs, apparel

40 Pros for driver

High-Moveable weights-Interchangeable shafts-early entry in hybrid market-perimeter weighted irons

Ping DiverseIrons: 4 linesPutters: Large line including premium offeringsDrivers, Hybrid Woods: G10 and Rapture

DiverseClubs: G10 vs. Rapture (low end)

Low20 PGA and 12 LPGA

Medium-Fixed weights-Perimeter weighted irons

Nike DiverseClubs, balls, and apparel

Club offerings not as diverse as competition

Low

High end irons only $600.

Clubs often priced below MSRP

HighOnly 18 pros, but large financial commitment in Tiger Woods

Medium- Driver pushes USGA regulation limits, but not much innovation elsewhere

Strategy of Major Golf BrandsProduct : Be all things for all golfers. All major brands offer a spectrum of products to match a golfers level, recreational to pro.

Price: Matched to level of product. Comparable across industry. Nike allows retailers to sell below MSRP

Endorsements: Significant source of differentiation and brand recognition.

Innovation: With the major brands having met the regulated limits, innovation is focused on increased launch angles and adjustable features. No significant innovations because of the regulations. Major brands are choosing to not go beyond the regulation specs.

Operational: Key production activities are often contracted offshore. Major brands may just be an assembler.

What are the internal factors affecting golf equipment manufacturers?

Internal Analysis

• Innovation of products drives growth– USGA rules discourage innovation and allow less

technologically advanced manufacturers to catch up to industry leaders

– Manufacturers struggle to differentiate their products when everyone has the same technological limitations

Internal Analysis

• Outsourced Manufacturing– Lowered operational costs industry wide– Allowed counterfeiters to copy equipment

• Led to Golf Manufacturing Industry alliance

Units of Products Sold (in millions)

•Total units of products sold have remained fairly flat over last decade…

Golf Industry Sales Figures

But…•Sales price per unit has declined for large ticket items like drivers•Increased for putters •And remained relatively flat for other sectors

•Conclusion – Equipment manufactures have moved to competing on price due to challenges with differentiation brought on by new USGA and R&A rules

Golf Industry Sales Figures

Golf Equipment Industry Product Mix1997 2007

•Not many significant changes in size of each segment from 1997 to 2007•Size of overall pie is larger from $2.4 billion in 1997 to $2.9 billion in 2007

•20% increase in total industry sales in US despite decrease in overall number of golfers

What are the strengths, weaknesses, opportunities, and threats of golf

equipment manufacturers?

SWOT AnalysisSTRENGTHS

•Good following - 22.7m US golfers, 2m Europe, 17m Asia•R&D budgets, technological advances/product innovation drives growth•20% increase in US sales, despite less golfers (’97 – ’07)

WEAKNESSES•Attracting & retaining new, recreational golfers•Innovating new products with rules/regulations in place•Short shelf life of products – new models each year

OPPORTUNITIES•Foreign markets, India & China – large populations, Incomes increasing•Align mfg’s with suppliers of grips, shafts, custom fitting systems/software.•Mfg’s align based on their competitive advantages (woods, irons, drivers, putters)•Aging population in US – baby boomers set to retire – more time for golf

THREATS•Counterfeit equipment from China•USGA & R&A rules freeze technological advances in industry, allow less technologically advanced mfg’s to catch up to industry leaders•Popularity peaked in 1998, reasons for not playing as much (See Table)

Reasons for Playing Less Golf

Married with Children •Job responsibilities•Lack of free time•Family responsibilities

Married w/out Children or Single

•Job responsibilities•Lack of free time

Retired or Older Golfers •Health concerns•injuries

30% of Surveyed Respondents

•High golf fees

• 2003 Survey from the National Golf Foundation

Recommendations for the golf equipment industry

Recommendations

• Penetrate Foreign Markets– Income rising in India & China

• Consolidation Strategy– Align Manufactures– Invest & innovate based on competitive advantage

(drivers or putters, etc.)

• Vertically Integrate & Purchase Suppliers– Grips, shafts, custom fittings

Recommendations cont.• Create Recreational Line of Equipment

– Ignore regulations• use available technology on equipment for recreational golfers• Playing better, making the game easier will inspire more people to

pick up the game and continue to play• Create partnership with competitors to change current

rules– Put pressure on USGA and R&A to create separate rules

for tour professionals and amateurs• Increase Community Outreach

– Work with current tour and club pros to increase golf appreciation and learning

– Donate overstock/excess clubs to junior players to build brand awareness

Questions?