Written By: Jay Baker
In my first installment, I talked about the Internet and how its affect on retail isn’t as bad as everyone thinks. The Internet is actually a good thing for consumers and retailers alike. There are far worse forces working against the golf industry. The golf store, as we know, it is becoming extinct. A new breed of retail is being born out of necessity and I am here to tell you the primary reason why your golf store will never look the same.
2. Real Estate
Commercial real estate is strong right now. If you can find an old K-Mart anchored center, there’s a chance to make a lot of money, but that is a topic for another website. Occupancy is up across the board due to “backfilling” created by empty space from the recession period. Simply put, demand is up and supply is down. Even the population growth is out pacing the growth of retail space by 3.5 times (source: ICSC).
Annual Net Addition to U.S. Shopping Center Space
Numerous stores are opening every year, public and private retailers. The U.S. Bureau of Labor statistics show that the increase of private retail establishments grew by 4,546 from 2011 to 2012. Early numbers look as if another net total of 7,887 private retail establishments were opened between 2012 and 2013. The National Retailer Demand Monthly reported in January of this year that retailers are planning on opening 40,000+ stores in the next year, as well as 77,000+ stores in the next two years (Moore, Golladay, Carroll and Salinsky, “Retail REITs: January 2014 National Retailer Demand Monthly (NRDM),” RBC Capital Markets, January 2014).
Rents are back up to pre-recession levels. Without getting into a CCIM case study, cap rates are super low and interest rates continue to stay low, for the time being. Properties are selling fast for a lot of money. The big developers and REITs are buying properties like they’re not making land anymore.
Not even Richard Donner could save this terrible plot device.
However, some exposure exists. Interest rates cannot stay low forever. While rents are currently plateauing, they could continue to creep higher due to elevated material/labor costs driving up the expenses of build-outs and new construction. It isn’t a question of if inflation will occur, but more of a question of “how soon?” and “how much?”
With inflation and higher rents, commercial retail locations could become expensive. Only high volume users will be able to pay the prices that landlords will be asking. In case you didn’t know, golf is not considered a high volume user. Real estate is will not be doing any favors for golf.
To be frank, we probably need some inflation in order to stabilize growth. Some business people out there get worried when they start feeling ‘good’, they believe it’s a false omen. If the last 20 years has taught us anything it is that the economy can grow too fast. That still doesn’t mean that some industries won’t feel the pain more so than others.
Honey badger don’t care! Rent can’t hurt golf, it’s already dying.
True, golf probably hasn’t seen the bottom of the crash. It’s definitely not in recovery. One industry executive I spoke with, who asked to remain nameless, predicted that golf would see the bottom in 2016. Some of the big players in the golf are already positioning themselves in such a way to take advantage when the recovery starts. For example, the PGA Tour Superstore hopes to have 40 stores opened by that time.
Certain areas will see recovery begin sooner than others, however, we can’t ignore the fact that golf retail will be forever changed going forward. Real estate developer Ralph Conti, of RaCo Advisors, believes that like the electronics industry, golf stores will opt for a smaller footprint due to increased competition and lower margins. The Golfsmith and PGA Tour Superstores of the world are going to continue to open massive locations, but they might be 40,000 square feet rather than 50,000 square feet. We have seen this already from other retailers such as Best Buy and Brandsmart. Every golf retailer will have to make some adjustment to account for the uptick in rent at some point unless they own their own real estate. The margins in golf are too tight to make huge sacrifices for location.
Conti did mention one possibility that might be a game changer for golf retail. He thinks Top Golf could absolutely be considered as a large anchor tenant for developers going forward. Conti works with power centers and big anchor tenants like a Cabela’s and Regal. He thinks Top Golf would bring the foot traffic that retail shopping centers covet. While it takes up a lot of real estate, it could work in an experimental type of development. He thinks the commercial real estate industry supportively considers Top Golf more of an attraction rather than a driving range/restaurant/golf store. It will be interesting to follow Top Golf and their growth strategy as they mature.
Our new National Treasure. Nicholas Cage will protect you.
Like I said earlier, only high volume users will be able to afford the increasing rents. People don’t have to buy golf clubs to survive. Golf stores will be looking to supplement their offseason sales with other goods such as ski or tennis equipment if they haven’t already. Rising rent costs will make it difficult to survive in prime locations.
PGA Tour Superstore has already applied an intelligent approach to real estate in order to combat the rising rent costs. They prefer to open in 2nd or 3rd generation spaces that allow them to negotiate their leases to a fraction of what the original tenant was paying. Very rarely will you see them open in new construction. They are like the Goodwill tenants of real estate.
Unfortunately, the mom & pops and smaller franchises will suffer the most. For example, Golf USA and Golf Etc. stores will have difficulty paying the higher rents in better locations. Depending on the length and options in their lease, each individual location could be in for a rude awakening when they go to renew. They will either move or close should they not be able to afford the rent. If they move, there will be concern whether or not their customers will move with them.
The current golf industry forecast.
When it comes to real estate, only three things matter: location, location, location. The nostalgia effect is the only redeeming quality for these smaller operations. They will have to focus heavily on customer service and building relationships with customers to encourage them to drive out of their way to the golf store otherwise, that cake don’t bake.
If the middle tier shops, such as Edwin Watts and Roger Dunn, lose profit margin due to higher rents, they will continue to get swallowed up by companies like World Wide Golf Enterprises. They have their own unique way of increasing the margins on golf equipment but I will talk more about that later.
I spoke to Jack Barber (former head pro of Meridian Hills, PGA Hall of Fame member, Professional of the Year 2009, 3 time Merchandiser of the Year, and helluva model American) and he talked about an interesting caveat related to the possible decrease of retail golf stores in the future. He believes this will increase the sales for green grass accounts.
Mr. Barber explains that people would much rather be fit outside with trackman using their own ProV1s rather than inside with a simulator. I can’t argue with that. For the head pros that own their own shop, they can compete with online retailers offering a discount because of the low overhead costs. The golf course is going to pick up the tab for the lights, water, A/C, and most importantly the real estate. The head pro doesn’t have to carry a large inventory either since most green grass consumers will most likely be “special order”.
The soup is “special order”.
Mr. Barber, or “Pro” as he is referred to within inner circles, continues by saying that retail execution in the pro-shop isn’t easy. You have to have a head pro that is willing to put forth the effort. They have to build relationships with the membership/golfers, which could be even tougher at a public course off the beaten path. For the pro-shops that can afford it, they should hire a full time professional shop manager to help with displays, trunk shows, inventory, and buying. The head professional is ultimately responsible for creating value and providing a pleasant shopping experience.
Presentation matters.
The problem is that more and more golf courses are taking over the pro-shop operation in order to capture more revenue or gain control over an unmotivated head pro. I wouldn’t be surprised to see the companies like Billy Casper Golf, Club Corp, and Troon Golf start to do significant amounts of retail business in their pro shops. Those types of golf management companies like to control the shop corporately.
Frankly, there isn’t much margin there to begin with and the pro shop is probably better off in the hands of a willing head pro. Then there are the pro shops at resorts, which are outliers in the green grass category. The head pro rarely runs those shops. If golf retail locations continue to close, golfers will have to go somewhere for their in-store purchases. Green grass locations should benefit if prepared to do so.
Real estate will be the real killer to the American golf shop, not the Internet. Typically, a strong real estate market has been good for the golf industry in the past but not this time around the merry-go. The future golf shops will be relatively smaller, more strategically placed, and less in total numbers. Green grass accounts will benefit from these shifts in retail, however, everyone better prepare themselves for the real storm that’s coming…
More to Come
Be sure to come back tomorrow to read the final installment (Investors) of Jay’s series.
Hef
9 years ago
I have to wonder about your comments about the “mid tier” shops like Edwin Watts and Roger Dunn being swallowed up by Worldwide Golf. I would assume that an expert like you would know that Roger Dunn Gold Shops has been owned by Worldwide Golf for over 20 years, They were not swallowed up by Worldwide, they were where Worldwide made their money.