Inside the Bubble: Golf In the American Marketplace Part 3

Written By: Jay Baker

For those of you have followed this series of articles over the last few days, I really appreciate you taking the time and interest in the subject I have presented. At the beginning of this project, I wanted to take three very general ideas that affect almost any industry and apply their impact to the future of golf retail in a very narrow scope. Today, we are going to look at the last factor that will reshape the golf industry going forward: MONEY.

For those of you who missed yesterday’s entry it is because of a carefully crafted plan by Adidas to leak photos of Taylormade’s new R15 in order to steal the readers away from my article. I also have a good source that tells me they furthered their efforts of distraction by hiring window washer acrobats at the World Trade Center (I may have made that up). Well, their diabolic scheme worked this time but I am not above stooping to their level so here is a sneak peek at a prototype of the R15 430:

Double the Trouble

I know what you are thinking, “Money affects golf? No ship Sherlock” In other news water is wet, Dike Vitale loves Duke, and Kim Kardashian has big assets. Stay with me now… What I want to talk about is the money that comes from investors. Besides the consumers, they are the individuals that will shape the industry the most. When I say “Investors” I am talking about anyone that is an owner, stockholder, partner, crowdfunder, or person that has any financial commitment to a golf company, whether it be manufacturer or retailer.

3. Investors

I’m not going to pretend I know everything about investing or Wall Street. I once read Rich Dad, Poor Dad and proceeded to lose a little money buying stocks. That is about the extent of my knowledge. However, I do know that the S&P 500 isn’t an Indy Car race and the SEC bias on Wall Street has nothing to do with College Football.

At the end of the day, every company has to answer to its investors and or stockholders. If the balance sheet and income statement don’t meet the quarterly projections, there’s hell to pay. Executives of large manufacturers and retailers alike are fired every year after subpar earnings. They have no chill when it comes to the axe.

The stock market has been good recently. Like sweeter than Yoo-hoo good. The Dow Jones and S&P 500 have had record closes in 5 consecutive sessions lately. The S&P itself has closed above its 5-day moving average for 18 straight times and is on its way to eclipsing the 19th mark. Even the private sector has seen a bullish increase in sentiment with many major and middle tier companies expanding operations.

When I spoke to Ralph Conti, who I mentioned in the Real Estate segment, he was enthusiastic about the strength in the commercial retail sector at this present time, both on the shoppers end and the investors end. There is a lot of growth currently under development or planning to be developed. Despite being optimistic for the short term, he believes there is a possibility for a small recession.

Sit back down and take a deep breath. We are talking a small recession that will probably have more to do with the political races in 2016 than anything else. If it happens it’ll feel more like 2000-2001 rather than David Li’s Gaussian copula function fiasco in 2008. Inflation and rising costs will play a minor roll. A recession might not happen. There is an old market saying, “It takes the stairs up, and the elevator down.” Investors could just feel a little bearish right now. However, it is definitely more of a threat than aunt Edna claiming to have Ebola after watching reruns of Dallas.

Honey badger don’t care! Golf doesn’t need fiscal responsibility.

Golf better care about fiscal responsibility; I’m not sure that it does, unfortunately. How does Mark King get fired, errr, I mean promoted sub-laterally, under very unusual circumstances (wink, wink Roland), especially when the balance sheet doesn’t balance? Very few hands control the estimated $6 billion revenue that is golf retail in the U.S. As the golf recession continues, the golf rich will get richer, while the golf poor will get poorer. The only consistency for little guy in golf is inconsistency.

It isn’t a secret that Wall Street execs love to play golf, just look at their GHIN cards here. But Wall Street has never loved golf as an investment vehicle. I think they realize golf isn’t a good investment. Sure you have the outliers like Club Corp, but there are plenty of sluggish stocks like Callaway to go around. Stockholders do not want to invest in a company involved in a sport that is having a mass exodus. Furthermore, there is far too much competition on the golf manufacturers side when it comes to equipment and even more so in golf clothing. Increased competition and a declining customer base go together like alcohol and texting.

I mentioned before a golf executive I interviewed for this series; let’s call him Don. He has almost 40 years experience in the golf retail industry. Don has worked on all sides including the manufacturers and the retailers. He believes that one of the top 5 brands will fall or be purchased in the next 5 years. Merger and acquisition is the best way to grow in the current golf market i.e. Adams Golf is bought by Taylormade. When you can’t grow as a company because the sport is losing participation, purchasing market share becomes the only way to grow. What is Adams golf today? Just a shell of its former glory. There is too much competition at the top for sustainability under the current circumstances.

Again, Ping and Titleist are somewhat exempt from this conversation due to the structure of their ownerships. Companies like Adidas, Nike, and Callaway are somewhat more transparent because they are publicly traded. For example, we know that Adidas golf sales are down 27% and investors aren’t happy. Titleist somehow keeps making profit every year from what I am told. Ping is a private company and doesn’t report their earnings but they shouldn’t ever have a problem because the Karsten Manufacturing parent company is very successful. They beat to a different drummer.

Smaller companies will also always be apart of golf. Every year at the PGA Show there are new training aids, equipment companies, and a guy making polo’s out of his mom’s basement. A fool and his money are soon parted, but there are always more fools and always more money when it comes to golf. Crowd-funding is now even an option for smaller companies looking for investors and disintermediation. I do believe we will see more entry-level companies try the Hopkins business plan for online only sales. It can only take them so far and eventually they need B&M execution to achieve substantial grow.

The investor factor isn’t limited to manufacturers either; it applies to retailers as well. The retailers have to answer to their investors, albeit they may be private. Big boys have to continue to capture market share, while small fries struggle to hang on. Companies like World Wide Golf Enterprises will continue to swoop up laboring retail brands under their umbrella that already includes Roger Dunn, Edwin Watts, Golf Mart, Golfers’ Warehouse, and others. Buying stores out of receivership and then stiffing the accounts payable is a brilliant move to increase inventory on the cheap.

Donald Trump couldn’t even pull off a move that slick in the golf world. Oh, wait, he can. The man is a notorious golf investor. Recently, the golf course I belong to was up for sale. Myself and the other members were terrified when Trump started kicking the tires. He likes to come in, bankrupt the operation, and make the members re-join at a higher initiation fee thus creating instant capital. The plan is genius but scummy. Of course this is coming from the guy that has told people “they’re lucky he didn’t rip them off harder.”

“Golf, you’re fired!”

Arthur Blank and the PGA Tour Superstore is the new kid on the block and are certainly making a name. They have had their bumps in the road with manufacturers like Titleist, and Blank has learned that the golf retail isn’t like selling building supplies at Home Depot. The PGA Tour Superstore is easily the fastest growing golf retailer. Here’s the question, can they sustain their growth considering the dwindling participation numbers in golf, especially if it’s coupled with a small recession? Will Blank continue to invest in golf? Time will tell.

The easiest way to examine how investors matter is to go read about the former golf retail heavy weight, Dick’s Sporting Goods, and the poor performance in their golf sector this year. Don’t be surprised if you see them with a smaller golf footprint in their stores while increasing space in other revenue generating areas such as hunting, fishing, and women’s apparel.

These guys wouldn’t even sell Dick’s stock. (Courtesy of Paramount Pictures)

Dick’s expects golf sales to fall another 10% next year, that’s a 20% fall from a few years ago. Golf Galaxy, which is owned under the Dick’s umbrella, is expected to receive the brunt of the pain. Two-thirds of Golf Galaxy’s locations are up for lease renewal in the next 3 years and they have already stated that they will not renew the underperforming locations. This is how the real estate ties into the equation. At the end of the day, the stockholders want them to push what sells. Dick’s investors will make Golf Galaxy pull back to make room for their other up and coming concepts, such as Field and Stream stores.

Investors won’t come back to the game of golf until they know that it is growing again. Unfortunately that doesn’t seem like it will be the case for a couple of years. The investors that do remain are very jaded and other than the Arthur Blanks of the world, seem unwilling to stick their neck out for golf. The decline will continue to make golf even more top heavy than the lady with 3 boobs. This may sound Marxist, but that is not a good thing for golf. The retail game needs a redistribution of wealth otherwise the oligopoly will continue to punish the consumer.