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 companys 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 Golf

Origin 1452 in Scotland, as a game played by both Royalty and Commoners Established game by 18th Century in British Isles with tournaments, rules and golf clubs (St. Andrews) Started being played in late 1700s, mostly as a game for wealthy. Rapid growth in popularity with TV coverage in 1950s and the emergence of golf stars Palmer, Nicklaus, and Player. Peak in popularity in 1998, 2 years after Tiger Woods turned Pro. United States Golf Association and Royal and Ancient Golf Club Growth In Europe

Growth In USA

Governing Bodies

Evolution of the Golf Equipment Industry

First equipment manufactures began in Scotland during 1700s 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 1990s 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 Drivers Drivers Regulation 0.83 COR 5x5 inches, not to exceed 460 CC 5,900 g-cm MOI No more U grooves Restrictions on distance Year effective 1998 2004

Drivers Irons and Wedges Golf Balls

2006 2010 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 Healthier, more active lifestyles Concern for environment Multiracial golf star Tiger Woods New metals/alloys for larger, lighter clubs Computer technology for customer fitting

Threat Opportunity Opportunity Threat or Opportunity

3 3 2 2

Social

Opportunity
Opportunity Opportunity

5
3 5

Technological

What is happening in the Golf Economy?

Overview of the Golf Market

Total Number of Golfers Target Market 22.7 million in US, 2 million European, 17 million Asia (2007) 1/3 of golfers, about 7.5 million in US, considered Core and account for 91% of rounds played and 87% of equipment sales Number of golfers in America has declined 17% since peak in 1998 (from 27.5 to 22.7 million) Drivers, Irons, Wedges, Putters, apparel, shoes, golf balls, golf bags Too difficult to play Length of time it takes to play a round Too expensive Older players have health concerns

Growth Rate

Key Items Purchased

4 Key Barriers for Consumers

Breakdown of US Golf Population

1998 2007 Percent Change

Steady decline over last decade of number of golfers in USA

Men

20 million

16.2 million

-19%

Women

5.8 million

5.1 million

-12%

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

Children

2.4 million

1.4 million

-41%

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?

Porters Five Forces

HIGH
Buyer Power

MED-HIGH
Threat of Substitutes

HIGH
Competitive Rivalry

LOW
Supplier Power

Threat of New Entrants

LOW

Porters Five Forces

Factor Rank
1=lowest 5=highest

Costly and takes time to build reputation

Threat of New Entrants

1 1-2 3-4 4 4-5

Huge learning curve....technology-driven Current name brands are very strong Acquisitions may be the only way ($$$) Relationships are well established Raw materials are abundant Other manufacturing sources are readily available

Power of Suppliers

Threat of Substitutes Power of Buyers Competitive Rivalry

Customers have a wide variety of sports and leisure to spend their time and money on
buy used items, internet, auctions # of recreational players declining buyers forcing new pricing strategies buyers are price sensitive now more than ever Intense between the top dogs Established brands have difficult time entering new areas of golf equipment and supplies

Where are all the golfers going?

Golfers Running 1996 23.1M 22.2M 2002 24.7M 2007 22.7M 2% 30.4M 37% 12.3M 7%

Tennis

11.5M

11.0M

Fitness Clubs

22.5M

28.9M

33.8M 50%

# of participants in selected sports in millions

Strategy

Strategy of Major Golf Brands

Product Price Endorsements Innovation Callaway
Diverse Drivers: 4 lines incl. Big Bertha Putters: Odyssey and premium black series Irons: X series (high end), Bertha, Hogan, Top Flite (low end) Other: Fairway woods, hybrids, footwear, balls Diverse Well defined price ranges on driver, putter, iron lines. Low 12 Staff Pros 7 Contract Pros Medium Two 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) High 100 PGA pros to use V1 ball Medium Push limits of USGA regulations with Cobra L4V brand Perimeter weighted irons

Tight price ranges on fairway woods and hybrids

Fortune (Titleist/ Cobra)

Diverse but focused Focus 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, welldefined High vs. low end Balls: Pro VI to Pinnacle (value brand) Clubs: Titlest, Volkey, Cameron vs. Cobra

Strategy of Major Golf Brands

Product TaylorMade / Adidas
Diverse Drivers, hybrids, woods, Irons: r7 and Burner lines Putters: 11 models Apparel: Adidas Brand Balls:

Price
Diverse Clubs: r7 vs. Burner (low end Putters: Why have 11 models in tight price range? Diverse Clubs: G10 vs. Rapture (low end)

Endorsements
High 70 Pros for driver, 11 clubs, apparel 40 Pros for driver

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

Ping

Diverse Irons: 4 lines Putters: Large line including premium offerings Drivers, Hybrid Woods: G10 and Rapture Diverse Clubs, balls, and apparel Club offerings not as diverse as competition

Low 20 PGA and 12 LPGA

Medium -Fixed weights -Perimeter weighted irons

Nike

Low High end irons only $600. Clubs often priced below MSRP

High Only 18 pros, but large financial commitment in Tiger Woods

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

Strategy of Major Golf Brands

Product : 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

Golf Industry Sales Figures

Units of Products Sold (in millions)
25

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

20 15 10 5

Drivers Wedges Gloves

Irons Golf Balls Bags

Putters Footwear

Golf Industry Sales Figures

But Sales price per unit has declined for large ticket items 200 like drivers Increased for putters And remained relatively flat 150 Sales price for other sectors
(USD) 250 Drivers Irons Putters Wedges Golf Balls Footwear Gloves 50 Bags 0 1997 1999 2001 2003 2005 2007

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

100

Golf Equipment Industry Product Mix

1997
171.8 156.7 676.8 Drivers and Woods Irons Putters Wedges Golf Balls 458.7 533.4 142.1 67.6 95.6 Footwear Gloves Golf Bags 190 579.5 552.3 275.5 174.9 877.7

2007
165.8 Drivers and Woods Irons Putters Wedges Golf Balls Footwear Gloves Golf Bags

214.3

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 Analysis
STRENGTHS
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 mfgs with suppliers of grips, shafts, custom fitting systems/software. Mfgs 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 mfgs 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 Married w/out Children or Single Retired or Older Golfers 30% of Surveyed Respondents

Job responsibilities Lack of free time Family responsibilities Job responsibilities Lack of free time Health concerns injuries 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?