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 Golf Origin 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 5x5 inches, not to exceed 460 CC 2004 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 Opportunity 3 Social Healthier, more active lifestyles Concern for environment Multiracial golf star Tiger Woods Threat or Opportunity 2 Technological New metals/alloys for larger, lighter clubs Computer technology for customer fitting

What is happening in the Golf Economy?

Overview of the Golf Market Total 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 Population 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 1998 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%

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 HIGH MED-HIGH LOW HIGH LOW 15

Porter’s Five Forces 1 1-2 3-4 4 4-5 Rank 1=lowest Factor 5=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 16

Where are all the golfers going? 1996 23.1M 2002  2007 22.7M 2% 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 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 Well defined price ranges on driver, putter, iron lines. Tight price ranges on fairway woods and hybrids 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) 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, well-defined High vs. low end Balls: Pro VI to Pinnacle (value brand) Clubs: Titlest, Volkey, Cameron vs. Cobra High 100 PGA pros to use V1 ball Push limits of USGA regulations with Cobra L4V brand Perimeter weighted irons

Strategy of Major Golf Brands Product Price Endorsements Innovation TaylorMade/ Adidas Diverse Drivers, hybrids, woods, Irons: r7 and Burner lines Putters: 11 models Apparel: Adidas Brand Balls: Clubs: r7 vs. Burner (low end Putters: Why have 11 models in tight price range? High 70 Pros for driver, 11 clubs, apparel 40 Pros for driver Moveable weights Interchangeable shafts -early entry in hybrid market -perimeter weighted irons Ping Irons: 4 lines Putters: Large line including premium offerings Drivers, Hybrid Woods: G10 and Rapture Clubs: G10 vs. Rapture (low end) Low 20 PGA and 12 LPGA Medium -Fixed weights -Perimeter weighted irons Nike Clubs, balls, and apparel Club offerings not as diverse as competition High end irons only $600. Clubs often priced below MSRP Only 18 pros, but large financial commitment in Tiger Woods - 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

Units of Products Sold (in millions) Golf Industry Sales Figures Units of Products Sold (in millions) Total units of products sold have remained fairly flat over last decade… 25

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 26

Golf Equipment Industry Product Mix 1997 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 27

What are the strengths, weaknesses, opportunities, and threats of golf equipment manufacturers?

SWOT Analysis STRENGTHS WEAKNESSES OPPORTUNITIES THREATS 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 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 Consolidation Strategy 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?