The modern game of golf has come a long way from its humble beginnings in 15th-century Scotland, and its fans are some of the most ardent of any sport. Ironically, it is golf’s deep-rooted traditions that have left it struggling to adapt to structural shifts, and the industry is now facing declining interest in many markets around the world. Golf’s proponents and professional associations are not blind to this and are taking action to turn the tide. That said, it appears the window of opportunity to be proactive has passed, and being reactive often presents a more arduous set of challenges. More broadly, golf’s current predicament offers a reminder to corporations and investors across all industries that, despite the seemingly short-term nature of the market, strategic vision cannot be overlooked.
To identify the issue at hand, one only needs to look at the PGA of America’s estimate that the U.S. golf population is down to approximately 25.7 million players last year from a high of 30 million players in the early 2000s.1 This trend is not unique to the U.S either. Japan is the second largest golf market in the world with about 8 million golfers, and it has been in decline for the last two decades due to the declining population and stagnant economy.2 Europe saw registered players increase at a rate of 5% annually from 1985 through the end of 2010, but witnessed declines in 2011 and 2012. The UK and Ireland, however, constitute 29% of the total 4.4 million total registered European players, where membership has been steadily falling since 2007.3
As with most troubled industries, China offers a bastion of growth, though even here golf is facing some obstacles. In 2012, the number of golfers in China grew by 16% to 1 million versus the prior year and the number of golf courses now stands at over 1,000, with much of the construction taking place in the last decade.4 What is particularly interesting about this growth is that the construction of golf courses was banned in 2004 due to concerns over water rights, available arable land, and the use of pesticides and chemicals, so construction ostensibly is taking place under the direction of local governments or with a nod from government officials. Dan Washburn, an author and journalist who lived in China for a decade, notes that golf is symbolic of China’s economic rise but also of “the less-glamorous realities of a nation’s awkward and arduous evolution from developing to developed corruption, environmental neglect, disputes over rural land rights and an ever-widening gap between rich and poor.”5
Tying these observations together, developed golf markets are broadly witnessing declining participation rates and growth in the most important emerging market is at best, controversial, and at worst, illegal. Focusing on developed markets, it is evident that demographic issues are the common theme driving declines in participation.
In the U.S., there are age, gender, and ethnic obstacles to overcome. From a generational perspective, the Baby Boomers began turning 50 in 1996 and in anticipation of the hordes of golfers that would “hit the links,” the golf and real estate industries constructed golf courses, many of which were accompanied by residential developments. Unfortunately, many of these developments are located in the hardest hit areas of the Great Recession, delivering a one-two punch to owners through their homes and retirement accounts. Fewer golfers played the game and many golf courses closed as a result (golf courses have seen net closures every year for almost a decade6). While most economists agree data supports a continued recovery, the golf industry is curbing expectations for the Baby Boomers.
In an effort to offset the disappointment around Baby Boomers, the industry is turning its attention to other, burgeoning demographics —Millennials, women, and minorities. This strategy could be complicated, however, in the face of secular headwinds. Millennials are facing high unemployment and underemployment rates compared with the same age cohort in prior generations. Falling real wages and record-high levels of student debt are further pressuring discretionary cash flow. Some suggest these are cyclical issues resulting from the Great Recession, though research indicates that starting a career in an economic downturn results in substantially less income over the lifetime of an earner. Millennials are also relocating to urban areas presenting a geographical supply-demand issue as there are too few golf courses located in areas accessible to urban residents.
As it stands, about 19% of all golfers are female, yet women represent 42% of the 90 million people desiring to play more golf, marking a significant untapped opportunity. However, a 2012 PGA report indicates that three women left the links for every man over the last five years. Though the more recent data is likely in part due to economic fallout, the fact remains that “over the past three decades, there has been a steady rise in the share of women, especially mothers, in the workforce.”7 This trend may in part account for rising participation in such activities as Zumba, which only requires about an hour of time, versus the typical four-to-five hour round of golf. In addition to addressing the time commitment barrier, the golf industry is engaged in an active effort to reverse the perception that golf is a “man’s sport.” Some may label this as hyperbole, but Augusta National Golf Club, home of the prestigious Masters tournament, only recently admitted women for the first time in 2012.
Despite the success of Tiger Woods, the golf industry is still working hard to attract minority players to the game. According to the National Golf Foundation*, the only minority group to participate at a level close to the rate of Caucasians (14.5%) is Asian-Americans. Hispanics and African-Americans participate at much lower levels, notwithstanding high levels of interest.8 The study also highlights the correlation between household income and participation in the game of golf, regardless of ethnicity. Because the industry cannot directly influence minority household income, it stands to reason that it must implement strategies to make the game more accessible from a cost perspective.
With these secular trends in mind, investors in sporting goods and golf equipment companies, such as Dick’s Sporting Goods and Callaway Golf, would be well-served in performing a scenario analysis based on various levels of success in addressing the participation rate issue. As in the case of any scenario analysis, certain macro-related variables, such as real income growth for Millennials, are inherently independent of the golf industry. Instead, investors should focus on the strategies being implemented to drive participation, as the nature of these strategies directly impacts the economics for these companies.
For instance, an industry effort to make golf courses more family friendly (i.e. family rooms instead of bars) could encourage participation by women, especially mothers. Also, in serving the real estate market and as a status symbol, many of the golf courses built in the 1990s are long, difficult, and more expensive to play and maintain. There appears to be a recognition of this misjudgment and a congruent discussion around fostering shorter, more playable, and sustainable courses in the future. These types of courses address several issues directly:
- Shorter rounds enable more participation from working individuals rather than just retirees
- Shorter and more sustainable courses use less water, fertilizer and chemicals and can reduce operational costs
- Reduced operational costs are passed on in the form of lower greens fees and increase participation in lower income brackets.
Whereas the above actions would likely increase participation rates and drive revenues for all companies in the golf value chain, managing the issue primarily by reducing expenses for golfers may prove to be detrimental. It is unlikely that many golf courses can materially lower greens fees due to a high level of fixed costs. Therefore, the burden to attract golfers through lower expenses would fall on the equipment manufacturers and retailers, potentially resulting in lower margins. In its most recent quarter, Dick’s Sporting Goods disappointed and cited weakness in golf and hunting. Echoing prior commentary from Callaway and Adidas (which owns TaylorMade), management pointed to excess golf inventory in the channel and told investors they were unsure of where the bottom is in golf. They also informed investors that they would reduce retail square footage dedicated to golf and left the door open to not renew upcoming leases with Golf Galaxy, a golf specialty retailer.
On the whole, near-term indicators do not bode well for anyone operating in the golf value-chain. There are options for the industry to reverse declining participation rates, though they cannot be implemented overnight. Still, golf would benefit from taking a mulligan on its strategic vision rather than playing out of the rough.
Michael Shavel, CFA is the Research & Business Analyst at Cornerstone Capital Inc. and a former Research Analyst on AllianceBernstein’s Global Growth & Thematic team.