For those who watch the golf equipment industry closely, the combination of technological barriers constructed by the USGA and the recent economic recession has created an environment of continual price compression on industry manufacturers. The question is “What can break the cycle of price compression?”
One theory we have heard is that golf equipment sales have followed the housing boom, both up and down. Certainly some of the data correlates, as the last year for double digit equipment sales increases occurred in 2005, while we began double digit declines in equipment sales in 2009. From 2000 to 2009, we basically ended up right back where we were in terms of equipment sales. During that time frame, rounds played showed smaller increases, and smaller decreases.
Still, we believe that even if the housing theory is correct, what got us to this point in golf equipment sales is not what is going to get us moving in a more constructive direction. We believe the ultimate solution is far simpler. People just need to get back to work to ultimately become less price conscious about discretionary purchases such as golf clubs.
As we can see from the Unemployment data above, as the rate of unemployment doubled from February 2008 to the end of 2009, during that same period we began to realize double digit sales declines in the golf equipment industry. In 2010, the rate of unemployment has flattened out, but has not really shown evidence of a sustained decline. We believe that as unemployment rates begin to show a sustained decline, we will see less price compression in the golf equipment industry. At that point in time, we would also expect to see significantly better consumer confidence indications.
As you can see from the above chart, the Consumer Confidence Index has recovered from 10 year lows in 2008, but the Index is still tracking well below the 2002 recessionary lows. This is hardly the sign of a strong recovery.
The second factor necessary to break the cycle of price compression in the golf equipment industry is a significant technological breakthrough that falls within the bounds of USGA barriers. Recent record scoring in PGA Tour events (a 59, multiple 60 and 61’s recorded) are actually increasing the call for more stringent technological barriers. The call for a reduced-flight ball seems to ring the loudest. How can innovation overcome this movement? Frankly, we have no idea. But what we do understand is that change begets change. If the USGA/R&A implements more stringent regulations regarding ball and/or equipment, the golf equipment companies will swiftly create responses.
It is also possible that regulatory changes could increase the need for equipment turnover, thus providing a short-term boost for the industry. The recent rule change regarding the elimination of square grooves has produced a very strong year for the wedge business, which is the only equipment category that is producing sales gains every month this year.
Source: usga.org
The end result is likely to be a combination of improved economics and industry innovation. Equipment companies will continue to spend on new innovations. Eventually the economy will improve and consumers will become more confident. The combination of the two will finally result in an opportunity for equipment companies to get higher price realizations. Years of industry-wide cost savings programs will finally leverage to the bottom line. In the meantime, the highly competitive nature of the industry will push some competitors out of the game, and other will be forced into some form of consolidation.
The easiest indicator to track in order to determine the pace of potential recovery in the golf industry is unemployment. This is a mature industry domestically, yet the US is still 50% of the market, so it really matters. So keep your eye on unemployment as the best indicator of health in the golf equipment industry.
