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Gofl Industry Analysis

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Autor:  anton  02 January 2011
Tags:  Industry,  Analysis
Words: 4545   |   Pages: 19
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Golf Equipment Industry Analysis

I. Competitive Forces: The Five-Forces Model

A. Threats of New Entrants:

1. The threat of new entrants into the market is moderate, indicators point in mixed directions. Companies within the industry can be separated into two parts: golf and sporting goods. To take the largest golf company, Callaway, and to look at its total assets which total $846,000,000. For a company to enter into this market would require significant amounts of investment. One could assume that other sporting goods companies could diversify into golf similar to Adidas and Nike, but there are no large manufactures that are not in the market already.

2. Brand preferences are very important to consumers. Callaway lists brand preferences as one of the top five reasons why consumers buy their clubs in their 2006 annual report along with technology, quality, customer service and price.

3. Capital requirements are low the production of clubs are very labor intensive and very little animation is in the manufacturing process. Ping is a good example of a literal garage based manufacturing process was able to make a club that could compete with larger companies.

4. Regulation is import and has hurt companies substantively as it did with Ping when all but one of its clubs was labeled as illegal during its earlier years but with due care there is little cost of compliance.

5. Access to distribution channels are very important the quality of the club which is largely based on the material of the club are very expensive. To obtain carbon fiber and specific alloys that few manufactures make would be troubling for a small company to maintain and economies of scale in purchasing power would be most evident here.

6. The economies of scale are important but should not be overestimated many of the companies within the last thirty years have been garage or single room operations which were able to succeed with a quality product.

B. Bargaining of Buyers:

1. The power of buyers is low, for the majority of a company’s business. In the case of clubs the majority of buyers account for less than three percent of a company’s business, compared to golf ball sales which some buyers account for more than five percent of a company’s business. Companies have roughly three fourths of their business in clubs and about one fifth in golf balls. These buyers are mostly distribution companies, sporting good stores are specialty golf stores, with a minority of the sales coming from end users which purchase from brick stores or online ordering.

2. The cost of switching products is low is fairly easy for buyers to do. One risk in the industry is forecasting. Overproduction is detrimental, because of short product life cycles and seasonal buying. Overproduction will lead to products on the shelf which will be marked down relatively quickly. Suppliers will also be unlikely to order products if it has competitors products on the shelf; so for an example Taylormade over forecasts even if Cleveland Golf is selling well Dick’s Sporting goods won’t buy more Cleveland products until it sells its Taylormade. The seasonality of the product exacerbates the problem as well. Callaway sells two thirds of its products in the first two quarters.

3. Buyers are normally very well informed of products which are constantly being compared to each other in periodicals. The industry as also shifted to releasing products in the third or fourth quarter to give buyers more time to judge the demand for the products.

4. Buyers have very little threat of integrating backwards. The business model between the industries has competing priorities in the golf industry innovation is king which is expensive compared to most buyers which focus on maximizing margins in order to increase profits.

5. Buyers also have to deal with the seasonality of the product, which is purchased at the beginning of each golf season, roughly the beginning of spring. The industry list the number of theoretical rounds of golf that could be played during a season as one of the strongest correlations to sale, especially those in the third quarter. If for example global warming makes the majority of the US warmer, and essence increase summer for two weeks then golf sales would increase.

C. Bargaining of Suppliers:

1. The wood, metal, and carbon fiber used as well as the manufactured pieces are not easily available for consumption. Many of the suppliers make specialty parts or alloys many that are also contain intellectual property rights. Many of these companies are medium sized manufacturing companies that do not rely totally on the golf industry. The suppliers of the industry are customized but they are not impossible to get from other sources, the ability for companies to obtain the needed inputs over the long run is more than confident. The risk is short term interruptions, especially with seasonal demand could be costly to companies. The extra costs to switch from suppliers must be considered. The risk of supply chain problems is listed on more than one of the industries 10-k report. Companies should protect their supply chain from unneeded shocks.

D. Substitute Products:

1. Within the industry the threat of substitutes is high with seven major firms in competition internal competition is a paramount risk. An external substitute to the golf industry as a whole is also very high. Golf is a leisure activity is very vulnerable; it competes with other warm weather activities. On the other hand it has a lot of protection from other sports, it is relatively easy to do physically and because of this nature and its expense it is associated to an older player. Golf has also been institutionalized as a way to do business. Callaway has predicted that the industries market growth does not appear like it will grow in the next five years it should be wary of segments of golf being chipped away. It should not be worried about losing its bread and butter market which is middle class men over forty but should be concerned about losing men 20-40 and women golfers who are more willing to accept alternatives.

E. Rivalries:

1. Rivalries are very high in this industry, many indicators point in the same direction in this matter. Marketing is very intense in three forms; print, competition, and endorsement. Printed articles mostly golfing magazines not only feature printed ads but more importantly feature constant comparison of products which are very highly sought after by the industry. Competitions opens and invitations are highly televised and a well advertised tournament is highly profitable. One of the biggest forms of advertisement is endorsement from pro athletes. One can see the importance of the endorsement by analyzing the amounts of compensation to athletes who receive them. To see Woods in Nike clothes from head to toe or Nicholson in a Callaway vest and hat sends a very strong message. Endorsed athletes successes and failures are featured in 10-k’s opening report next to brand accomplishments and sales figures.

2. Another important factor is technology innovations. The most profitable years of a new club are two years (with a vast difference between the first and second year). Products have to move off the shelves at a very fast rate to be profitable to a company. With research and development cost averaging just over three percent for companies.

3. The market as stated above is not growing and is not expected to grow in the next five years and thus to gain more profits companies have to fight to get larger portions of the pie. As a leisure item golf club sales are based off of discretionary income and thus are very sensitive to market fluctuations.

II. Economic Features:


III. Industry Change:

A. Strong Driving Forces

1. Increased Globalization- Although the market for golf products is very mature there is still growing markets throughout the world. As well as increased competitions most notably Mizuno which has started to compete with Western companies.

2. Product Innovation-This is the paramount driver of the industry sales are based strongly around product releases. Companies make the majority of their profits off of products that are less than two years old, and hence have to be releasing products every season.

3. Marketing Innovation-Marketing is also a large part of this industry; this is a leisure product in which demand needs to be created.

4. Diffusion of Technology-Intellectual property is the basis of product innovation IP infringement both on purpose and accident creates a lot of legal issues for a company. Companies also have to constantly work to improve their product to keep it profitable.

B. Moderate Driving Forces:

1. Internet Capabilities- Many companies are adding internet ordering options but with products that depend on a sensitive touch or even personalization the majority of this option will be repeat business.

2. Manufacturing Innovation-The bulk of the manufacturing process is hands on while companies are moving to automation it will continue to use humans to maintain high quality.

3. Entry or Exit of Competitors-As stated before entry of competitors should be watched but the likely hood of this occurring is low.

4. Changes in Cost Efficiency-Changes in R&D such as improvement in computer added research as well as manufacturing innovation may lead to increased margins and profitability to companies.

C. Weak Driving Force:

1. Long term growth rate-As stated above the five year fore cast seems static.

2. Buyer Demographic-Buyer demographic does not appear to be changing.

3. Regulatory Changes-As Ping found out regulatory changes can have substantial effects on sales, but with cooperation between the industry and its regulators it does not occur often.

4. Society Changes-Golf has been a well respected sport and will in the near future stay that way.

IV. Rival Positions

A. Callaway Golf

Callaway Golf is the golf equipment industry leader overall. Callaway is also the leader in iron club sales. The company had about 20% of the iron club market share in 2004. Callaway used to be market share leader in drivers and fairway woods, but recently TaylorMade has surpassed Callaway in the drivers and fairway woods market. Callaway, in 2004 stood with 18% of the drivers and fairway woods market share while TaylorMade held about 30% of that market. In 1999, Callaway held a little over 30% of the drivers market share, but by 2003 that market share declined by one third. Callaways decline can be attibuted to a few factors including the success of TaylorMade’s drivers, along with the fact that Callaway’s newest drivers were not well received. It seems that Callaway has a slight disconnect with consumers because they were not looking hard enough at what consumers will accept. The company has fallen behind in research and devlopment, which is a key to successful innovation in the golf equipment industry. Even though Callaway has experienced less success then its peak in the late 1990s, the company still remains a big rival to other companies in the golf equipment industry. Callaway has opportunities for success in the golf ball market especially because of the company’s 2003 acquisition of Top-Flite Golf. At the time of acquistion there were issues with the Top-Flite production facility being unusable for the production of Callaway golf balls, but those issues seem to have been ironed out.

B. TaylorMade-adidas Golf

Taylormade is showing signs of great innovation and success. Most of TaylorMades profits are derived from the sales of high-margin drivers and fairway woods. The company had the most technologically advanced metalwoods in the industry until Callaway introduced the Big Bertha metalwood in 1991. Even thoough TaylorMade often did not get to the market with the latest golf technology prior to Callaway, they were quick to follow with their own clubs boasting the latest technology. In 2003, TaylorMade started to make headway in beating out Callaway in the driver market when TaylorMade introduced their 400-cc driver and then the r5 series and r7 Quad drivers. TaylorMade also became the leading seller of hybrid clubs with it Rescue line that started to have huge success in the market place in 2002. TaylorMade has not surpassed Callaway in the irons market, but TaylorMade is continuing to make innovations in their irons. TaylorMade is a weak competitor in the putter segment and the Maxfli golf ball brand only accounted for 5% of golf ball sales worldwide.

C. Titleist/Cobra

In 2004, Titleist and Cobra (both owned by Fortune Brands) were ranked third and fourth, respectively, in total equipment sales. In the drivers and fairway woods market in 2004, Cobra held 14% of the market share while Titleist held 7%. The irons market in 2004 had Titleist at 7% of the market share and Cobra at 5%. In terms on golf ball sales, Titleist golf balls and Pinnacle golf balls (the lower end golf ball made by Fortune Brands) had 70% of the golf ball market. Titleist marketing approach is strategic – brand first. The company knows that in order to be successful in the golf ball business, the golf balls need to be validated through their use on the tours. Titleist is strategically takinga brand view of Titleist as opposed to a produc view. Titleist’s line of golf clubs targets low-handicap golfers because its line of forged irons can only be used successful by the best of recreational golfers. Titleist’s one driver model and forged wedges were frequently used by professionals and its putter line sold at the highest price points in the industry. The Cobra line of golf clubs, on the other hand, is geared toward golfers of average skill level. The King Cobra drivers and hybrid club did well in the market and sold at slightly lower price points than the same types of clubs made by Callaway or TaylorMade. The wedges and putters did not do well on the PGA tour or with recreational golfers.

D. Ping Golf

Ping golf is up and coming in the golf equipment industry. This company can be viewed as the underdog of the industry because Ping shows true potential, but it still has a ways to go. The potential of Ping to make headway in the golf equipment industry is evidenced by its technologically advanced putters. Ping was a market leader throughout the 1980s (back when the company still had it original name –Karsten Manufacturing) and pioneered the custom fitting. The founder of Ping created a system of fitting an iron to a golfer’s physical measurements. In 2005, Ping still was rated as the industry leader for custom fitting by a 3 to 1 margin. Ping also trained thousands of retailes how to skillfully execute a custom fitting for a golf club. Ping sits in the number two position in the iron segment and trades places with Callaway’s Odysessy putter for the number one brand of putters. The company specializes in putters and irons, but Ping did have the best-selling driver in the golf equipment industry in 2005. Ping’s G5 titanium driver outsold both Callaway’s FT-3 Fusion and TaylorMade’s r7. Ping definitely has great potential for growth and could chip away at TaylorMade’s and Callaway’s marketshare, especially now that Ping has proven that not only can they produce high quality putters and irons, but a great driver too.

E. Nike Golf

Nike is a brand that is well know through out the sporting goods industry and Nike Golf is only one of the company’s many segments. Nike relies heavily upon endorsements by golf professionals (including Tiger Woods and Michelle Wie) to bring in golf equipment and apparel sales. Even with Woods endorsing Nike, Nike Golf has not experienced growth in golf equipment sales. Apparel and shoe sales have proven succesful for Nike, along with a 10% market share of golf balls in 2004 (most of which can be attributed to the succes of Tiger Woods while using Nike golf balls). However, in 2004, Nike still only held 2.4% of the market share in golf clubs. Up through 2005, Nike’s drivers, irons, and hybrids were poor sellers, while the demand for Nike putters and wedges is also low. Nike is really hoping the endorsement contracts (Nike signed 13 more endorsement cotnracts in 2005) it makes can help the company gain a larger share of the golf equipment industry, but in actualiy Nike needs to be relying on technological innovations too. Relying solely upon endorsements will not bring make more golfers purchase Nike clubs if the clubs lack the innovation and technology of other golf club brands. Nike overall has done well in the past and is a very established brand due to its many segments, but Nike Golf will never reach the magnitude of Callaway or TaylorMade because Nike has other interests such as footwear and its other sports divisions.

F. Overview of Rivalry

The game of golf is not expanding and more golfers are not entering the market, which means those companies on top with large percentages of the market do not have much room to grow. However, smaller brands like Cobra, Titileist, and Ping have growth potential and they can start taking small parts of the market away from the larger competitors. Evidence of the smaller golf companies growth can already be seen - Cleveland Golf, Nike, Cobra and Titleist, and Ping have 28% of the market share, which is more than double of their combined market share in 1999 (Callaway and Taylormade hold a combined market share of 36%). These five companies have revenue of over $100 million in the $3 billion retail golf equipment industry. That $100 million is no small share, and shows that these companies are rising threats. The rising of the smaller companies creates a threat for Callaway and TaylorMade because competition in the metal –wood golf club market is increasing. In order to compete, companies are starting to specialize such as Ping that has focused a lot of energy and innovation on its putters. Smaller companies like Ping, Titileist, and Cobra do not have the money to specialize in every type of club, so they will have to pick one or two golf equipment pieces to focus the research and development effort on. If Ping for instance can take on more market share and bring in more money by focusing on its putter developments, then the company could move on to specializing in other types of clubs. The winners of course in the end are those companies that can find ways to be low-cost producers, while at the same time making something that people really want to purchase.

V. Key Factors for Competitive Success and Profitability?

A. Technology

Technology is a key element in a company’s success in the golf industry. Players are always looking for the newest innovation in golf equipment because they want to improve their game as much as possible. Not keeping up with technology is detrimental to a golf equipment producers business because consumers do not want to purchases golf clubs, golf balls, and other equipment that are not boasting the latest technological innovations in golf. The rate of technological change causes product life cycles in the golf equipment industry to be short (ranging from 12-18 months). For example, in 2002 and 2003 drivers lasted an average of 10 months at full retail price. Short product life cycles are a big cause for the large amount of new products coming from companies such as TaylorMade and Callaway. As soon as one club comes out, another company is introducing a club or ball that claims to be better in some innovative way. The commitment to innovation in the golf equipment industry is clear – TaylorMade keeps 60 engineers on staff and Callaway, on average since 2000, has spent 31 million on R&D (about 4% of Callaway’s sales). Recently, Callaway has been falling behind in research and development. In 1999, Callaway accounted for about 1/3 of the drivers sold, but through the summer of 2003 that share declined by 1/3. The USGA (United States Golf Association) imposed technological limits on clubs and balls in 1998. The technology ceiling that was put in place for golf clubs was hit by all major manufacturers of golf equipment by 2005. The limits on club face performance allowed smaller golf equipment manufacturers to start catching up to the technology of larger companies.

B. Marketing

For golf clubs and golf balls – you want them validated on tour. If players on the professional golf tours use a company’s products and the products perform well, then the products are validated for other potential consumers in the industry. Consumer acceptance follows the acceptance of the product on the tours. Marketing can be done in many different forms, but the best form of marketing is the PGA Tour. A company’s image is based on its reputation and endorsements from touring professionals. Often golf companies even pay tournament entrants to place certain clubs in their golf bags on the day the surveys of club use are taken. Creating a great product is key, but a demand for the product also needs to be created and that demand can certainly be fueled by a products use on the PGA Tour. A products use in professional tournaments helps to build a brand name for that golf equipment company. Building a brand name is important because it leads to brand loyalty and repeat purchases (such as gloves, hats, and bag), and consumers will continue to buy that particular brand of clubs.

C. Manufacturing

Most golf equipment companies restrict their part in the manufacturing to assembly. Clubhead production is usually contracted out to investment casting houses in Asia and the grips and shafts are purchased from third party suppliers. Companies are very selective when it comes to choosing who will produce their clubhead overseas because the quality of the clubhead greatly effects the consumers’ perception of the club’s quality and performance (Ping Golf is the only golf club producer vertically integrated into clubhead casting). Now with the limitations on clubheads, differentiation for shafts is more important. Most golf club manufacturers produced small lines of shafts with their company’s name and produced by outside suppliers. Other shafts were produced and marketed by UST, Fujikura, and Graffaloy. These third party branded shafts are available to all golf club manufacturers and are important in attracting highly discriminating customers because some customers want a particular shaft. Manufacturers are highly specialized in the needs of a particular golf company. If a manufacturer chose to stop producing clubheads or shafts for a certain golf company that golf company would face hard times trying to find another manufacturer. When a new manufacturer is found the golf company would have to spend time and money retraining that manufacturer to create products to the correct specifications.

D. Distribution

Leading golf equipment manufacturers sell through on-course proshops, off-course proshops, and online golf retailers. The on-course shops carry few clubs and do not make as many sales as compared to the off-course proshops. Off-course pro shops account for the largest portion of retail golf club sales. Reasons for this can include the chance to demo and inspect the club up close, clubs are marketed more aggressively in pro shops where the staff if trained and knowledgeable about golf, and off-course pro shops carry a wider range of brands. Both on and off-course pro shops offer the opportunity for custom fitting and the advice of an experienced professional. Pro shops generally choose to only stock equipment that is from leading manufacturers because they do not want to carry equipment that is low end and less technologically advanced. Lower end manufacturers of golf equipment usually end up in discount stores, mass merchandisers, and large sporting goods stores.

E. Skills and Capabilities of Workforce

A skilled and knowledgeable workforce is essential to success and profitability of a golf equipment company. The equipment produced by golf companies needs to meet the high standards of retailers and consumers. A capable workforce making the clubheads, shafts, and grips (all of which are most likely made overseas) keeps a golf equipment up and running. Clubheads, shafts, and grips need to meet particular specifications for the golf company they are created for. Once a golf equipment company finds a manufacturer to produce their products to the exact way they like, that golf equipment company will not want to lose the skills of that workforce. Clubs for a certain brand need to meet particular specifications because that brand needs to retain its good reputation in the golf equipment industry.

VI. Conclusions

A. New Entrants

1. The golf market is in the maturity phase of growth, with consolidation of the market almost complete, there are decreasing margins. So new entrants would have to be able to match the low margins of companies who had the opportunity to join the market when margins were still high.

2. Brand name is important for consumers especially those who pay for the higher priced/margin products. It would be very hard for a company to enter into the high end market with quick success.

3. New companies might be able to enter into the market by merging or acquiring existing companies. Ping would be the most likely choice since it is the smallest unaffiliated company. Nike, Taylormade (Adidas) and Callaway are the least likely because of their size as well as their business model. Cleveland Golf and Cobra/Titleist are both owned by unusual parents Rossignol (skis), and Fortune (kitchen appliance/Spirits and wines) respectively. Mizuno would be a likely buyer since it is a company similar to Nike who has a golf division but little to no brand awareness in the U.S. As seen with Rossignol and Fortune you don’t need to be in the sporting goods industry to enter into the golf industry.

4. New entrants who would be unable to capitalize on the high end merchandise might decide to capture the low end market. Trying to build a name for high quality low price clubs that would be better suited at general merchandising stores like Dick’s Sporting Goods compared to high end pro shops, which all manufactures already compete.

B. Existing Companies

1. Margins are dwindling in the current environment; there are still high margins in drivers and to a lesser extent in irons as well. We can expect to see players in the industry chase the highest margins in each sector of the industry.

2. Companies will be expected to try to increase margins in numerous ways to maintain high profits, one method would be an increased move to automation, which has been started, but companies still rely heavily on labor intensive practices.

3. Companies will move to specialization as competencies start to form in different sectors. Taylormade in other words might find that it has a strategic advantage in producing high end drivers while Callaway will continue to produce middle of the road drivers or decide to focus more on irons.

4. Endorsements will continue to go up as well with increases in other forms of advertisement. Businesses will continue to build more of a brand image and worry less about products since products have a decreasing shelf life.

C. Future Market Conditions.

1. Businesses in the industry are expecting the market size to stay the same. Companies will then have to compete with each other to realize more profits. This increased competition will fuel increased rivalry.

2. The market although mature might mature more over the next five years. With market consolidation. As previously stated Ping, Cleveland and Cobra/Titlists are the most likely candidates to be merged or acquired.

3. There will be an increase in R&D with additional focus on intellectual property rights as companies try to gain a technological edge. The clubs have come so far over the years companies will continue to struggle to come up with ways to hit a ball with a club in a more efficient manner.

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