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Callaway Golf - Case B

Ely Callaway felt proud as he took stock of the year 1997 in his report to

shareholders. Callaway Golf had yet another year of strong growth in sales, with net

sales up by $125 million from 1996. Sales in the US had increased 19% while sales to

Europe and Asia had increased 46% and 20% respectively. International sales, which

were ~ $300 million in 1997 now accounted for 35% of the firms total revenues, more

than the total sales of the entire firm in 1993 (see Exhibit 7a for details on Callaway

financials). In addition to its wholly owned subsidiary in the UK, Callaway Golf now

had a subsidiary in Germany as well as in Japan.

Callaway Golf had consistently been the market leader in US market for Golf

Clubs over the past 5 years, with an estimated market share over 25% despite the

introduction of many new products by leading competitors (Ping's "ISI" Irons, Taylor

Made's "Burner Bubble Shaft" Irons, Cobra's "Ti" Titanium Metal Woods, "King Cobra

II" and Armour's "Ti 100" Irons; see Exhibit 4 for market shares of leading players).

The use of Big Bertha drivers by professional tour players on the five major tours (PGA,

Senior PGA, LPGA, NIKE and PGA European Tours) in the 1997 was 66%1, and

Callaway's two new products - the Biggest Big Bertha Titanium Driver and the Great

Big Bertha Tungsten-Titanium Irons had done well with consumers and constituted over

20% of 1997's sales. Part of this success had stemmed from its continued ability to

deliver new, innovative golf equipment at regular intervals since its introduction of the

Big Bertha in 1992. In the preceding five years it had introduced the Great Big Bertha

Drivers, the Great Big Bertha Fairway Woods, Big Bertha War Bird Metal Woods, and

Big Bertha irons, most of which had been extremely successful with consumers. It

continued to spend heavily on R&D, increasing expenses to $30 million in 1997 as

compared to $16 million in 1996. In addition to its investments in R&D, Callaway had

spent considerable effort in marketing and branding its image as a firm that was up-

market yet accessible to 'amateur' golfers, helping to deepen its penetration in the market

for woods and expand into the market for irons.

Earlier that year, Callaway had also acquired Odyssey Golf, the market leader in

putters, thereby expanding its lead and breadth in the market for golf clubs. Callaway

had also decided in May 1996 to enter the $ 650 million golf ball market (see Exhibit 3b

for a break down of the golf industry market by segment) by designing and building its

own golf balls. As part of this effort Callaway formed the Callaway Golf Ball Company,

a wholly owned subsidiary of Callaway Golf. While it did not expect to generate any

revenue from this business until 2000, it continued to make further investments in this

project, including investments in plant machinery in 1997, as well as in designing the

prototypes for the golf balls it planned to launch within the next few years.

In addition to these large capital investments, Callaway had also opened Callaway

performance centers earlier that year at Walt Disney World in Orlando, Florida, Pebble

Beach Resort in Carmel, California as well as in Las Vegas. These new sites were meant

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Callaway 10K, 1997

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to provide in-depth advice to help golfers trying to decide which model of Callaway Golf

clubs would work best for them. In May 1997, Callaway also consolidated its design

efforts in a new technology design center. In line with these investments, Callaway

decided that the theme for the 1997 annual report would be "Technology - Investment for

the Future" (see Exhibit 6a for a comparison of capital expenditures by Callaway and

other competitors).

Despite these tremendous successes, some dark clouds were looming on the

horizon. An unusually wet winter brought on by "El Nino" seemed to have dampened

sales in the US, while the economic turmoil in Southeast Asia and Korea had impacted

the golf markets in those countries and was feeding through to Callaway's sales. Even as

Callaway and its competitors continued to spend aggressively on designing and

marketing new golf clubs, industry reports were cautioning that inventory levels seemed

to be building up and warned against possible 'buyer fatigue' with the next new golf club.

Callaway had just cut its prices 15% for Big Bertha clubs, the