By JJ Keegan^*

Heroes v. Villians - Who will Survive

April 2010 - Golf, Inc. Article

The Gauntlet Now Thrown

At the 2010 PGA Show, the leading industry research firms, the National Golf Foundation, Golf Datatech, and the PGA of America confirmed that in 2009, rounds and revenue had decreased 1% and 6% respectively, and that up to 1,000 courses may close in five years.

In searching for answers, many cite the uncontrollable factors of the economy, our time-crunched culture, and the oversupply of golf courses as the primary reasons contributing to the malaise. Others cite software firms—particularly third-party tee time providers—as the culprits.

In a February, 2010 Golf Business article titled, “The Flip Side,” Michael Tinkey, Deputy Director of the National Golf Course Owners Association wrote,

“I have an idea for a way we can all make more money…: Let’s build additional golf courses … and charge below the market rate to drive more demand and play.

Sound logical? Of course not, but that’s just what happens when multiple golf course operators in close proximity give barter rounds to third-party tee time distributors. All of those “unused rounds that cost the course nothing to give away” add up to … tee sheets full of inventory … being sold at deep discounts. It’s like constructing a competing course … and the worst part is you helped build it.”

Is Mr. Tinkey, who is a sincere, well-respected and dedicated professional, correct that third-party tee time distributors are responsible for the industry’s demise?

Economic Theory

Every business is governed by the laws of supply and demand. When the price of a product goes down, suppliers will usually produce less and consumers will usually want more. That relationship presumes that supply and demand are purely elastic.

Unfortunately, demand for golf is slightly inelastic – a change in price will impact rounds played, but only partially. It is unlikely that if the prices are decreased 10%, rounds will increase 11.1%, the percentage of growth required to generate the same total revenue. A 10% decrease in price is more likely to increase rounds only between 5% and 9%, resulting in a 1% to 6% decrease in total revenue.

What is worse is that the supply of golf courses is nearly completely inelastic. Changes in price affect only the short-term financial performance of the facility. Based on the capital reserves of a course, it could take years before its funds are depleted and the course turns to seed and/or must be sold.

The Facts

Golf is a $76 billion industry, of which golf facility operations represents a $28 billion component. It is estimated that green fees, season passes, membership initiation fees and dues account for 55% of that, or $15.4 billion in revenue.

It has been heard on the street that Golf Channel, by far the leading third-party intermediary (selling $121 million in tee times, representing four million rounds to 730,000 golfers) liquidated nearly $19 million in tee time inventory for themselves in 2009, receiving an average of $10,500 in tee times sold per course among its more than 1,800 clients. For that “fee,” the golf course receives a custom-designed Web site, an email blast tool, and access to a database of golfers within the local market. The real value of Golf Channel’s Golfnow.com solution is only realized if the golf course owner can leverage those tools to competitive advantage. Unfortunately, few owners do.

While the Golf Channel email software is difficult to use and is subject to valid criticism for not creating a true yield management tool to boost the golf course’s revenue per available round (RevPar ), one must respect that the company has invested over $75 million in the belief that this system will benefit the industry. The $40 million investment in Cypress Golf Solutions to acquire 750,000 email addresses as well as the $17 million investment in Last Minute Tee Times to acquire 200,000 tee times are impressive.

While it was laughable to some who listened to Golf Channel officials on January 26, 2010, espouse that they are not in competition with the golf course owner, it is equally humorous to entertain the notion that one vendor who generated nearly $19 million in revenue cratered a $15.4 billion industry.

Who is the Villain?

First, it must be acknowledged that software firms are partially guilty of inserting their own economic interests ahead of the golf course owner.

Jeff Levine of Century Golf Group, for years, and Jim Roschek of the Alamo City Golf Trail, more recently, have sought to use the EZ Links Tee Time Reservation call center with the IBS golf management software. As recently as September, 2009, IBS declined to create the requisite interface.

Fore Reservations published a white paper in 2009 indicating that it was not in their clients’ interest to create an interface to third-party intermediaries, and that they, representing the interests of their clients, were reluctant to provide such an interface.

In December, 2009, it is rumored that Fore! Reservations was paid by Golf Channel seven figures for prepaid seat licenses and to ensure an interface to Golfnow.com. It could be debated that Fore! was advancing its own economic interests ahead of its clients if they truly believed that third-party intermediaries are detrimental. That begs the question why the other leading software vendors (Active Network, Club Prophet, EZ Links, IBS and Jonas) don’t demand similar compensation for each potential interface to Golf Channel.

Interestingly, shortly after the Fore! agreement, a letter was sent to a Florida course indicating that Fore! Reservations is a preferred software provider of the Golf Channel. That prompted a meeting with Club Prophet on January 29, 2010, at the PGA Merchandise Show in which it was indicated that their interface provided to Golfnow.com was in jeopardy, as Club Prophet viewed Golf Channel competitive to their primary business: golf management software.

Such a meeting was necessary because Golf Channel made the same mistake made in the 2000’s by both Turner Broadcasting, on behalf of the PGA, and Golf Switch, when, in attempting to create a national tee time network, they endorsed one software firm at the expense of the others. Such is a fatal flaw. A national tee time provider can’t have an interest in a golf management software company. You need the cooperative assistance of all software providers to succeed.

Then are software firms the villains? Hardly. They are merely embracing the fundamental principles of capitalism, whereby strong incentives are provided to exploit other people’s frailties.

In this case study, the frailties are those of the golf course owners.

Who Will Be the Survivor?

The formula for a successful golf course is simple; value = experience – price. To the extent that the experience equals or exceeds the price, loyal customers are developed. To the extent that the price exceeds the experience, attrition occurs.

While uncontrollable factors and software firms exerting their own self-interest contribute to the industry’s decline, perhaps 35% and 10% respectively, the lack of professional business skills among the golf course owners, management teams, and its staff are the primary factors contributing to the financial demise of golf courses. They consistently fail to undertake and execute effective strategic planning that embraces eight key components: 1) understanding the local market, including the age, income, ethnicity, and population density within 10 miles of their facility; 2) calculating the impact of weather on year-to-year performance; 3) ensuring the proper integration of technology; 4) benchmarking their performance to Golf Datatech and PGA PerformanceTrak data; 5) assessing equipment, capital and manpower requirements properly; 6) realizing that golf courses are in the entertainment business and need to emphasize customer satisfaction at each of the 13 potential touch points; 7) measuring customer preferences, spending patterns, and identifying core, acquired, and defector golfers; and 8) constantly assessing customer loyalty.

In 2010, facilities like the City of Ann Arbor, City of Winnipeg, City of Virginia Beach, Naperville Park District, Les Bolstad GC, Merrill Hills CC, Reignwood Pine Valley, and Tartan Park will all realize opportunities to increase their by net income by a minimum of 12% by engaging in such strategic analysis. In one case, the City of Winnipeg could reverse its economic destiny by $8.5 million in the next five years.

Warren Buffet was quoted that he likes to invest in industries where average people can make a lot of money. Unfortunately, golf is a business that requires extremely smart people who have the potential to only make a little money. Thus, the average golf course operator is likely to struggle and perish, becoming an unwilling example of a fundamental lesson of capitalism, a system that creates opportunity but devours the weak.

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Author: James J. Keegan, Managing Principal of Golf Convergence and author of The Business of Golf – What Are You Thinking? to be released on April 15, 2010. You can follow J.J.’s divergent views at twitter/golfconvergence.

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Credits

Originally posted by JamesKeegan on 12 Mar 2010.
All contributors: JamesKeegan, MarleneStone,

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