I attended the 2010 PGA Merchandise Show and came away with the following observations about the state of the golf equipment industry. I hope you find them illuminating.. I welcome any and all feedback. I KNOW I will hear the feedback when you disagree. It goes with the territory. This is Part 1 of the report. Part 2 will follow with my annual Equipment review.

2010 Prognostications for the Golf Equipment Industry

Looking in Golf’s Crystal Ball

• Cracking the Bullwhip on the Golf Equipment Industry Suppliers

While attending the PGA Merchandise Show we had meetings with over 20 senior executives in the golf industry including OEM’s, suppliers, retail distribution channel partners and service providers. The OEM’s came off like the Stepford wives. To a company they espoused the collusive mantra of ‘cautiously optimistic’ on the prospects for 2010.

Yet I found a curious phenomenon as I worked my way towards each end of the channel. The retail channel partners were conceding that their Q4 inventory levels were brought as low as possible so they could produce balance sheets that appeared as liquid and healthy as possible. Mission accomplished. The retail channel partners were suggesting that they were taking the annual sell-in of hard goods plus doing some restocking of inventory. Thus the order patterns to the OEM’s are better, and this is leading the OEM’s to their ‘cautiously optimistic’ tone. I would read ‘cautiously optimistic’ to mean ‘2010 Q1 orders from retail are better than expected, but we don’t want to get too enthusiastic until we see how the sell through goes’.

This has led to a curious phenomenon that has occurred as we back up into the supply side of the business. A couple weeks ago the Wall Street Journal ran an article about Caterpillar and the bullwhip effect of their ordering patterns on their suppliers. This article could easily have applied to the suppliers of the golf equipment industry. Last year, when the sell through did not materialize, orders to the suppliers of components, shafts, grips, head covers, packaging and the like slowed to a crawl. These suppliers, all located in a tight regional area in China, proceeded to downsize their labor forces by as much as one-third. Now, as the OEM’s are returning to more normal ordering patterns compounded by the restocking of the retail distribution channel, the stress on the suppliers to meet this demand is extreme. I spoke to supplier after supplier that is running 24 hours a day/ 7 days a week to try to keep up. Their efficiency ratios are off the charts because they are all still running with 1/3 less employees. As the suppliers have gone to try to rehire the employees that they laid off last year, they can’t find them! Apparently, these employees which came from primarily rural areas of China, have matriculated into urban settings and found jobs in the service sector.

The employees that are still there in the supply side are beginning to be run ragged. You can only run flat out for so long before production problems and accidents begin to crop up. If there is any meaningful sell-through this year, I could easily see supply-side bottlenecks. This will work to the advantage of the larger equipment companies, because they will be able to carry larger inventories on their balance sheets and they will have first call on the supplies that are available.

• The Consumer: Not Free Spending, but Not in Free Fall

So much of how 2010 turns out for the golf equipment companies depends upon the condition and state of mind of the consumer. The state of mind of the golf consumer could hardly have been worse during the key selling season last year. The Dow Jones Industrial Average made an inter-day low below 6500 on March 6^th, 2009, just as the key selling season was preparing to move into full swing. As you can see from The Consumer Confidence index chart, the index has risen steadily since bottoming out early last year.

Clearly, last year heading into the key selling season, the consumer was in free fall, and the consumer’s reticence to spend was exacerbated by brokerage accounts that suffered enormous damage with no certainty that a bottom had been found or that the financial system as constructed was viable. Looking at the index today, it is clear that the consumer has not returned to free-spending mode. But the consumer is clearly no longer in free fall.

I was invited to the Sports Illustrated Golf Group breakfast meeting at the PGA Show and listened to a presentation from Jon Last of the Sports & Leisure Research Group entitled ‘The Golfer’s Mindset 2010: Moving Out of the Rough’. Sports & Leisure Research Group conducted online surveys of over 1,000 golfers last January, last July and this January. The results were quite revealing. Last January, before the real bottom of the market, 80% of those surveyed suggested that they intended to spend the same or more on golf in 2009 versus 2008. By the July survey, after the bottom, that number had crumbled to 59%. This most recent January saw the number beginning to rise, up to 66%. By itself, this number could be interpreted as better, but not that great. But we need to remember that golfers are a special impulsive breed. The more they are at the course, the more they end up wanting to spend.

Last January Sports & Leisure Research identified that 77% of golfers intended to play as much or more in 2009 versus 2008. Looking back, 72% actually did play as much or more in 2009 versus 2008, so there is decent correlation to the predictive nature of the survey. This January, 94% report that they expect to play as much or more in 2010 versus 2009. The likelihood is that, if a greater percentage of golfers are going to be at golf courses the same amount of time or more, then more is going to get spent on golf.

After all, when I listened to The State of the Industry presentation from Jim Koppenhaver of Pellucid Corp. and Stuart Lindsay of Edgehill Golf Advisors, I learned that the number of golfers were statistically flat and that the number of rounds played were statistically flat, but the brunt of the pain had fallen on the backs of the golf course operators who had engaged in discounting to keep the numbers up. Certainly there had been extraordinary discounting by golf equipment companies as well. For a successful 2010, we are going to need the equipment companies to ‘take the needle out of their arm’ as it were. The Pellucid/Edgehill report suggested that golf has lost ‘committed and involved’ participants and now has more ‘casual’ participants, but if close to 90% of the golfers out there play as much or more in 2010 versus 2009, it is possible that the ‘committed and involved’ group could regain some ground.

Certainly an improvement in unemployment statistics would further improve the consumer mindset. We would note from the unemployment chart that the rate of increase in unemployment appears to be flattening out, if not declining. Were unemployment to begin to measurably decline, this would have a beneficial impact on consumer confidence.

SUMMARY

We understand the need for golf equipment CEO’s to be cautious. At the same point in time, suppliers work off of purchase orders. Suppliers in Asia have been working overtime for months now as you can see by reading the short news article attached to this hyperlink.

Put this together with the improvement in consumer sentiment and the fact that golfer’s intentions are far better than last year, and we feel certain that the first quarter will be vastly improved for the golf equipment companies. Simply stated, the traditional sell in of equipment during the first quarter, plus some inventory restocking at the retail distribution channel end, is leading to improved order patterns for golf club equipment.

There are still big questions to be sure. How robust will the sell through at retail be? That requires consumer confidence to continue to rise, and unemployment to begin to fall. Can the industry take the needle out of its own arm and reduce the amount of cannibalistic discounting that goes on? TaylorMade is opening the year off with a $250 driver. That’s not exactly an encouraging sign from the market leader in the driver category, even if the strategy is “My competitor is drowning, so I am going to stick a garden hose down his throat.”

The return of Tiger Woods would certainly do a lot for golfer’s personal sentiment. He is the most popular player out there, despite his troubles. The game needs him back.