Former Star Hedge Fund Manager Launches Golf Business Blog

Predicts Massive Fall Off In Golf Equipment Sales

(New York, NY) - ClubCrown by VIVE CEO Andrew Glaser has launched a golf business blog. As a Former Hedge Fund Portfolio Manager, Mr. Glaser is in a unique position to opine on golf trends and their implications on the industry. In his first blog, Mr. Glaser analyses the replacement cycle of drivers, fairway woods and hybrids. His conclusion is that golf equipment sales could decline up to 40% in the next few years. This prediction is supported by a review of replacement cycles in the TV industry.

Andrew Glaser

Mr. Glaser said "For 10 years on Wall Street I specialized in retail and consumer equities, overseeing up to $500 million. I have seen many replacement cycles start and end in a variety of industries. For example, in 2010 I analyzed the end of a television replacement cycle and went short Best Buy to much success. I believe the same issues are occurring in the golf industry and no one is talking about the very real and adverse implications of this huge change."

Prior to founding ClubCrown, from 2002-2011 Andrew worked in finance, most recently as a hedge fund portfolio manager with a focus on retail and consumer equities. This experience gave him a detailed understanding of retail business models and a tremendous amount of access to public company management.

Andrew attended The University of Pennsylvania and graduated with a business degree from Wharton and a BAS from the Engineering School, also earning a minor in math. In his free time, Andrew enjoys golfing and carries a low single digit handicap.

Golf's Equipment Replacement Cycle
by Andrew Glaser, CEO of ClubCrown by VIVE

Over the past 30 years, the golf industry has undergone a massive upgrade and replacement cycle in woods. As long as the equipment noticeably and materially improved, the replacement cycle continued. The sober reality is that the golf equipment manufacturers have maxed out the product within USGA and R&A limits and this replacement cycle is over. The consequences of this could vastly change the golf business landscape in a matter of a few years.

Over the 30 year period starting in 1979, three major innovations significantly improved wood performance. First, TaylorMade introduced the first steel wood, creating a wood to steel cycle. Next, Callaway launched the first larger format head with the 1991 Big Bertha. This innovation accelerated the wood to steel cycle and also replaced smaller steel heads from the 1980's. The third major innovation was titanium and its ability to form even bigger heads. Unrestricted, the manufacturers could have easily continued to improve their products. However, the USGA imposed a COR (trampoline effect) limit in 1998 and limited heads to 460cc in 2004, effectively stunting innovation.

While those in the R&D departments of club manufacturers will only admit in close company that drivers have been maxed out, there are those who surprisingly have gone on record saying as much. In Callaway's Q4 2012 earnings conference call held in January 2013 CEO Chip Brewer said "we ran into our limit on COR in size in drivers so the two big trends that you saw driving some driver innovation and - replacement cycle out there was the size of the driver and the COR of the driver and they're maxed out now in size and COR..." Other reputable sources have said that COR has been maxed out for 6 years already but the consumer is just now catching on.

In its current dynamic, the golf equipment industry has a variety of competitors and there is no major disruptive technology on the horizon. These dynamics have been exhibited in other industries, most recently in televisions over the past 10 years, providing a telling case study for the golf industry.

Flat panel TVs dropped to an affordable price around 2004 kicking off a massive US TV industry replacement cycle. Users replaced their tube TVs, starting with their living room TV. This replacement cycle took about 5 years. Given the significant percentage of profits that TVs represent for Best Buy, a long term BBY stock chart is a good barometer for what happened during and after the replacement cycle.

DisplaySearch, the premier TV research firm, noted that "global demand for LCD TVs declined 18% Y/Y in developed regions in 2012..." At the same time, it is an indisputable fact that TVs made today are BETTER than those made in 2007 and 2008. New TVs are smart TVs, integrated with Netflix and the internet. They are thinner, more energy efficient, better color, and they even offer a 3D experience! Yet people are not buying them. For a consumer to open their wallet and buy a new TV, the TV must be BETTER ENOUGH.

Best Buy mentioned in their 2012 annual report that they "experienced a decrease in television revenue due primarily to a decrease in average selling price from an increased sales mix of small and mid-sized televisions." Consumers are not replacing their living room TV. They are just upgrading the other TVs throughout the house. These are smaller TVs with a lower margin and dollars per unit.

With technology maxed out in drivers (large TVs), equipment manufacturers have turned their marketing to smaller drivers, aka fairway woods and hybrids (small TVs). Chip Brewer, in the same call noted that "high COR, or spring-like effect fairway woods were the story of the year in 2012" and he goes on to say that Callaway's 2013 "fairway Wood is at the legal limit..." History truly does repeat itself!

This analysis is not to say that no one will ever buy a new driver or fairway wood, but it is highly conceivable that if the golf industry follows similar patterns to other industry replacement cycles, sales and units of drivers and woods could decline materially. How much they will decline is very hard to determine but here is one last thought on the potential amplitude of the decline.

At the 2013 Memorial Tournament, Jack Nicklaus was asked about a persimmon 3-wood he kept in his bag for a long time. Jack said he used the same 3 wood from at least 1965 until he switched to a metal wood in the 1980's. Do you know a single person who still carries their same 3 wood from 15+ years ago? Clearly replacements cycles in golf did compress and the industry should be exceedingly concerned that they could revert to 1960's and 70's levels. If driver replacement cycles go from 3 years to 5 years, for example, total sales will drop 40%. The implications will be dire, especially for those manufacturers and retailers who prefer to keep their heads in the sand.


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