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ON THE UPSWING

Golfsmith grows even as America’s enthusiasm for golf plateaus

BY ANNA ROBATON

Tiger Woods is surely America’s best-known golfer, but when it comes to selling golf sporting goods, another player is fast becoming a household name.

In a relatively short time, Golfsmith International Holdings, which for much of its 39-year existence catered to hobbyists and pros who wanted custom-built clubs, has transformed itself from a little-known catalog company into one of the country’s largest specialty retailers of golf merchandise.

The Golfsmith chain has more than doubled in size to 50 units nationwide since 2002, the year its founders sold a majority stake to First Atlantic Capital, a New York City-based private equity investment firm.

In recent years Austin, Texas-based Golfsmith, founded in 1967 as a designer and maker of club components, has also been reinventing its store concept to distinguish itself by offering more than a sprawling selection of merchandise.

“Part of the challenge when we were sold was to position the brand as a multichannel retailer and not be known as a club-making retailer,” said James D. Thompson, the company’s president and CEO.

By the end of this year, the company expects the sales generated by its stores to account for most of the overall sales, which totaled $296 million in fiscal 2004 (ended in January). The catalog and Internet operations will continue to make up the rest.

Yet the company’s rapid expansion has come at a challenging time for the sport of golf, which peaked in terms of participation about four years ago. Between 2001 and 2003, the overall number of golfers fell to 25.8 million from 27.6 million, about 3 percent annually, according to Chicago-based Pellucid Corp., which provides information to the golf industry. Participation appears to be stuck at about 10 percent of the total U.S. population, the firm says.

Some blame a soft economy combined with the increased green fees that make the game overly expensive for many casual players. Others say Americans are spending more time working and less time playing, and that Woods, who attracted many to the sport in the 1990s, has lost some of his appeal (he went nearly three years without winning a major title before his Masters Tournament victory in April).

Off their game
Not surprisingly, sales of clubs, bags, balls and the like have declined along with the diminished interest. Sales dropped 7 percent to $3 billion in 2003 from the previous year, according to the Mount Prospect, Ill.-based National Sporting Goods Association.

The few that have grown during the slump have done so by snaring market share from competitors. Golfsmith, Fort Walton, Fla.-based Edwin Watts Golf, other large specialty chains and sporting goods stores all appear to be thriving at the expense of the on-course pro shops, mom-and-pop merchants and discounters.

Specialty golf shops generated nearly 26 percent of sales of clubs in 2003, up from 22 percent in 1998, the association reports. Over the same period, sporting goods stores generated 23 percent, up slightly from 22.4 percent. Pro shops, meanwhile, posted 16 percent, down from 17 percent, and discount stores reported 11 percent, versus 15 percent in 1998. An association spokesman says discount stores have suffered largely because sporting goods chains have broadened their selection of high-end golf brands.

“It becomes a market share game rather than an organic-growth game,” said Stuart Kessler, president of Clear Thinking Group, a Hillsborough, N.J.-based consulting firm serving retailers and consumer product companies. “The pie is basically the same size. The question is: How do you get a bigger slice?”

Well, Golfsmith did it by expanding its geographic reach and offering a range of price points and merchandise, including custom-made clubs and proprietary brands. Some of its stores are as large as 26,000 square feet, but the company also operates units half that size.

“We have candy stores for golfers,” quipped Thompson.

In recent years, the company has also put a big emphasis on improving the customer experience. Golfsmith encourages visitors to try out equipment on its in-store putting greens. The company outfits many of its stores with technology designed to give golfers an edge, from computerized swing analyzers to hitting bays with devices that measure club-head speed and ball flight. Some Golfsmith stores offer on-site lessons by Professional Golfers’ Association-certified instructors.

The strategy seems to be working. Golfsmith has enjoyed positive same-store sales for the past three fiscal years, though fiscal 2004’s gain was a mere 0.7 percent. Still, same-store sales slid 8.1 percent for the first quarter of fiscal 2005, way down from a gain of 24 percent for first-quarter 2004. Company officials attribute that to a drop in the number of golf rounds played. “When rounds played are flat to declining and our comp-store sales are positive, as they have been for the last three years, I know we are taking market share,” Thompson said.

Tennis anyone?
Golfsmith has grown by acquiring smaller chains, too, such as Don Sherwood Golf & Tennis World in 2003. The acquisition of the six-store chain based in the San Francisco Bay area yielded a presence in one of the country’s top golf markets and Golfsmith’s first experience selling tennis equipment.

In April Golfsmith announced plans to add tennis centers in up to 60 percent of its stores in major tennis markets, which include Atlanta, Austin, Chicago, Dallas, Denver, Houston and parts of Florida.

Thompson says he expects this initiative to boost overall sales in those stores, because many tennis players also play golf. And, of course, tennis equipment sales are less seasonal.

The company says the move will help draw more women, who make up nearly 53 percent of all tennis participants, according to the sporting goods association. Men account for nearly 77 percent of all golfers.

Yet tennis, like golf, has been waning in popularity of late. Between 1995 and 2004, the number of tennis participants dropped from 12.6 million to 9.6 million, the association says.

But Thompson says the company will expand its sales of tennis equipment in much the same way it has grown sales of golf goods: by gaining market share in what remains a fragmented industry.

“You can’t just grow organically,” Thompson said. “There are just too many regional retailers that do a great job.”

The sun will come out…
What’s more, he says, golfing will begin to make a comeback over the next five years. The country’s oversupply of golf courses is likely to drive down green fees, reduce the wait for tee times and make the game all together less time-consuming, he speculates.

Further, he says, more Americans under 25 are acquiring a taste for the game, partly because parents are exposing their children to it, and as baby boomers age, they will have more time and disposable income to devote to golf.

Indeed, Golfsmith is not exactly slowing its expansion. The company says it plans to open about 15 stores per year over the next five years; its ultimate goal is to have about 250 stores countrywide.

Although other golf specialty chains are largely regional, Golfsmith has cherry-picked markets throughout the country based on research showing high levels of participation in golf and/or high numbers of golf-playing households. The largest markets include the metro areas of Atlanta, Chicago, Dallas, Denver, Houston, Los Angeles, New York City and San Francisco. Stores are either freestanding or located in open-air centers with a regional draw.

All in all, Thompson says, things look promising both for the game of golf and for Golfsmith. “There is an awful lot of growth in front of us.”