Daily Pulse

 

Web Street Golf Report

VOLUME 12, NUMBER 47

Monday, November 23, 2009

THE FINAL FRONTIER? China is being heralded by some as golf’s next playground. For some companies that compete on a global basis, it’s an inviting opportunity in large part due to the incredible population it possesses. With more than a billion calling Mainland China home, the opportunity is eye popping when compared to the US population, which is only north of 300 million. Yet, very little is known about this geographical area. Perhaps in large part since it is under communist control.

According to a Reuters report, Cui Dalin, the deputy sports minister told local reporters recently, “Golf is widely seen as game for entertainment, and thus the business tax rate is 22 percent for golf clubs. Adding the land-use tax, a golf club has to pay almost a 30 percent tax rate. That will not boost golf’s popularity here.” The sports ministry is believed to be already working on ways to change the perception of golf in China, starting with an attempt to reduce the tax paid by the country’s 500 golf courses.

China Daily, meanwhile, recently reported the average price of 18 holes in Beijing is between 600 and 800 yuan (approximately $88 - $117) but most golf clubs only allow their members to play. It said membership fees are usually between 100,000 yuan and 1.7 million yuan (approximately $14,600 to $250,000), which prohibit the general public from play.

"There has been an annual rise of 10 percent in our fees since Bayhood No 9 opened in 2004," Zhang Qun, Bayhood No 9's director of Operating and Marketing, said. According to China Daily, Bayhood No 9 Golf Club requires 1.08 million yuan (approximately $158,000) to join it. "Besides membership fees, we ask for an annual fee of 10,000 yuan (approximately $1,466). And for every game, an additional course expense of 7,000 to 8,000 yuan (approximately $1,026-$1,173) per group.”

While China clearly represents an opportunity, it’s still unknown whether the possibilities are large or small. For example, its unknown how much golf is actually played in the country and whether it is produced from international visitors, such as from Japan, versus the Chinese nationals. Considering some of the prices reported, its also unknown just how many Chinese can afford the sport as well as well as how that translates into age demographics compared to the US.

GIVE AND TAKE: While China on one hand represents incremental opportunities for golf, be it yet unproven, there are risks to this geographic region. The country has a culture and propensity towards counterfeit or fake products. Rolex, Gucci and other luxury brand names are frequently the subject of knock off goods in China. Golf equipment too.

The U.S. Golf Manufacturers Anti-Counterfeiting Working Group comprised of the Acushnet Company, Callaway Golf, Cleveland Golf/Srixon, Nike Golf, PING and TaylorMade Golf Company reported that the Beijing Chaoyang District People’s Court has sentenced eight people to serve prison terms ranging from one to four years. Included with the jail time are fines totaling several thousand dollars as a result of a conviction of counterfeiting registered trademarks and manufacturing, distributing and selling counterfeit golf equipment.

The two principal defendants, TIAN Yu and TIAN Zhongyi, will serve four year and three-year prison terms, respectively. According to Wan Hui Da, the law firm representing the Anti-Counterfeiting Working Group, these sentences are considered very severe penalties for intellectual property related crimes in China. The defendants will not appeal the decisions.

Nearly 10,000 pieces of counterfeit golf equipment were seized; including more than 740 assembled golf clubs, 1,500 club heads, 4,700 golf grips, 2,300 shafts, 280 club head covers and assorted golf towels, golf bags and apparel. The seized goods were illegal copies of authentic products made by all six of the Group's members.

 

OLD SCHOOL: The Children’s Miracle Network Classic was not only the conclusion of the 2009 PGA Tour season but perhaps also the end of an era. It marks the death of the U groove. Professional players will be forced to adopt V grooves in their irons and wedges starting in Hawaii next year. While independent contractors inhabit the PGA Tour and the other worldwide professional tours, the reality is that they are told what they can and can’t do with regard to many different subjects. For example, in the real world most non-employees are not subject to random drug testing. However, the ruling bodies in golf, the R&A and USGA, determined the U groove needed to be outlawed and replaced by a slim down version, which resembles a V.

The purpose behind this condition of competition rule going into effect is the intension of placing an emphasis on accuracy. It’s believed that players will lose a significant amount of spin on their golf ball when playing from the rough. However, they can expect similar spin rates versus the U groove configuration when playing from the fairways. It’s indirectly an attack on the bomb and gouge style that is fashionably played on the professional tours. The term refers to players who hit their driver as far as possible off the tee with regularity and then a short iron to wedge from whatever lie they find from their tee shot.

Stephen Ames won the final event of the PGA Tour Fall Series. By now that is considered old news, but what a lot of people don’t know is that Ames won using the 2010 grooves in his irons.

“I've actually already changed my grooves to next year's grooves,” he said “(And) I'm winning with these grooves in the bag.”

Ames stats at the Disney event indicate the groove fuss didn’t interfere with his march towards the winner’s circle. His driving accuracy was 67.9%, which was tied for 31st overall. He hit 73.6% of greens in regulation, which was a tie for 27th in the field. His putter proved to be the greatest of equalizers as he averaged 27.3 putts per round, which ranked him in a tie for 6th overall. So despite missing fairways, Ames still found the putting surface with regularity and his Nike prototype METHOD putter delivered when it counted the most.

The Disney event was the last official PGA Tour tournament where players could use U grooves and some, if not most players, did. Its unclear how many in the field used V grooves like Ames, but the results, it would seem, would imply the U grooves didn’t represent a clear cut advantage to those who employed them.

The first data point in what might become a trend implies the rule change will have little or no effect on the end result over who ultimately wins. It may force some or all players to alter their strategy in approaching a golf course, but beyond that it’s still unknown whether the rule was necessary. For the record, Ames’, (a multiple winner on the PGA Tour prior to last week) winning score was 18 under par. The 2008 Children’s Miracle Network Classic victor, Davis Love III, won posting a score of 25 under par.

Meanwhile, Tiger Woods won the Australian Masters in electrifying fashion. Woods has publicly stated that he has been using V grooves in his irons for quite some time, other than the two wedges he carries. The world’s #1 player, despite coming back from reconstruction knee surgery, won six times on the PGA Tour in 2009 before heading to Oz for another W. The data points appear to be growing thus implying the more things change, the more they will stay the same.

ONE BRIGHT SPOT IN AN OTHERWISE DARK CLOUD: Ordinarily with the holiday season fast approaching, this would be the time of year when many turn towards reflection. But with a new year quickly on the horizon, it doesn’t allow much time to think about the past. It’s been a brutal year for golf outside of the PGA Tour, which saw its prize fund somewhat insulated from the recession. Time will tell how long it will be able to fend off the real world that may likely still be awaiting it.

Next year it would seem has more questions than answers at this point. The economy hasn’t worsened but it hasn’t improved either in the US. Unemployment levels are higher than a year ago at this time and it remains to be seen whether any level of divine intervention may provide a spark to an otherwise sagging economy.

One segment within the golf industry that may have a modest up tick going for it would be the wedge category. 2010 will be the last year that manufacturers can make U or square grooves, as they are sometimes referred to, based on the USGA and R&A rules. Any wedges featuring this groove configuration can be sold at retail after 2010, but they can no longer be manufactured. Meanwhile, for the recreational golfer around the world, the product is conforming for handicap purposes until 2024. The hope, in a sense, is that avid to casual players will stock up on wedges with U grooves while they remain available. One company has introduced a unique strategy towards wedges that is certain to capture some attention with many weekend warriors.

TaylorMade Golf, which has made a reputation for itself with adjustable features, specifically in drivers, has extended this to include wedges. The company has created the TP wedge with xFT (Exchangeable Face Technology), which allows players to easily remove a clubface and replace it with a new one to maintain performance in terms of spin and control. You may have already guessed it, but the company is offering two types of xFT wedge faces for purchase. Consumers can choose from TaylorMade’s new ZTP groove design that conforms to the USGA's new rules change, or the company’s current Z groove that conforms to the pre-2010 rule on groove design.

"In a nutshell, the rules change stipulates that new groove designs must have less cross-sectional area and their edges must be less sharp," said Bret Wahl, senior director of iron, wedge and putter development. Two types of xFT wedge faces will be available for purchase. Consumers can choose from TaylorMade’s new ZTP groove design that conforms to the USGA's new rules change, or the company’s current Z groove that conforms to the pre-2010 rule on groove design.

"Most players won't experience a dramatic reduction in spin from dry fairway lies, but will see a decrease in spin by up to 50% from the rough. All the more reason to keep the clubface of your wedge fresh and at peak performance. Our new ZTP groove is the most aggressive, spin-inducing design we have that conforms to the new USGA rule."

While most of the attention is centered on the groove configuration changes, TaylorMade is the first company that lets players hang on to their wedges and change out a part that is worn through usage. Previously, grips were the only component.

"Though the face of a typical iron is sturdy, it isn't impervious to wear," said Wahl. "A wedge's face wears from contact with the ball and from the dirt and sand that's often sandwiched between the ball and the face at impact. Every time you explode from sand with your wedge it's like rubbing a piece of sand paper on your clubface. Over time the face wears down and the edge-radius of the grooves becomes dull. In addition to the normal wear and tear a face suffers from normal play, it can be nicked and damaged in a variety of other ways such as when club heads bang together when you put your bag down or when you walk or drive your cart, or when you hit out of waste areas, or when you unintentionally scrape the clubface against debris when hitting the ball from poor lies off the fairway."

How quickly does the face of the average wedge show signs of wear? TaylorMade studies indicate that after about 1,000 shots the edge-radius of each individual groove changes and the roughness of the face surface are worn away. For players who play with reasonable frequency or practice between rounds, 1,000 shots can add up pretty quickly.

The xFT face is held in place with two screws located on the back of the club head that can be loosened and tightened with a white TaylorMade R9 torque wrench. Each TP xFT wedge will sell at a street price of $129 per club and will come equipped with a Z groove face (conforming to the pre-2010 USGA rule). Individual xFT wedge faces with either the Z groove or ZTP groove (conforming to the new 2010 USGA rule) will be sold separately at a street price of $39. Availability in stores and online is set for December 1st with the 56° loft and 12° bounce only, with nine more combinations will follow in mid-February, 2010 -- 50.09, 52.11, 54.12, 56.16, 58.09, 58.12, 60.06, 60.10, 64.06.

WHAT WOMEN WANT: Callaway Golf (ELY: NYSE) has gone back to the drawing board with the purpose of understanding what women player needs are. “We’ve spent countless hours researching the way women swing and play golf in an effort to design equipment that promotes shots that fly farther, higher and straighter,” said Alan Hocknell, Senior Vice President of Research & Development, Callaway Golf. “Women were heavily involved in the design process of these sets, both from a performance standpoint and on the aesthetic side. Solaire represents the latest example of our commitment to the women’s game, and we’re confident this equipment will help many reach new heights on the course.”

The company searched for an answer that led it to design and create Solaire. Available in 14-piece and 9-piece set configurations, Solaire features an Energy Efficient Design that optimizes every element of the golf club to maximize performance, Callaway said. New lightweight club heads incorporating draw configurations and higher lofts, as well as lighter grips and shafts, should help women to swing efficiently with power to generate increased distance throughout the set, Callaway promised.

The new 14-piece Solaire Set consists of an all-titanium driver, three stainless steel fairway woods, three hybrids, two irons, three wedges, a mallet putter and a cart bag. The new 9-piece Solaire Set has two less fairway woods, one less hybrid, iron and wedge than the 14-piece set. The introductory price is $899 for the 14-piece set and $599 for the 9-piece set.

Solaire is also available in a golf ball. According to the company, it was designed to perform ideally at slower swing speeds and features a soft, resilient core. It carries the company’s patented HEX Aerodynamics for assistance in creating lift and reduced drag even with slower swing speeds. Callaway is offering the ball in two color options: “ 100% Pure Callaway White or High Visibility Pink.” The introductory price is $19.99 per dozen.

VIRTUAL SPACE IS NO PLACE: The Internet has become a staple in many peoples’ lives. It has evolved rather quickly since it first began to gain traction, including for those in the golf industry who were somewhat reluctant to jump on board. It provides transparency, especially in retail pricing and that wasn’t something many golf companies were particularly thrilled with. Nevertheless, the Internet offers much more than a window-shopping experience and it continues to be a daily ritual for a variety of reasons beyond simply email.

Club Glove announced it has a new distribution policy aimed at minimizing excessive online discounting by limiting sales to only those e-tailers that also have a brick-and-mortar location.

Designed to support key green grass and big-box accounts like Edwin Watts, Dick's Sporting Goods, Golf Galaxy, Golfsmith, PGA Tour Superstores and Roger Dunn, among others, the new mandate helps Club Glove and its partners maintain price integrity and ensures consumers can more easily locate authorized dealers.

"We're not against online retail, but we are against the overcrowding and differences in both price and service that are so common in this sphere. Quite honestly, standard retail margins are not needed at the e-tail level," explained company founder Jeff Herold. "An overwhelming number of hours and hard work are involved in running both sides of the manufacturing / retail equation. It just doesn’t make sense for websites without a store front to claim the lion's share of the profits."

By limiting its online presence to established brick-and-mortar retailers with an e-commerce component, Club Glove said it is able to prevent its products from being discounted in a manner that undercuts some of its best partners.

"We're confident consumers will find Club Glove through our vast network of approved merchants. There's no need to search hundreds of websites before purchasing," added Herold. "Ultimately, this policy supports retailers and helps maintain the value of the Club Glove name. And if we ever decide to reverse it, products will be priced accordingly based on the work load and the margins required to operate."

TRICKLE DOWN EFFECT: There was a time when many people believed that golf was immune to the economy. Now that may sound like a fairytale given the new world that has emerged in 2009, but golf from a fair market value, is not what it was once thought to be. While the economy may show signs of pointing upwards from time to time, the PGA Tour has largely escaped to this point the chilling realities of 2009. But as Bob Dylan once sang, “The times they are a changin’,” so it would seem the harsh economic realities are closer than ever to catching up with the weekly fortunes up for grabs for those who call the PGA Tour home.

The site of Tiger Woods’ most impressive victory, Torrey Pines, is unable to find financial backing for its upcoming event, which is ten weeks away. The San Diego Union Tribune explores this topic, which is near and dear to its readers in greater detail. To read more click here.

Meanwhile, a former #1 player understands that it’s impossible to postpone the inevitable. “Look at the United States in general: 500 hotels are going to go into foreclosure next year. Nobody is really writing about that, but that's a reality. The shared demise of the global economy is everywhere. And the PGA Tour is suffering,” Greg Norman said. “In business, you have to be aware of going through cycles. I hate for the players to look recession-proof,” he continued. “I've been through three recessions. And I think the younger generation don't see it because they have never been through it before.”

European Tour Commissioner, George O’Grady went in a different direction than Tim Finchem’s PGA Tour with respect to holding the line on purses. O’Grady reevaluated and subsequently reduced the prize fund for the Race to Dubai in its first of a five year contract. “We made the offer, rather than them demanding they would honor their contracts, and I think everybody understands the word face,” O’Grady explained. “So we made that offer, and having spoken to a lot of our leading players at The Open Championship, specifically Greg (Norman) on a one-to-one at Sunningdale, and I think it's been well received here and shows no one is immune.”

While a year ago many were and are still, hoping the economy finds its way towards higher ground, the question of when is still as relevant today as it was a year ago. In the meantime, over the next two years, the PGA Tour has approximately a dozen events as it stands today that are in need of sponsors re-upping or finding alternatives. It remains to be seen what the next television contract will produce for the Tour as well...

STOCK WATCH: For the week the Dow managed to rise 0.5% and was the only of the three major indexes to show a gain. The Nasdaq Composite lost 1%, while the broader Standard & Poor's 500 Index fell 0.2%.

TRAVEL:

FLY OR DRIVE? This coming week is considered historically the busiest travel period throughout the United States. AAA is projecting 38.4 million Americans will be traveling 50 miles or more away from home this upcoming Thanksgiving holiday weekend, which if accurate represents a 1.4 percent increase over last year when 37.8 million traveled.

The number of travelers by automobile is expected to be 33.2 million in 2009 compared to 32.5 million last year; an increase of 2.1 percent. The number of travelers by air is expected be 2.3 million compared to 2.5 million in 2008; a decline of 6.7 percent. The number of those traveling by “other” means, including, trains, watercraft, buses and multiple-modes of transportation, is expected to be 2.9 million compared to 2.8 million last year, an increase of 1.2 percent, AAA said.

Last year, Thanksgiving travel dropped 25.2 percent in the wake of the ongoing housing and financial crisis. This year’s expected modest increase reflects improved consumer confidence from one year ago, better financial market performance and a growing sense among many consumers that the worst of the global economic crisis is behind us, AAA said.

“Although far too many Americans remain unemployed or under other financial stress, AAA’s projected increase in Thanksgiving travel from one year ago is another hopeful sign that economic conditions are stabilizing and improving in some areas. We can also be thankful the gradual recovery we have been seeing in the U.S. travel industry since the start of the summer is continuing,” said AAA’s director of Travel Services, Glen MacDonell.

This year’s decrease in the number of air travelers continues a decade-long trend in which air travel as a percentage of total Thanksgiving travel has declined substantially. Since 2000, the number of Americans traveling by air during the Thanksgiving holiday weekend has dropped an astounding 62 percent. While much of this decrease can be attributed to ongoing economic difficulties, the air travel experience itself has undergone a substantial change since the 1990s with stricter airport security, more frequent flight delays, reduced capacity, added surcharges and fees, all contributing to the decline.

Thanksgiving travelers expect to spend approximately $718 per household this upcoming holiday weekend. With the main purpose of Thanksgiving holiday being a special meal with family and friends, it is not surprising that only 15.7 percent of spending will be for accommodations, while 32 percent will be for transportation, according to AAA. Food and beverage will absorb 21 percent of spending and shopping will account for 16 percent. Entertainment and recreation will account for 10 percent of spending on average. “Other” or miscellaneous spending is five percent.

Thanksgiving travelers will journey an average of 815 miles roundtrip this upcoming holiday weekend. More than one-third (37 percent) of travelers will travel 250 miles or less round trip. Slightly less than one-quarter (24 percent) of weekend travelers will log between 251 and 700 miles. And 38 percent will travel more than 700 miles round trip.

THE INFORMATION CONTAINED IS BELIEVED TO BE RELIABLE, BUT IT IS NOT GUARANTEED. THE OPINION EXPRESSED IS THAT OF TERRY MCANDREW AND SHOULD NOT BE CONSIDERED A SOLICITATION TO BUY OR SELL SECURITIES IN ANY OF THE COMPANIES DISCUSSED WITHIN THIS NEWSLETTER. CONTENTS OF THIS NEWSLETTER MAY NOT BE REPRINTED OR REBROADCAST WITHOUT THE EXPRESSED WRITTEN CONSENT OF TMAC GOLF