Fall is a time for balance, reflection … and making sure no one is looking when you order a pumpkin spice latte.
During the Autumnal Equinox, the light of day and the dark of night are virtually equal but as we progress toward December, the days get shorter, the nights get longer and everything gets colder. If you’re a golfer in the Northern Hemisphere, it’s impossible not to reflect on how much this sucks.
If you’re a golfer in the northern half of the Northern Hemisphere, this really sucks.
Hey, Fall, I got your pumpkin-spiced reflection right here …
But fear not, dear readers. The Winter Solstice is coming and, with it, hope for rebirth, renewal and a buttload of birdies. In the interim, however, let’s celebrate the Harvest Moon by discussing a very specific topic that’s been rattling around the ol’ cranium for a while …
Yes, friends, let’s talk price.
Are “greedy” OEMs harvesting your money?
Let’s start with transparency. I have no firm insight into OEM profit margins beyond what publicly traded companies report every quarter. What we can say is that margins on golf equipment are a lot slimmer than you think.
That said, I was talking with a buddy last week. He was fed up with golf equipment pricing: “If these greedy OEMs would just cut the price, they’d make it up in volume.”
Sounds reasonable, except for one problem: From a business perspective, it’s utter BS.
Always has been. The problem, my friends, is math.
“We’ll be fine,” you tell them. “We’ll make it up in volume.”
We know from your quarterly reports that your operating profit margin is about 20 percent (that’s before interest, taxes, depreciation and amortization). That means that for every driver you sell to Big Box Retailer for $400, you make $80 on a cost of $320 (Cost of Goods Sold, fixed and variable overhead, that kind of stuff).
The retailer then sells that driver for $600. That $200 “profit” is a 33-percent gross margin. The retailer must factor in all its costs to determine its net profit.
Anyhoo … after cutting your wholesale price by 15 percent, you’re now selling your driver to Big Box Retailer for $340. Your cost, however, is still $320.
You’re making $20 per driver and you’re leaving very little room for interest, taxes, depreciation and amortization.
Your Harvest Moon question of the day is this: How much more volume will Acushnallaway have to sell to “make it up?”
“It’s the Great Pumpkin, Charlie Brown …”
One fall many years ago, this same buddy bought a truckload of pumpkins for 40 cents apiece. Figuring he’d get rich, he sold them at three for a dollar. Later, after counting his money, he realized his mistake.
He needed a bigger truck.
Acushnallaway is going to need one big friggin’ truck. To “make it up in volume,” they’ll have to sell four drivers at $320 for every one driver at $400. The math is simple: 4×20=80.
That’s 400,000 drivers instead of 100,000 drivers, just to get back to where they were.
The question, however, is whether a $90 retail price drop ($510 instead of $600) is enough to quadruple sales?
If you think yes, meet me at the farm tonight. We can greet the Great Pumpkin together.
I’ll borrow my buddy’s truck.
Well, they should just trim costs …
My buddy, who clearly doesn’t have a head for business, remained undeterred: “Well, if they stopped paying these spoiled Tour players so much money and cut back on advertising, they’d reduce costs and still make enough money.”
The cool thing about publicly traded companies is that you can look stuff up. Acushnet’s Selling, General and Administrative expense is consistently around 30 percent of sales. It’s a substantial line item and includes salaries, commissions, utilities, travel expenses, maintenance, shipping, receiving, insurance and damn near everything else. Specifically, it includes advertising and Tour sponsorships.
R&D has its own line item.
MediaRadar estimates Acushnet spends roughly $100 million annually on advertising. That’s about four percent of annual sales. Acushnet doesn’t disclose its Tour pro spend but educated estimates put it in the tens, not hundreds, of millions. Acushnet sponsors more than 2,000 players worldwide, most of them emerging players on the Korn Ferry, Asian and PGA Americas tours.
(Seriously, the corporate split can’t come soon enough for Callaway.)
“All the leaves are brown …”
Even if Acushnallaway cut its advertising and Tour spend in half, would it bring the retail price of your new driver down? It might but it’s doubtful that it would be enough to move four times as many drivers to make it up in volume.
There are a few additional problems with the above scenario. First off, who the hell are you going to sell four times as many drivers to? That’s tough sledding in the best of times. It’s exponentially harder after cutting your advertising spend in half. And don’t forget your competitors. Their pencils have erasers, too.
We won’t even bring up four times the mistakes, warranty claims, bad debts, and whether your supply chain can support that kind of volume.
Lowering price to make it up in volume is a fool’s errand. And if you think a market bust is inevitable and will force OEMs to lower prices, well, my friend, you’re in for a very long and never-ending autumn.
However, if you follow the rituals of neo-Paganism, the Winter Solstice is coming.
And with it, there’s hope, renewal and the ultimate triumph of light over darkness.
The “second spring”
If you know your Camus, you know that “autumn is a second spring where every leaf is a flower.”
He also said, “One must imagine Sisyphus happy,” so he did find hope in struggle. So, as much as winter sucks, the Winter Solstice says better days are coming. For golfers, those better days come direct-to-consumer.
The Business Research Company says global golf club sales should reach nearly $8 billion this year and $9.44 billion by 2029. While DTC brands account for less than five percent of all equipment sales, reports say DTC’s compound annual growth rate (CAGR) is outpacing that of traditional sales channels.
Yeah, I know. You can’t demo or get fitted for DTC brands. It’s a legit concern but, as a grownup, you’re going to have to make a decision and find a workaround. The better DTC brands offer demo programs allowing you to test sample clubs on your own course for a couple of weeks (arguably better than whacking a few shots into a net). Additionally, as long as iron categories stay the same, fittings travel between brands. If two degrees flat and a stiff DG Mid 100 works for you in the Titleist T250, it’ll work for you in the Maxfli XC2.
You may not maximize or optimize but you will economize. Besides, most of us can play good enough golf with close enough specs.
Forever autumn or eternal spring?
They say we vote for the kind of world we want to live in with our dollars. If that’s true, this election needs an extra-long ballot.
One could buy new clubs the old-fashioned way: by saving up for them. Or you could fire all of the guns at once and put them on your credit card. Then there’s DTC. There’s very little difference in iron performance between the mainstream OEMs and DTC brands anymore. In many cases, DTC pricing is half that of mainstream brands.
The metalwood gap between DTC and mainstream shrinks every year and you can get shockingly good wedges and putters from DTC, as well.
On the other hand, I suppose you could wait for the big OEMs to smarten up and lower their prices but I wouldn’t advise it.
Thanks for indulging me, friends. Let me leave you with a couple of autumnal thoughts.
First, OEM board rooms are not filled with fat cats raising prices willy-nilly while lighting cigars with $50 bills. I’ve spent 30 years working for HVAC manufacturers and have learned one universal rule: No one worries more about selling price than the people who make stuff. They have customers and competitors.
And they can do the math.
And never try to cut your price and make it up in volume. It rarely ends well.
It’s your money, Golfspies. Spend it wisely.
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