Callaway Handout

Callaway Golf – Case B Ely Callaway felt proud as he took stock of the year 1997 in his report to shareholders. Callaway Golf had yet another year of strong growth in sales, with net sales up by $125 million from 1996. Sales in the US had increased 19% while sales to Europe and Asia had increased 46% and 20% respectively. International sales, which were ~ $300 million in 1997 now accounted for 35% of the firms total revenues, more than the total sales of the entire firm in 1993 (see Exhibit 7a for details on Callaway financials). In addition to its wholly owned subsidiary in the UK, Callaway Golf now had a subsidiary in Germany as well as in Japan. Callaway Golf had consistently been the market leader in US market for Golf Clubs over the past 5 years, with an estimated market share over 25% despite the introduction of many new products by leading competitors (Ping’s “ISI” Irons, Taylor Made’s “Burner Bubble Shaft” Irons, Cobra’s “Ti” Titanium Metal Woods, “King Cobra II” and Armour’s “Ti 100” Irons; see Exhibit 4 for market shares of leading players). The use of Big Bertha drivers by professional tour players on the five major tours (PGA, Senior PGA, LPGA, NIKE and PGA European Tours) in the 1997 was 66%1, and Callaway’s two new products – the Biggest Big Bertha Titanium Driver and the Great Big Bertha Tungsten-Titanium Irons had done well with consumers and constituted over 20% of 1997’s sales. Part of this success had stemmed from its continued ability to deliver new, innovative golf equipment at regular intervals since its introduction of the Big Bertha in 1992. In the preceding five years it had introduced the Great Big Bertha Drivers, the Great Big Bertha Fairway Woods, Big Bertha War Bird Metal Woods, and Big Bertha irons, most of which had been extremely successful with consumers. It continued to spend heavily on R&D, increasing expenses to $30 million in 1997 as compared to $16 million in 1996. In addition to its investments in R&D, Callaway had spent considerable effort in marketing and branding its image as a firm that was upmarket yet accessible to ‘amateur’ golfers, helping to deepen its penetration in the market for woods and expand into the market for irons. Earlier that year, Callaway had also acquired Odyssey Golf, the market leader in putters, thereby expanding its lead and breadth in the market for golf clubs. Callaway had also decided in May 1996 to enter the $ 650 million golf ball market (see Exhibit 3b for a break down of the golf industry market by segment) by designing and building its own golf balls. As part of this effort Callaway formed the Callaway Golf Ball Company, a wholly owned subsidiary of Callaway Golf. While it did not expect to generate any revenue from this business until 2000, it continued to make further investments in this project, including investments in plant machinery in 1997, as well as in designing the prototypes for the golf balls it planned to launch within the next few years. In addition to these large capital investments, Callaway had also opened Callaway performance centers earlier that year at Walt Disney World in Orlando, Florida, Pebble Beach Resort in Carmel, California as well as in Las Vegas. These new sites were meant 1 Callaway 10K, 1997 to provide in-depth advice to help golfers trying to decide which model of Callaway Golf clubs would work best for them. In May 1997, Callaway also consolidated its design efforts in a new technology design center. In line with these investments, Callaway decided that the theme for the 1997 annual report would be “Technology – Investment for the Future” (see Exhibit 6a for a comparison of capital expenditures by Callaway and other competitors). Despite these tremendous successes, some dark clouds were looming on the horizon. An unusually wet winter brought on by “El Nino” seemed to have dampened sales in the US, while the economic turmoil in Southeast Asia and Korea had impacted the golf markets in those countries and was feeding through to Callaway’s sales. Even as Callaway and its competitors continued to spend aggressively on designing and marketing new golf clubs, industry reports were cautioning that inventory levels seemed to be building up and warned against possible ‘buyer fatigue’ with the next new golf club. Callaway had just cut its prices 15% for Big Bertha clubs, the first across the board price cut for woods. On the other hand, with 932 new golf courses under construction in 1997, a favorable demographic profile in the US and a robust economy in the US with no immediate sign of slowing down, cutting back on R&D, marketing and investment in capacity could mean getting left behind by the competition. As Ely Callaway considered his options for the rest of 1998, he wondered what his strategy should be. How could he continue to ensure Callaway maintained its leading position in the market, while also ensuring the high margins and rising stock price investors had come to expect in the five years the company had been public? Exhibit 1: Number of Golfers, Number of Golf Courses and Number of Rounds of Golf Played in the US (1970 – 1997) Year 1970 1975 1980 1985 1992 1997 Number of Golfers (Million) 11.2 13.0 15.1 17.5 21.3 25.0 Number of Rounds (Million) 265 310 360 415 505 550 Number of Golf Courses 10,188 11,370 12,005 12,346 13,210 16,010 Exhibit 2 : Value of Golf Equipment Shipments to US Market vs. Real Per Capita Income in the US (1972 – 1997): 3,500 Total Golf Equipment Shipments to US Market, $ MM 1997 3,000 1996 2,500 1995 2,000 1993 1994 1992 1,500 1990 1991 1,000 1988 1989 1987 1982 500 1977 1972 10,000 12,000 14,000 16,000 18,000 Real Income per capital (2001 constant prices) 20,000 22,000 Exhibit 3a: Value of US Golf Equipment Shipped from US Plants (1972 – 1997) Year 1972 1977 1982 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 US Plant Shipments Exports Imports Shipments to US ($ MM) ($ MM) ($ MM) Market ($ MM) 277 28 12 261 385 52 25 358 644 133 28 539 964 178 190 976 1,246 284 253 1,215 1,398 437 278 1,239 1,470 402 304 1,372 1,485 433 305 1,357 1,768 428 389 1,729 1,926 491 435 1,870 1,976 541 489 1,924 2,370 690 524 2,204 2,648 766 589 2,471 3,245 810 714 3,149 Notes: (1): Golf Equipment shipments include golf clubs, golf balls, bags and related equipment (2) Shipments to US Market = US Plant Shipments + Imports – Exports: (3): In 1992 Japan constituted the largest export market, with ~ 32% of US golf equipment exports, followed by UK (13%) Canada (10%), and Germany (7.5%) Exhibit 3b: Value of Shipments to US Market and Estimated Consumer Expenditure in US by Segment (1997) Type of Product Golf Clubs Golf Balls Golf Bags Specialty Golf Equipment Total Value of Shipments 1,497.0 642.6 264.6 744.9 3,149.1 Estimated Consumer Expenditure 2,522.8 889.0 323.0 n/a Research Network Note: Shipments to US Market = US Plant Shipments + Imports – Exports Exhibit 3c: Fraction of $ Value* and Number of Clubs Purchased by Major Distribution Channel in US (1997): Channel Sporting Goods Stores Specialty Sports Shops Pro Shops Discount Stores Warehouse Clubs Mail Order Catalog Showrooms Online/ Internet Other Outlets Fraction of $ Value 15% 30% 32% 7% 2% 5% --9% $ 2523 MM Fraction of Clubs purchased 22% 25% 21% 15% 2% 5% --10% ** Research Network. ** Note: Sources differ on the number of clubs purchased in US in 1997. Estimates vary from ~ 40,000 Clubs to ~ 70,000 clubs Exhibit 3d: Quantity and Value of Golf Club Shipments to US Market by Type (1977-1997) Notes (1): Percent of Total is calculated as fraction of total of Irons and Woods. (2) Shipments to US Market = US Plant Shipments + Imports – Exports Exhibit 4: US Sales and Market Share of Top 25 Golf Club Manufacturing Companies (1995- 1997) Exhibit 5a: Worldwide Sales for 16 Public Golf Companies ($ MM) Exhibit 5b: Profit Margin (Op Income/ Sales) for 16 Public Golf Companies Note: (1) Sales of Golf Equipment and Accessories only Exhibit 6a: Capital Expenditures for 11 Public Golf Companies Note: Fortune Brands includes the brands Titleist and Cobra, Exhibit 6b: Advertising Expenses for 6 Public Golf Companies Exhibit 7a: Select Callaway Financials Exhibit 7b: Breakdown of Worldwide Callaway Sales by Product Group Exhibit 7c: Breakdown of Worldwide Callaway Sales by Geography (Thousand $) Country United States Japan All Others (individually less than 10% of Net Sales) Total 1995 367,359 60,971 124,957 1996 460,611 58,156 159,745 1997 547,256 84,634 211,037 553,287 678,512 842,927 Source: Callaway Annual Report, 1997 Exhibit 8: Callaway Golf Stock Price from IPO to December 31, 1997 40 35 30 25 20 15 10 5 0 1-Jan-92 31-Dec-92 31-Dec-93 31-Dec-94 1-Jan-96 31-Dec-96 31-Dec-97