Golf Club Makers in the Rough as Sales Drop and Rules Are Revised

CARLSBAD, Calif. -- Perhaps it is no coincidence that as the cold war ended, the golf-club war began. In their quest for the ultimate ball launcher, club manufacturers turned to the space-age materials, computer-aided design techniques and laid-off engineers of their Southern California neighbours, the aerospace companies. And they guard their secrets just as closely.

"The security here is tighter than it was at Lockheed," said Tom Preece, who worked as an engineer on the F-22 fighter and is now product design manager at the Callaway Golf Company, where robots test clubs by hitting balls with a consistency that would make a weekend duffer weep with envy.

But now -- also like the aerospace business before it -- the golf-club industry is enduring a serious retrenchment.

Despite the sharp rise of interest in golf from ageing boomers and a new influx of young people, sales in the $2.5 billion American golf-club market are off 10 to 20 percent this year, executives and analysts said. Golfers who once paid as much as $500 for the latest oversize titanium driver are becoming more cost-conscious. So prices are falling and inventories rising.

What's worse, new rules adopted last month by the United States Golf Association, the sport's governing body, could make it far more difficult for manufacturers to devise the next great advance that might stimulate demand. Indeed, the association's season-long review of how technology affects the game hung over the industry like a cloud all year.

One of the hardest hit has been the largest club maker, Callaway, which is known for its Big Bertha line. In October, the company dismissed its chief executive, Donald H. Dye, and gave the reins back to Ely Callaway, 79, its founder. Last month the company dismissed 700 employees, or nearly a quarter of its work force.

The Taylor Made Golf Company, the second-largest club maker, and Cobra Golf Inc., the third-largest, have also had layoffs; Cobra's president, Bob Dubiel, departed a few months ago. Lynx Golf Inc. and Snake Eyes Golf Clubs Inc., two smaller manufacturers, have filed for bankruptcy protection.

The problems come at a time when, by most measures, the sport is doing well. Owing largely to the popularity of Tiger Woods, the number of American golfers increased 7 percent in 1997 to 26.5 million, according to the National Golf Foundation, an industry group. The number of golf newcomers soared 51 percent, to three million. Until those gains, the numbers had barely budged since 1990, the foundation said. Figures for 1998 are not available, but people in the industry say the Tiger Woods boom has cooled.

To some extent, the industry was hurt by the poor weather inflicted by El Niņo storms early in the year as well as by the economic crises in golf-loving Japan and the rest of East Asia. Callaway, which relies on Japan for about 10 percent of its sales, is selling half as much in that country as it was a year ago.

But a bigger problem, analysts and retailers say, is a lack of new products to excite golfers.

Club sales boomed in the 1990's, spurred initially by "oversize" drivers -- which were said to offer a bigger sweet spot for hitting longer and straighter shots -- and then even more when the industry developed clubs made of titanium, which is lighter and stronger than steel. The number of golfers barely changed, but club sales in the United States soared like a perfectly hit seven-iron, from $1.3 billion in 1993 to $2.5 billion last year, according to the National Sporting Goods Association.

Now, though, golfers have their titanium's and neither Callaway nor Taylor Made has introduced anything to replace them. "There's no must-have club out there," said Bud Leedom, publisher of Golf Insight & Investing, a newsletter in San Diego.

With the giants idle, two companies came out of virtually nowhere to pitch new fairway woods. The Orlimar Golf Equipment Company, an obscure operation for most of its 38-year history, expects sales of more than $50 million this year from its Trimetal clubs, versus only $1.5 million in 1997. And Adams Golf, of Plano, Tex., which makes the Tight Lies clubs, should achieve sales of about $100 million this year, up from $3 million two years ago.

Most of their gains came out of the hide of Callaway, whose market share in metal woods fell from about 39 percent a year ago to 27 percent in September. Taylor Made also lost a few points of market share.

But the golf industry's problems might be catching up even to the new highfliers. Adams, which went public in July at $16 a share, closed yesterday at $3.875 and the company expects to barely break even this quarter. Orlimar, based in Hayward, Calif., postponed plans to go public.

Some golfers say equipment makers raised prices too high. "It got to a ridiculous point, with Callaway coming up with bigger heads and charging $100 more each time they improved it," said David Palmer, 28, a corporate bond salesman at Lehman Brothers, who has not yet bought a titanium driver.

Prices have started to plummet. Taylor Made, for example, cut prices three times in 12 months on its top-of-the-line Ti Bubble 2 driver, bringing the retail price down from more than $450 to as little as $250.

"We have learned that arrogance in price has not really worked," said George Montgomery, president of Taylor Made, which is owned by Adidas-Salomon, the German sporting goods company. Adidas reported that Taylor Made sales shrank 24 percent in the third quarter.

The slowdown has hit hardest in Carlsbad, a city of 70,000 about 20 miles north of San Diego that is home to Callaway, Taylor Made, Cobra and smaller companies. That has earned it the moniker "Titanium Valley."

But there is less interaction among the companies than, say, in Silicon Valley. Callaway and Montgomery, for example, have never met. And the companies are always shooting barbs at one another in their public relations.

Golf remains the biggest industry here, but the number of workers has shrunk from more than 5,000 to about 4,000, about a tenth of the town's lobar pool. Still, city officials say, Carlsbad is not suffering; unemployment in San Diego County was only 3.2 percent in November. The opening next spring of a Legoland theme park should also help.

Callaway's layoffs came after its net income dived 84 percent in the third quarter to $5.8 million; sales fell by a third, to $173 million.

Based on the success of the Big Bertha line, Callaway's sales shot from $21 million in 1990 to $843 million last year. But this year sales will drop to about $700 million; the company's share price has plunged from a 12-month high of almost $34 in February to $10 yesterday.

Some analysts say the company simply took its eye off the ball. It began moving into other businesses like golf-book publishing and driving ranges. That strategy, now abandoned, cost Dye, the former chief executive, his job.

Callaway, who was chairman during Dye's two-year tenure, said the worst is behind the company. "We're not going to have anywhere near the negative surprises we've had," he said. But the company also does not expect significant sales increases for several quarters.

Other companies are also hurting. Cobra experienced a "significant" decline in sales and profits in the third quarter, according to its parent company, Fortune Brands, a conglomerate that also makes Titleist clubs and balls and Footjoy golf shoes. Cobra sales are down 2 percent for the year, but 15 percent in the third quarter.

In contrast to Cobra, Titleist's golf club sales are up 38 percent this year because of new product introductions.

Callaway is also trying to promote new lines. In August, it introduced a smaller-headed line of steel drivers and fairway woods that seems to have stopped its losses to Orlimar and Adams; it is now working on a new line of titanium woods. Callaway would not say when it would be introduced but suggested that the clubs would stay oversized and expensive. He scoffed at those who say that club heads have gotten too big and prices too high.

"If we come up with something that's better than what we have now, the price will be secondary," he said.

Still, there is a question of just how much better any club can get. When the United States Golf Association began its review of whether equipment advances let players hit the ball with greater distance and accuracy -- thus imperilling the integrity of the game -- the industry feared that existing clubs could be banned.

Last month, the association adopted new regulations to limit a so-called trampoline effect, in which the club face bends inward when it hits the ball and then springs back, propelling the ball farther. Under ferocious lobbying by the makers, though, the association said that virtually all existing clubs conformed to the new standard.

Even so, some manufacturers say, future advances will be stymied. Callaway acknowledged that a "substantial improvement" over existing clubs "probably will not conform." He threatened to sue if the association rejected a Callaway club.

But Dick Rugge, director of research and development at Taylor Made Golf, said the rules made sense. "There's plenty of other points we can work on," he said.

Some say the sport needs to attract more players by making playing times shorter and protocols less intimidating. The bulk of golf equipment is bought by only about 5.6 million avid golfers.

"People don't realise," said Leigh Bader, manager of the pro shop at the Pine Oaks Golf Course in South Easton, Mass., "what a small pie is being fought for."