The Future of Public Golf in America

The Future of Public Golf in America B Y J O S E P H F. B E D I T Z, P H. D. A N D J A M E S R. K A S S N A T I O N A L G O L F F O U N D A T I O N PHOTO: NEW YORK PUBLIC LIBRARY ALTHOUGH GOLF IN AMERICA began as a private game the first private golf club was built in 1888 public golf courses, and public golfers, soon followed. The first public golf course in the U.S. is reputed to be the 9-hole Dutcher Golf Course in Pawling, N.Y., established in 1890 and still in operation today. About 65 miles to the south, golfers can still challenge themselves on the first 18-hole public facility (1895) at Van Cortlandt Park Golf Course in the Bronx. In its heyday, many luminaries played at Van Cortlandt, including Babe Ruth, Willie Mays, Joe Louis and The Three Stooges. But the average person, who perhaps paid Van Cortlandt Park Golf Course, Bronx, New York, circa 1930 admission to see the aforementioned stars, could also plunk down a few dollars and proceed to the first tee. Then, as now, the well-to-do flocked to private golf clubs. So how and why did affordable public golf grow? Two reasons: pied pipers such as Bobby Jones (and later Arnie and Jack), and the introduction of very affordable public supply (yes, they built them and they did come). Whereas private golf is about homogeneity (members from similar social strata join private clubs that share a general standard of quality and exclusivity), public golf is about diversity and variety. Diversity of golfers in terms of income, occupation, race, age, etc... and variety in terms of course quality and price point... from a ten-dollar 9-hole muni in Nebraska to Pebble Beach Golf Links at $495 for 18 holes. There are at present 11,581 public golf facilities in the U.S., including 9,132 daily fee (privately owned) and 2,449 municipal (owned by a tax-supported entity such as a city or county). There were three construction booms the 1920s, 1960s/70s and 1990s and about half of all existing public golf facilities were built during those decades. Even industry veterans may be surprised to learn that nearly one-third of public facilities are stand-alone 9-holers. Construction of these shorter courses also surged during the three booms: half were built in the aforementioned three time periods. Fifty-eight 2010 NATIONAL GOLF FOUNDATION.

Public golfers are responsible for 75% of both rounds played and dollars spent on golf. percent of 9-holers were built in the country s mid-section, from Ohio west to North Dakota and south to the Gulf of Mexico. The state of Iowa is a good example of golf in the central U.S. where 44% of its courses were built in the 1960s and 70s. Two out of three of its public facilities are 9-holers. Very affordable courses translate to high golf participation, and Iowa has one of the highest participation rates (16% vs. a national average of 10%). But affordable public golf isn t just available in the Midwest it s available from coast to coast and from border to border. Last year we wrote about the future of private golf clubs in America, noting the importance of private club golfers with their above average play frequency and golf-related spending. Public golf is also vitally important to the industry: nine out of 10 golfers play at public courses and three out of four golf facilities are public. Bobby Jones would be proud of how far public golf has come. Bobby Jones was one of the early pied pipers for public golf in America. Current State of Affairs But for all its storied history, public golf finds itself in a quandary today. While it took about 100 years to build the first 70% of public golf supply, it took only 20 years to build the remaining 30%. It is the nature of that 30% that is at the root of the current challenges operators are facing. The entrepreneur-driven building boom during the 1990s contributed more than 3,000 new 18-hole daily fee and realestate related courses to the national supply. These developers (with relatively easy availability of financing in the 90s) recognized that high demand for tee times, superior golf experiences and fairway homes created investment opportunities. Public courses built in the 1990s tended to be very highend and with higher construction costs than courses built previously. The country-club-for-a-day and luxury golf community concepts both achieved significant momentum and fulfilled the needs and dreams of many affluent golfers. Some daily fee courses packed their tee sheets at green fees of $100+. Real estate golf courses were valued amenities that helped sell homesites and homes. Unfortunately, as golf demand hit a plateau in the middle of the 90s, the heavy building of high-end daily fee and real estate courses continued, much of it still without the due diligence that might have raised red flags in oversupplied areas (or areas stocked with public golf choices similar to what they were building). So, in addition to having more competition, operators of relatively newer courses generally had higher debt and operating costs, and had to charge more. The nation s public golf landscape was undoubtedly getting richer in quality, though the cost basis was rising. The building boom continued into the first decade of the new millennium, and the absence of commensurate demand resulted in the dilution of rounds played (from a high of about 40,000 per 18 holes in the late 1980s to under 33,000 today). The loss of those rounds per course (more or less, depending on the specific property and the supply and demand balance in the trade area), explains a lot about why many 2 NATIONAL GOLF FOUNDATION

Bethpage State Park (Black Course), Farmingdale, New York courses are financially at risk today. Looking back, the number of golfers has increased 17% since the early 1990s while the total number of golf facilities is up 24%. As many as 1,500 to 2,000 public courses are having serious financial problems. Those more at risk include the very stand-alone 9-holers that helped to spur the public golf boom, as well as courses at the lower price points, alternative facilities (par-3 and executive) and those in less populated areas. In addition, certain very high-end/highly debt-leveraged facilities are in trouble. The average green fee of courses built in the 1990s is $52 vs. $38 for those built in the 1960s and 70s. PHOTO: PATRICK DRICKEY / STONEHOUSEGOLF.COM Courses at all price points have been affected, but, the lower the price point, the more steep the decline in rounds from the high-water mark to present. Value courses (peak season green fee with cart under $40) are down 26% from the high; medium price point courses ($40-$70) are down 21%; and premium courses ($70+) are down 19%. At-risk courses are in their predicament partially because they ve been hit particularly hard by demand dilution and increased competition. Their rounds are off 30% to 35% from their peak (the peak year differs by facility) and revenue is off Growth of Public Golf Dilution of Rounds Number of facilities The building boom of the 1990s especially high-end daily fee is clearly visible. Rounds per course have dropped about 20% over the past two decades the source of today s challenges. THE FUTURE OF PUBLIC GOLF IN AMERICA 3

PHOTO: PATRICK DRICKEY / STONEHOUSEGOLF.COM Public Course Financial Health 10% to 15% of public courses report being financially at risk. Profile of At-Risk Facilities (Financial Health rated 0-3) Bandon Dunes Golf Course, Bandon, Oregon 10% to 25%. Many of these facilities may be trapped in a downward spiral 60% report they have lowered maintenance standards, and almost 90% are deferring capital expenditures. So, how many will close? We expect 100-150 courses (less than 1% of 18-hole equivalents) will close per year, possibly more, for the next several years. An average of approximately 125 closed, per year, during the past three years, so a market correction is already underway. This is not a very large number of closures, considering the influx of roughly 4,000 new courses built since 1990. We may see a rise in transaction-related closings as the real estate market improves and financially challenged golf course owners have attractive opportunities to sell the land for higher and better use. How Courses are Responding It comes as no surprise that successful public facility operators are doing more of the right things and less of the wrong things, when Daily Fee Municipal Rounds off 31% 34% Revenue off 24% 12% Operating loss 80% 87% Lowered maintenance standards 59% 64% Deferring capital expenditures 87% 87% Considering... Closing or selling 53% 26% Leasing to a 3rd party NA 28% At-risk courses have lost about one-third of rounds. About 90% are operating in the red. Courses with 4,000 golfers for every 18-hole course within a 10-mile radius are more likely to be enjoying financial stability. 4 NATIONAL GOLF FOUNDATION

The challenge for the industry is to bar the back door on the quitters and make the front door easier to walk through. it comes to running their facilities. They show a higher degree of good management behaviors, including focus on customer service, strategic planning, player development, monitoring customer sentiment and feedback, identifying new revenue sources and improving the golf experience (e.g., pace of play). Successful operators are far less likely to engage in negative management behaviors such as cutting maintenance standards, delaying improvements and indiscriminant discounting. Successful operators are more committed to e-mail marketing and communications. Successful operators are more likely to maintain customer databases than at-risk operators. And the more successful courses have larger databases (average of 3,500 vs. 2,000 customers), are more likely to use e-mail marketing, and they communicate with their customers more effectively overall than their at-risk counterparts. Many successful facilities have a built-in advantage they happen to be located in more densely populated areas. Perhaps the best predictor of a public course s success is the number of golfers per 18-hole public course within a 10-mile radius. The magic number is approximately 4,000. In other words, courses with 4,000 golfers for every 18-hole course within a 10-mile radius are more likely to be enjoying financial stability. Outlook for Public Golf On the demand side, the outlook for public golf is stable (even though we are losing some golfers to economic pressures). We found that two out of three Core golfers (those playing eight or more rounds per year) are quite passionate about playing golf. Only 9% of Core golfers are weakly committed to the game. Incidentally, one in four Occasional golfers (one to seven rounds a year) are passionate about playing golf, which equates to over three million players. Perhaps it is just circumstances (time, money, health, family) that are temporarily suppressing their rounds. Golfer passion may go a long way toward explaining why the numbers of golfers and rounds have only been down marginally in recent years (granted, revenue per round at the facility level is a different matter, and that metric has declined due to discounting and golfers managing down their cost per round). Today is undoubtedly a great time to be a public course Dilution Number of golfers per course within a 10-mile radius may be the best predictor of a course s success. golfer given the abundance of affordable high-quality choices. According to recent research, considerable latent demand for golf exists. Over 25 million people indicate they are quite interested in playing golf. This figure includes over 17 million who have never played golf and nine million who have had some past exposure. In 2008, four million people acted on their interest and played golf a conversation rate of 15%. It is due to this pool of latent demand that the number of golfers has remained relatively constant. In any given year, some players drop out due to mortality, infirmity, etc. and other interested players step in to take their place. The challenge for the industry is, and has been, to bar the back door on the quitters and make the front door easier to walk through. Core Golfers At-Risk Index Over 90% of Core golfers are quite passionate about playing golf. Only 9% are disenchanted. THE FUTURE OF PUBLIC GOLF IN AMERICA 5

Course closures will reverse the dilution process and give at least some rounds back to the courses that remain open. Females continue to be disproportionately represented in the latent demand pool (42% of latent demand vs. 20% of existing golfers). Females also represent 41% of actual beginners and returning former golfers. Public golf needs to be more welcoming and friendly to female players. Females account for one-third of private club golfers, while only 19% of public course golfers are women, primarily because female golfers are more comfortable and less intimidated at private facilities. Number of Golfers vs. Recessions As with the current recession, there have been only slight drops in golfers during past recessions. (Gray bars = recessions) How qualified is this latent demand of over 25 million people? Latent golfers are less affluent overall as compared to existing golfers, so it may be more of a financial challenge for them to get into the game. Nevertheless, many do exist in the higher income categories. Those who actually started playing in 2008 look very much like the rest of the latent pool in terms of income. Rounds Volume vs. Recessions Conclusions There is plenty of available public golf. This is good for golfers and bad for facility operators who have seen their rounds cut by 20% due to dilution of demand. Dilution has affected almost every facility, but 15% (or 1,500 to 2,000) very seriously. The short-term prospects for improvement for these at-risk courses is poor. Wellmanaged courses in populated areas are most likely to thrive. Between 500 and 1,000 public courses are likely to close within the next five years primarily those with negative cash PHOTO: PATRICK DRICKEY / STONEHOUSEGOLF.COM Rounds have dropped in past recessions, but not significantly. (Gray bars = recessions) 6 NATIONAL GOLF FOUNDATION

PHOTO: PATRICK DRICKEY / STONEHOUSEGOLF.COM Whistling Straits (Irish Course), Haven, Wisconsin Latent vs. Actual Demand The latent demand pool has lower household income vs. existing golfers. Nevertheless, many higher income potential players do exist. flow and low return on investment. Overall supply will shrink in the 2010s by as much as 5-10%. And this is not necessarily a bad thing for owners and operators as a whole course closures will reverse the dilution process and give at least some rounds back to courses that remain open. Continued lack of growth in the number of golfers due to economic pressures is likely for the next several years. Less committed golfers and lower income golfers are more likely to leave. Rounds will likely drop for most golfers trying to manage household expenses. On the bright side, existing demand appears to be stable, latent demand exists and past recessions did not have a significant lasting impact. Passion and commitment to golf remain high, even if play decreases. Latent demand continues to provide opportunities for long-term growth. Baby boomers will still play and spend more as they age, just not as much as previously hoped because of drops in discretionary income and the financial pressure to postpone retirement. Pebble Beach Golf Links, Pebble Beach, California

PHOTO: PATRICK DRICKEY / STONEHOUSEGOLF.COM Pinehurst Resort & Country Club (No. 4), Pinehurst, North Carolina Golf course openings will remain low for a decade good news for operators, not for architects, builders and course suppliers. New construction will be below 100 18-hole equivalents per year. Given the projected increase in closures, net growth in supply will continue to be negative. Meanwhile, renovations will likely be delayed short-term and pick up long-term. In summary, a large drop in demand is unlikely (short or long term) but a large increase is also unlikely. So, the overall supply/demand imbalance is expected to continue (with market exceptions). Therefore, operator difficulties are not transient, but semi-permanent. Recommendations Operators need an honest and objective analysis of their business outlook. They need to determine their return on equity and consider how best to invest in the course and the customer experience. They must work on properly positioning themselves in the marketplace through strategic planning and customer targeting. Finally, they will need to market and sell themselves like never before, especially through increased use of technology (e.g., sophisticated customer targeting, e-mail, yield management tools and other Internet applications) and dedicated sales. Methodology A number of research methods and sources of data were used in studying the future of public golf in America: 1,100 operator surveys in January 2009 fielded via mail and online. Respondents were highly representative of all public courses in terms of geography, price point, age of course and type (daily fee vs. municipal). Survey of 42,000 Americans in January 2009 fielded through Synovate, a global market research firm, regarding both golfer and non-golfer behaviors. Survey of 1,000 adult Core golfers (those playing eight or more rounds a year) in January 2009. Current and historical look at the NGF facility database. 2 0 1 0 N G F B O A R D O F D I R E C T O R S C H A I R M A N V I C E C H A I R M A N S E C R E T A R Y / T R E A S U R E R JOSEPH F. BEDITZ President & CEO JEFF COLTON Senior Vice President JIM CONNOR President JEFF FIORINI President MICHAEL HAPPE Vice President Commericial Division PETER HILL Chairman & CEO JERRY HINCKLEY Senior Vice President & Managing Director MARK KING President & CEO PAGE THOMPSON President JOHN WATSON President & CEO These industry leaders ensure that NGF s members and clients are getting the best thinking in the game. KEEPING GOLF BUSINESSES AHEAD OF THE GAME SINCE 1936. 1150 SOUTH U.S. HIGHWAY ONE, SUITE 401 JUPITER, FLORIDA 33477 TOLL FREE: (888) ASK-4NGF MAIN: (561) 744-6006 FAX: (561) 744-6107 W W W. N G F. O R G 2010 National Golf Foundation.