Golf Resort Economics...........

[Adam Smith]

Last Wednesday, Spanish Bay had 17 players on the course all day, the times were all in the am. A group of 50 players in town, knowing the paucity of play at the course, offered to pay $150.00 per person for thirteen times starting at 1.00pm. They were told the fee was $225.00 plus cart fees and was not negotiable. Mr. Uberoth does not care for discounts. The group went over to Bayonet.

If there were twenty five people on the course today I would be surprised.

If you owned a fee based operation would you countenance discounting the green fee?

[Richard_Goodale]

Yes.  ROI = Asset Turnover X Margin.  "Margin Envy" is the oldest and most persistent cause of business failure.

[Greg Ramsay]

I am very surprised that Spanish Bay doesn't have an afternoon discounted rate.  Certainly when I worked in the States in 2000, i was very impressed with the discounted green fees after about 2:30pm, at places like PGA Village Port St.Lucie, the rate dropped from about US$80 down to about $30.  I played most of my golf after then.

This is a question of yield management, all golf courses have almost infinite capacity, any year-round golf courses could plausibly host around 70000rnds/year which would make a manager tempted to discount at every opportunity, e.g. groups bookings, local golfers, off-peak times and seasons.  

However there are issues which balance out this temptation, such as wear on the golf course, 'brand values', the price sensitivity of your target market etc.

I think that Spanish Bay did the right thing to reject the group at that discount rate if they have a strategic plan for the structure of their green fees, eg. market research may suggest that if they start dropping fees for groups, then that will lessen the appeal to single and 4-ball golfers.  Personally i think Spanish Bay should have a policy of encouraging groups to come and golf in the afternoons and give them such a discount.  Yield management is something that a lot of the golf management companies such as Troon, ClubCorp etc. have really specialised in, ie they try and fill the course with as many rounds as possible, often through selective strategic discounting that wont actually decrease the number of high yielding golfers who will pay the top fee.

Bandon Dunes seems to have a pretty good strategic approach, with a base green fee that changes with the seasons and time of week, and opportunities for a greater saving for local golfers, guests at the resort, and those willing to play in off-peak time or multiple rounds in a day.  Here in Tasmania we'll be doing something similar to this I expect, as being an hour from the airport and the closest major population, and being a seasonal tourism destination (but with a year round golf course on the coast) there will be major peaks and troughs in demand for tee-times.  We'll also have discount opportunities for local golfers who buy a set number of rounds per year in the off-peak times.

All very interesting, a good topic!

Greg Ramsay
www.barnbougledunes.com

[Lou Duran]

Rich:

I am probably foolish for arguing with a Stanford grad, but I haven't figured out how to make money on volume in the long run while pricing an item below cost.  The Pebble Beach deal does not make a lot of financial sense to me.  It must rely greatly on real estate sales and development.  I understand that if you cover variable costs it makes some sense to offer the discount, but would you rather have 30,000 rounds @ $150 each, or 20,000 @ $225?  Will the resort tarnish its image if it offers discounts?    

[Richard_Goodale]

Hey, Lou, my Stanford degree was in English, so what do I know?

Well, I do know a bit about finance too, just enough to know that pro formas are just that--speculation.  Nevertheless, all other things being equal, I'll take the 30K rounds at 150, only because I'll make a bit of money in the pro shop and from the cart girl form the additional traffic.  Of course, things really aren't equal as the additional 10K rounds will require more maintenance, more cart girls, etc.

In this particular case, however, Ueberorth et. al. were being offerred a virtually marginal cost free additional $2,850 in revenue.  $2,850 straight from the top line to the bottom line.  The real issue, as you imply and Greg very well points out is the impact, if any, of such "yield management" strategies on the long-term "brand value" of Spansih Bay.  I personally think that whatever brand value SB has these days cannot be significantly hurt by the willingness of management to accommodate the desires of a few goflers who happen to be there, and willing to pay good bucks to play on the day.

I paid less last time I played there, and I'm nobody.  Coke and Pepsi discount, and discount heavily--every day.  They count on the 40-50% of the market who are brand loyal and will pay full whack for their particular fix of fizzy water to give them BOTH volume and margin--just like the golf operators count on those of us who will play SB or Pebble or Pacific Dunes at any cost, to keep them in their Gulfstreams.  All IMHO, of course.

[Kevin_Reilly]

Assuming that these players were visitors to town and this was the only time that they would play Spanish Bay, then the course made a mistake by turning them away. There is little incremental cost associated with their play, so whether the club receives $150 or $250 from them, it almost all goes to the bottom line.  And either of these numbers is better than $0.

The answer might be a little different if these players could be counted on to play Spanish Bay another time at the full freight, and you assume SB is a "play it once only" course.

SB is probably taking the postion of other premium priced products or services...don't discount.  Yet since a situation like this allows textbook price discrimination they could probably do it without fear of diluting the "brand" of SB.

[Don_Mahaffey]

The surest way to fail is to try and change the market. The market is what it is. If fewer people are traveling, find a way to get those people to spend money at your business; pride doesn't pay the bills.

[John_Conley]

Making decisions "on the margin" can be hurtful to a company with a "precious" commodity.

If word gets out that Spanish Bay is a $100 experience they will have a hard time getting $200+.

From what I've heard, the Pebble Beach packages only allow one round on PB for so many rounds on SB, SH, and the others.  If so, "transfer pricing" will allow them to still get their money.

The travel recession we are in may be temporary.  If so, the large organization can whether through this and keep rate intact for better days.

Time will tell if they are making the right decision.  I don't think you can say for sure either way now.

I once read a fascinating article on "Giffin goods" - those that see demand INCREASE when the price rises because of a perception of quality.  Luxury daily-fee golf often fits this category.

A separate thought on the economics of tee-times.... does anyone think a Dutch Auction would work during busy times?  I do, particularly on weekends.  There would be an initial "learning curve" on the part of patrons, but once they became familiar with it I think it would help "yield management".

[Bob_Huntley]

I think my good friend Adam Smith was trying to point out that the dearth of play at Spanish Bay is a serious problem. If the Pebble Beach Corporation made an effort to allow locals access to the course for a moderate fee, it would help them in their efforts to bulldoze the Monterey County Supervisors into a more conciliatory mood. At present the PB representative , a certain Mr. Alan Williams, seems to antagonize more people than imaginable.

As one of the pricipals of the PB Partnership once ran a major airline, he knew that an empty seat was money lost irretrievably, is there any difference in a wasted tee time?

[Bob_Huntley]

Lou Duran:

You should know that the PB Corporation is not making money out of real estate deals. They have given up most of the lot opportunities in exchange for expansion of the hotel additions and the new golf course. Company income is derived primarily from their resort activities and gate fees.

[Bob_Huntley]

I think my good friend Adam Smith was trying to point out that the dearth of play at Spanish Bay is a serious problem. If the Pebble Beach Corporation made an effort to allow locals access to the course for a moderate fee, it would help them in their efforts to bulldoze the Monterey County Supervisors into a more conciliatory mood. At present the PB representative , a certain Mr. Alan Williams, seems to antagonize more people than imaginable.

As one of the pricipals of the PB Partnership once ran a major airline, he knew that an empty seat was money lost irretrievably, is there any difference in a wasted tee time?

[Kevin_Reilly]

I once read a fascinating article on "Giffin goods" - those that see demand INCREASE when the price rises because of a perception of quality.  Luxury daily-fee golf often fits this category.

Proponents of this theory use luxury goods like Rolls Royce, Gucci etc as examples.  But of course each of these goods has an optimal price that maximizes total revenue, and the presense of this optimal price sort of throws the theory out the window.  In other words the demand increase accompanying a price increase for a luxury good only works across a finite band.  I'd venture to say that Rolls Royce wouldn't sell many cars at $1M per.

Regarding the Dutch auction, it would be great from the standpoint of consumers, since each would be paying an amount that they are comfortable with (by definition), but it would possibly cut into the excess profits earned by the most desireable courses.  They would be better off if they were able to charge each person the maximum that the person values the course.  They could do this by setting up blocks of premium times that are available at a premium price, while charging less for later times. Etc.

[David_Elvins]

In Australia a daily fee course that charges A$100 (US$50) is considered very expensive.   The amount that people pay in America for a game of golf always amazes me.  I always thought that the seemingly ridiculously high prices were due to a far greater supply than demand.  But if SB can't get 30 people onto the course then maybe not.  So my question is:  Is this a local problem or are other high end daily fee courses having the same problems?  Is there likely to be a widescale reduction of daily fees related to either an over supply of courses or an economic downturn?

Cheers,

[Brad Klein]

This is less about Adam Smith and the free-market than John Nash and his bargaining theory.

In any case, green fees at high-end daily-fees are coming down in many areas of the country. See Scott Kauffman's article to that effect in the Feb. 8 Superintendent News/Feb. 9 Golfweek. There is no doubt that golf is over-priced, and that also means over-supplied. The biggest discounts are the most overbuilt areas, namely Myrtle Beach, Williamsburgh. If Spanish Bay is able to resist discounting, it's because it has other price issues and revenue streams to deal with, namely a $400 a night inn, and the hope that by staying there guests can also play Pebble Beach and Spyglass. If it were dependent on revenue from the golf course alone, it would surely allow flexible pricing.  

[Paul Richards]

Probably the best thing that can happen to Spanish Bay
is that play goes down, their revenue drops, they can't
afford to water the place, so they turn off the sprinklers,
and then the course starts to play hard and fast as it
was meant to be played!

[John_McMillan]

Re the Giffen Good -

It's a theoretical possibility, but one which is almost never found empirically.  The reason for an increased demand with an increased price, however, is not the perception of quality - and is not a theory applied to luxury goods.  A price change can be decomposed into two effects - one based on relative prices, and one based on changes in one's income.  The "pure" price effects are always negative - when a price increasew, demand decreases.  However, when prices increase, one's purchasing ability decreases.  Most goods have positive income elasticities - as one's income increases, one purchases more of that good.  Luxuries are goods with income elasticities greater than 1 - the increase in purchase of luxury goods, in percentage terms, is even greater than the increase in income. There are some goods with negative income elasticities - as income increases, their percentage share of consumption decreases.  These are goods like food.  If someone with a $20,000 income consumes $5,000 worth of food (because it is a necessity), someone with a $200,000 income does not consume $50,000 worth of food.  The theory of the Giffen Good is that a commodity could have a negative income effect which was large enough to offset the price effect.  In this case, a good's price would increase, which would cause a decrease in a consumer's wealth, which would case an overall increase in the good's consumption.  However, when economists get down to measuring actual price and income elasticities for goods, they've never found a "Giffen Good" in practice.

Re discounting and daily-fee golf -

The good rule of thumb that I've heard for estimating greens fee revenues is 2/3 of the top greens fee times the number of rounds - that is if you plan to charge $150 per round, and plan to do 10,000 rounds of golf, you'll probably realize $1,000,000 in greens fee revenue.  The difference is due to the number of rounds which will have to be discounted for group, comped and non-peak play.  Maybe a top-tier golf course can get away with less discounting, but even then it's questionable whether they're maximizing their revenue, and it's certainly not the general practice at most daily-fee courses.

[Tim_Weiman]

I'm wondering if there is anyone in the pro shop at Spanish Bay who even has the authority to quickly cut such a deal.  Or how high up the chain of command they have to go?

Does anyone know the PB organization well enough?

[Lou Duran]

Based on a purchase price of nearly $1 Billion, the PB resort property would have to net $80 to $100 Million annually to offer an acceptable return to most normal real estate investors.   Even with premium pricing, without real estate to sell or develop, I wonder if it can make this kind of money in the long run at full occupancy.  Some investors in the past, particularly the Japanese, paid inflated prices for trophy properties in deals that were rationalized as "asset buys".  They made no financial sense, and often after awhile, someone took the loss.  PB may be this type of a deal, and if the financial structure is such that operating costs are being covered and debt service is minimal, perhaps the prestige of owning the asset is sufficient compensation for its owners.
If this is the case, I can understand them not discounting the rate for this group of golfers.

Discounting green fees and variable cost pricing can be quite dangerous for the operator.  I am playing Fossil Creek GC, an upscale Palmer/Sey course in Fort Worth, today for $25 including cart.  Just three years ago, the rate was $75+.  This course was built in a great area with the thought that one day it could become a high-end resort property or a private club ($20,000+ initiation, $300+ monthly dues).  ClubCorp is now offering an annual pass (no green fees) for $999.  Like Fossil Creek there are numerous others in this market.  I am sure that they are generating more play, but are they making any money?  No easy answers down here.        

[John_Conley]

Kevin:

You can obviously run a Dutch Auction for Saturday morning tee-times and then book your tee sheet normally in the afternoon.  I never said I'd consider precious (Sat AM) teetimes in the same auction with twilight or Senior Specials.

John McMillan:

When an opening sentence includes both "theoretical" and "empirically", you know someone is woefully out of touch with reality!    Seriously, nobody in the world can ever consistently figure out how markets work, let alone economists or engineers who strive for absolutes.

Nobel Prize winners for Economics ALMOST brought down the world's financial systems a few years ago; only a government intervention to bail out Long Term Capital Management and Oxymoron Fund averted disaster.  Still want to cling to the notion that ECONOMISTS would know what to charge on the Monterrey Peninsula?

The article on the Giffen Goods was about a new course opening in Myrtle.  The owner said people wouldn't choose it over the many other courses in the area if he priced it below market.  Opening at a slight premium actually triggered increased demand.  Eventually the "newness" would wear off, so I suppose the unwritten part of the article was that this was a short-lived event.

I hold a college minor in Economics, so you and I both know that any study into such a phenomenon would wrap-up too late to reach an acurate conclusion.  Since today is Valentine's Day, let me remind you that perfume and stocks are two things that see an increase in demand as their price rises.  "You can lay all the Economists in the world end-to-end and they still wouldn't reach a conclusion."

My only point as it relates to Spanish Bay is that I understand the reasoning about turning away bargain (some bargain, $150 in the PM!) seeking golfers.

In this case a Dutch Auction would have worked wonders for the one day.  With a "floor bid" of $150, we know 67 people would have played.  Much more revenue than 17 at $225.  HOWEVER, do you think those 17 would keep bidding $225 in the future if they were able to get on for 1/3 less in the past?  Perhaps that's why Spanish Bay would rather turn people away to protect rate, reasonably confident that business will pick up soon.

My proposed Dutch Auction would work best for a 112-person shotgun at 8:30 AM on the busiest days.  Sell each foursome for whatever the lowest bid out of 28 is.  You can book normally on other days.  If I were an operator, I'd at least try it during peak season.  Also, by limiting the number of players you will provide a reasonable pace-of-play assurance that will keep people coming back.

[John_McMillan]

John Conley -

Yours is a confusing response.  Part seems to vitiate the profession of economics - "out of touch with reality," "almost brought down the world's financial system," "still wouldn't reach a conculsion," while the other part wants to apply pet theories - the Giffen Good, and the Dutch Auction.  It's frustrating to see the same approach used in political discussion of economic issues.  The most common rhetorical tactic in political debates (and one which seems to have been perfected by Bill Clinton), is to repudicate the profession of economics when replying to an opponent, then to cherry-pick parts of that profession that agree with your agenda.  I'd prefer to see discussion of economic issues handled in a different manner - if it's a science (and they award a Nobel Prize to its practitioners, so I think it qualifies), then it ought to be possible, and desirable, to resolve debates using things like empirical evidence and theoretical consistency.  In evaluating your "Dutch Auction" proposal, is it more important to know how a Dutch Auction works, and whether it has been successfully used in similar situations, or is it more important to know whether the Dutch are good and honest people, or a group of scaliwags and bumblers?  The structure of your response seems to indicate that the later is the more insightful way to evaluate your proposal.

Re the Giffen Good -

It just doesn't apply to golf (unless you believe that golf is such a necessity of life that people would starve themselves  before they would give up their afternoon rounds at the links).  Any  article that wants to evaluate golf pricing in that framework is starting out in the wrong theoretical direction.  It's like using the law of gravity to solve a thermo-dynamics problem.

[Lou Duran]

John M:

Economics is a social science, and while economists strive to explain and quantify human behavior with near mechanical precision, they often fail.  My first job in real estate brokerage was with Coldwell Banker Commercial, the leader in its industry.  CB had a draw against commissions program, something like $500 twice a month (it was jokingly and incorrectly referred to as the "bi-monthly insult").  Yet it never ceased to amaze me how the first in line to get the checks were often the "high power" brokers replete with their $500 suits and Rolex watches, and their perfectly detailed Mercedes-Benzs prominently parked up front.  The law of supply and demand is broadly accurate; theories of price elasticity, inferior goods, marginal propensity to consume. etc. have holes.  I've often heard that golf and movies were recession proof.  In the case of the former at least, at the present supply/demand level, this does not appear to be true.  

[Adam Smith]

Tim Weiman:

The person that was approached by the group for the $150.00 deal was adamant that the no-discounting came from the top, Mr. U. He/She had no latitude in the matter.

[John_D._Bernhardt]

This is a wonderful discussion. I am assuming PB abd SG are full and only Spanish Bay is suffering. As we all know, it is always the last one to fill. I really believe if it were 20 miles away and not part of the resort package the green fee would be $75 to $100.00. Bob H is right. This PB ownership group is not trying to make friends at the local level. However as a conversation maker, one knows Peter U is still making friends at the national or corp level. I believe if the 50 men were from IBM and went through corp sales the $150 would have been done in a heart beat.

[John_Conley]

John McMillan:

You know that at one level you can have someone who understands basics of a discipline and always tries to apply them - the "Student", if you will.  

Above that level is someone who recognizes shortcomings and adapts - you can call him something else.  He still can invoke some of the basics up to the point they no longer apply.  This doesn't render the discipline faulty, just imperfect.

My comments certainly didn't include any political agenda, yet somehow your reply does.   :-/  It even said I inspired them.  I may just not understand the relevance of an analogy you use.

A "Dutch Auction" has nothing to do with people from Holland that I know of.  I suspect it may have roots there.  In America, we eat a Danish and speak of a French Kiss.  The Danes eat the same thing, yet call such a roll Vienna Bread.  The French don't own up to such sloppiness and turn the table, calling it an American Kiss.  I think it is just as acceptable to hold a Dutch Auction in America as it is to "go Dutch" when dating.

If I were a course operator looking to drive revenue, I would be bold enough to try alternate pricing methods not yet accepted by the industry.  The failure of on-line tee time operators to take hold lies in their inability to drive demand at non-peak times.  Observation of that "pricing method's" failure causes me to look for an alternative.

Regarding my comments about the field of Economics:

"out of touch with reality," - MY OPINION of some arcane economic studies or a broadbrush to explain why many economic exercises result in some factor that can't be accounted for.  You may not agree.

"almost brought down the world's financial system," - FACT, I can provide you with concrete information on the participants in LTCM and those seated at the table in an emergency weekend meeting.  The Black/Scholes model for pricing options is the result of their work that won the prize and stands alone as the only practical application I know of for a Nobel Prize winning paper, the rest are theoretical.  (This event occurred less than 4 years ago and was fully disclosed in the media, so there isn't a lot of gray area.)

"still wouldn't reach a conculsion," - THIS IS A FREQUENTLY QUOTED JAB BY ECONOMISTS AT THEMSELVES to poke fun at the fact you can usually find another economist to disagree with the one you last heard.  I'm sorry if you don't find it as humorous as I do.

Lou - Thanks for the help.

[SBusch (Guest)]

Perhaps the best thing will be for each golfer to call up and negotitate with the starter for tee times like buying a rug in an Indian bazaar.  

Golfer:  "$225?  It's going to rain and your greens are slow.  I'll give you $150"

Starter:  "Rain?  It's partly cloudy and they're rolling 11!  $215"

Golfer:  "My brother played there two weeks ago and he said the bunkers weren't raked and the beverage cart girl is a hag.  $170!"

Starter:  "If the bunkers aren't raked, I give you your money back.  My own daughter will serve you drinks, and she is beautiful.  $205 is my final offer"

Golfer:  "Throw in a bucket of range balls and a Coors Light and you have a deal."