Can we lower the cost of playing golf?

[Tim_Weiman]

On another thread Bill McBride shares news that 1500 golf courses might go bankrupt in 2002.  Ed Getka expresses some satisfaction with this, explaining that too many second rate golf courses in his area were charging $75 for a $25 dollar experience.

This got me to thinking about how to balance the interests of investors and consumers when creating or operating golf facilities.  I’m hoping the economy will pick up before too long, but what if it doesn’t?  What if people in the golf industry need to lower their cost structure for an extended period of time?

What costs do you think could be eliminated in either the construction of new facilities or the operation of existing courses and still maintain an attractive product for the consumer?  In other words, what are the frills that seriously add to the cost of running facilities but don’t add much value for the customer?

[jim__janosik]

Tim:

Sadly  Tim  it doesn't take much for  a  total  golf  facility  to
cost  12 to  17  million and this is  AFTER  the rough grading costs are  covered  by  the developer and buried in his  lot
costs for housing.  This is  WITHOUT  frills.  

Soft  costs:  Design  Fees( Architect, Engineer, Irrigation,
Clubhouse, Staking, Clubhouse  and maintenance facility design plus contingency can  approach +$750,000 alone.
Golf  course costs $6,000,000 with only one lake for irrigation
no water falls,  1.6 million for irrigation in California.  Add  
3  million  for a  15,000 sq.ft. clubhouse,  $500K  to  install
an  entry road,  $600K for  FF&E ( Furniture, fixtures and equipment)  $500K  for environmental  mitigation and monitoring  for  5 years, it adds up quick. Heck, a stinking
bare bones on course restroom costs  $60,000.  Smart people
build a complete facility for  < $6,000,000 if  they can.

My point being that it is not always the frills that drive costs up.  It is just the shear magnitude of  a  large project.  What
do you consider frills?

[Doug Wright]

Tim,

I don't think much new construction is gonna happen for awhile, for all the reason Jim suggests. Plus so many of these courses are tied to real estate development, and with that slowing the funding for courses just isn't there. For those that do occur I'd think there are ways to scale the construction costs back, eg defer clubhouse construction or redesign on a smaller scale.

Re existing courses I'd think for starters you'll see all the usual suspects labeled in a cost reduction effort--personnel (fewer staff in the shop and in the grounds crew), maintenance (less fertilizer, water, equipment) and clubhouse (reduced food and dining costs, staff etc). On the revenue side you'll see efforts to keep the revenue up by attracting groups/outings and aggressive marketing campaigns.

Those are my thoughts.

Happy Holidays,

[A Clay Man]

One of the all-time greatest truisims:

 You can run a great course without a Pga guy, but you can't, without a GCSAA guy.
To mall my PGA friends;
As ruffled your feathers may be, this is broken down to it's basest.

 

[Tim_Weiman]

Jim,

Thanks for your response.

I really didn't have anything specifically in mind when I used the word "frills".  Rather , I was hoping to stimulate input from people more knowledgeable than I am, particularly people knowledgeable the economics of getting a course up and running.

From the consumer side, it is easy to criticize the $100 and up green fee.  But, I'm also interested in the investor perspective, and really, how to best balance the two perspectives.

You seem to be saying the golf industry can't really lower costs significantly when it comes to the development side.
Is that a fair summary?  If so, can you play devil's advocate and take the other side on this question?

Thanks again.

[Jeff_Brauer]

Jim,

I know things are more expensive in SoCal, but for the record, we build lots of good quality public courses here in Texas for a total of $6-8 Million.  Of course, no $750 K in design fees (but I still eat well), no money losing 15,000 SF clubhouses, irrigation either side of million, and golf course for about 4M.

Of course, land is given by a city or housing developer, and some off sites are paid.  Like the old guys, we locate the clubhouse (and unfortunatly maintenance) at the nearest utility point and work from there to save entry road costs.  We also try to keep our "naturenauts" in better check here, reducing those costs in most places.

Dallas is know almost as much as So Cal for its conspicuous consumption, but also has both down to earth consumers who just don't overpay, and is the home of most big management companies who know what to spend money on for return

[ed getka]

I have noted over the years that comparable courses in SoCal have green fees about 1/3 less than the Bay area. This may be due to the longer playing season, but I doubt there is much difference in many of the other costs.

Club cleaners, bag handlers, beverage carts, flowers, waterfalls, large clubhouses, etc. are frills in my opinion.

[jim__janosik]

Tim:  A  case in point.  In Summer  we  completed(Project
Management role)  the Black Gold G.C. for the City of Yorba Linda. If you play it you will note the severe elevation changes
particulary i on the back.  Cart paths  and curbs cost +725,000 on the project.  Had to be 10' wide in some areas
to accomodate  MWD  12 ton truck access.  If  you  eliminated  the  27,000  linear feet  of curbs  are there to
keep golf carts from falling down 100 foot slopes you could have saved  $175,000.  But could you?  It's all site specific
in my estimation.  Jeff  B.  has a grip on it.  You don't put more into a  site than you have to.  Talega  overspent  on
$75 a ton trap sand  (vs a normal  $40)  and  exsessive  watre
falls.  

In terms of  the investor balance  issue  one has to deal with
"patient money"  that will wait  5 to 8 years for their return not the  2 to 5 year  pace that  most people  want.  But, off
to  practice.  Am  playing  Cross Creek with  dad in law and brothers in law  on 1/1.  

Jeff, prior to Black Gold  I  was involved in a  sub 3 million
project in the  CA  desert  that  was  great.  Built on blow sand,  push  up greens( with Bermuda and sand thats not all
that  bad)  wall  to wall  paths(6')  lakes &  two water falls.
A very  good  case  study for no frills and  a  satisfied owner and customer base. $45  green fee range.  Again,  very difficult  to find sites to build  on  cheaply  but it can be done
and should be done more.

[jglenn]

Jim,

I'm with Jeff B. on this one.  It seems "no frills" means different things to different people.

A 15,000sq.ft. clubhouse, for example, is a "frill".  So is a 60,000$ "johny-on-the-spot".

Up here in Canada, we can build a relatively "no frills" golf course for $3,000,000, if not less.  That's just the golf course, obviously.  (And that's Canadian dollars, which is by now probably worth $47.23 us.  :-/ )

Spending $17,000,000 for an entire golf course project, including everything, is perhaps not outrageous.  But it certainly seems pretty high up there on the "high profile / luxury" scale.  Even in canadian dollars.

We've been building these "Ferrari" golf courses the past decade, which makes us think that a basic golf course means a BMW.  But we're forgetting about the Fords and Hondas.

[Jim_Kennedy]

Adam,
Wrong thinking, a good pro pays dividends well beyond the cost of his presence, as does a good super. There can also be a great relationship between pros and supers. Each brings plenty to the table and the club experience would be extremely diminished without  professionals from either discipline.
I have a friend who is a PGA/GCSAA member. He manages a private club in my area and does this from an "old school" perspective. Nothing is kept on the edge of life and death but the playing ground is kept in wonderful condition. Want to lower playing costs?- take a page from his book.

Tim,
The "business" of golf requires a certain level of return and due to overbuilding and flat (since 1990} new player growth, many existing courses can't achieve the necessary % that investors need. Some of the courses going into bankruptcy are selling for $.50 on the dollar. They will either come out the other side leaner and meaner or face the bulldozer. IMHO
this will be good for future investors and good for the playing public. It will force new development to search out markets that really need golf, not just build competing facilities in over-tapped customer bases. The costs of building go down when you don't need to try and out-do the competition. The clubhouse can be smaller, the staff fewer and courses can be maintained to less than "tour" standards when building in markets needing golf. This might not happen everywhere, Gib's thoughts on the SF area come to mind, but just might in many others.    

Doug,
In Florida : 33 golf courses recently opened, another 45 are under construction and an additional 65 are in planning stages.
This is on top of the 1,261 existing facilities. Whew!

[RJ_Daley]

The original questions asked by Tim were about balancing the interests of investors and consumers.  I think that those interests must be balanced on the point of expectations.  Until current expectations of what is desirable change, then the whole system of supply and demand for new or existing courses will remain the same.  That may result in some bankruptcies by the facilities that are overconceived/overextended in debt.  As pointed out, the existing over priced facilities can do the cursory things like cut back on maintenance (impacting on expectations of the landscaped beauty most of them provide to their customers) and they can cut back on frills and ammenities.  Labor must be among the biggest cost considerations at most over-built facilities. But, isn't that a drop in the bucket compared to the debt service?  How do you cut that down once the cat is out of the bag and the course is already built and financed for XXX millions?  Don't those entities simply have to go through a bankruptcy event to reschedule the capitalization and revalue the worth of their facilities if they are to survive in a new structure?  

For new projects in the future, expectations must be lowered if costs are to be controlled.  I don't think the game can grow until that happens, IMHO.  Consumers have to determine if they want to golf for the sport of it, or schmooz and be somebody at someplace of distinction that costs a lot of money to provide to them.  Do you want to golf en-masses of a popular sport affordable to all, or do you want to golf in splendid elite isolationism?  I think there will always be enough venues for the elite and isolationists of well heeled means to fill their demand, and no need to lower costs there - even if bad times thins their ranks somewhat :-/

[John_McMillan]

Tim,

It's a bit off the mark to place the discussion in the context of economic cycles (and the current downward part).  In recent history, we have had recessions in 1983, 1992 and 2001, each lasting about a year, and followed by periods of pretty good economic growth.  Recessions tend to be unpredictible (except for the recent trend of once every 9 years), and fairly short-lived.  Since golf courses take fairly long to build - at least in relation to the predictability and duration of recessions - building a golf course tuned to a particular economic climate isn't going to work very well.  If one started today, with permitting, construction and grow-in, it would be at least 2003, and probably 2004 before the new course opened for play.  Tuning the budget of that operation to economic conditions in 2001 means the course will probably be mis-tuned by the time it opens.  

The "problem" with the CCFAD's built in the '90s is that they didn't make a whole lot of sense in ANY economic condition, and the errors are just accentuated in a recession.  To respond to a point Tommy made in the other thread, rather than selling minimalist architecture as budget architecture for hard times, I think it makes better sense to emphasize its strong points for all economic conditions - good times as well as harder.

[Tim_Weiman]

John McMillan:

Spoken like a true economist!

But, actually, I'm wondering if achieving a better balance between consumer and investor interests would be served planning projects with the asumption of prolonged economic difficulties in mind.  

Back in my days in the oil business we would always ask ourselves if an investment would make sense in long periods of low prices and margins.  It is certainly not the only way to look at the business problem, but it does encourage some discipline.

One other point: it would be interesting to see data on the economics of "minimalism" verses other approaches to design.  I realize the case for "minimalism" isn't just about economics, but it would be nice to see the numbers, if they exist.

Jim Kennedy:

Thanks for bringing up the point about flat demand for golf since 1990.  I don't want to digress, but can't help wondering (again!) if the interests of golf course developers are being undermined by equipment manufacturers, at least in part.  Suffice it to say that the cost of every aspect of the game has gotten out of control.

[Jim_Kennedy]

Tim,
I don't think you can single out any one group and charge them with undermining the situation. As the size of the pie increases everyone wants, or feels entitledto, a larger piece.
 
As for consumers, they want a good return for monies spent just as investors want a good return for monies invested.
The projected need of building a golf-course-a-day to meet the demand was mistaken at worst and misdirected at best.
The baby boomers are buying into golf communities, a sector that seems least bothered by today's problems. The courses that are drags on the portfolios of the major firms are resort courses, like those at Myrtle Beach. In an effort to grow large these firms overpaid for non-performers because they could offset loss against income from their better performing courses. This way of thinking may have worked if golf met the projected numbers, i.e., they would now own a portfolio of earners and become either Hertz or Avis, but it hasn't.
I think the present shakeout will have a positive benefit for everyone involved as we go forward.  

[John_McMillan]

Re "flat" golf demand since 1990 -

Has no one heard of Tiger Woods?  I thought part of his story was supposed to be bringing a new group of his fans to the game.  I cannot believe that golf looks essentially the same in the post-Tiger era compared with the pre-Tiger era.

Re golf courses and profits -

A wrinkle to measuring the profitability of golf courses was pointed out to me by Tom Doak (and to Tom by Pete Dye).  Doak had argued to Dye that Jack Nicklaus' golf courses made money.  Dye's response was that after the bankrupted their first owner, the second or third owners usually did make money out of them, but that was hardly an economically desirable feature of the course.  

As an illustration, consider the following hypothetical -
Course is constructed for $20 million, all of it financed by group A at an interest rate of 10%.  The course operates for a year, generating revenue of $5 million, against operating expenses of $4 million.  After interest costs, the operating profit of $1 million turns into a $1 million loss.  After that year, the course goes bankrupt, and is sold to group B for $5 million.  It is operated the next year, generating revenue of $5 million against operating expenses of $1 million.  After interest costs (the same 10%, but against debt of $5 million instead of $20 milliion), shows a net profit of $500,000.  Is the course now profitable?  Sure, if you don't ask the investors in group A who are never again going to see their $15 million.  

The numbers, if they exist, are very difficult to come by, because (i) many of the relevant costs are sunk into businesses which no longer own or operate the courses and (ii) real profit figures are guarded as proprietary information.

That scenario is a very common one for golf courses, which is why those interested in making money are buying, rather than building, golf courses.

I suspect though, Tim, that the real answer to your question is that good long term planning (asking whether projects are profitable in a variety of economic scenarios) is easier to neglect when you're playing with someone else's $$'s, which is probably how many of the CCFAD's were built.  

[RJ_Daley]

With regard to the existing courses and what can be done to lower costs; and if that is going to improve the participation in the game, perhaps we have to look at what happens to courses taken over by management companies like American Golf.   How do they lower costs, and how does that improve participation.  

I am not the expert.  For those in the biz, please correct my statements if I have them wrong.  But, first they use their aquisitive facility or operating partner - National Golf Properties - to aquire a facility that is on the wrong track for various reasons within the structure of the REIT.  Then they try to apply economy of scale to buy product and manage facilities at lower costs by utilizing shared resources with less personnel.  Then, they cut out some of the frills like ammenities or upkeep of details on the course.  Does all that come with a price reduction of rounds?  I don't actually know because I have no first hand experience with them.  I just read the 10Ks once in a while.

Also, for answers, shouldn't we compare like facilities in the same market?  It does no good to ask these questions and compare the extravagance of maintenance or cost of construction in disparate regions.  Costs can be lowered in some regions more easily than others, I am guessing.  Can two courses in the same area; both having about the same financial structure of cost to build operate and maintain; both doing the same number of rounds a year; one lowering costs through making ammenities and conditions lean and lowering green fees; while the other maintains status quo and green fees; continue to meet margins of profitablility through differing approaches and maintain rounds per year or grow?  There has got to be some sort of expectations of consumers and owners to profitability and growth of the game ratio in there somewhere?

[jim__janosik]

Great  discussion guys but I feel lead to return to Tim's original
question.  Yes  golf can be built cheaper  and  and therefore
more affordable.  It  practicaly  means  less and smaller bunkers,  fewer  trees,  less  irrigated  turf,  simple  clubhouse,  in  a  word  mininalist.  To  address  equipment
costs  Tim,  a  decent  equipment  package to maintian  100
acres  in  So.  Cal  will  approach  $750,000.  (Crsoby Club spent  that)  Black  Gold  spent  I  believe  around  $550,000.
(And   it shows!).  Golf  carts  cost  retail  around  $3,300
a  piece but nobody  pays that.  

[John_McMillan]

Dick -

I suspect that the greatest cost reduction that a company like National Golf Properties creates is reducing a course's capitalization by paying pennies on the dollar to the course's previous owners.  I don't think there are much $$$ to be made by buying golf balls (or other inputs) in bulk.  

Tim -

With thinking like that, I assume that your days in the oil business were not spent at Enron.

[Jim_Kennedy]

John,
In 1986 the average number of golfers per course (18-hole equivalent) was about 1,900. This ratio grew to a high of about 2,250 in 1990 and has declined to today's level of approximately 1,970 golfers per course. Since 1990, additions to supply (number of courses) have been outpacing growth in demand (number of golfers).
Two thirds of the revenue increases seen in golf come from higher prices, not additional rounds. This is thought, along with time needed to play, as detrimental to growth.
The Tiger effect lasted for one year, 1997, and has not continued. Biggest effect: a 30% increase in minority participation since 1996.

[Lou Duran]

RJ:

You have correctly described the professed advantages of the NGP/AGP business model.  Unfortunately, the reality is somewhat different.  First of all, NGP acquired a large number of properties at the top of the market.  For example, the portfolio in my part of the country (NC Texas) was purchased at a substantial premium.  Secondly, a golf course (and its clientele) has its own peculiarities and needs which does not lend itself to management from afar.  You can have a national or regional turf specialist, but if you are paying your local superintendent $50M and dictate to him how and when to do his work, things don't very often come out according to plan.  Take away the decision making from your local Director of Golf, restrict his vendor relationships, and bifurcate his authority on the setup of the course and you create a bureaucrat with little initiative.   Push for year to year profit growth in excess of cost inflation with fixed asset base (capacity), then you have to price in a market with heavy competition or cut services and expenses.  These are but a few reasons why I believe that the golf course business is best done by small, hands-on owner/operators who can respond more quickly and directly to the demands of the marketplace.

Tim:

In this part of the country, away form the high growth corridors, I believe that it is still possible to build a very playable, enjoyable golf course for $5MM+/-, turnkey.   It is not going to have 100 sand traps, wall-to-wall irrigation, 8-10' concrete cart paths, and an opulant 15,000 SF clubhouse, but it can provide a very acceptable playing environment.   In as far as moderating investors' expectations, the fact that alternative investment yields are down should by itself have a lowering effect.  Golf, however, is correctly perceived as a high risk endeavor by most investors so a higher return is expected.   Hopefully, as owners turn-over during this down cycle, a new group will emerge that trully loves and understands the game, and who will be long term oriented in its investments.  

[John_D._Bernhardt]

I agree with lou and several others. I believe with a  good piece of land you can build a great course with 5000 to 6000 sq. foot clubhouse for 5 to 7 million. I also feel people who spend 20 million on a course are making alot of money up front and need $125 to $150 green fees to have a chance. I hope I can create a great golf experience for $50.00. I feel a great course and overal experience is fair depending on the land from $50 to 100. People who want golf at $25.00 are not going to have a well maintained course.

[Jim_Kennedy]

John B.,
I hope you get the chance to create some very good golf at $50.00, which is not too high a price to pay, but there are some very good golf courses at $25.00, sometimes less, and many of them are not poorly maintained. Granted, you may find more in the $50.00 range but there are lots in the lower price ranges too.

[grass-man]

Jim,

Please explain this to me?  

"Wrong thinking, a good pro pays dividends well beyond the cost of his presence,"

I am a Superintendent at a resort course for the last 4 1/2 years and I still don't understand the need to have a PGA golf professional at our operation.  Don't get me wrong, our PGA pro and I have an excellent relationship and he is one of my best friends, but I have no clue what he does other than fold sweaters and putting the cash in the register.  After spending the majority of my career at private clubs, I see the need and what a PGA pro does, but in a public/resort setting, IMHO, you would be much better off eliminating the golf pro and food and beverage manager and having one person oversee both operations.  In this scenario you have just reduced your payroll by about $45,000 a year, minimum.  

Just my humble opinion.

By the way Adam, I think that attitude is growing.

[Tim_Weiman]

Jim Kennedy:

My apologies for bringing up the equipment issue.  It's a pet peeve of mine that probably only complicates a discussion we should probably keep more focused.

But, I did have an experience recently that brought me back to that issue.  For the first time in thirty years I walked the course I grew up on, Pelham Country Club, the not so famous site of the 1923 PGA Championship that was torn up in the 1950's to built the New England Thruway.

Going back, I found the place quite charming compared to my current home club in Cleveland (Sand Ridge), mostly due to how small the place is: 6,300 yards or so sitting on about 120 acres.  As I walked around, thinking about how the property is one third the size of a very modern place like Sand Ridge, my thoughts turned to the question of why we aren't building more such courses today.

I couldn't imagine many investors even considering such a proposal!

But, why not?  What if Tiger & Co. could only hit drives 250-260 yards?  What if the average guy was hitting at best only 220 yards?  Wouldn't that make much smaller properties more of a viable option?

The point about the Tiger effect being so limited is very interesting.  How often does such an athlete come along?  If he can't help grow the business, maybe the industry needs to look elsewhere?  Maybe it needs to think out of the box on the cost issue.

John McMillan:

While I didn't work for Enron, I do feel sorry for the rank and file.  They were badly let down by senior management and their personal losses were staggering.

I know from my trading days at BP that encouraging an entrepreneurial culture involves taking risk, but in the case of Enron it seems they completely abandoned reasonable controls.

Anyway, I agree with the point TD credits to Pete Dye.  Spending $20 million seems like one hell of a risk regardless of whose brand name is attached.

[John_D._Bernhardt]

I hope the world can work at $50.00 plus cart and F&B plus merch. That should on 35000 rounds a year produce 2 to 3 million in revenues. More than likely 2 to 2.25 million. You can maintain a course and run it for 1 to 1.3 million, thereby leaving around a million plus.for debt service, survicing capital accounts and profit. I think this is a number people are willing to pay for a golfing experience on a regular basis. The industry needs these type numbers to work to be healthy over the long run. I really believe there is not a good reason course constuction costs should not go down by 30 plus % this year. It needs to to attract investment capital.