Pop Goes The Bubble

[Craig Sweet]

Yes! Pop goes the bubble...current problem tied into current bubble pop....however...long term future of golf will be tied to availability of disposable income...if wages go up, people might spend on things like golf...if wages continue to decline, people will spend on food, shelter and little else.

But hey, isn't that how it has ALWAYS been?  From 1945-1975 we had a huge explosion in the middle class with increases in wages, education, and spending on "things"....golf, tennis, skiing, all had goodtimes....

[Carl Nichols]

In northern Michigan, for example, many courses have seen a decrease in demand and have either failed to reduce their fees or have increased them.  This is based largely on maintaining a certain level of "prestige," which is a completely irrational thing to do in a typical model.

Setting high prices in order to establish or maintain a certain level of prestige is, of course, often perfectly rational -- think Tiffany's and Cartier, and perhaps even Pebble right now (i.e., although Pebble might fill a few open tee times by reducing its rates, the result might either be to lose certain customers or to lose its prestige, which could have a long-term effect).  I think it's pretty hard to say these courses are acting "completely irrationally" without knowing lots of information about them -- and perhaps without a crystal ball (both about what would happen with lower prices and what will happen in the next ten years).

[JC Jones]

In northern Michigan, for example, many courses have seen a decrease in demand and have either failed to reduce their fees or have increased them.  This is based largely on maintaining a certain level of "prestige," which is a completely irrational thing to do in a typical model.

Setting high prices in order to establish or maintain a certain level of prestige is, of course, often perfectly rational -- think Tiffany's and Cartier, and perhaps even Pebble right now (i.e., although Pebble might fill a few open tee times by reducing its rates, the result might either be to lose certain customers or to lose its prestige, which could have a long-term effect).  I think it's pretty hard to say these courses are acting "completely irrationally" without knowing lots of information about them -- and perhaps without a crystal ball (both about what would happen with lower prices and what will happen in the next ten years).

You are actually supporting my argument because I said it was "completely irrational" in a typical model that works its way to equilibrium irrespective of the intangible/emotional/human element.  The problem that economic analysis has, generally, is the inability to account for this utility. 

[Carl Nichols]

Sorry, JC, I misread your post to say that the N. Michigan courses are pricing irrationally.  I agree that economic *models* may have some shortcomings, but Lou's post was really discussing economic theory, and I don't think your post really refutes his basic points.

[JC Jones]

Sorry, JC, I misread your post to say that the N. Michigan courses are pricing irrationally.  I agree that economic *models* may have some shortcomings, but Lou's post was really discussing economic theory, and I don't think your post really refutes his basic points.

Carl -

Lou said this: As a result of an oversupply, one could see lower revenues due to discounting, but the number of rounds should be up, holding everything else equal.

This was the point I was refuting by pointing out that N Michigan courses are not discounting.

[Carl Nichols]

Sorry, JC, I misread your post to say that the N. Michigan courses are pricing irrationally.  I agree that economic *models* may have some shortcomings, but Lou's post was really discussing economic theory, and I don't think your post really refutes his basic points.

Carl -

Lou said this: As a result of an oversupply, one could see lower revenues due to discounting, but the number of rounds should be up, holding everything else equal.

This was the point I was refuting by pointing out that N Michigan courses are not discounting.

But aren't most courses discounting?  I seem to get an email a day with some new "special offer."

[JC Jones]

Sorry, JC, I misread your post to say that the N. Michigan courses are pricing irrationally.  I agree that economic *models* may have some shortcomings, but Lou's post was really discussing economic theory, and I don't think your post really refutes his basic points.

Carl -

Lou said this: As a result of an oversupply, one could see lower revenues due to discounting, but the number of rounds should be up, holding everything else equal.

This was the point I was refuting by pointing out that N Michigan courses are not discounting.

But aren't most courses discounting?  I seem to get an email a day with some new "special offer."

Some are, but it has been my experience this year that Boyne and other N Michigan operators are not discounting. 

[Tom_Doak]

Mike H:

Was just reading the controversial piece in Rolling Stone about Goldman Sachs being behind every bubble.

Which suggests, for your theory to be right, Goldman has to have made obscene profits in the golf business, too.  Have they?

Perhaps they've been shorting golf stocks and golf REIT's.  You could have made a pretty penny doing that in the past 5-10 years.

[Richard Choi]

Don't get me started on Goldmand Sachs...

Took billions through various government bailout programs (AIG bailout was really GS bailout) and now they are about to pay out record bonus this year.

Nice having friends controlling Fed and Treasury.

[Mike Hendren]

BTW, would you care to define "intrinsic value"?  I may argue that it is mostly without meaning.

Lou, by intrinsic value I mean its current economic value or the net present value of its future income stream discounted to refect an appropriate premium over the prevailing risk free rate of return.  In other words, no value is given to the golf course for: 1) anchoring a private club or residentail development; or 2) improving the quality of life in a state or municipality.

Make sense?

Mike

[George Pazin]

Don't get me started on Goldmand Sachs...

Took billions through various government bailout programs (AIG bailout was really GS bailout) and now they are about to pay out record bonus this year.

Nice having friends controlling Fed and Treasury.

Makes you think.

Or at least it should...

[Lou_Duran]

Crony capitalism.  Those who prefer politicians and not markets making decisions, that's the choice.  Got to get the money somewhere.

Bogey,

As you know, every project that's pitched to a financier has all sorts of financial analysis supporting the investment.  Those of us who have tumbled numbers for a living at one time know that appraisals in many cases are not worth the paper they are printed on.  BTW, it was your friend DScmidt who argued ad nauseam that the risk free return of capital is zero (I disagree, citing 2% - 3% real return). 

BTW, the term "intrinsic value" is being tossed around locally to sell lake-front lots at a "50% discount".  I really do believe that the term is so theoretical to be useless.  If I was going to lend my own money, my underwriting criteria would have much more reliance on the project's ability to generate the necessary cash flow over the life of the loan on the worst case basis, the ability of the borrower to make up losses out of his pocket, and his reputation.  The current administration would not want me to be a banker.

JC Jones,

You may wish to look up the words "could" and "economics" in the dictionary.  You may also benefit from researching the differences between micro and macro economics.  You may also learn that economics is a social science.  I am unaware that any economist would argue that human behavior is always rational, or that models are correct in most instances.  In fact, most of us who are trained in both the behavioral sciences and business, are mostly suspicious of static models such as the ones being used to score the costs of government policies.  People do not behave on a straight line.  A 10% increase in income taxes does not yield a 10% increase in tax collections simply because people don't act linearly.  Much of economic behavior is quite rational, with errors in both directions offseting.

I am unaware of the north MI market.  Perhaps it is following the state government's formula of raising prices (tax rates) in the hopes of offsetting profits (tax collections).  A quick review of history would reveal the folly.  But I digress.  I have had a couple of golf investment opportunities in MI presented to me, and both are a substantial discount from replacement cost.  Neither make the claim of stable or increaing green fees.  So, perhaps yours might be a unique experience.

Again, I am unfamiliar with the so-called "prestige" pricing you refer to.  There is probably not a more prestigious accessible golf course in the world than Pebble Beach and its owners are offering deals galore.  Perhaps your definition of "many" is different than mine- do you have actual numbers?- but there might be some relatively rare instances when lowering or discounting green fees might cannibalize full price rounds to the point where the net receipts are lowered.  Pricing is part art and part science.  Ditto on the cost side.  A course might be able to sustain a higher level of NOI at a lower number of rounds by not deeply discounting its green fees (there are some variable costs in golf operations).  Personally, I put a lot more trust on the professional operators and the mom and pops than the anecdotal evidence tossed out by us common golfers.

[Richard Choi]

I am unaware that any economist would argue that human behavior is always rational, or that models are correct in most instances. 

But isn't that the main reason why we are in economic SH%T storm right now? Plenty of economists making big bucks on Wall Street claimed exactly that.

[Michael Dugger]

I am unaware that any economist would argue that human behavior is always rational, or that models are correct in most instances. 

But isn't that the main reason why we are in economic SH%T storm right now? Plenty of economists making big bucks on Wall Street claimed exactly that.

I am a little more apt, currently, to listen to the guys who aren't making big bucks....

[JC Jones]

Lou -

As someone who has had training in both human behavior and business I am fully aware that economics is a social science.  In addition, while an economist may acknowledge that human behavior is not always rational (i.e. towards the maximization of wealth), they very much will argue the effectiveness of models.  In fact, that is the entire point of models, to be used as a tool to predict behavior or events.  Without their predictive potential, they simply lack any significant usefulness.

Now, I could spend the rest of this post telling you to look words up in the dictionary or to go study something, but I don't need to make attempts to insult someone's intelligence in order to make my argument seem more valid.

Cheers.

[George Pazin]

I am a little more apt, currently, to listen to the guys who aren't making big bucks....

That's part of the mistake you're making.

[Lou_Duran]

Lou -

As someone who has had training in both human behavior and business I am fully aware that economics is a social science.  In addition, while an economist may acknowledge that human behavior is not always rational (i.e. towards the maximization of wealth), they very much will argue the effectiveness of models.  In fact, that is the entire point of models, to be used as a tool to predict behavior or events.  Without their predictive potential, they simply lack any significant usefulness.

Now, I could spend the rest of this post telling you to look words up in the dictionary or to go study something, but I don't need to make attempts to insult someone's intelligence in order to make my argument seem more valid.

Cheers.

Ouch!  JC, being that you're so learned and, apparently, a much bigger man, perhaps you might try not to misrepresent what I stated in order to make your argument seem more valid.  And when I do have trouble with a word or a concept, I do further research including the use of a dictionary.

BTW, there are several reasons for models- economic , climate, stock prices, sports scores- besides predicting behavior.  One use is to test a hypothesis.  Another is to provide quantitative support for a favored program or policy.  A third might be to better understand a complex system without any attempt to make any specific predictions.  Probably the only time a model is useful in predicting future outcomes is when it can capture all the variables accurately, their correlation, and when history repeats itself.  I am unaware of the existence of such a model to the extent that I would be compelled to put my money on the predicted results.

I await the list of your "many" courses which have held their prices firm or even increased them.  I can think of one scenario where that might be the case, but I am sure you can come up with several.

Ciao
     

[JC Jones]

Lou -

You are correct, there are various reasons and various uses for models.  In the context we were discussing them, however, I was referring only to economic models.

The "list" of courses that I have noticed includes:

All of the Boyne courses including Bay Harbor (8 courses in all).
Belvedere

There are other courses that have kept their "rack" rate static or have increased rates but are offering several "specials" on various days of the week or times including:

Little Traverse Bay
True North
Dunmaglas

I understand this list is not exhaustive but it is what I have noticed, personally.

[Carl Nichols]

There is probably not a more prestigious accessible golf course in the world than Pebble Beach and its owners are offering deals galore. 

Lou:
Earlier discussions on this board suggested that Pebble was letting certain tee times go empty rather than discount its rates.  What great deals are being offered right now?  Maybe a trip west is in my future!

[Steve_ Shaffer]

Speaking of public courses lowering rates, a CCFAD in Wilmington, DE- White Clay Creek- just lowered it's prime time rate from $95 to $80. This course was developed by the Delaware Park horse race track and did not have a land acquisition cost and tried to make it as an upscale place to play on their Arthur Hills course. I haven't played there yet but maybe  I'll go and play it for their twilite rate of $65.

www.whiteclaycreekgolfcourse.com

[Lou_Duran]

The "rack" rate is less meaningful than the effective rate- how much people are actually paying to play.  From my experience in SoCal and Dallas, there have been deals advertised in the local papers for a number of courses.  Add to this the use of internet services for promotions- Palmer Golf for example sends E-Mails on specific tee times throughout the day at selected courses that are available at substantial discounts.  The emergence of "Players' Clubs" in some markets which involves a modest monthly dues for the range and twilight golf for a cart fee is another.

Carl Nichols,

If I am not mistaken, there has been a thread or two on PB and the Monterey area discounting fees.  Either the WSJ (maybe the Weekend edition) or the Dallas Morning News recently had a short article on play and stay deals at the Lodge which included a round at PBGL and one on another of its courses.  The total cost was still lofty, but significantly below normal rates.  Perhaps Mssrs. Huntley or Dodd will chime in.  It is my understanding that PB is also available on a limited basis in the card or membership that provides access to the other area courses at a good discount (we used it when we played Del Monte GC in the KP last year for around $60).

Bogey,

I understand that as a banker and for investors the inability to control supply is a real issue.  From the consumer's standpoint, however, I think that a growing supply is a good thing on balance, provided that the demand/supply relationship does not get totally out of whack.

What is troubling to me is that demand as measured by rounds played was already stagnant or declining when the economy was seemingly doing fine and supply was increasing.  Either families/consumers were already stretched too thin when GDP was growing 3%+ or other things were drawing people away from golf (perhaps both).  If either is the case, and the economy is in a tailspin with no end in sight, Golf is in a world of hurt.

From my perspective, this is mainly a demand problem.  Everything in the early to mid-1990s indicated that golf was poised for continued growth.  Courses were built in anticipation.  The expected demand just didn't materialize.  

[Bill_McBride]

I think Lou (demand side) and Bogey (supply side) are both making good arguments.  I think this is a double whammy, the golf industry is being attacked from both supply and demand sides.  Over supply plus shrinking demand = an accelerating deterioration.  Keep your seat belts fastened!

[Sam Maryland]

George Pazin:  How affordable are other things in the big metro areas? What is compensation in the big city like relative to the sticks?

-----------------------

Great question. Big city compensation is unquestionably multiples of salaries earned in the "sticks" but the costs are as well.  And unfortunately for metro-area clubs a good number of people within their membership have gone from a large income to $0 income quickly.  A large concentration of the good clubs in the NYC-metro are would probably cluster in the $75-100k initiation range but the dues+minimum almost always exceeds $10k and $15k++ is way more common than you'd believe.  Throw in mandatory caddies on top of that and and a guy could have a $20k year at the club easily.  Unless you are really really really highly compensated, and can be assured that income won't go to $0 anytime soon, it's hard not to think you are overpaying.

By contrast, I'm aware of a great little full service club (golf-pool-tennis) in the mid-atlantic with a terrific Donald Ross course where initiation is $20k, annual dues are $2100, and the food minimum is $200 for the year.  Walk and carry your own bag, no problem.  Sure seems like a lot of people could afford this.

As for Pebble, I don't buy the "prestige" argument.  They have been discounting the rate to NCGA members for a good while now and the tee sheet remains wide open most days.  Prestige is a nice concept, but try to deposit it at a Wells Fargo branch and it'll get you zip.  I believe Pebble will ultimately be forced to make significant adjustments to their pricing structure, permanent adjustments -- JMO.  (Hosting the 2010 Open may allow them to scrape along under current structure longer than they would otherwise, but then again, given the lack of corporate activity seen at Bethpage Black this year, maybe not)

Out of curiosity I checked the tee-sheet at Pebble for the next 7 days, only looking for times before 8.30am, this is what I found:

Mon -- 7.10, 7.20, 7.30, 7.50, 8.10, 8.20
Tues -- 7.00, 7.10, 7.20, 7.30, 7.40, 7.50
Wed -- 7.00, 7.10, 8.30
Thurs -- 7.10, 7.20, 7.30, 7.40, 7.50, 8.10
Fri -- 7.20
Sat -- n/a
Sun -- 7.00, 7.10, 7.20, 7.30, 7.40















 

[Richard Choi]

I just read in a local golf magazine that rounds played in Northwest are actually UP (comparing April 2008 to April 2009) about 3 or 4%.

Pretty amazing fact with the economy being where it is.

[Sam Maryland]

I heard the Northeast is the new Northwest, and the Northwest is the new Palm Springs...

...in terms of weather that is.