Can Callaway Golf Bank on Brand Performance for Global "Cleat Cred?"

(MoneyWatch)  To the envy of competitors, Callaway Golf 's historical success as a manufacturer of premium golf equipment has been accomplished without the promotional muscle of a Tiger Woods. As U.S. consumers continue deferring first-time purchases of golfing gear -- and upgrades to new sets of Diablo Forged irons (retailing for $999) -- the company is eyeing overseas markets, and banking on its technology to grow "cleat" credibility and sales.

Callaway Golf (ELY) is the U.S. market leader (as either the No. 1 or No. 2 brand) in almost every equipment category. Management acknowledges that celebrity golfers carrying the Callaway banner -- from Arnold Palmer and Gary Player to Phil Mikelson and Annika Sörenstam -- help to build brand recognition. However, the company was early to recognize that lots of top golfers walking the fairway with a plethora of labels also dilute the message. In contrast to Nike Golf, the company's marketing strategy has long been built around loyalty to brand, not star.

The company's core competitiveness has been the timely introduction of innovative and game-changing technologies, said Callaway spokesman Tim Buckman. The performance-enhancing Big Bertha driver (of then) and the shot-shaping control of its Fusion Technology fairway woods (now), illustrate how the company has strategically captured and grown its share of market. An estimated three percent of sales is spent annually on product design and development, according to regulatory filings.

However, in recent years other high-end gear manufacturers like Titleist (Acushnet), Ping, and TaylorMade (adidas Group) have closed the performance gap, resulting in life cycles of two years or less. In this marketplace, a substantial portion of total company revenues is generated by products that are in their first year of introduction, followed by a predictable falloff in demand and profit margins:

Gross margin decreased to 37% in the first nine months of 2009 compared to 45% in the comparable period in 2008. The decrease in gross margin is primarily attributable to the unfavorable economic conditions and the resulting reduction in sales volume.... In addition, gross margin was affected by various golf club promotions, price reductions taken on older golf clubs products combined with a shift in consumer spending to lower priced and lower margin products in 2009. [Third-quarter 2009 regulatory 10Q filing]

In today's marketplace, is Callaway's sales strategy obsolete? Innovation means little nowadays to cost-conscious U.S. consumers willing to wait the six-months for discounted (or closeout) prices of "obsolete" golfing inventories. For example, chief executive George Fellows admitted in recent interviews that lower-priced products, such as $299 drivers, would still dominate U.S. and European consumer behaviors in 2010.

As mentioned, Callaway has a significant share in the U.S, Europe, and Japan, deriving approximately 52 percent, 15 percent, and 15 percent of annual sales from these markets. With demand for golfing equipment (golf balls in particular) directly related to the number of participants and the number of rounds of golf being played by these participants, the company is looking to emerging markets, such as India and China, for meaningful growth opportunities (absent commodity pricing too). In fact, participation in the sport is growing at a rate of about 15 percent a year in Asia, compared with a stateside growth rate of 2% to 3 percent, according to Callaway's PR department.

The International Olympic Committee's decision in October to make golf a part of the 2016 games in Rio de Janeiro will likely open up new markets in Latin America, too.

In order to tap this growing global popularity for the sport, will Callaway need to adapt its business model -- with a greater reliance on celebrity endorsements? Company spokesman Buckman tells me no, that the "dominant DNA strain of the company will remain technology driven."

Granted, "average" golfers worldwide have the same performance wants, such as the desire for drivers with accuracy; nonetheless, to thwart competitors and quickly grab share the company will need (local and identifiable) celebrity endorsements. The positive link between the athlete's image and a communicated (and recallable) message of brand performance, in my opinion, is more important than actual performance of the golfing gear in the first-stage of any successful launch in these new markets.

To management's credit, while others are responding to the global economic slowdown by cutting back on expansion plans, Callaway is forging ahead, establishing a presence in key growth markets. For example, on January 12, Callaway announced the formation of Callaway Golf India, a new wholly-owned subsdiary dedicated to building out the Indian golfing market.

The company also signed an endorsement deal with Jeev Milkha Singh, the highest ranked Indian golfer in the world, to serve as Callaway Golf India's brand ambassador. Competitors will be watching to see if Callaway's innovative products in a nascent market, supplemented with the visibility of local talent, can counter the shorter product life cycles seen in more mature markets like the United States.