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Topgolf could save golf, but not as we know it

Michael Santoli
Michael Santoli

Young people these days just aren’t so into golf. But they still enjoy smacking golf balls, competing good-naturedly with friends, having a few drinks and meeting others.

This explains the swelling popularity of Topgolf, a fast-expanding chain of golf entertainment centers, at a time when participation in the real game of golf is bumping along near 20-year lows.

Topgolf CEO Ken May thinks there could be enough of a market for 100 locations across the U.S. in the next eight years.

Topgolf originated in England, where a pair of golf-loving twin brothers sought a way to liven up driving-range sessions with some competition. They devised an array of targets that could read a microchip embedded in golf balls to score each player for accuracy and distance.

Now, there are 13 Topgolf locations -- three in the U.K., 10 in the U.S., concentrated in the Sun Belt -- and 11 more are under construction. The Dallas-based chain’s backers, which include golf-equipment standout Callaway Golf Co. (ELY), plan to roll out 10 to 12 new ones a year for the next several years, says CEO Ken May.

A top executive at FedEx Corp. (FDX) for 25 years, May says he was drawn to take the top job in 2013 by Topgolf's growth prospects and his affinity for golf itself. New locations are on the way in Tampa, Oklahoma City, Virginia Beach and eight other cities. A bit over a year ago, the company said 2013 revenue would approach $100 million, and growth has been blistering since then.

A Topgolf "store" is typically a combination three-level driving range, upscale sports bar, pro shop and nightspot. They can exceed 70,000 square feet and sit on some seven acres. The driving-range tiers have dozens of tee-off bays opening onto a course with nine sunken, circular targets, each of them divided into pie-like sections, appearing a bit like a dart board.

Indeed, the dart game cricket, in which players amass points as they try to complete a circuit by hitting each section, was a model for Topgolf, whose name is based on the phrase "target oriented practice."

The microchip-carrying Callaway balls play just like a regular ball. An electronic system keeps score and tracks distance and allows for a number of game formats. Players can compete with others in their group, try to beat their prior best scores and climb the "leader board" capturing everyone playing at the entire location.

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Meantime, players have control of the TVs in their seating pods, can order drinks and food from a constantly circling wait staff and may take lessons with a golf pro if they choose. Topgolf costs between $25 and $50 an hour, based on time of day.

At the location Yahoo Finance visited this month in the Atlanta suburb of Alpharetta, Ga., there was a decent lunchtime crowd of casual-seeming golfers and plenty of corporate groups on sales of team-building outings.

May calls Topgolf "bowling for cool people," and indeed there are similarities to bowling, which can be enjoyed as a social gathering by novices as well as by avid bowlers who compete hard. He says only a quarter of Topgolf customers are "serious" golfers, defined as those who play at least once a year.

Early in the morning, driven golfers can be found at Topgolf putting themselves through determined solitary practice sessions -- if a golfer prefers, Topgolf can largely serve as a regular driving range for practice. By the evenings, especially on weekends, the place has transitioned into a fully social "place to be and a place to be seen," says May, complete with thumping music and crowded dance floor.

Topgolf requires players to drive a golf ball into one of nine targets scattered across the range. The further away and closer to the center the better your score.

The golf boom of the 1990s drove overbuilding of golf courses and a bit of a consumer bubble in bigger, pricier and supposedly more advanced clubs. But Baby Boomers aren't playing as much as their parents did, and golf's slow pace and dated image don't fit well with millennial sensibilities.

May says Topgolf is thriving by catering to relatively well-off millennials, seeking to open stores in communities thick with 18-34 year olds who earn at least $100,000 a year.

"We take away a lot of the traditional barriers" that keep many people today from taking up golf, May argues: The game takes one or two hours instead of five, it's unnecessary to buy equipment, the "cart lady" is always nearby for a food or drink order, and there are heaters and misters for when the weather's too cold or hot.

Topgolf has launched a youth golf-education effort, and May says he's pleased that Topgolf might stoke greater interest in "real golf" among some players. But he's mainly focused on the opportunity at hand for his company rather than somehow saving the old game.

May says there is room in America for about 100 thriving Topgolf centers, and he plans to get there over the next seven or eight years. At that point, or even before, the company could certainly entertain the idea of going public, though May won't explicitly say what he foresees ultimately for Topgolf.

Even if the chain isn't trying to be the savior of golf, it could well end up helping to resurrect Callaway's financial fortunes. Callaway owns just under 20% of Topgolf, having invested a total of $42 million in separate stages. The company's CEO, Chip Brewer, is on the Topgolf board. A Callaway spokesman says the company views Topgolf mostly as an attractive investment with some limited opportunities for business synergies.

Yet some investors think the Topgolf stake could represent a pretty big portion of Callaway's current market value. While Brewer has improved Callaway's brand esteem among golfers and nudged market share higher, there isn't much growth in the industry, and Callaway shares, now around $7.25, have been mired between $5 and $10 for the past six years.

Scott Hamann, analyst at KeyBanc Capital Markets, several months ago estimated that Callaway's Topgolf investment could be worth $3 per Callaway share, or some 40% of Callaway's market value.

This implies Hamann believes Topgolf itself should be valued today at more than $1 billion, and growing -- a huge score in any game.

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