Once upon a time, in a popular South Delhi market, there was a street food vendor with a loyal clientele. He differentiated himself from the competition not just by the quality of his product, but by quality of service: staying open till late in the night when the rest of the market would shut shop. Over the years, he bought and moved into a shop and diversified his business. There was a time when you could have a ‘chaat,’ a lemonade, an ice cream, and a ‘paan’ at the same shop. With the exception of a roadside ‘momo’ stall that pulled in a steady stream of customers, this street-food vendor had garnered the lion’s share of the F&B footfall to the market.
A couple of years back, visitors to the market found that the ‘momo’ vendor was nowhere to be found. Eventually they realised that the street food vendor had subsumed the ‘momo’ business and added the dumplings stand to his shop. On the face of it, this seemed like a good strategy, but things didn’t quite work out like that. What the vendor failed to realise was that even though both ‘chaat’ and ‘momos’ are classified as ‘street food,’ it was, in fact, a different clientele that each of these catered to. And clubbing the two products together under one roof appeared to dilute their respective brand equity. The demand for momos in particular began to fall and that had a cascading effect on the ‘chaat’ sales. The overall business suffered.
Earlier this year, the street food vendor bought a smaller hole-in-the-wall kind of outlet in the same market and moved the momo shop there. The last time I visited, it was business as usual at the ‘chaat’ shop that seemed to be reclaiming its popularity but things were still slow at the momo shop. Either way, the vendor told me, he’d managed to get his original business back on track. And he did not think it was a good time to invest more in the momo shop as it wasn’t doing particularly well.
I was reminded of this – and couldn’t resist the urge to serve it up as a rather long winded analogy – when news came out earlier this month that Topgolf Callaway Brands Corporation’s board had approved a split of the company into two independent entities. While Callaway will revert to its core business in golf equipment and lifestyle, Topgolf will focus on being a pure-play venue-based golf entertainment business.
Callaway is the global market leader in golf equipment sales and second (to Acushnet) in golf ball sales. Callaway’s portfolio also includes Odyssey putters, Ogio accessories, Travis Mathew apparel, Jack Wolfskin apparel and equipment, and Toptracer – the popular ball-flight analytics and gaming technology brand. Topgolf entertainment has over a 100 venues – that combine driving ranges with entertainment and hospitality – around the world. At Topgolf, players accumulate points by striking microchipped golf balls at targets spread across a large outfield. The utilisation of Toptracer ball-tracing technology and the presence of hundreds of high-definition screens at the hitting bays introduce a diverse realm of gameplay options. The multiple dining outlets, bars and events have made Topgolf a one-of-a-kind experience hitherto missing in golf.
The news of the potential spin-off comes three years after Callaway Golf Company paid out $2 billion to acquire Topgolf Entertainment Group creating the Topgolf Callaway Brands Company. Before the acquisition, Callaway held a 14% stake in Topgolf. “Over the last decade plus, we have transformed Callaway into the No. 1 brand in golf equipment, while building a successful and complementary apparel and accessory business,” said Chip Brewer, Topgolf Callaway Brands president and CEO in a recent statement. “We believe this business, on a stand-alone basis, will be well understood and valued by the market. Since our merger with Topgolf, we have made considerable investments in the Topgolf business that have dramatically expanded its scale, digital capabilities, and venue profitability. These investments, combined with the hard work of the Topgolf team, have allowed us to outperform our original growth and free cash flow expectations. Looking forward, we remain convinced that Topgolf is a high-quality, free cash flow generating business with a significant future value-creation opportunity,” he said.
Brewer’s statement came after Topgolf Callaway reported $1.16 billion in revenues for Q2 of 2024. This is a -1.9% year-on-year decline following Q1’s -2.0% decline indicating an underlying trend. The report has raised concerns among investors, revealing a worrying decline in same-venue sales at Topgolf that signal a drop in customer footfall. While the company attributes this partly to a broader economic slowdown and cautious consumer spending, a deeper analysis suggests the challenges may be more deeply rooted. Same venue sales for Topgolf fell 8% in Q2 year-on-year, even though revenue – fired by new venues– increased 5% year-on-year to $494.4 million. The merger was expected to bring in new customers and add a stronger digital component to golfing, including microtransactions around personalised content in the future. Investors weren’t convinced: Callaway shares dipped 19% following the announcement of the merger in October 2020. From the time of the merger in 2021, Topgolf Callaway’s share price has dipped from $28.60 to a 52-week low of $9.24 earlier this week.
In response to these challenges, Topgolf Callaway has initiated a comprehensive strategic review of the Topgolf business. This review aims at revitalising same-venue sales growth and inorganic alternatives, including a potential spin-off of the Topgolf segment. CEO Brewer emphasised the company’s commitment to “maximising long-term shareholder value” through this process, signalling a willingness to consider bold moves to address the current situation. The company’s statement says that Callaway is considering spinning off at least 80.1% of Topgolf “to obtain the desired tax-free treatment of the spin-off for tax purposes and will also consider retaining a limited ownership in Topgolf for a period of time.” Under this route Topgolf would have a cash balance of more than $200 million while Callaway is expected to absorb all of the current joint entity’s financial debt.
A spin-off might be exactly what the doctor ordered. It’s a fair conjecture that investors interested in putting their money into a golf manufacturer may not be interested in investing in a golf entertainment and F&B business and vice versa. At the end of the day, Topgolf is a profitable business with a healthy top line and a long list of new and upcoming venues. “As we look forward, we remain convinced that Topgolf is a high-quality business with significant future opportunity,” Brewer said. “It is transforming the game of golf, and we believe it will deliver substantial growth and financial returns over time.” That may well turn out to be true. In fact Topgolf should come to India; there’s a great deal of interest in golf, and with only a handful of driving ranges, it’s likely that Topgolf won’t have to worry about footfalls here.
A golfer, Meraj Shah also writes about the game
