Callaway Golf Company Business Information, Profile, and History

Company Perspectives:

Callaway Golf has always believed that the way to grow the game of golf is to make it more enjoyable for the average golfer. That is why Callaway Golf tries to design, create, build and sell the most forgiving golf clubs in the history of the game--giving more golfers more opportunities to hit a few additional 'great' shots each round. Callaway Golf intends to continue to grow the game by helping people enjoy the game. --Ely Callaway, founder, January 2001

History of Callaway Golf Company

Callaway Golf Company is the premier manufacturer of golf clubs in the United States. The company sells more golf clubs than any other firm, and has the lion's share of the $3 billion golf equipment industry, eclipsing the higher-profile brand names such as Wilson, Spalding, and MacGregor. Callaway's most famous club, the "Big Bertha" Driver, is the most popular piece of equipment sold to golfers. Callaway has about a third of the U.S. golf equipment market, and its annual sales dwarf its nearest several competitors. Besides its line of drivers, Callaway also makes putters and golf balls, and licenses Callaway golf wear through apparel maker Ashworth Inc. The company began a meteoric rise to fame and fortune with the introduction of Big Bertha in 1991. The success of Callaway Golf Company is attributed to Ely Callaway, who transformed a modest company into a worldwide powerhouse. Callaway led the company until his death in 2001, at the age of 82, from pancreatic cancer.

Early Career in Textiles and Wine

Ely Reeves Callaway, Jr., was born in La Grange, Georgia, a small town about 60 miles southwest of Atlanta. Ely's grandfather, a Baptist preacher, owned and operated a plantation with approximately 20 slaves. When the Union forces defeated the Confederacy in the U.S. Civil War during the 1860s, the Callaways lost their entire fortune. Ely's uncle, Fuller Callaway, was the primary force behind the family's resurgence. He first went into farming, then into dry goods, later into banking, and finally into the cotton mill trade. Ely's father worked for his uncle, but when the young Ely Reeves, Jr., graduated from Emory University, his father advised him not to work for the family.

In June 1940 Ely was working as a runner in the factoring department of the Trust Company of Georgia, and decided to take an army reserve correspondence course. Commissioned six weeks later, Ely went to Philadelphia and began working in the apparel-procurement division of the quartermaster's depot. Callaway was soon promoted to major, a significant achievement for a young man of 24, and was in charge of 70 civilians and two lawyers. During this time, he was buying approximately 70 percent of the total wartime production of the U.S. cotton apparel industry, and was dealing with such companies as Levi Strauss, Hart, Schaffner & Marx, and Arrow Shirt on a daily basis. When the war ended, Callaway decided to go to work for Deering, Milliken & Company in order to continue a career in the textile and apparel industry.

Callaway rose quickly in his chosen profession. In 1954, after he became involved in a disagreement with Roger Milliken's brother-in-law, however, Milliken fired him unceremoniously. Undismayed, Callaway found a job at Textron Industries and, under the supervision of Royal Little, oversaw the merger of Robbins Mills and American Woolen, two large textile mills. When Textron sold Callaway's division to Burlington Industries, Callaway was part of the package deal. By 1968, Callaway was appointed president of Burlington Industries.

Callaway's new post as president of the largest and most influential textile company in the world merely fueled his ambition. When he was passed over for the position of chairman in 1973, Callaway quit abruptly. Picking up his family, he moved from the East Coast to California in order to start a wine making company in the tiny town of Temecula. Although the land that Callaway had purchased was not prime grape growing country, nonetheless he persevered until his venture began to pay off. Callaway Vineyard & Winery was soon supplying its products to well-known restaurants such as the Four Seasons in New York City. He sold the operation to Hiram Walker in 1981 at a price of $14 million. In just a few short years, Callaway had garnered a profit of over $9 million.

Starting Over with Golf

At the age of 60, Callaway thought it was time to relax, and, hearkening back to his youth and the years when he was a tournament champion, he began in earnest to resume his game of golf. One day on the golf course, he became acquainted with a hickory-shaft club that had a steel core. The club was made by Hickory Stick, a tiny California company run by two entrepreneurs, Richard Parente and Dick De La Cruz. Callaway liked the golf club so much that he called up its manufacturers to tell them so. Parente and De La Cruz, short of money and looking for someone to invest in their company, asked Callaway for help. In 1984 Callaway purchased the small enterprise at the bargain basement price of $400,000, and pinned his own name to the company.

Callaway Golf Company, under the direction of Callaway himself, immediately began to conceive of strategies to increase both its profile and its revenues in the highly competitive sports equipment market. Callaway decided the best way to achieve the above goals was to introduce new products, and within four years of acquiring the company he had his design staff come up with a new premium-priced item that did away with a large amount of the neck of the club, while extending the shaft through the clubhead. This club was called the S2H2, short for Short Straight Hollow Hosel. Callaway funded development of the new club by signing up investors, including the General Electric Pension Fund. The pension fund invested $10 million in Callaway Golf in 1988. The response to Callaway's new design was nothing less than phenomenal. Golfers responded to the heavier-weighted clubheads that included a lower center of gravity, and sales shot up dramatically, as did the profile and reputation of Callaway's company. By the end of 1988, company sales amounted to approximately $5 million. One year later, sales had doubled to $10.5 million. In 1990 sales doubled again, and by 1991, revenues skyrocketed to $54.7 million, an increase of nearly 150 percent.

Ruling the 1990s with Big Bertha

In 1991 Callaway created the "Big Bertha" Driver, an oversized driver named for the huge gun used by the Germans during World War I to drop shells on Paris from six miles away. The principle behind Callaway's creation of the metal wood driver was that it put more weight around the perimeter of the head of the club, resulting in a thinner face. According to Callaway, this gave the golfer a greater "feel" at the time of impact with the ball. Moreover, the golfer did not have to hit the ball precisely on the button to obtain directional control and good distance. Soon golfers were swearing by them, and sales surpassed all the other brands of golf clubs made in America.

With the company growing rapidly, Callaway decided to take it public in February 1992. With 2.6 million shares of stock offered on the New York Exchange at $20 per share, the stock had jumped to $36 per share by the end of the day. The capital provided by the stock offering enabled Callaway to expand his manufacturing capacity. The demand for the company's golf club was rising at unexpected rates, and management at the firm needed more cash to take advantage of what has always been regarded as a notoriously faddish market in the golf equipment industry. By the end of 1992, sales had reached $132 million. At the end of April 1993, the price per share of Callaway Golf Company stock had increased to an impressive $54. In 1993, when sales were reported at $255 million, the company had surpassed the better known names in the sporting goods industry such as Wilson, Spalding, and MacGregor to become the revenue leader in the field. As sales and stock price continued to climb, Ely Callaway's personal share rose to a hefty $86 million.

In 1994 Callaway Golf Company introduced an innovative design for irons that would accompany the highly successful "Big Bertha" Metal Wood Drivers. The new irons, created with the same principles in mind as Callaway's "Big Berthas," were an immediate hit on the golf course. Priced at $125, the steel-shafted irons were approximately 20 percent more costly than conventional premium clubs. For $175, a golfer could purchase the new design with a graphite shaft. Since nearly all the company's clubs relied on a new development in casting technology, supplies of the new clubs were limited and helped keep the price per iron high. A total set of nine irons and three woods purchased from Callaway Golf Company at the suggested retail price amounted to the small fortune of $2,325. Yet golfing enthusiasts, both amateur and professional, happily bought the company's wares. By the end of fiscal 1994, sales had risen to $449 million.

At the beginning of 1995, there were only three major companies in the golf equipment industry, including Callaway Golf, Cobra Golf, and Taylor Made, a division of Salomon, which was a prominent manufacturer of skis in France. These three firms were clobbering the remaining competition. Revenues at Callaway Golf in 1994 had increased substantially over the previous year, while revenues at Cobra Golf shot up an astounding 121 percent during the same period. There seemed to be no end to the prospects for these three companies. Nearly 400 golf courses were opened in the United States in 1994, with approximately 800 more under construction. The baby-boomer generation was approaching its golfing years, and the sport was gaining in popularity all over the world, especially in the countries of the Pacific Rim.

Yet trouble loomed on the horizon as increased competition among the three major companies and a gathering group of both new and old golf equipment firms threatened to cut into profit margins. Wilson, Spalding, and other companies saw an opportunity to secure a share of the market with new products made from aerospace-grade materials and composites. When a golfer swings a club, the wrists rotate, and the head and shaft of the club twist, creating a centrifugal force that tends to pull the club from the golfer's hands. When the golfer then hits the ball, for every millimeter the ball is hit off the center of the club's head, there is a corresponding penalty in distance. When Callaway's designers created "Big Bertha," they revolutionized the industry by taking advantage of a major technological innovation, namely, investment casting. This process was an improved technique for making metal club heads and enabled designers to shift the weight of the club around with greater precision than ever before. With other innovations, Callaway's people designed a club that allowed a golfer to actually control more of the centrifugal force of a swing directly onto the ball.

One company, Goldwin Golf, began to use 7075-T6 aluminum, an aerospace-grade material, in its manufacture of golf clubs. Management at Goldwin guarded their production process as carefully as a national secret. Another development by the same company resulted in the design of a club head that weighed a mere 140 grams, approximately 30 percent less than the average weight. GolfGear, yet another firm on the cutting edge of golfing technology, began using an aluminum-vanadium alloy. Only three firms in the industry could forge the new metal. Some companies also began using titanium, which is lighter and denser than steel, resulting in a longer driving range. Titanium drivers were particularly popular in Japan, where they made up over 60 percent of all drivers used. In that market, the seemingly prohibitive cost of approximately $700 for a club was not an insurmountable deterrent.

In spite of the competition, however, Callaway Golf Company continued as the leader in the golf equipment industry. In the mid-1990s the company built a $9 million research, development, and test facility for the purpose of staying ahead of the game. The facility was a state-of-the-art complex, including a 260-yard driving range, which was peppered with hundreds of testing sensors, four kinds of bunkers, and three types of grass in order to simulate the golfing conditions at any course around the world. Callaway expected the highly sophisticated setup to yield even more innovative golf club designs. Since the development of new technologies for designing and new material for manufacturing golf clubs had become so essential to keeping abreast of the industry, the inability to introduce a new product for even two or three years could spell disaster for any golf equipment company.

Keeping Afloat in the Late 1990s

By the late 1990s, Callaway's sales had risen to over $800 million, up from only $5 million a decade earlier. The company's production facility churned out expensive clubs, running three shifts six days a week. Every golfer knew the Big Bertha, and a score of famous amateurs accepted Callaway stock as recompense for appearing in advertisements for the club. Entertainers including rock star Alice Cooper and Canadian singer Celine Dion endorsed the Big Bertha. Even computer mogul Bill Gates took time off from running Microsoft to appear in a Big Bertha commercial. By 1998, Callaway claimed that almost 70 percent of all professional golfers worldwide used a Callaway driver. The company held about a third of the U.S. driver market, and a company spokesperson told Golf Magazine (May 1998) that Callaway wanted 100 percent. Callaway's annual sales were double that of its nearest competitor, and the company hoped to break the billion-dollar mark soon.

Yet conditions were not absolutely favorable to Callaway's continued advance. Wet weather brought on by El Niño in 1998 kept sales flat, and the crash in the Asian financial market also dampened things. Over 16 percent of Callaway's total sales came from Asia, and the weakened economy there had a direct effect on the company. The firm began to diversify. Callaway acquired a putter manufacturer, Odyssey Golf, in 1997, and revamped a small publishing company run by Ely Callaway's son into Callaway Golf Media, which put out coffee table books on golf. Callaway also launched Callaway Golf Experience in the late 1990s, a computer- and video-aided fitting center designed to align customers with the right clubs. Callaway also introduced new clubs, bringing out the Big Bertha Steelhead metalwood line in mid-1998, and following with the Great Big Bertha Hawk Eye Woods the next year. But Callaway's most dramatic move was into the golf ball market. By 1998, Callaway let it be known that it had invested at least $100 million in developing a new golf ball. The ball market ran a high profit margin, and sales industry-wide were growing at a steady pace. With its excellent brand name recognition, the move into balls seemed appropriate for Callaway.

These new strategies may have meant long-term gains, but in the short term, the company was not doing well. Imitators with cheaper drivers had snatched market share from Callaway. Two upstart companies, Orlimar Golf Equipment Co. and Adams Golf Inc., together took over 20 percent of the U.S. driver market by the fall of 1998, sending Callaway's share down. By the end of 1998, Callaway stock had crashed, sales were down 17 percent, and profits had dropped 80 percent. Ely Callaway, who had stepped away from the day-to-day running of the company in 1996, agreed to come back full time as chief executive and try to turn things around. Callaway promptly axed 700 employees, divested unprofitable lines, and trimmed costs all around. Golf equipment sales across the industry began to rebound somewhat. The company brought out its pricey, high-tech Rule 35 golf ball in 2000. But the long-anticipated product launch did not prove as beneficial to the company as it had hoped. Nike Golf, a division of the well-known shoe company, also brought out a golf ball that year, and convinced golf superstar Tiger Woods to use it. Woods won three championships in 2000 using the Nike balls. Callaway expected ball sales of about $70 million for 2000, but brought in less than half that.

With conditions still rocky at the company he brought to prominence, 81-year-old Ely Callaway announced in the fall of 2000 that he would continue to run the firm "indefinitely." The company restructured, folding its previously separate ball unit into the parent company. Mr. Callaway continued to fight for the company's reputation and market share. The firm surpassed even the Biggest Bertha with the ERC II in 2000, a new driver with the largest "sweet spot" yet. Unfortunately, the U.S. Golf Association banned the ERC II from its competitions. Callaway appealed the USGA's decision, and filed suit against the Royal Canadian Golf Association over the same issue. Ely Callaway was diagnosed with pancreatic cancer in the spring of 2001, and died in July that year. The company carried on under the direction of Ron Drapeau. Though sales recovered somewhat in the first half of 2001, with the whole economy evidently slowing, the company did not predict a return to its former growth rate. Yet the company appeared to be in sound shape on some fronts. It had no debt and a sizeable cash reserve. Drapeau expected to lead the company much as Ely Callaway had done, concentrating on innovative product introductions aimed at the average golfer.

Principal Competitors: Orlimar Golf Equipment Co.; Fortune Brands Inc.; Nike Golf.

Chronology

• Key Dates:
• 1984: Ely Callaway buys Hickory Stick, which becomes Callaway Golf.
• 1991: Company launches Big Bertha driver.
• 1998: Company claims approximately 70 percent of pro golfers worldwide use Callaway clubs.
• 2000: Callaway golf balls debut.
• 2001: Founder Ely Callaway dies.