STRUCTURAL DETERMINANTS OF GOLF COURSE PROFIT : THE CASE OF GOLF COURSES IN GEORGIA

The Ordinary Least Square estimation and survey data are employed to quantify the influence of golf course features and location on incremental gross margins. The analysis distinguishes among three golf course ownership types, private, semi-private, and public, to implicitly account for different motives behind their operation and ability to compete. Results show that the age of the facility, location, number of rounds played, and the size of course influence revenues and the gross margin as a result of additional spending on maintaining the playing surface. Differences among the ownership types exist in the magnitude of effects. INTRODUCTION Golf is a major recreational activity and a rapidly growing business in the United States today. According to the U.S. Census Bureau (2007a), between 1980 and 2004, the number of golf players increased by 63.2% from 15 million to 24,479 million, and the number of golf courses increased from 12,846 in 1990 to 15,489 in 2000, or 20.6%. The number of golf courses as reported by the National Golf Foundation (NGF) (2005) continues to increase and reached 16,057 in 2004. Golf courses constitute a recreational use of land which offers an economically viable alternative to agricultural use. The Council for Agricultural Science and Technology (CAST) (2002) identifies turfgrass as a product of agriculture whose maintenance on golf courses also uses traditional agricultural inputs such as fertilizers, pesticides and other chemicals, irrigation water, and equipment. The demand for recreational facilities results from preference for leisure coupled with increasing income as suggested by Templeton et al. (2000). Crittenden (1995) notes that the golf industry understands that to remain competitive, a course must be well managed and marketed. Stephenson (2003) observes that with increased competition within the golf industry, it is important for golf course managers to identify factors which attract and retain their golfing clientele. Examining various aspects of golf course economics, Shmanske (1999) concludes that the demand for golf at a particular golf course is a function of the price, location, relevant population, and other characteristics including the level of maintenance of the golf course. Southwestern Economic Review 114 Golf course maintenance includes mowing, fertilizing and pest control in turfgrass, caring for trees and shrubbery, maintaining sand traps and equipment, among others. If maintenance is not undertaken daily, the condition of the course will suffer, risking the loss of clientele to other, presumably better maintained courses. Therefore, proper maintenance is expected to result in greater demand for golfing at a specific site. However, regular maintenance is associated with high expenditures, but the potential for profit remains if the marginal costs are less than the marginal revenues. All managers must deal with unavoidable issues of feasibility, which implies that a course generates sufficient cash to fund its operations, then earns and retains profits on an annual basis for growth and sustainability. Aterburn (1998) asserts that feasibility, profitability, and sustainability of operations constitute key indicators of business viability that apply to golf course facilities. The objective of this study is to quantify the link between factors that have a potential to directly or indirectly affect golf course revenues because they directly or indirectly influence turf maintenance costs and golf course financial performance. The examination of the effects of selected factors on the measure of financial performance provides an indication of the importance of auxiliary services offered by a golfing facility to the revenue potential as well as the common golf course characteristics such as the number of holes. To provide additional insights, this study distinguishes among three ownership types of golf courses, i.e., private, semi-private, and public. The importance of this distinction is relevant because various golf course characteristics and factors that influence the management of a facility may differ in their response to ownership type. It is plausible that a private corporation operating a golf course attaches a different importance to revenue generation than a tax-supported entity responsible to a group of elected officials. In this regard, McElyea and Krekorian (2006) assert that private operation of a private golf course is often more efficient than public operation, and generates extra savings ranging from $100,000 to $250,000. Reports by the NGF (2002) suggest that core golfers (those playing an average of 37 rounds of golf per year with a minimum of 8 rounds) tend to choose among three publicly accessible courses and may choose facilities of different ownership. Furthermore, Marchand (2006) notes that competition for golfers has greatly intensified between the three types of ownership, with some municipal courses luring golfers away from privately owned courses. To test the ownership relevance, three separate equations were estimated using sub-samples of data that account for an ownership type. An alternative model is estimated applying pooled data and the binary variables describing the ownership type. The study is based on the data collected from superintendents and managers of golf facilities in Georgia. The results from the study generate new knowledge about factors potentially responsible for the economic viability of a golfing facility. Specifically, superintendents and managers of golf courses gain insights about sector-wide performance and are able to review their operation’s relative strengths and weaknesses. In the industry, the job performance of superintendents and managers is evaluated on the basis of the financial performance of each facility, yet the immediate interests of superintendents and managers are not identical. Superintendents are directly responsible for the course maintenance and struggle with the pressure to control maintenance costs, while assuring a high quality playing surface that influences the golfer loyalty. Managers are accountable for the performance of the whole enterprise, which may include other services besides golfing such as access to dining facilities or other types of recreation, e.g., a swimming pool. The relative role of various activities in creating additional costs and generating revenue helps Structural Determinants of Golf Course Profit: The Case of Golf Courses in Georgia 115 managers to allocate resources within the operated facility. Investors in real estate development gain knowledge useful in the calculation of expected returns prior to committing resources to invest in a golfing facility. The NGF (2005) reports that about one in five new golf courses is a part of a real estate development suggesting that development is an important part of many new facilities. How a real estate development is related to the economic performance of the whole facility is investigated in this study. Consultants and outreach personnel ascertain the contribution of various factors to the financial performance of the enterprise and are able to gauge their role in the process of improving the management of a facility. The importance of each factor affecting the marginal costs or revenues also helps to guide the research and outreach efforts. Finally, local governments, especially those investing in community golf courses, are able to better gauge the current and planned costs, while recognizing factors responsible for shaping the profitability. Public bodies considering a renovation, expansion, or construction of a golf course are able to compare the relative importance of different factors relevant for such undertakings. THE CONCEPTUAL MODEL The examination of the relationship between the golf course characteristics, including the ownership type, and a measure of financial performance is an empirical question that can be studied in the context of available data. A golfing facility’s financial performance information is proprietary and not readily available. Data used in this study were collected through two surveys described in the next section. However, even the most thoroughly designed data gathering effort requires cooperation from management to share the relevant information and assumes that the desired data are easily obtained from the existing records and applied reporting system at each facility. The role of ownership on the economic performance of an enterprise has been well established. Communal ownership has been observed to experience greater incidence of mismanagement leading to X inefficiency. Such ownership kept costs high, while the concealed measure of profits hid the extent of waste. In the case of public ownership of golf courses, Gustafson (1999) and Gustafson and McLean (2002) observe that in some communities, there has been pressure to privatize such facilities due to the need or desire to lower government expenditures and find new revenue sources. Many members of the community viewed privatization of public service provision as a way to promote the competition and risk-taking constrained by the public sector preoccupation with strictly defined responsibilities and procedures. The “invisible hand” guided numerous course construction projects because the primary motives of the investors were anticipated returns. Mothes (1998) indicates that farmers across the U.S. have attempted to convert their operations into golf courses in expectations of returns higher than for agricultural production. This study primarily contends that differences in the magnitude and direction of marginal effects of the various explanatory variables across the ownership groups have important implications on the use of available private versus public funds. Although public golf courses dominated in Georgia in the past, the majority of newly constructed golf courses are private or semi-private facilities. The increased demand f