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Up, up and away
The rising cost of raw materials has equipment manufacturers in golf seeing red. Will superintendents be the next to feel the pinch?
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With nearly 40 years of experience in the vehicle business, there’s not much Phil Gaffney hasn’t seen or experienced in the industry. After decades spent in the automobile, truck and construction industries, Gaffney, who now is in charge of purchasing raw materials (or commodities) for Club Car, says he’s never before encountered what’s been occurring in recent months.
“In terms of commodities purchasing, the past 12 to 18 months have been the most difficult cost-pressure scenario in my 35 years,” he says. “We haven’t experienced price increases of this magnitude in more than three decades. It is unprecedented.“
Through the roof
Golf car makers use many of the same raw materials as course irrigation and maintenance-equipment manufacturers. Gaffney has diligently tracked records of what Augusta, Ga.-based Club Car has paid for its raw materials — primarily aluminum, copper, lead, polypropylene and nickel — since January 2004. From that time through November 2007, his cost figures show:
• Aluminum rose 166 percent. Manufacturers have designed aluminum into their equipment vehicles for many years because of its non-corrosive and lightweight nature. Much of the cost increase has occurred in the last 18 months.
• Copper increased 255 percent. It is used heavily in battery chargers and electric motors. Club Car’s electric motors have about 13 pounds of copper in the windings and wire harnesses. Battery chargers also contain significant amounts of copper.
• Lead jumped 646 percent. Club Car Precedent golf cars average 232 pounds of lead.
• Polypropylene, a base product and petroleum derivative, climbed 175 percent.
• Nickel leapt 227 percent. Nickel is an important component of steel, particularly stainless steel, which the government requires in beverage vehicles and kitchen appliances/accessories.
Why the big cost hikes?
There are several reasons for the enormous increases in raw material costs, especially when you consider that the increase in overall inflation was about 10 percent over the same time frame.
First is the emerging economies in the Far East, particularly China and India. China, for instance, manufactured just 500,000 automobiles in 1990. Today, Chinese consumers are purchasing more than 10 million cars a year. Many of the same raw materials that go into making Chinese cars are also used in producing golf course equipment here in the United States.
But while demand for those raw materials has increased, production has not kept pace. And as any high school economics student knows: Increased Demand + Stagnant Supply = Higher Prices.
Then there is the matter of gas and oil markets. Petroleum is a component of many golf course products, most of which are also shipped in diesel fuel-powered trucks. Anyone who has had to fill an automobile or home heating oil tank knows what has happened to petroleum prices in the past two years. The Iraq War and increased consumer demand, among many other things, have combined to triple the cost of a barrel of crude oil in the past few years. And even if more crude oil was available at cheaper prices, the nation’s refining capacity has not increased to keep pace with the upsurge in demand.
“This is not just a U.S. problem but a global situation,” Gaffney says. “With what has been going on in the Mideast plus the rise of the Far East consumer and manufacturing markets, there has been a huge jump in commodity prices. China and India are large economies requiring huge amounts of raw materials. That has shifted market demand, cost and availability of these products. It is a global situation everyone has been dealing with for a couple of years now. It will be a continuing challenge in the golf marketplace.”
Impact on golf companies
“Gee, Toto, I don’t think we’re in Kansas anymore,” Dorothy told her terrier after her windblown farmhouse touched down in Oz.
Superintendents and course owners have been delivering the same message to equipment manufacturers in recent years. “Kansas” represents the golf construction and player participation boom times of the 1990s. With more course closings than openings these days, and golf participation stagnant, “Kansas” is definitely in the golf industry’s rearview mirror as the first decade of the new millennium draws to a close.
Equipment manufacturers have received and understand the message. “We know our customers are facing cost pressures in many areas of their budgets — labor, healthcare benefits, fertilizer, fuel, etc.,” Rick Olson, The Toro Co.’s director of operations for commercial equipment, says.
Adds Gaffney: “The golf industry is struggling. You combine these economic issues with our upward cost pressures and it makes it very challenging to produce and sell golf equipment in our marketplace. Passing on some or even small chunks of our heavyweight cost drivers is not easy.”
Knowing they cannot simply jack up equipment prices to cash-strapped course operators, manufacturers have instead sought to strategize and engineer their way around price hikes as much as possible.
“As a large durable goods manufacturer of turf equipment and irrigation solutions, we spend a significant amount of time working with our supplier partners to minimize the impact of rising commodity prices,” Olson says, adding that the company eliminates as much waste as possible from its manufacturing processes. “We have many cost-containment strategies in place to help offset these raw material cost increases without affecting product quality.”
David Behrmann, the global marketing manager for Rain Bird’s golf division, notes the irrigation component manufacturer was able to hold its highest price increases to just 6 percent in the coming year by developing design efficiencies that make products easier to manufacture and with fewer parts so the process takes fewer steps.
Product durability, which results in superintendents needing to buy new or replacement equipment less often, is frequently overlooked as a way manufacturers are able to avoid passing raw-material cost increases on to customers, Behrmann says. “Every superintendent focus group we conduct wants products to last longer. Test results showing products last … longer make the price increase a little more palatable.”
Rain Bird tries to manufacture products with less copper, steel and brass while also encouraging superintendents to adopt technologies that require less of those metals. For example, Behrmann explains, there are basically two different types of irrigation control systems — the classic central control system with satellites and an emerging technology worldwide that uses decoders buried underground. Decoders require less wire, meaning they cost less and require fewer repairs, he continues.
“Copper wire is one of the major costs of an irrigation system,” he says. “Every superintendent has to think about that when developing a budget. We are trying to convince owners and superintendents that decoders are a better option for them.”
Likewise, John Deere is pushing new technologies that help save superintendents money, according to golf group marketing manager Mike Koppen. Three years ago, Deere introduced its 2500 E riding greensmowers. The hybrid vehicle reduces fossil fuel consumption by as much as 30 percent.
“It provides excellent cut quality and lowers a club’s fuel budget,” Koppen says. “We have plans to take that technology to other golf products, like fairway mowers and utility vehicles. If superintendents can save 30 percent in fuel costs on one piece of equipment, imagine how much they can save on 30 pieces of equipment.”
Mark Woodward, CGCS, who serves as the golf operations manager for the city of San Diego, home to Torrey Pines, says when he worked in Mesa, Ariz., several years ago, he went to electric greensmowers and bunker rakes. He plans to look at those and other new technologies for San Diego’s municipal courses following the U.S. Open, which Torrey Pines hosts in June.
“We went to electric vehicles for two reasons,” the 29-year member of GCSAA says. “The first was for the environmental benefits and fuel-cost savings. The other was to reduce noise pollution because we were surrounded by homes.”
Gaffney says Club Car has engineered improvements under the hood using speed controllers, devices that measure energy in the power train and electrical systems that save superintendents money on their operational budgets. Improved molding practices reduce the material needed during manufacturing.
“Our productivity programs,” he says, “attempt to stiff-arm cost increases to the consumer by looking at improvements to our molded plastics, shape-extruded aluminum products, electric motors, battery chargers and battery packs.”
Superintendents’ bottom line
What does this all mean for superintendents? In the short term, most companies have been able to hold their percentage price increases to single digits.
Gaffney says the typical Club Car vehicle that sells for $3,000 to $4,000 costs superintendents roughly $200 more today than it did in early 2004, roughly a 6 percent hike.
Rain Bird’s price increases for 2008 range between flat and 6 percent depending on the product, Behrmann says.
In some cases, such as with John Deere, prices have remained basically the same the past two years, Koppen says.
“But as commodity costs continue to increase we have to take a look at price increases,” the Deere representative adds. “These (raw material hikes) will have to be passed on to the end user at some point. But we will be very, very careful when we do that.”
In the meantime, Koppen says, superintendents are trying to have their course budgets increased, knowing price hikes for equipment are likely on the horizon. But bigger budgets are a tough sell in the current golf market.
Woodward says he has purchased $1.5 million in equipment over the past two years preparing for the U.S. Open.
“It is always difficult when equipment prices go up,” he says. “But we have been pretty fortunate. We are a municipal operation and use competitive bidding. The manufacturers have been pretty good about keeping their prices competitive in terms of what I have available in my budget.
“One issue that also affects us tremendously is the fuel costs to run all this stuff. I urged the club to raise greens fees because fuel costs were increasing so dramatically. Golf courses are not immune to rising petroleum prices.”
Feeling the squeeze
One superintendent who knows that and feels the pinch more than most is Ed Michaud, who in addition to heading maintenance operations at the 6-year-old Fox Ridge Golf Club in Auburn, Maine, is also the course’s co-owner. He feels fortunate that the only additional equipment he has had to purchase in the past two years is a riding rough mower.
“I had a little sticker shock when they told me a new one would be $60,000,” says Michaud, an 18-year member of GCSAA and the current president of the Maine GCSA. “I ended up buying a demo with just over 100 hours on it for $48,000 and walked away thinking I got a heck of a deal. I could have been buying a house for that money.”
Michaud adds he has noticed that fertilizer, which uses petroleum products in the manufacturing process, has increased in price in recent years. “I buy a lot of my fertilizers through a local company,” he says. “The representative called me two years ago and said his company’s prices were going up first of the year at least a dollar a bag. He said if I could commit to buying product immediately, he could lock me in at this year’s lower price. He made a point to give me a call and realized any fertilizer purchases were coming out of my pocket because I am one of the owners. He probably saved me $2,000.”
Michaud believes the golf industry has yet to feel the full impact of rising petroleum prices, both directly at the pump and indirectly through equipment and supply purchases.
“For instance, with the price of oil going up, farmers have supposedly planted something like another 10 million acres of corn to turn into ethanol,” he says. “They are going to need fertilizer for their crops, so that will probably drive up the price of fertilizer. Now you are into national supply and demand. They are growing more corn because of the price of oil, which in turn pushes up the cost of fertilizer. So the ramifications of these commodity price increases are very far reaching. It’s a double whammy with the cost of fertilizer. Who knows how many of those other double whammies we are going to see.”
Sounding very much like his fellow equipment manufacturers, Gaffney concludes: “We have only passed on a portion of our mammoth cost-ups. We are engineering better, manufacturing more effectively, and working with our global supply chains to minimize the impact. It takes a multifunction approach to deal with a customer base that cannot handle us simply passing along our added costs.”
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