Topgolf Callaway Brands’ unique combination of golf equipment maker and golf-themed restaurant chain has run into a buzzsaw known as a weak operating environment for restaurants.
But the company’s proposed fix for those problems risks creating more headaches down the line.
Topgolf is an innovative concept that combines a casual-dining restaurant with golf in fairway-sized venues where customers hit balls equipped with tracking technology. The chain has struggled with weak sales over the past couple of years, including a 12% decline in the first quarter.
The company is now rethinking its pricing and value proposition.
“As the mid-income consumer has become more stretched, Topgolf has begun to be perceived as relatively expensive,” Oliver Brewer, CEO of Topgolf parent company Topgolf Callaway Brands, told analysts on Monday, according to a transcript on the financial services site AlphaSense. “And in a slowing consumer environment, this is significant.”
That is a heck of an admission that suggests the company either overstated demand for its product for years, overpriced itself, or both. Yet it’s indicative of the challenges facing that entire sector, which has gone from one of the hottest sectors in the industry to one of its coldest in less than two years.
Topgolf thrived coming out of the pandemic, as consumers emerging from quarantine eagerly sought out entertainment. Callaway, the golf equipment maker that bought the chain in 2021, was so thrilled with its performance that it renamed the company by 2022.
Topgolf also spawned all kinds of competitors, which generated hundreds of millions in investment cash to fund concepts combining food with all sorts of entertainment, from bowling to baseball, pickleball to puzzles.
Yet the sector could only ride the wave of post-pandemic release of pent-up demand for so long. Consumers spent up savings, inflation ate into their finances and customers started cutting back. Callaway is now spinning off Topgolf, but the chain’s sales challenges have only raised more questions.
Almost nobody in the sector is doing well right now. Food-and-games chain Dave & Buster’s, one of the segment’s largest players, has been pressured over the past two years and just ousted its CEO. The bowling-and-bocce concept Pinstripes, meanwhile, was just delisted less than a year after it went public in a reverse merger. It also needed a $7.5 million loan just to fund operations. At least two food-and-games concepts, Chicago WhirlyBall and Velocity Esports, have declared bankruptcy.
Topgolf is now working to fix its apparent value perception. The chain has removed booking fees, which Topgolf CEO Artie Starrs called “absolutely the right thing to do with the consumer.” It has created family-oriented “Sunday Funday” and “Topgolf Nights” aimed at a younger, late night crowd. Some venues are offering discounts on weeknights. Customers can find $5 draft beer and $6 margaritas at the bar.
For the company, the moves will hurt profitability over the short-term. Topgolf expects that its EBITDAR margin, or earnings before interest, taxes, depreciation, amortization and rent, will decline 100 to 200 basis points. That’s potentially problematic, because the company expects to take on more debt in its spinoff later this year.
But Starrs argues that this is a worthwhile investment because of the chain’s long-term ability to improve profitability. “We still see significant long-term margin opportunity for our venues and have proven our ability to grow these margins,” he said.
Customers have responded. Traffic using just one or two bays, or average, non-event customers, has improved “significantly” in April, though spending-per-visit is down in the high single digits.
Topgolf’s strategy is largely focused on those customers because the company has been losing its corporate business, where price is less of a concern, which it also blamed on the economy. “We’re clearly seeing corporate spending pressure,” Starrs said. “The environment for event spending from corporates in particular is pressured.”
Yet higher-end restaurants, which similarly rely on corporate events and higher-income consumers, have not quite had the same challenges.
In shifting to value, however, Topgolf risks losing its premium position as people start seeing it as a cheaper brand rather than the destination it was supposed to be. Its existing customers will grow accustomed to the cheap prices and will be less likely to visit at full price.
But this is the situation the food-and-games sector is in right now. Pairing food with fun sounded great when everybody had money. It’s a lot less so when people are cutting back.