Titleist Golf Balls

Type: Market Entry, Market Sizing

Problem at hand:

Our client is Titleist Golf Ball Company, a global manufacturer and supplier of golf balls. It is present in almost every market in the world. One country where they are not yet available is the African country of Malawi. Currently they have no representation in the country and have no information on the size of the market. The CEO wants to know, should they enter the market and if so, how?

Approach and Framework:

Assess the Target Market:

What is the size of the market?
What market share would the client need to capture in order to reach break-even?

Profitability:

What would be the cost incurred?
What is the estimated revenue and profit margin on sales?

Competition:

Who are the competitors currently supplying the market?
Is the cost structure competitive?
Do they have the necessary sales or distribution channels?

Market Entry Strategy:

What is the value chain involved?
Will partnering allow the company to enter significantly faster than building capacity in-house?

The client has provided us with the following inputs-

Malawi is a small country between Tanzania, Zambia and Mozambique. It has a population of 11 million and a GDP/cap of $158. There is no detailed, reliable information on population demographics available.

Market Size:

As a consultant, you have to estimate the market size in terms of the number of golf balls sold each year.

We can estimate the number as:

Number of players*Number of games played per year*Number of balls lost per game

Players

Tourists & Casual/ Unregistered Players

Registered Players

After conducting market research, it is observed there are 150,000 unregistered players and the number of members registered with the Royal Malawi Golf Association is 48,723

Registered Players

22%

Unregistered Players

78%

Customer Segmentation

The following information was also extracted after market survey and on-ground validation. Assume that all the lost balls are replaced with new ones.

Calculations:

For simplicity, we consider 50000 registered players

Therefore, balls lost in a year:
(50000 players * 50 games/year * 1 ball/game) + (150000 * 12 games/year * 5 balls/game)
= 2,500,000 + 9,000,000
=11,500,000 balls lost per year

Total Addressable Market Size= 11.5 million Balls

Thus, the total market size comes to be 11.5 million balls annually, assuming that all the lost balls are replaced with new ones.

The golf equipment market is expected to register a CAGR of 2.73% during the forecast period (2021 - 2026).

2026

2021

2.73%

Market Growth

Some strategic issues that need to be considered while understand the Market Structure

The distribution channel and the sales point- The final sales are via pro-shops at the golf courses and they use salespeople to build relationships
Price sensitivity of golf balls- Given the target customer base for golf balls, that majorly includes people from higher economic strata marked by sophistication, they can be considered to be price inelastic.

Competitor Analysis:

Survey shows that the market is currently supplied by 3 suppliers.
There are:

Two local entrepreneurs (A and B) who import balls from China
An American supplier, Callaway who imports from the US

Each player has a 1/3 market share.

Competitors’ Pricing:

The client claims that their product is comparable/slightly better than Callaway. They decide to price their product at $0.78 each.

While it may seem that for market penetration strategy, Titleist Golf Ball Company should set their price tag lower than the industry benchmark, what the consultant should be mindful of here are the category of the product and the quality. Usually, playing golf is more of a status symbol i.e., he/she plays golf because it would symbolize, he/she belongs to the sophisticated higher economic group. Thus, even if the price of the golf ball increases the customer would continue to demand golf balls to keep playing the sport as their status symbol is at stake here. This is known as the snob effect. Another factor that comes into play is the Veblen Effect i.e., the customer feels that he is paying more for better quality. And as our client claims that their product is associated with better quality the price would seem justifiable to our target consumer base owing to the Veblen effect. Hence, they would tend to purchase more of the Titleist Golf Balls because of its higher-end price tag which assures them of higher quality of golf balls.

Market Share Needed to Achieve Breakeven Volume

The client’s accounting department came up with some costings for entering this country:

Revenue per ball: $0.78 / ball
Direct materials cost: $0.22 / ball
Labour cost: $0.15 / ball
Other variable costs: $0.16 / ball
Country office costs: Rent $5,000 per month
Sales person cost to company: $2,400 per person per month
Country manager cost to company: $4,000 per person per month
Additional information from accounting department: 1 salesperson can service approximately 40 golf courses (South Africa benchmark)
Number of golf courses: 206

Calculations:

Revenue per ball = 0.78

Variable Cost per ball = 0.22+0.15+0.16 = 0.53

Number of salespersons required = 206/40 = 5.15, approximated to 5 (It is recommended that the consultant does not approximate the number of required salespersons to 6 as that would entail greater cost. Rather increasing the workhours and a small amount of wage, while keeping the salesforce to 5 seems a more plausible choice)

Fixed Cost= 12*(5000+4000+(2400*5)) = $252000/year, approximated to $250000/year

Let’s say x balls are sold to achieve breakeven

0.78x = (0.53x+252000)

0.25x=250000

Or, x=1,000,000 balls per year

That implies that the client needs to capture about 9% of the market to achieve breakeven.

Titleist Golf Ball

Competitors

91%

Market Share needed to achieve Break-Even

Strategies for Market Entry:

Based on our calculations, we need a 9% market share to get into this market. As seen in our costing report, our traditional way to enter the market is to use salespeople to get visibility in stores. The client wants to know if there are any other feasible ways to overcome the barriers of being a new entrant in the market.

Use of 3rd parties who have a distribution system and thereby making the system purely variable, rather than putting their own people in and creating fixed costs
Imports (pilot project can be implemented to check whether they will make more money) Converting the 2 local entrepreneurs to supplying the market with our ball vs the Chinese
Trying to cut fixed costs out of the system by changing pay packages, using less salesmen

Final Recommendations to the CEO of Titleist Golf Ball

After careful consideration of the numbers and the assumption that all lost balls are replaced with new ones for all players (registered and casual players), Malawi presents an attractive market with an estimated 11.5 million balls sold every year. Considering each ball to be priced at $0.78, the total addressable market provides a revenue opportunity of $8.97 million. Titleist Golf Ball, with their quality at par with or even better than Callaway, would require to capture around 9% of the market to achieve break-even and establish a strong foothold in the new market. The higher end price would likely drive customers to purchase more of Titleist Golf Balls.

This is mainly due to the fact that owing to the target customers we see 2 economic demand exceptions coming into play – Firstly, the Veblen Effect, where the customer is thinking that he is paying more for a better quality of golf ball i.e., higher quality is indicated by the high price tag. Secondly, the Snob Effect, where the customer has a perception that playing golf is a status symbol and thus, even if the market price of golf balls increases, owing to Snob Effect, the demand for golf balls would not dip.

However, if a market survey reveals that casual players tend not to replace lost balls with new ones, the scenario would change, as the segment contributes to nearly 80% of the demand generated.