In this occasional series we will look at old and new businesses and trace what went wrong along the way.
Photo by Echo Hazes from Pexels
One example of a company that rose quickly but has also quickly fallen into financial difficulty is Topgolf, a golf driving range that was more of a nightclub than a golf club. Their purchase this year by the private equity firm Leonard Green & Partners was made in hopes of turning things around, but time will tell whether their moment has been missed or simply delayed.
The Beginning
The idea started as a way to gamify golf. Golf, even for professional athletes, is a difficult and frustrating sport that requires thousands of hours of practice and innate ability to master. What the founders of Topgolf sought out was a way to make the process of improvement fun and social. If they could modernize the practice aspect by making it entertaining as target-oriented practice golf (or, Topgolf), they thought that they could encourage users to participate and start a new form of golf entertainment. While the first location had some growing pains, it attracted interest from a US-based investment group that invested in the Topgolf concept. After the revamp, a new location was opened in Dallas, Texas, and the initial results were phenomenal.
The Rise
Their first location in Dallas, Texas, was the right choice for many reasons, including the relatively high amount of disposable income of the nearby residents. Their successful launch of the concept in Dallas quickly led to new locations in nearby markets. What the business model succeeded at was making the act of practicing golf more enjoyable for those people who were not interested in getting better at golf. The reason to go to Topgolf was as much to see and be seen as to play golf, with drinks and dining available at your golf station or at the bar and restaurant. Almost 40% of the income for Topgolf resulted from food and beverages, which gave people a reason to come aside from practice. The customer base grew quickly, and investors saw a massive opportunity, giving Topgolf access to cash to expand to even more locations.
This meteoric rise meant that it attracted the attention of other companies in the golf industry, specifically Callaway Golf, which saw in Topgolf an opportunity to grow the game of golf through increased fervor that could lead to greater sales of golf equipment and clothing for Callaway. As everyone was trying to get a reservation at their local Topgolf, Callaway Golf acquired the business for approximately $2 billion in an all-stock transaction, successfully merging the next big thing in golf with one of the game’s biggest brands.
The Fall
The Topgolf business model was very successful in the markets it originally focused on. However, Topgolf benefited from introducing a new concept in areas primed for a new entertainment offering. The new acquisition by Callaway meant that they wanted to expand as quickly as possible, which meant moving to new areas that did not have the fertile ground for such an endeavor. Massive real estate investments, construction costs, and staffing requirements meant that a lot of upfront money was spent to open each new location, and the company’s focus shifted from experience to growth. Unfortunately, a global pandemic and worldwide economic slowdown meant people were changing how they spent their disposable income. The business quickly saw a shift in its costs versus income. Essentially, they overestimated Topgolf’s scalability. The availability of disposable income of the customers did not scale with the costs of operation. The business model could not sustain its growth, and its valuation suffered.
Topgolf recently sold to a private equity firm for $1.1 billion, which was almost half of its 2021 valuation. The new purchase resulted in layoffs, restructuring, and a pause and re-evaluation of ongoing plans. Time will tell whether this change in ownership will return the business to its previous level of success, but it is far from a sure thing, as it once was.
Expansion was the cause of the downfall for Topgolf. While most good businesses look to expand their footprint, they should be wise enough to make sure their popularity in new areas is not confused with successful scalability.
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