Either/Or... Whitney Crouse on the Polarizing Effects of Inflation

 As seen in Golf Business July/August 2021 

By Steve Eubanks:

The late Nobel Prize winning economist Milton Friedman called inflation “taxation without legislation.” Friedman argued that inflation is the most scurrilous and pernicious tax of all because no politician voted for it, no one takes credit for it and no one seems to know how to control it. Most damning is the fact that inflation hits poor and middle-class citizens the hardest and squeezes small businesses in ways few can afford. 

It’s been almost two decades since the United States has seen inflation levels like those experienced in the first half of 2021. According to the latest statistics from the U.S. Department of Labor, consumer prices rose 4.2% in the first four months of the year, the biggest rate of inflation in 13 years. But those numbers do not include the price of gasoline or building materials, which have skyrocketed. A gallon of gas, for example, is between 60- and 120% higher than it was in the spring of 2020. And that’s mild compared to the price of lumber, which has risen 340% over the same period, an all-time high.  

Used cars are 21% more expensive than a year ago. And Labor costs are on the rise. Overall, the core inflation rate is at its highest level since 1981, a period so volatile that it spawned a new word: Stagflation.

So despite the good news in golf, of which there has been plenty in the last 12 months, operators believe in waving a big yellow caution flag when it comes to forecasting for the rest of the year and into 2022.

“We’re just building these added (inflationary) costs in because, for many people, they are just now kicking in,” said Whitney Crouse, CEO of Bobby Jones Links, which manages golf properties up and down the east coast. “It’s all hitting us at once. Real estate numbers, gasoline, and of course the biggest number is labor, which is a real issue for people at the moment.”

Rising labor costs are being driven by three engines. The first is minimum wage laws. The governors of New York and California signed laws this spring raising state minimum wages to $15 an hour. Similar legislation is on the dockets in other states.

The second engine is the cost-of-living increases brought on by skyrocketing inflation. When a gallon of milk jumps 25%, employees look for raises or higher-paying jobs. And in today’s market they get them, in large part, because of the third engine: government subsidies.

COVID-based government relief checks in some states reached annualized levels of over $40,000. This softened an already slim labor market. So while unemployment remains high, labor shortages continue to drive up wages. 

“The good news in golf is, on the demand side, we’re still pretty strong,” Crouse said. “We’re still well ahead of 2019 in terms of rounds played. So we’ve been able to raise rates considerably. That’s at least going to mask the inflation in the short term. 

“In the public space, rates have been stagnant or, adjusted for inflation, have actually gone down for almost 20 years,” Crouse continued. “So, because of the pandemic and the number of new players that have come into the game and, so far at least, have stayed in the game, we’ve seen rate increases that have kept up with, or in some cases, outpaced the rising costs.”

This elasticity of demand is a phenomenon that hasn’t existed in golf for almost 40 years.

“Herefore, if you raised rates, no matter how insignificantly, you lost market share,” Crouse said. “In the 90s in Atlanta, for example, there were three public or semi-private golf courses that charged $100 for golf. They were high-end with strong demographics. But now, that number is substantially greater. You have a lot of courses in town that can charge $100 or more and get it because demand is so great. But, once you reach equilibrium again where if you raise rates, even a little bit, you see a dramatic loss in rounds, then even if you’re only dealing with an annualized inflation rate of 2%, that’s the quickest way to go out of business.

“Unfortunately, a day of reckoning is coming. No business can continue to raise rates at the levels of (inflation) we’re currently seeing. I was at Home Depot last week and as I’m walking through the lumber department, I asked a guy there, ‘Hey, is this stuff going up much?’ He stopped, looked at me, and said, ‘You see those 2 x 4s? They’re four times more than they were six months ago.’ He said contractors are screaming. They’re having trouble with their contract (pricing) because materials are so much more expensive now than they were.”

The biggest immediate hit in the golf industry will be capital improvements. Gasoline and food costs can, in the short term, be absorbed. But when the price of siding for the cart barn triples in six months, that project either takes a big chunk out of a course’s profits or, more likely, gets deferred.  

“Capex is the thing a lot of people forget,” Crouse said. “But if you’re not saving for that new paving or that new irrigation system or repairs on the buildings, then it’s going to get you. And now when you look at the costs of materials and labor and the fact that it’s more and more difficult to hire people and the prices for those people keep going up, it’s really tough.” 

So, where is this unbridled inflation likely to leave the golf industry? We needn’t guess. Look no further than the 1970s and the squeeze golf operators faced at that time.

“Inflation polarizes,” Crouse said. “In periods where rising costs are outpacing the prices you can charge, then you either have to be Nordstrom’s, where the quality and service at your facility attracts people, even at a higher price, or you have to be Walmart. You’re either at the top end, where you have an affluent base and you can afford capital improvements on a regular basis, or you have to be the low-cost provider, the person charging $25 and if the cart paths haven’t been paved and the clubhouse paint is chipping, people understand because of the value.

“What you don’t want to be; what you can’t be in an inflationary period, is stuck in the middle. Because as prices go up, people gravitate to the extremes. Market share goes to either the high or low ends. And the middle gets squeezed.”