At an investor meeting, Artie Starrs, CEO of Topgolf, discussed the fast growth and improving unit economics of the golf-entertainment concept and the benefits the chain is just starting to realize from newer digital activations and marketing pushes.

“I’ve led the business and had this privilege to do so for the last few years,” said Starrs. “I’m proud of our team and the improvements that we’ve made. But I believe we’re just getting started.”

Starrs was formerly the president of Pizza Hut before taking over as Topgolf’s CEO in April 2021.

Topgolf Callaway Brands, which acquired Topgolf in March 2021, set several ambitious goals for Topgolf at the company’s 2021 Investor Day, including Topgolf expecting to represent more than half of adjusted EBITDA for the company by 2025, up from 40 percent in 2021.

Chip Brewer, president and CEO of Topgolf Callaway Brand, said Topgolf is tracking at or above those targets, with Topgolf expected to be “the biggest part of our growth and profitability story long term.”

The investor meeting came after shares of Topgolf Callaway Brands fell 13 percent on May 11, its largest drop since October 2020, after the company reported first-quarter results topped expectations but lowered its guidance for the year. The outlook change led to concerns about the fundamentals of the company’s business, although Topgolf Callaway Brand officials said it was due to the worsening macro environment.

Overall, Topgolf Callaway Brand’s goals from 2021 to 2025 include the following:

  • 10 percent to 12 percent annual revenue growth;
  • 15 perce t to 18 percent EBITDA growth; and
  • Mid-teens adjusted EBITDA margin.

“At Topgolf, we’re on a mission,” said Starrs at the investor event. “As a brand, we’re on a mission to grow, evolve and expand access the player participation in the game of golf through creating more fun, more simple and easier ways to play this great game.”

Topgolf’s growth is expected to be driven by the expanding appeal of the off-course golf movement that the chain is spearheading. Off-course golf participants have grown from 4.3 million in the U.S. in 2006 to 27.9 million in 2022, representing a CAGR (compound annual growth rate) of 12.4 percent. Last year saw off-course play come in ahead of on-course golf participation, which ended 2022 with 25.6 million participants.

Topgolf expects to add 3 million to 4 million new off-course participants with its planned 11 store openings this year.

Internally, Topgolf’s goals include doubling its player base from 28.5 million in 2021 to 57 million by 2025, as well as increasing the number of balls hit per player by 3 percent to 5 percent annually to enable players to hit 50 billion balls between 2021 and the end of 2025.

Other key metrics around Topgolf’s business include a $38 average walk-in spend per visit and 1.5 times annual visits per player (customer). Among its player demographics, 60 percent are between 18 to 54, 40 percent are female and 40 percent are non-white. The average player has a household income of $100,000. Half of Topgolf’s participants are non-golfers, and Topgolf has found that 10 percent of new golfers attribute off-course golf as their entry point into picking up the game.

Under Topgolf Callaway’s ownership, Topgolf ramped up store openings and has 82 owned and operated stores. It plans to open 11 stores annually over the next several years. The chain recently upwardly revised its EBITDAR targets.

“The returns we’re seeing are strong,” said Starrs. “The improved returns targets result from the continued success we’re seeing in new venue openings combined with actual venue performance in our venues with longer operating history.”

Topgolf’s financial model remains attractive with an estimated payback period of 2.5 years, targeted cash-on-cash returns in the range of 50 to 60 percent, and targeted return on gross investment between 18 percent and 22 percent.

Topgolf’s revenues reached $1.4 billion in 2022 with 7 percent same-venue growth versus the pre-pandemic fiscal 2019 period. Topgolf delivered 75 percent bay utilization at peak times, and 33 percent four-wall adjusted EBITDAR margins.

Driving Comp Growth 
Starrs said Topgolf can grow comp sales through a balance of traffic and price, with approximately one-third of the growth coming from traffic. Topgolf’s team is confident it has the leverage to raise prices in 2023. Starrs said, “We have seen little to no resistance to date, specifically at peak demand.”

Digital, particularly its Popularity Inventory Engine (PIE) scheduling app, is expected to significantly drive comp growth gains via improved hitting bay utilization going forward.

Starrs noted that Topgolf relied primarily on walk-in players only a few years ago before also targeting larger groups with corporate events. Only recently, Topgolf began allowing reservations to serve smaller groups as part of its event approach, with the growth of smaller two-bay reservations helped by the ongoing migration to PIE. Starrs said digitally booked two bay players are returning more often than through traditional events booking.

“Two Bay bookings are now 10 percent of our business and growing. And broadly, we view all events, corporate and Two Bay, as our Happy Meal,” said Starrs. “It’s like the introduction to the brand and the Topgolf experience in the same way we all got to McDonald’s when we were kids.”

PIE, which was introduced to 36 venues at the end of the first quarter and will reach all venues by year-end, is expected to particularly address wait times, the number one complaint by players. The wait times are particularly long on Friday and Saturday nights and Sunday afternoons.

Starrs said, “It’s not uncommon to experience two-, three- and even four-hour-plus wait times at Topgolf. Because of the various channels of access we built with large events, small events, walk-in reservations and walk up, managing this inventory, especially when all players were allowed to extend their time, is extremely complex.”

PIE is generating just north of a 2 percent sales lift to venues as it’s being added. “It immediately drives digital mix as more reservations are available and gives us the ability to charge different reservation fees based on time of day and provides more predictability for our operators in how to staff,” said Starrs. “We are thrilled with how it’s going.”

Longer-term benefits include improved digital engagement with players, but the big win is taping variable pricing to manage demand better. Being able to use price will help mitigate waits during peak times. He added, “It allows for pricing opportunities for premium experiences such as a middle bay on the third floor on a Friday night.”

Topgolf will also be able to lower prices to stimulate traffic when demand is weaker earlier in the week, particularly Mondays, Wednesdays and Thursdays. He said that while bay utilization is about 75 percent during peak times, it’s less than 40 percent across the full week.

Raising Brand Awareness 
Starrs noted that with the help of new venue development, increased marketing investment in recent years, and the launch of a new marketing campaign, brand awareness in existing markets had grown by 10 percentage points from 38 percent in January 2022 to 48 percent in January 2023; however, that still leaves about half of reachable consumers unaware of Topgolf.

“With our marketing campaign with the tagline, ‘Come Play Around,’ plus the buzz on social media we create with new openings both locally and nationally, and with our brand ambassadors, we are driving significant improvement in our brand awareness,” said Starrs.

Topgolf’s in-venue media partnerships model is also shifting from focusing on a large number of small local or regional partners to a select group of national partners to support brand-building better. In late 2022, a multi-year agreement was announced with Honda Acura, a longtime PGA Tour sponsor, as Topgolf’s national auto partner. Starrs said, “They saw the opportunity to present their brand in a unique way to potential customers. We saw a world-class brand that develops automobiles relevant to our player base. You can expect more of these deals in selected large verticals that will be complementary to our brand identity and accretive to our unit economics.”

Topgolf will launch a second wave of its advertising campaign in the third quarter of 2023 with “more retail-like messaging” expected, such as 50 percent off gameplay on Tuesdays that are available in many markets and food and beverage specials.

Margin Expansion 
Starrs noted that Topgolf has “materially improved” its venue margins over the last two years through a more efficient labor model and streamlining its menu offerings to the most popular sellers that can be made fast. The margin improvement came despite increased marketing, higher wages in the second half of 2022, and lapping overly-lean staffing levels during the earlier stages of the pandemic.

Topgolf recently raised its four-wall adjusted EBITDAR margin target to 35 percent, up from 32 percent-plus previously, and is “tracking well” against the new target with the benefit of continued labor and menu optimization, as well as benefits of scale as Topgolf expands and from being part of Topgolf Callaway Brands.

Four-wall adjusted EBITDAR margin improved from 29 percent in 2019 to 32 percent in 2021 and 33 percent in 2022.

“When we add on to this, the impact of digital as we roll out PIE across all venues in the immediate reservation fee mix; higher visibility into a demand which impacts staffing levels; and the opportunity to more dynamically price and adjust on time per occasion, which improves bay utilization; we are confident in our ability to achieve our 35 percent target,” said Starrs.

He noted that the 35 percent margin target is expected to be achievable across a variety of venue sizes. Starrs added, “Many of our larger venues are already performing at or above these levels.”

250 Venue Opportunity In The U.S.
Topgolf sees an opportunity to open 500 venues globally with its current formats, split between the potential for 250 in the U.S. and 250 globally.

Starrs said Topgolf’s progress in venue design and the market fit is not only enabling driving improved returns and payback but has expanded the concept’s addressable market.

In the U.S., Topgolf expects to end this year with 88 owned and operated venues, with the 250-venue goal covering more than 900 addressable markets. Topgolf has four venues open in the UK.

Openings have accelerated following Topgolf Callaway Brands’ acquisition, with 21 openings since the beginning of 2021 through the end of Q123. A recent push has been opening venues on the west coast to reach markets including Los Angeles, the San Francisco Bay Area and Seattle. Starrs said, “In these markets, development is much more complex and more expensive, but our performance has been outstanding.”

Topgolf also delivered “outstanding” results in smaller markets with locations in Boise, ID; Fort Myers, FL; and Knoxville, TN. Starrs said, “We’re confident our suite of proven small, medium, and large market designs chosen based on our significant experience to date, balancing location, site visibility, growth rate of the trade area and cost, position us very well to build out this addressable market.”

Internationally, Topgolf reported it plans to work with franchised partners outside the UK and Canada and sees a similar opportunity.

Regarding financing, Topgolf has relied on a “small group of trusted and outstanding real estate partners” to finance venue construction and land purchase, but access has expanded with the concept’s success and since joining Topgolf Callaway Brands. Starrs said, “This has allowed us to maintain competitive cap rates and successfully finance improvements on ground leases.”

Starrs also said the company had a strong enough balance sheet to self-finance venues if necessary and is on track to be self-funding and free cash flow positive in 2023.

“Most importantly, we are confident our growth model of building new venues combined with the overall venue economics will result in improving free cash flow characteristics going forward,” said Starrs. “We’re clearly at a tipping point in 2023.”

 Photos courtesy Topgolf