Nike's campus in Oregon. Image source: Nike.

When Nike (NYSE:NKE) decided it was getting out of the golf equipment business -- including clubs, balls, and bags -- it took a lot of people by surprise. The company has invested hundreds of millions of dollars in its golf business over the past decade and sponsorships of Tiger Woods and Rory McIlroy alone cost Nike somewhere around $40 million to $60 million  annually. In fact, Woods, who signed a $40 million deal with the company in 1996, was the catalyst for Nike's entry into the club and ball business.

With club sales falling and interest in golf generally slowing, Nike has decided to focus on apparel and shoes. But there's more to it than golf's decline, and when you take a step back and look at it, the move makes all the sense in the world. It could even lead to Nike making more money on golf than ever before.

The great golf distraction

When Nike entered the golf business in a big way, it tried to do everything all at once. After Woods signed his five-year $40 million sponsorship deal, Nike clubs, balls, bags, shirts, and shoes were suddenly in every sporting goods store in the country. Nike Golf was on the map.

But as the last two decades have unfolded, some flaws in Nike's golf strategy have emerged, which explain why it makes sense to drop hardware and focus on golf apparel and shoes.

  • Skillset mismatch: Nike is an incredible brand and one of the best apparel and shoemakers in the world. But hardware devices don't fit in its natural skillset. After trying to get into hockey hardware (Bauer), activity trackers (FuelBand), and golf clubs, the company realized it didn't have the skills to excel in the hardware business. Engineers with specific skills in metals and manufacturing are needed for golf and, like FuelBand, probably don't bring skills that can be leveraged in other parts of the business. It's no coincidence that all three hardware businesses I mentioned above have either been sold or shut down.
  • No strong cross sell between clubs and apparel: In 1996, it seemed obvious that Woods could create a draw to Nike's apparel, which would lead customers to clubs, balls, bags, and other golf accessories. But that strategy of customers being drawn to one brand in golf has proven to be very flawed in recent years. Adidas, Puma, and Oakley have all built large golf clothing, shoe and accessory businesses without selling clubs under the same brands. In fact, Adidas is selling Taylor Made because it doesn't want to be in the club business either. Nike will now take the same strategy. And it may be a better way to make money (which I'll cover below).
  • The great game is slowly dying: For as much excitement as Woods brought to golf in 1996, the golf industry is fading as his career has. Maybe it's no coincidence, but country club memberships are down and courses are finding it hard to draw customers to a game that takes four or five hours out of the day. That's not a trend Nike wants to ride.  

All three of these factors are driving Nike's decision to get out of making golf equipment, and it may be a good move for the company's bottom line.

Golf clubs are historically a bad business

As much as golf may appear to be a business with lots of money for club manufacturers, it's historically been a very tough business. Below is a chart of revenue and net income for Callaway Golf (NYSE:ELY) since 2000. As you can see, that revenue has been flat and profits have trended lower.

ELY Net Income (TTM) Chart

ELY Net Income (TTM) data by YCharts.

The challenges also go well beyond Callaway. Acushnet Holdings, which owns Titleist and Pinnacle brands and is preparing for an initial public offering, puts a positive spin on the industry but it even said sales fell from $1.54 billion in 2014 to $1.5 billion last year. Combined net income from 2011 thru 2015 was $22.9 million. That's right. One of the biggest names in golf averaged less than $5 million in net income over the past five years.  

Both of these businesses include some apparel, but clubs and golf balls are their bread and butter. And it's clearly not as profitable a business as you might think. Nike doesn't break out its margins in golf equipment versus apparel, but it's likely the company can make just as much profit -- or more -- by cutting the equipment business out of the picture.

Are there winners?

Leaving the golf equipment business won't be a huge deal for Nike long term. It generated $706 million in revenue in fiscal 2016, compared to $27.2 billion for the entire company. And, as I mentioned, the move may lead to a more profitable golf business overall.  

What will be worth watching is whether or not Callaway, Titleist, Taylor Made, and other equipment companies will be able to generate more income from the reduced competition. In theory, they will be able to increase volumes, lower cost per unit in manufacturing, and even spend less on sponsorships with Nike out of the business. But that may be wishful thinking and this could continue to be little more than a breakeven business for investors -- something Nike found out the hard way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.