One Town, Two Rivals Tiny Carlsbad, Calif., is home to the two mightiest golf- club makers in the world: Callaway and TaylorMade. And it's feeling mighty crowded.
By David Rynecki RESEARCH ASSOCIATE Doris Burke

(FORTUNE Magazine) – It's a typical evening in tiny Carlsbad, Calif. Several thousand white guys in khakis and golf shirts have just ended the workday at the dozens of golf-equipment companies--clubmakers, ballmakers, shaftmakers--housed in sterile office parks in the area. A few dozen have just arrived at the Karl Strauss brewpub. At one end of the restaurant are four men who work for TaylorMade. You know that because each is wearing a golf shirt that bears the company's logo. Other tables are filled with men wearing shirts emblazoned with the names Titleist, Cobra, or Aldila. No one seems to mind the proximity until two men dressed in Callaway shirts enter the restaurant. As they pass the TaylorMade table, the two Callaway men look over and nod. No one smiles. Finally one of the TaylorMade men leans over to a guest and says, "They don't speak to us, and we don't speak to them."

Welcome to the capital of golf--a town that finds itself racked by a major feud between longtime rivals Callaway and TaylorMade, the two biggest makers of golf clubs in the world. Three years ago TaylorMade launched a very public campaign to steal the No. 1 market-share title in drivers from Callaway, the company that made the oversized Big Bertha driver a household name. And TaylorMade succeeded. Though Callaway still leads in irons, the company's percentage of sales in the high-margin metalwoods category (all drivers are metalwoods) has fallen from 30% to 16% since 2000; TaylorMade's has risen from 17% to 20%. Before 2000, Callaway had a lock on the market for drivers selling for more than $300; now TaylorMade has the bestselling drivers in the world. The divide is likely to widen further with the recent unveiling of TaylorMade's newest driver, the $499 r7 Quad, which features innovative movable weights and has cut deeply into the buzz surrounding Callaway's own new club (see box).

The close confines of Carlsbad have made this fight all the more intense. Callaway, a public company with revenues of $906 million last year, and TaylorMade, a $750-million-a-year unit of German sportswear maker Adidas-Salomon, share not only the same zip code--they share an office park as well. Their buildings are just a standard-length par-5 away from each other.

Callaway, which brought millions of golfers into the game with its forgiving clubs, has taken to blaming the hipper, more aggressive TaylorMade for its problems. The fight is nasty, to say the least--complete with false rumors about FBI searches and CEOs being fired; charges of personnel poaching; legal challenges; accusations of unfair price cutting--and that's just what's coming from the Callaway allies. For its part, TaylorMade has openly dared Callaway to join an expensive arms race that involves launching new products at six-month intervals and spending millions of dollars a year on player endorsements. Callaway executives take that as a personal attack. "We've had enough. We're not going to sit here and take it anymore," says Callaway's CEO, Ron Drapeau. To which TaylorMade CEO Mark King responds, "Isn't this what business is about?"

It made sense to be in Carlsbad. The town was in the center of Southern California's aerospace industry, which employed many of the same tools used to study how golf balls fly, and near-perfect weather made testing clubs easy. Location was just about all TaylorMade and Callaway had in common when they came here in the 1980s. To Callaway, free-wheeling TaylorMade was "the Frat House." TaylorMade mocked its insular rival as "the Firm." Callaway made clubs for average golfers, while TaylorMade took the clubs pro golfers were using and adjusted them to suit amateurs. Callaway focused on management and production efficiency while sticking to core product designs, much the way Ford built cars around a basic chassis. TaylorMade, run by sales guys, was constantly reinventing its product lines. Callaway compelled its employees to wear jackets and ties. TaylorMade's people dressed like golfers.

Even on an executive level, the two seemed like polar opposites. Callaway execs belonged to the haughty Del Mar Country Club. TaylorMade people joined the less impressive Shadow Ridge Country Club. They lived in different neighborhoods; TaylorMade people tended to bunch up around middle-class Vista, while Callaway's executives often preferred tonier Del Mar and Rancho Santa Fe. Their kids went to different schools. They had entirely separate social circles. In a town of just 78,000 residents, they hardly saw one another. On the rare occasions they did, tensions often flared. A TaylorMade executive recalls being invited to a party a few years back at the house of a friend who had gone to work at Callaway. He and his wife were informed by guests that they did not belong.

Ely Callaway probably would have wanted it that way. The charming Georgia-born salesman, who died in 2001, was as intense a competitor as you could find anywhere, with a masterful touch for building businesses. He did it in textiles in the '60s, then as a vintner in the '70s. Callaway came to Carlsbad in 1985 with the goal of creating a professionally run golf-club maker. He despised the status quo in town: the friendly golf matches between competitors, the haphazard approach to manufacturing, and the fact that most clubmakers cared only about satisfying skilled golfers. Hackers were an afterthought. That is, until Callaway decided that the high-handicap weekend player would spend big bucks for a club that was easy to hit. "Mr. Callaway was disciplined from day one," recalls Chuck Yash, a former TaylorMade CEO who joined Callaway in the mid-1990s. "He knew exactly what he wanted."

The same could not be said of Gary Adams. Fun-loving, creative, and a tad eccentric, the Illinois native had started TaylorMade in 1979 and moved to Carlsbad a few years later. He became known as the "father of the metalwood" for developing the first metal-headed drivers, which soon replaced traditional persimmon heads. But he was an awful business manager. By the mid-1980s, Adams--whose financial shortcomings had brought TaylorMade to the edge of bankruptcy--was forced to sell the company to France's Salomon.

TaylorMade entered a decade of declining sales and market share, exacerbated by the 1991 launch of Callaway's Big Bertha driver. Big Bertha was a phenomenon: Sales hit $300 million within the first three years. As it turned out, pro golfers liked the club too--and endorsements from pros are hotly contested marketing tools in the business. By 1998, Callaway, which had had almost zero presence on the pro tour before 1991, had two-thirds of the top pros using its clubs--and wasn't even paying most of them to do so. That was no small accomplishment. The "driver count" calculated each week is golden among clubmakers because it lets the winner boast in ads that it has the No. 1 driver on the PGA Tour. And once the pros use your clubs, amateurs want them too. TaylorMade's share on tour sank from No. 1 to nearly nonexistent.

In 1997, Salomon merged with Adidas. The new parent overlooked TaylorMade's most spirited executive, Mark King, a brash and self-confident uber-salesman. Yash hired him the next year to help start a golf-ball business for Callaway. But King was out of sync at the company. A competitive scratch golfer, he loved being out on the course and schmoozing in Carlsbad. When the top spot at TaylorMade opened up 18 months later, King broke his employment contract with Callaway to grab it--even taking a pay cut--shortly before the golf-ball business officially launched. "I was offered a chance to come back and run a company where I had worked since college and where I had a family," says King, 44. "The decision was a no-brainer."

An ugly legal dispute ensued. At one point, TaylorMade employees organized a King rally and hung a banner declaring FREE MARK KING from their headquarters building, visible to the many Callaway execs who drove past every day. Callaway has not forgotten the insult or the stunt. "It was like a top assistant coach quitting right before the Super Bowl to be head coach of the competition and taking the game plan with him," says Callaway's top marketing executive, Larry Dorman. "That's what inflamed a lot of people."

On his return, King drew up plans to rebuild TaylorMade, then less than half the size of Callaway. Golf is not a growing business; there is one pie, and it's worth about $5 billion a year. To steal more of it, King knew he had to get extremely aggressive. His strategy included a new line of woods and irons, a new logo, and a more dogged sales force. He devised a three-tier line of clubs that targeted every level of golfer, from scratch players to duffers. He discarded TaylorMade's traditional copper-colored equipment, opting instead for a gunmetal blue similar to that of a BMW.

Problem was, TaylorMade had no credibility. At the August 2000 launch party for the new clubs, known as the 300 Series, only five of 200 invited guests showed up. Twenty-four PGA Tour players were paid to use TaylorMade equipment, but only seven actually did. So King doubled the so-called tee-up money the company paid pros to use its clubs, from $500 a week to $1,000. He landed high-profile players such as the South African Ernie Els with generous annual contracts estimated to be in the seven-figure range. He also aggressively went after players who had no company allegiances by giving them prototypes of new clubs. The strategy worked: Within a few months the TaylorMade 300 was the hottest driver on tour. Less than a year later TaylorMade became the top seller of drivers among retailers despite being the priciest on the market ($399 for a driver).

Next King unleashed an unprecedented product and marketing blitz. In an industry that expected product cycles to last 18 months or longer, King began releasing new drivers and irons in rapid-fire succession--the lower-cost 200 Series, the r500 Series, the larger-headed r5XD, the innovative r7 Quad. Each new line had some kind of breakthrough, such as a lighter alloy or a wider sweet spot. King was almost daring Callaway to match him club for club.

While Callaway typically launched products with lengthy PowerPoint presentations, TaylorMade turned its launches into huge pep rallies. At the launch party for the r7 during the U.S. Open this June, for example, TaylorMade hired a famous chef to prepare a seven-course meal for journalists, tour players, and vendors. Spotlights spelled out the name of the club along the bottom of a swimming pool. Banners waved the name. Everyone left with a bright-red baseball cap with the TaylorMade logo and r7 in big letters.

During that same period Callaway was working on its own breakthrough driver, one that could hit the ball farther than any other club. There was just one little problem: It violated the rules of the U.S. Golf Association. Callaway knew the club didn't conform, but in his stubborn confidence he told his people to go ahead anyway. He argued that it would be received with such gusto that the public would demand that the USGA change the rules.

Callaway introduced the ERCII driver in 2000. The USGA immediately labeled it illegal, stating that anyone who used the club would not be allowed to record a handicap. Sales flopped. Worse still, Callaway had no backup plan. And the company continued to struggle for more than two years--at one point deciding that smaller was better when the rest of the industry was making larger club heads that offered amateurs more margin for error. "We left the door open for the competition," concedes Callaway's president, Patrice Hutin, himself a former TaylorMade executive.

In the middle of it all, Ely Callaway became ill. After he had surgery in early 2001, doctors discovered a malignant tumor in his pancreas. He died that July at the age of 82. His successor, Ron Drapeau, named just months before his death, was almost immediately put on the defensive. In December 2001, Drapeau made the fateful decision to slash prices on Callaway's premium driver, the VFT Hawkeye, from $399 to $329 in order to undercut the pricey TaylorMade driver. It was a move that King had been waiting for. The price war had officially begun.

It would be difficult to find someone more unlike Ely Callaway than Ron Drapeau. The 57-year-old CEO and chairman is a manufacturing guy by training. He's understated, serious, and slightly awkward in public. The one thing he does share with Callaway's founder is an intense competitive drive. Thus, it can't have been fun for him to release an earnings warning in early June that sent Callaway shares down 20% in a single day, to below $12. They've since drifted lower and are now 70% below their 1997 high.

How does Drapeau explain the dramatic reversal of fortune of a company sometimes known as the "Kleenex of golf"? Does he discuss Callaway's mistakes, its several consecutive product flops? He does not. Instead, he blames TaylorMade. Seated in a conference room at the company's headquarters, he outlines what he sees as TaylorMade's reckless business decisions. Its "distress prices" on certain clubs have destroyed the ability of the industry to maintain profitability, he contends. TaylorMade has taught consumers that today's hot $499 driver will sell for $179 in 18 months. This strategy is wreaking havoc inside TaylorMade, Drapeau's lieutenants hint. They point to the recent departure of TaylorMade's CFO--replaced by a German executive--and rumors of an FBI search of TaylorMade's premises. An FBI spokeswoman says she doesn't know of any search.

Drapeau does say that he plans to take back the top spot in metalwoods and introduce a new plan to better customize clubs for average players. He also recently hired a new ad agency, Young & Rubicam, after firing the old one. And he's willing to play TaylorMade's price game. Callaway will soon begin cutting prices on titanium drivers. But he avoids discussing the all-important driver count on the PGA Tour. Back in 1998, Callaway deliberately pulled back on tour endorsements and began using celebrities to hawk its clubs instead. But Alice Cooper and Bill Gates swinging a Big Bertha didn't inspire a lot of golfers. Today only about 28 drivers counted in the tournament field each week are Callaways, vs. 50 for TaylorMade.

Talk on the tour is that Callaway has been aggressively pursuing players under contract to TaylorMade as well as the 75 or so pros out of the top 200 who don't have contracts. During conversations with professionals at tournaments, FORTUNE was told repeatedly that Callaway representatives had offered to double whatever TaylorMade was paying. For one mid-level pro, that meant an increase from $100,000 to $200,000 a year. Several players said that the No. 3 player in the world, Vijay Singh, had turned down an offer of $30,000 a week to play the new Callaway ERC Fusion driver. Singh, who is under contract to Cleveland Golf and plays a TaylorMade driver, declined to comment.

Drapeau won't acknowledge that Callaway is in the midst of an endorsement war with TaylorMade. But TaylorMade is clearly waging one. A few hours after FORTUNE's interview with Drapeau, two TaylorMade executives are sitting at a booth overlooking the Pacific Ocean. The location is Vigi-lucci's, a premier restaurant in Carlsbad. There's lots of laughter. A bottle of 1999 Cakebread is nearly empty. At one point a reporter who's at the table offers the waiter a Callaway hat he has been wearing. One of the executives, Sean Toulon, an architect of the company's marketing blitz, snatches it away. Toulon announces, "He's under contract to us. Get him a TaylorMade hat!"