Financial Trends in A Fluctuating Economy and the Effect on the Club Industry
by
Member of the Firm
How does the country’s current economic situation impact the club industry? Officially we are in a recession and have been for a year. Members demand more and better services and the competition for the entertainment dollar continues to increase. The demographic mix within the United States continues to change and unless the private club changes some of its membership policies, the pool of eligible applicants will continue to shrink. In the past, the club was the place to go and frequently, the centerpiece of the town. You knew that you had made it when you finally could afford to join the club.
Now, however, exclusivity is not quite as important and may even work against private clubs when going after the younger generation. Private clubs still seem to be more appealing to men than women but women control more of the discretionary funds in a household. With corporations changing the way they do business, the increased time people spend commuting, and the desire to spend more time with family, it becomes more difficult for many to justify the cost of membership, even as that cost continues to rise.
However, not all the news is bad. Due to increased mobility, people are looking for a place to make connections. Clubs can fulfill that need. The population in the US reached 300 million in 2006 and one-third of these are baby boomers. This group controls 70 percent of the net worth of the country. They spend $2 trillion dollars a year. The baby boomers generally are healthier than their parents and are looking for ways to stay active. Surprisingly, the boomers never joined clubs in the numbers expected. However, this is still an area of potential growth as the boomers start to retire. In addition, minorities make up a very small percentage of private club members. However, they are the fastest growing group in total and the economic power they control continues to increase. A club that reaches out to that community will help to ensure its survivability in the future.
2007 was not a great year for many clubs. The economy began slowing down and the slowdown continues today. Clubs, particularly in the mid-west, are feeling the impact of the changing economy and no area is totally exempt. Clubs may have survived the weather problems of the last few years but rising energy costs continue to impact all clubs. With oil well over $100 a barrel at some points during the year, it adds to all aspects of a clubs operations. Unlike the weather which may impact only parts of the country and can change from year to year, it is apparent that the turmoil in energy industry will continue into the foreseeable future. In addition to increased fuel costs, the increase in energy costs will impact the kitchen to the golf course.
More important than the specific issues mentioned above is the impact on consumer confidence. Joining a country or city club is still a discretionary expense. The plunge in the stock market and increase in the unemployment rate have left many members and potential members wary. As a result, the universe of individuals from which to draw club members is much smaller. If, due to time constraints, golfers are playing less, it may not make as much sense to join a private club. It makes it much more difficult to justify the initiation fees and yearly dues.
Competition in the club industry continues to increase and sometimes the industry is its own worst enemy. Members are spending more and more time at the clubs in the warmer climates and these are becoming the “home“ club. This causes members to question belonging to more than one club. Many areas are overbuilt. The dramatic rise in the number of high-end daily fee courses and those associated with real estate development has further impacted the private club. There has been a more than 50 percent increase in daily fee courses since 1990 with almost the same number of golfers. Many of these types of clubs are having financial difficulty and some may be cutting costs which will further challenge the amount a private club can charge. The dramatic slow down in the housing market also impacts the courses built by developers. Members in these communities seem more unwilling to take on the ownership of the club without the developer’s subsidy.
Clubs in Town and Country has been published for more than 50 years. The 2008 survey of overall club membership for country clubs with years ended October 31, 2006 through September 30, 2007 continues to show a problem with keeping members. The membership in country clubs had been static for a number of years but dropped by approximately four percent this year. In spite of the difficulty in obtaining members, the cost for joining a club has not dropped substantially.
However, we should not paint too bleak a picture. Membership in quality clubs is still desired. Clubs are adapting and providing more offerings for members. Waiting lists (although shorter) still exist at many high-end clubs. However, the rise in initiation fees seems over except in a few selected clubs.
Revenue for country clubs increased over 2006. Country clubs increase revenue by approximately 3.3% but city club revenue declined by 1.7%. Approximately 49% of country club and 37% of city club revenue comes from dues. As a result, dues increased for both country and city clubs during 2007. The average increase for country clubs was 6.65% while for city clubs was 4.2%.
While revenue continues to increase, costs do as well. The largest, but one of the more controllable, expense of any club is labor. Regardless of the state of the economy, and the increase in the unemployment rate, finding and keeping good employees continues to be a problem. For many clubs, the change in the immigration rules is having a major impact on hiring seasonal workers. More time and effort is spent on recruiting. This is one area where the part of the country in which you are located makes a major difference. The east and west coasts still seem to have a shortage of qualified workers but the labor market in the middle of the country is softening. For all clubs, labor costs tend to be about 53% of every dollar of operating income taken in by a club.
Great strides have been made in controlling costs in this area but clubs can only go so far. Members expect service so a club does not have the flexibility to cut costs in this area as readily as a commercial operator would have. At some point, members start to notice a lack of service and this can cause a downward spiral. Unfortunately, members’ expectations do not always equal the amount they are willing to pay to have them fulfilled.
Food and beverage departments continue to lose money and this area seems to be one of the hardest hit by increased costs. Unfortunately, there are times when too much emphasis is placed on this department. It is important to remember that the expense of running a club is borne by the members. How they decide to cover the expenses is a matter of philosophy. Clubs may decide to fund many of the cost through dues. Dues spread the costs of operating a club to all the members, not just those that use it on a regular basis. Since many of the costs involved in operating a club are fixed, this may be appropriate.
While some clubs had a difficult year, not all did. Some continue to grow. Whenever you have averages, about half the sample is doing better. In addition, clubs seem much more adaptable and can react to a change in the economic climate much faster than in the past. The ability to adapt will be sorely tested this year. People are still coming to the club, particularly those that can promote a clear vision of the club ethos, its purpose and its very reason for existing. It is those characteristics of clear purpose and strategic thinking that will allow successful clubs to come through periods when the economy is hurting and be there for the members now and in more settled times.