Financial Trends in City and Country Clubs in a Changing Environment
by
Member of the Firm
The economy has seemed to bounce back over the last few years. However, in early 2007, the stock market began its “correction” and the housing market slowed down tremendously. The unique and high risk mortgages granted during the housing boom are now coming due or the rates are being adjusted and the owners do not have the equity that was anticipated. The hospitality industry as a whole had good 2006 with hotels at peak occupancy and room rates showing double digit increases in some areas. Travel seems to be coming back. However, this growth was not reflected in clubs and as a whole, the industry remained static.
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 the 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.
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 United States reached 300 million in 2006 and one-third of these are baby boomers. This group controls 70% 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. 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 increase the likelihood of its survivability in the future.
2005 was not a great year for many clubs particularly with the weather issues around the US and Canada. 2006 was better but still not back to the heyday of the 1990s. However, the economic signs are not all positive. While the economy is better in some parts of the country, others receive news of massive layoffs in industries that have been the backbone of our nation for generations. Clubs may have survived the weather, but now rising energy costs continue to impact all clubs.
Unlike the weather which may impact only parts of the country and can change from year to year, it is apparent that the rise in energy costs will continue into the foreseeable future. In addition to increased fuel costs, the increase in energy will impact the kitchen to the golf course. More important will be the impact on consumer confidence. Joining a country or city club is still a discretionary expense. The stock market had a great year in 2006 but the problems of the early 2000s 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 developments has further impacted the private club. There has been a more than 50% 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. One hopeful sign however, construction of new country clubs finally has started to slow down.
Membership Trends
Our survey of overall club membership for country clubs with years ended October 31, 2005 through September 30, 2006 continues to show a problem with keeping members. The membership in country clubs remained relatively static from last year. Country club membership declined by approximately one-half of one percent, which is statistically insignificant. The problem is that membership has not grown for several years. City clubs showed a 3.7% loss. What is interesting with city clubs however is that the healthiest clubs are in the 500 members and larger clubs. This should not be a surprise as the smaller dining only clubs are finding it harder to continue. Members need a full service club to justify belonging.
Only 16% of the clubs had a waiting list in 2006. This is a 2% drop from the prior year and a more than 50% drop over the last three years. The East has the greatest number with a waiting list with the Central having the lowest. If a club has a waiting list, it is much shorter than in the past and it generally does not require as long to get off it. Alternatively, if a club has a sellers’ list, it tends to take much longer to get off it.
In spite of the difficulty in obtaining members, the cost for joining a club has not dropped substantially. The average cost remained at approximately $45,000 ranging from a high of $61,000 for the large sized clubs to $42,500 for the medium clubs. The cost of joining a club is almost totally dependent on location. The average cost in the West is $65,000 and in the Central is $42,000. However, a number of clubs far exceed the average with several over $100,000 in the West.
City clubs continue to be impacted by the economy to a greater degree than the country clubs. The average cost to join a city club has remained consistent at approximately $8,000 with the West being the most expensive. Waiting lists have dropped in city clubs, with less than 15% of the responding clubs having one. This is a reduction from the 33% three years ago.
Country Club Trends
Costs continue to rise. In our first Clubs in Town & Country, published in 1954, the average income per country club member before dues was $476. Fifty-three years later, that number has skyrocketed to $6,500. If we look at the country club dollar, dues make up almost half of the revenue received. For the last five years, operating expenses have exceeded operating income, although improvement has been shown. For every dollar in operating revenue the club received, it spent $1.02. This means the club is funding operations with debt, savings, or initiation fees. In the long-term, a club cannot operate under this premise.
2006 Country Club Income
2006 Country Club Expenses
Food and beverage operations continue to be a major revenue generator for the club. Unfortunately, due to the expectations of members, it seldom breaks even. The fact that a club is not a restaurant and cannot expect the same performance must constantly be explained to board members. However, this is not an excuse for underperforming. Constant review of costs, particularly labor, and realistic pricing of the menu can reduce the loss. For 2006, the departmental net loss remained about 16%.
Dues for members continue to rise. The amount increased approximately 6% across the board. Dues make up about half of the total operating income of the club. This is consistent with prior years and is the norm.
City Club Trends
Unlike country clubs, which may have substantial savings or regular initiation fees to cushion any slow-down, most city clubs do not have that type of endowment. Of course there are exceptions to the rules and generally those are the larger (and older) city clubs in the larger cities. As a result, it is critical for city clubs to operate on a break-even basis. They have done that the last three years and this year, while not as good as last year is still positive. Unlike country clubs, the amount of operating income was more than the amount of operating expenses. The balance of dues available for debt service and capital was almost 4%. However, it is important to note that the best results were in the larger city clubs which makes sense since, as previously stated, the luncheon only clubs are finding it much more difficult to survive.
2006 City Club Income
2006 City Club Expenses
Food and beverage operations continue to be the largest revenue generator for the club. Total income for 2006 was less than in 2005 which should raise some flags for city clubs going forward. Since it is such a large revenue source, it is imperative that the operations come close to breaking even. Unfortunately, that did not occur this year. Total gross profit was consistent with last year and the overall loss was about the same. However, it was still worse than a few years ago when city clubs were making money in the department. The larger clubs did better in their performance than smaller city clubs because of the greater percentage of the business coming from banquets.
Breaking even is difficult because of the expectations of members. However, constant review of costs and realistic pricing has improved the performance of city clubs. However, for 2006, the food and beverage department showed an 8.8% loss. Although better than the country club performance, it is almost 2% worse than two years ago. Both payroll and cost of sales were worse than in 2005.
Rooms continue to be profitable for city clubs with the departmental income at 57% which is consistent across the country. As would be expected, the larger clubs with many rooms make the most money in this area. In addition, occupancy, although still not at the pre 9/11 rate, has improved dramatically over the last two years. For many clubs, this is a major source of nonmember income.
Conclusion
The article should not be read as all doom and gloom. While overall, many clubs had a difficult year, not all did. Some continue to grow and did not experience the slow down. Whenever you have averages, there are clubs that do 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 club industry has restructured itself and seems poised for growth...and that is an article for another day.
Note: All reference to statistics comes from the 2007 edition of Clubs in Town & Country published by PKF North American Network. The publication is a statistical review incorporating operating and financial data on private clubs. Data for years ended October 31, 2005 through September 30, 2006 was submitted by more than 200 clubs. PKFNAN does not represent the data contained therein to be definitive or all-inclusive. PKFNAN believes the information is reliable but is not responsible for errors in expenditure figures or in other reported source information.