by Ed Shanaphy, CMAA
Perhaps one of the most difficult realities in club management to accept is that club departments run at a loss. Discussing with and relating this ultimate realization to members and board members could be one of the most difficult tasks for a club manager, or even a club president. The idea of net neutrality in terms of profit and loss is often a dream. Clubs run at losses and it’s imperative that membership and membership dues both grow annually to cover these losses.
I was no different in thinking clubs and departments could make profits. When I started my career in club management, I always believed that a members’ bar made money. Whether inside the golf club, by the pool, or on the water, the profit margins for alcohol should be high. Add a slightly smaller profit margin with food, there must be a profit center within every food and beverage department. But that is simply not the case.
Staff wages continue to rise post-Covid. Wages are a reflection of inflation and minimum wage increases matching an overall hike in cost of living. Online recruiter Indeed notes that country club food servers make just about $20 per hour on average across the nation. Only a few years ago, that figure was closer to $12 to $14 for servers on the club house floor or behind the members’ bar.
Recently, I was chatting with a member at one of our managed, partner clubs. As a businessman, he found it astounding that club departments more often than not lose money. I mentioned to him that in almost every case, almost every department loses money. He was speechless and motioned toward the restaurant. “Even the restaurant and bar?” I nodded and added: “One of the biggest losses on the club’s P and L.”
Membership, New and Retained, Is Key To Longevity
Profitability for any private club resides in membership dues, which are allocated based on the departments’ cost-basis and member usage. How a club manager allocates member dues to each department and into that department’s budget for an upcoming year is one of his or hers most fundamental tasks. The long term effects of these allocations can make or break a club in both the short-term and long-term.
Although this particular member went away frustrated with the business model, looking back at this conversation made it even clearer to me just how important membership is to a private club. Without annual dues clubs could never survive. More importantly, a pipeline to new members to counter higher attrition rates in the past few years is essential.
Another key component for membership is knowing the affordability to key demographics. Breakdowns in various membership categories can often help younger families to join earlier. Additional years within membership may increase a membership’s lifetime value over additional years. Affordability for older, retired members is also a key component.
Once you have a stable membership and a waitlist with the desire to join a club at an affordable rate, you can then look at saving rather than making money at department level.
A Captured, But Small Audience
I took over direct management of one of our managed club’s food and beverage several years back. The department was losing over $250,000 a year. I recall the club’s general manager saying: “The more you bring in revenue, the more you lose money. The more plates we serve, the higher the loss.”
To me this seemed impossible, with my background in advertising, marketing and record companies. The more sales created and the more you head up the Billboard 100, the more your profit. I had always been believed that the higher the revenue, the more overheads are diluted and more profit is realized. In food and beverage, and largely at private members clubs, this is not always the case.
Club management is different, and growing losses with higher revenues are certainly possible. Without a nod to food and beverage costs and controlling staff costs through wages and hours on property, this can easily be the case. Strong marketing to bring membership to the food outlets is also paramount. Event marketing, joint partnerships with other clubs, and departmental sharing to bring members to F&B largely go unrealized. And often, members ask for opening times of food outlets to be extended. Those unrealized opportunities and extension of opening times for membership’s whims are very costly.
Club departments have a tight, finite universe, as we call it in the advertising world. One quickly understands that numbers will prove an issue when a club only serves, say, 400 households. Even a club the size of Westchester Country Club, located just north of New York City and one of the largest clubs in the country, is limited in numbers. It’s members only. We often forget, unlike a restaurant open to the public, club dining rooms can only serve members and their guests. Hence, why food and beverage minimums exist at so many clubs across the nation. Monthly minimums are there to create a revenue, even if a visit is not made by the member that month.
In fact, clubs have a small universe for new members as well. As we go from the department model to the overall club model, the same tenet holds true. Only a small universe is available to a club for prospective members.
Just Like Golf Handicaps, Margins Are Always Lower Than One Believes
I understand overheads. I had offices and staff in four countries across the globe. Running and maintenance costs and the underwriting of corporate liability. Housing, travel, workers compensation and continuing education for staff. Utilities, banking and credit card charges. I know variables, too. Marketing versus retention and usage. Cost of goods sold to inventory write-offs to journal entries for depreciation. When we look at gross profit margins at just 12 to 15 percent for operations from the golf shop through to tennis lessons and golf clinics, we all can see that it’s just not enough to create a profit.
We often get blinded by a tennis pro who wants 70 percent of their lessons. Although one member of staff will not make a major difference to a profit and loss report, we need to set budgetary standards. Whenever I see a golf or tennis professional receiving more than 60% of lesson revenue, I begin to look closely at those departments. Higher commissions to these staffers will require more funding for the department from membership dues. It also will make less funding available to the G & A items and those expenses on the profit and loss report.
Just last week I sat down with one of the nation’s leading club managers. We sat watching bitcoin trending higher on his office’s television. His head dropped. “I just can’t get staff in my restaurants lower than $20 an hour.” I folded my arms and said costs are going up. He replied, “Here’s where we are Ed: For every dollar I earn in food and beverage I am losing 35 cents.” Basically, the more you make, the more you lose.
Retaining good food servers is truly difficult for private clubs. Most clubs are non-tipping and servers at restaurants look to tips for the majority of their income. Even though private clubs may offer health insurance and a 401k, cash is king for this younger demographic of worker. Therefore, managers are forced to raise the hourly pay rate to retain servers who could make more with tips elsewhere. This is a constant battle I face, and one which I often lose, with the clubs we manage.
A club’s food and beverage operation, on average, typically lose 25 cents for every dollar they make. 35 cents for each dollar is high. But looking at these figures is imperative. Wise governance understands bringing the department to a net neutral position will require earmarking 30 percent of F & B revenue as a loss. This loss must be brought to zero by an allocation from membership dues.
Once we have that figure for food and beverage, we can look at other allocations and then guage raises in dues. Your food and beverage department will almost always be the biggest allocation of any department. It’s why on job descriptions food and beverage revenue is the first statistic listed. Club managers sometimes understand. Membership not always. Educating members and fellow managers about how to better understand these losses is one of the toughest jobs I have ever had.
Planning For Future Losses
The most difficult part of this juggernaut is educating the member, the board and, even sometimes, my fellow colleagues looking for that juicy bonus or higher salary. With healthy research and an investigative eye, a manager and board can close the gap between a loss and breaking even. A better understanding of the cost basis and that clubs market to a closed universe of customers will help us to budget wisely, minimize losses and efficiently allocate funds.
Ed Shanaphy is President of SBW Associates, Inc, which is the parent company of BeyondTheBaselines.com and the InstituteOfClubDirectors.com – both leading organizations in the private members club industry. Ed has served as Club President and Board Member, Director of Club Operations, Director of Tennis and Club Manager in recent years. Abroad, Ed served for twenty years as CEO and Managing Director of Haysbridge (UK) Ltd, one of Europe’s leading media, advertising and music and video recording conglomerates. He is a graduate of Duke University, where he gained his B.A. and The London School of Economics, where he studied Economic History for his M.A.
