Questions businesses and clubs should never stop asking Part II
ECLUB NEWS |
The March 2012 issue of eClub News introduced ten questions offered by a Forbes columnist and the first three of these questions originally intended for business were related to the private club industry in the first installment in this series.
The next three questions are among the most challenging to which boards of directors at private clubs must respond and are the focus of this month's article. In one form or another, questions four through six are posed as often, if not more so, than any others in the original list of ten.
As a refresher, the complete list of questions includes:
- What is our purpose for existing?
- Who is our target customer?
- Why does anyone need what we're selling?
- If a need exists, is it enough to support a profitable business?
- What are our competitors up to?
- Can you reduce expenses without harming the product or brand?
- Do we have the right leadership and structure?
- Do we have the right employees?
- How will we continue to drive revenue?
- How are your employees holding up?
If a need exists, is it enough to support a profitable business?
The need to drive profits is a concept that has gained more traction in boardrooms of private clubs over the last few years as a byproduct of the Great Recession and concerns about declining memberships and revenue streams—most notably dues. However, assuming a not-for-profit orientation for a private club, which was established for a common purpose of the members, then offering goods and services to make a profit conflicts directly with this model. If a club were to make a profit from its members, one could logically conclude that it has overcharged them during the year. Either dues were too high or the menu prices in the restaurant were too expensive. Okay, the latter is probably not a good example!
The exception to a nonprofit concept in the case of a club is the result of intensive capital demands of the industry. Much of what is delivered, in terms of lifestyle and experiences, relies on excellent facilities. Whether they include a clubhouse, golf course or tennis court, maintaining, replacing and improving these facilities (not to jump ahead to question 5) requires considerable capital dollars. Most commercial businesses generate those capital dollars in one of three ways: (1) they borrow, (2) they issue equity instruments on the capital markets, (3) or they generate surpluses to retain for future capital investment. While clubs can borrow, horror stories in the press about clubs crippled with debt burdens have made many prospective members wary to join a club with debt. Clubs used to be able to issue "equity" or ownership interests to new members—or increase the capital investment of existing members with capital dues or assessments—with great success, but the recession quickly dried up initiation fee channels at many clubs and weakened member tolerance toward more capital fees. In the absence of these other capital funding streams, clubs need to look to generate surpluses—that is, profit—from operations. Understandably, clear communication with the members about why a club is generating operating surpluses is crucial and might even be an argument for reporting depreciation expense, or a portion of it (i.e. budgeted depreciation), above the line if, in fact, the club is generating "profits" to pay for future capital projects.
What are our competitors up to?
For many years, clubs failed to acknowledge or admit that they operated in a competitive environment and in a battle with other clubs to retain their own members and recruit new members. This has intensified further in recent years in golf course housing communities, where the challenge of selling real estate is inextricably linked to club amenities. Understandable neighborly jealousy may have been the reason for Club B to renovate its golf course as soon as it heard Club A had undertaken a renovation of its own. Post-recession, however, market economics have taken hold. Clubs now appreciate that they cannot afford to have their amenity offerings fall behind. They are in fierce competition with clubs and other businesses down the street and, in those cases dealing with amenity migrants, clubs across the state or region. Whatever sector of the market served by a club, it must ensure it offers the best lifestyle experiences in that sector—or at least that no one is offering a better one.
This question also warrants a discussion about benchmarks and benchmarking.
A Wikipedia entry defines benchmarking as "the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost. In the process of benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compare the results and processes of those studied (the "targets") to one's own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful."
The club industry has a long history of trying to establish benchmarks. Food and beverage subsidies, dues rates and even the price and size of a pour of scotch have been tracked, averaged and reported. If one considers how little these metrics have moved over time once inflationary trends on cost of sales and payroll have been factored out, one must question whether this fascination with benchmarking has led to any improved processes and results. Part of the challenge of benchmarks in the private club industry is that, as the old saying goes, no two clubs are alike. By definition then, it must be incredibly difficult to find a club that has a membership that wants lifestyle offerings exactly like another's. How does one measure the quality of the food, golf course and fitness center in an analytical manner? Boards can become obsessed with measuring the minutiae in financial data when, in reality, the first question that should be asked is whether members like whatever it is as is. If so, then consider whether there is a more efficient way to deliver what the members want (within the parameters established by question six in this article).
A potentially more useful term than benchmarking for clubs might be trending—the consideration of how metrics move over a time period. Regardless of quality levels, the cost of one club could be expected to trend in the same fashion as those of all other clubs over time—assuming no major decision regarding a critical success factor that effectively altered quality levels. Observing how results have moved over time and plotting changes against those of the industry is likely to be a more useful tool than a onetime snapshot of the cost of providing a certain service or amenity.
It could be argued that benchmarking is only useful when setting an annual budget. Assuming the budget is aligned with the mission and strategic plan of the club, comparisons to other clubs at the start of the year for any obvious outliers in a forecasted number would be useful. Once a budget for the year has been agreed upon—effectively a numerical depiction of the strategic plan—the only benchmark that matters is how well the club performed compared to that budget. If a club is to compare itself to other clubs after that point, it had better be able to compare its strategic plan to those of the others as well if it intends to have a meaningful discussion rather than simply creating an environment in which management is critiqued without justification.
Can you reduce expenses without harming the product or brand?
There is a rumor in the industry that some clubs actually lose money in restaurant operations. It seems hard to fathom that after all the years of trying to run clubs like businesses this can be allowed to happen.
While this is described in jest, the restaurant operation likely best highlights the challenges in addressing this question. For years, new board members have demanded to know why the club dining operation loses money and voiced opinions that it must stop. Similarly, general managers have politely explained for years that they would be happy to reduce costs in the dining room. Where would the ambitious new board member like to start? By reducing the quality of the food offered, the pour of his favorite whiskey or by the staff members that know this same board member by name, bring him his favorite whiskey and his wife's favorite pinot without an order having to be placed? Alternatively, general managers could offer to open the doors of the dining operation beyond the membership so that tables can be turned, waiting times created and the clearly profitable ambiance of a chain restaurant can be created. All are difficult business decisions and each of which could certainly trim expenses from the budget—while also slashing expectations of excellence from the member experience.
The fact is that clubs have had to make some decisions over the last few years that undoubtedly caused harm their product—the lifestyle experience of members. Given improving economic conditions and with reference to the previous questions regarding competitors, clubs should evaluate whether survival steps that may have been taken in the last few years are now barriers to being able to answer the second question in this list: "Why does anyone need what we are selling?"
These questions are clearly intertwined, and some are inextricably linked to others. They must, therefore, be considered en masse and not merely as unique thoughts.
Next month, in the third and final installment of this series, the remaining questions will be considered as clubs are encouraged to address several challenging considerations about people—those working in their clubrooms as well as those debating in their boardrooms.