Board Members of Private Clubs Should Evaluate the True Profitability of Outside Functions
There are an increasing number of Private Clubs undertaking significant facility upgrades. For many of these Clubs there is a hesitancy to assess the membership for the cost. Rather, the Clubs take on debt without a clear way of paying for it and, for some, incorrectly assume that new facilities will generate F&B profits from increased membership, membership usage and outside functions.
For many Private Clubs, food and beverage operations consume a lot of discussion in the Board room. These discussions often focus on profitability, despite the fact that the typical Private Country Club loses money in food and beverage. According to a report by the Club Managers Association of America, a private club loses an average of over 9% of F&B revenues. As a critical member amenity (and not a profit center), Private Clubs focus on quality, superior service, expanded hours and multiple venues. Because of this, F&B operations in a Private Club generally do not scale with increased volume from upgrading facilities because of increased service requirements, high food costs, and increased maintenance. For that reason, we like to say that for Private Clubs, the “Better the satisfaction in F&B, the more you lose”.
In the same vein that a Private Club should not expect upgrading its facilities to necessarily result in increased F&B profitability, a Private Club should not expect increasing outside functions to increase profitability and/or subsidize the cost of an upgrade. Reasons include:
- Different front of the house staffing requirements, especially if member dining is open at the same time
- Event pricing competes with venues that specialize in functions and employ very different business models
- A Private Club’s cost of food is typically higher than other venues
- Increased kitchen staff, especially with multiple menus
- Increased wear and tear on the facility, resulting in increased maintenance costs
- A focus on outside functions may require additional administrative/marketing resources
- Non-Profit Private Clubs are subject to unrelated business income taxes
There are also other non-financial costs that a Private Club Board should consider:
- Diverts attention of Club management from member services
- Members may be put off by non-member encroachment on the facility or their Private Club becoming “less exclusive”
- Too much unrelated business income can jeopardize a non-profit Private Club’s tax status
- Overt marketing of outside functions may also jeopardize a non-profit Private Club’s tax status
While there are certainly Private Clubs whose outside functions are profitable and help subsidize member F&B costs, outside function profitability is generally insufficient to justify significant investment in purpose-built facilities to support outside functions. Before undertaking a push to increase outside functions, we recommend that Private Club Boards understand all the ramifications, financial and otherwise.
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