Clubs in a Crisis — The Framework for a Strategic Response

Moderated by: Ray Cronin, Club Benchmarking

While we could never have imagined the abrupt changes that have occurred due to the coronavirus pandemic, we have been expecting the economic winds to shift for some time. The period of time from 2009 until March 1st of this year has been the longest continuous run of economic expansion in the nation’s history. Based on historical patterns, the economy was obviously closer to the next recession than it was removed from the meltdown in 2007-2008.

The financial crisis that peaked in 2009 saw half of the club industry making what could most appropriately be characterized as “poor” decisions that still impact them to this day. In light of that, Club Benchmarking produced a whitepaper from the point of view of trying to learn from the past and prevent those same mistakes being made a decade later. These mistakes arose from a fundamental misunderstanding of the inherent financial model of clubs that is necessary for success.

During the club-focused HFTP Hangout on Tuesday, April 21, Club Benchmarking’s Founder and Chief Innovator Ray Cronin presented data and findings from this whitepaper to help clubs get through both the short and long-term financial impact of the COVID-19 crisis.

The virus crisis is an issue – not THE issue for clubs.

When Cronin graduated college in 1980, the U.S. economy was in the worst recession since the Great Depression. He has charted a summary of the recessions that have occurred in the United States over that span of 40+ years. There have been 483 months since January 1980. Twelve percent of that time, the U.S. was in a recession.

Perspective for thought: What has had more of an impact on clubs – the 12 percent of time the nation was in recession, or the decisions made in the board meetings that occurred over the entire 483 months? Answer: The decisions made in these board meetings, month after month, regardless of the nation experiencing recession or not. While the current crisis is certainly a tactical issue, it is not a strategic issue.

Entering the Crisis

Entering this crisis, the club industry very naturally sorts itself into three buckets. Looking at the members’ equity or net worth for more than 600 clubs from 2006-2019:

  • 25 percent of clubs fall into the “shrinking” bucket. These clubs can be categorized as shrinking in a significant manner and, if the decline is not arrested, towards their eventual demise. The balance sheets are weak, with a compounded annual growth rate (CAGR) of net worth that is declining at 1 percent or more per year since 2006. They have too few members as a result of a weak, lackluster or pedestrian member experience, offering a narrow breadth of services or amenities. There is significant deferred capital investment. You might see parking lots with potholes, worn-out entrances or run-down clubhouses.
  • On the other end of the spectrum, 25 percent of clubs are growing purposefully. These clubs have a full membership roster and offer compelling services and amenities. Their balance sheet is strong, with a net worth that is growing more than 5 percent CAGR. They have assets that are fresh and up-to-date including clubhouses, parking lots, furniture and fixtures, and they have adequate cash reserves.
  • In the middle bucket, 50 percent of clubs are experiencing moderate growth. On one end of this bucket, clubs border with the 25 percent of clubs in the shrinking bucket while on the other end, clubs border with those that are growing purposefully. The clubs in this bucket could fall anywhere on the growth spectrum from barely adequate to quite adequate, with balance sheets, membership numbers and assets reflecting their respective levels of growth.

The bottom line is: A club must grow its net worth (also known as members’ equity) year-in and year-out at least three and a half percent. Any club that is not growing at least two percent each year is actually going backwards in inflation-adjusted dollars. That is half the club industry since 2006.

Given the operating ledger (excluding depreciation) is a break-even proposition, then the only way a club can grow its net worth is if its capital is greater than its depreciation expense. If it is, the net worth goes up, but if it is not, then the net worth goes down.

What is the main driver?

The main financial driver in a club is not the operating ledger, which unfortunately is typically the focus of attention for many club boards and finance committees. Financially, the operating ledger is the vehicle for delivering services and amenities to members; it is consumed each year by enjoying the club (meaning it results in a break-even outcome). Essentially, it is the goal line – it is not the financial driver.

Capital income is the financial driver. What Cronin counsels clubs to do is to resist making financial decisions that will have long-term consequences during this crisis. During this time, most club leaders believe that they are moving their club into a better bucket by cutting expenses or reducing initiation fees and membership dues. In fact, your club is actually moving closer to the “shrinking” bucket by doing these things. Cutting services can kill the pipeline of potential membership.

When a club contemplates lowering dues to retain and draw in members, there is a hypothesis behind this action that makes sense at the forefront. With lower dues, a club expects to get more members. However, the data shows the exact opposite. The clubs with the highest initiation fees and the highest dues have the most members, and vice versa. The point is this: On the margin, clubs do not compete on price; they compete on value.

Have a forward-looking capital plan.

Clubs that experience a decreasing net worth are not generating enough capital income because they do not have a member experience that is compelling enough to recruit new membership. The way we change the future of clubs in the “shrinking” or “almost shrinking” buckets is by creating a forward-looking capital plan.

Clubs do capital planning with a lot less vigor and comprehensiveness than they do their annual operating budget. And, most clubs plan capital (for the most part) one year at a time, alongside the operating planning. What clubs should do is look at capital as a rolling 10-year plan that gets updated every year so that clubs can meet future capital needs. When they do not do that, you can see the story reflected in the balance sheet.

Check out these supplemental resources.

Accompanying the Hangout discussion was a visual presentation illustrating the data. You may download these supplemental presentation slides here. Then, be sure to access the full Club Benchmarking whitepaper The Framework for a Strategic Response to the COVID-19 Crisis online.

About HFTP Hangouts

HFTP is hosting these live, interactive Zoom meetings three times a week — Tuesday, Wednesday, Thursday — in April at 2:00 p.m. CT. Sign up to attend.

Briana Gilmore is the HFTP Communications Coordinator. Briana can be reached at Briana.Gilmore@hftp.org or +1 (512) 220-4017.

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About the Author: Briana Gilmore

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