Future events and their impact on financial: management in the U.S. Club Industry: Delphi predictions in 2007 and 2027.

Hospitality managers, investors, lenders, and other decision-makers in the hospitality industry are not comfortable with uncertainties and the associated risks that they imply. Most decision-makers have some feeling about the occurrence of future events. These may range from a high degree of confidence to a vague and ill-defined feeling of discomfort. (1) Nevertheless, decisionmakers in the hospitality industry are concerned about the direction of actual change in any future event. Sinkley (1992) states that actual change, which is after-the-fact future change, can be broken down into an anticipated component and an unanticipated component. If change consisted of only an anticipated component, then there would be little or no risk involved. The unanticipated component is clearly the source of risk. (2)

Through a study of literature and discussions with hospitality business faculty and industry executives, the following five categories of uncertainties were identified as primary concerns for the hospitality industry:

1. The size and structure of the hospitality industry.

2. Management of human resources in the hospitality industry.

3. Management of operations and information technology.

4. Marketing management.

5. Financial management.

The purpose of the current study was to identify and predict the likely occurrence of key events that will affect finance and financial management in the U.S. club industry in 2007 and 2027. By successfully predicting the likelihood with which these key future events will occur, we hope to mitigate some of the uncertainty associated with the financial management of club organizations in the future and anticipating its financial structure.

Overview of the Delphi Study and Methodology

The research method used to conduct the study was the Delphi technique. "The Delphi technique is a method used to systematically combine expert knowledge and opinion to arrive at an informed group consensus about the likely occurrence of future events." (3) Helmer and Rescher, the original proponents of the Delphi technique, state, "The technique derives its importance from the realization that projections of future events, on which decisions must often be based, are formed largely through the insight of informed individuals, rather than through predictions derived from well-established theory." (4) As required by the technique, the study was conducted with the assistance of an expert panel consisting of 41 U.S. club industry executives who were selected from the Michigan State University alumni database and the Club Managers Association of America (CMAA) membership directory.

The steps in conducting a Delphi study listed below are combined from various sources in the Delphi literature.

Step 1: Identify the basic issues, problems, and events to be predicted.

Step 2: Select a panel of experts.

Step 3: Explore, discuss, and finalize the basic issues and events to be predicted.

Step 4: Design a draft questionnaire.

Step 5: Pilot-test the draft questionnaire.

Step 6: Mail Round 1 of the Delphi questionnaire.

Step 7: Summarize the statistical results of Round 1 and include these results with the Round 2 mailing of the questionnaire.

Step 8: Continue future rounds similar to steps 6 and 7.

Step 9: Analyze the data to show consensus of participants over progressive rounds.

The results of a two-round Delphi study are presented in this article.

Summary of Results

Our club panelists considered nine events impacting the club industry's financial health as listed in Table 1. The majority of panelists believe that the first five events listed are likely or very likely to occur. A brief review of the history of several of these events will increase our understanding.

Historically, the largest expense of private clubs has been labor costs. Labor costs as a percentage of total revenue and per member for four selected years from 1971 through 2001 for country clubs are shown in Table 2.

Labor costs for these selected years have varied from 45% to 47% as a percentage of total club revenues. When labor costs are compared to the clubs' membership, the labor costs per member have increased from $722 in 1971 to nearly $4,000 in 2001.

Almost all panelists (96%) believe labor will continue to be the highest cost in the club environment in both 2007 and 2027. Based on the history revealed in Table 2, this forecast is no surprise.

Part of the total labor costs are payroll taxes and employee benefits. A majority of panelists believes the cost of payroll taxes, and employee benefits will be higher in future years than experienced in the past. Since these costs, especially FICA portion of payroll taxes, is directly related to salaries and wages, these costs can naturally be expected to increase as salaries and wages increase. Payroll taxes finance social security received by most Americans upon retirement. Virtually all forecasts suggest this is a system headed for financial difficulty and it will most likely continue by raising even greater amounts of payroll taxes. Therefore, the panelists forecast higher payroll taxes and employee benefits costs is logical and we concur with their prediction.

Historically, the largest source of club revenues has been member dues as outlined in Table 3. Dues at country clubs have ranged from $699 per member (45%) in 1971 to nearly $3,800 per member (44%) in 2001. Of the years shown, only in 1981 was revenue from food and beverage sales slightly greater than dues revenues. In 2001, dues per member were just over $1,000 greater than the second highest revenue source, food and beverage sales per member.

Consistent with these historic trends in club revenue sources, the panelist predictions that clubs will continue to rely primarily on membership dues for their revenues in the future is logical. The majority of club panelists in our study believe this is likely to occur at both target dates in the future.

Sixty-five percent of panelists believe that club profit margins will be lower in the future. A historical review is warranted. The bottom line in the PKF studies for country clubs is "income available for debt service and capital expenditures." This figure results from subtracting payroll and all operating expenses from total revenue. As a percentage of total revenue, this bottom line number for several selected years has varied as shown in Table 4.

As a percentage of total club revenues, the income available for debt service and capital expenditures (the bottom line) has varied from 1.6% to 5.7% over the selected years shown in Table 4. In 2001, only 2.5 cents for each dollar of revenue was shown on the average country club's bottom line from operations.

The majority of panelists believe club profit margins will be lower in 2007 and 2027. These lower predicted profit margins may also be partly explained by the panel's prediction that in the future regulatory pressures will increase costs associated with food safety and environmental protection. In the final analysis, the panelists do not believe that these lower profit margins will result in an increase of unprofitable clubs in the future. In direct response to the question: "The number of unprofitable clubs will increase," only a minority (39% for 2007) and only 13% for 2027 felt that this would be the case.

Responses to other proposed events included the following:

1. A minority of club panelists believes members will be assessed to finance club improvements in the future.

2. In the near term (2027), a minority sees leasing as a popular source of financing capital expenditures, while a majority sees it as a long-term solution.

3. Similarly, a minority of panelists sees strategic alliances as a finance solution in the near term (2027), while a majority (65%) see it as helpful in the long run (2027).

Conclusion

The internal and external operating environment of U.S. clubs has been getting progressively stringent. A historic analysis of the financial performance indicated that labor costs remain high, revenue sources are concentrated, and profitability has been narrow. These tougher operating conditions are expected to continue into the future based on the Delphi predictions. Progressive club managers will be well served to pay close attention to these projected scenarios and continue to educate themselves to navigate their clubs through the increasingly choppy economic waters in the future.

References

(1) Pyhrr. S.A., Cooper, J.R., Wofford, L.E. Kapplin, S.D. and Lappides, P.D. (1989) Real Estate Investment. 2nd edn, John Wiley & Sons, New York.

(2) Sinkley, J.F. (1992) Commercial Bank Financial Management. 4th edn, Macmillan, New York.

(3) Moeller, G.H., and Shafer, E.L. (1994) 'The Delphi Technique: A Tool for Long Range Travel and Tourism Planning,' in J.R. Brent Ritchie and C.R. Goeldner (Eds), Travel, Tourism and Hospitality Research: A Handbook for Managers and Researchers (John Wiley & Sons, New York), pp. 473-480.

(4) Helmer, O., and Rescher, N. (1960) 'On the Epistemology of Exact Sciences' (Paper R353). Rand Corporation: Santa Monica, CA.

Editor's Note: In the April 2005 issue of Club Management, Michael Kasavana explored the Delphi findings in relation to the future of information technology in hospitality environments. In this issue, the Delphi studies are examined from the perspective of issues related to club financial management across a variety of associated cost areas.

RAYMOND SCHMIDGALL, HILTON HOTELS PROFESSOR, THE SCHOOL OF HOSPITALITY BUSINESS, MICHIGAN STATE UNIVERSITY, AND A.J. SINGH, ASSOCIATE PROFESSOR, THE SCHOOL OF HOSPITALITY BUSINESS, MICHIGAN STATE UNIVERSITY

Table 1
Most Likely Events to Impact Club Industry Financial Management
Years 2007 and 2027

                                                     EVENT
             CLUB                MEAN    MEDIAN   PROBABILITY
                                2007 *   2007 *     2007 **

Labor will continue to be the     4.6      5.0        96%
highest category for clubs.

The largest revenue source        4.3      4.0        91%
for clubs will continue to be
member dues.

Industry regulations will         4.0      4.0        87%
increase costs associated
with food safety and
environmental protection.

The cost of payroll taxes and     4.8      5.0        78%
employee benefits will be
higher.

Overall profit margins will       3.7      4.0        65%
be lower.

Member assessments will           3.3      3.0        43%
continue to be a primary
source of capital to finance
club improvements.

The number of unprofitable        3.3      3.0        39%
clubs will increase.

With rapidly changing             3.3      3.0        35%
technology, leasing will be
a popular source of financing
capital expenditure items.

Clubs will form strategic         3.0      3.0        17%
alliances with other
hospitality organizations to
increase revenue and add to
services.

                                                     EVENT
             CLUB                MEAN    MEDIAN   PROBABILITY
                                2027 *   2027 *     2027 **

Labor will continue to be the     4.6      5.0        96%
highest category for clubs.

The largest revenue source        4.0      4.0        70%
for clubs will continue to be
member dues.

Industry regulations will         4.3      4.0        91%
increase costs associated
with food safety and
environmental protection.

The cost of payroll taxes and     4.6      5.0        61%
employee benefits will be
higher.

Overall profit margins will       3.7      4.0        65%
be lower.

Member assessments will           2.8      3.0        22%
continue to be a primary
source of capital to finance
club improvements.

The number of unprofitable        2.6      3.0        13%
clubs will increase.

With rapidly changing             3.7      4.0        65%
technology, leasing will be
a popular source of financing
capital expenditure items.

Clubs will form strategic         3.7      4.0        65%
alliances with other
hospitality organizations to
increase revenue and add to
services.

* Scale: 5 = Very likely to occur; 1 = Not at all likely to occur

** Cumulative percent of "Very likely to occur (5)" and "Likely to
occur (4)"

Table 2
Labor Costs in Country Clubs for
Selected Years
Years 2007 and 2027

                                     1971    1981    1991    2001

Labor cost %                          46%    47%     46%     45%
Payroll & related costs per member   $722   $1287   $1728   $3937

Source: Clubs in Town & Country, PKF International (Editions: 2002,
1992, and 1981)

Table 3
Mix of Revenues per member for Country Clubs

                       1971            1981

                    $       %       $       %

Dues               $699     45%   $1,124    41%
Food & Beverage     617     40     1,186    43
Other               237     15      430     16
Total             $1,553   100%   $2,740   100%

                       1991            2001

                    $       %       $       %

Dues              $1,735    47%   $3,787    44%
Food & Beverage    1,348    36     2,784    32
Other               647     17     2,104    24
Total             $3,730   100%   $8,675   100%

Source: Clubs in Town & Country, PKF International
(Editions: 2002,1992, and 1981)

Table 4
Per Member Revenue and the Bottom Line for
Country Clubs for Selected Years

        Revenue     Per Member
       Per Member   Bottom Line    %

1971     $1,553         $88       5.7%
1981      2,740          43       1.6
1991      3,730         149       4.0
2001      8,675         215       2.5

Source: Clubs in Town & Country, PKF International
(Editions: 2002, 1992 and 1981)