Soho House owner risks cool factor in pursuit of profitability

Skift grip

Membership Collective Group and its leading brand Soho House have not seen profitability since the first club opened over 25 years ago. Opening more clubs at reduced costs can generate profits, but it also risks diluting the exclusivity once associated with the brand.

Cameron Sperance

Hospitality businesses typically rely on making a profit by opening more properties, but this usually comes at the expense of a fashionable reputation.

The Soho House Owner’s Collective Membership Group must somehow find a way to achieve both.

MCG, which launched last year as parent Soho House went public, lost more than $265 million last year and nearly $42 million in the fourth quarter alone, reports the company earlier this week. The company has never achieved profitability since opening the first Soho House in London in 1995, and MCG lists its potential inability to post a profit as a risk factor in its latest annual 10-K filing with the Securities and Exchange Commission of the United States.

Soho House’s parent company had run up just over $1 billion in debt by early January, up from a $757 million deficit the previous year. Investments typically go into opening new homes and launching new businesses (the company operates other brands like Scorpios beach club and new membership club The Ned). The company is also investing in a digital membership platform.

MCG provided some degree of roadmap to profitability, or at least how it could reduce its own costs by opening new clubs, amid a major wave of expansion in the years to come.

Further details were provided in MCG’s annual filing of falling development costs in new Soho homes, as Skift first reported last year.

The company has already spent $10 million or more to open new homes. But the company is now capitalizing on its brand’s appeal to landlords, who bear more of the construction costs, as having a Soho House on site can boost the appeal of the rest of a development. immovable. MCG estimates that it now spends between $3 million and $6 million on each new home.

“New membership at Soho House incurs virtually no membership acquisition costs, as we do not conduct any paid marketing,” MCG’s filing states. “With consistently high retention and minimal costs associated with retaining or supporting our members, Soho House enjoys a very attractive lifetime value for members. We believe that new memberships will also provide compelling economic benefits and be accretive to our earnings as they can be created and operated in a way that leverages the existing platform.

But this once again raises concerns about whether the brand might be shooting itself in the foot by sacrificing the cool factor it needs to attract new members by growing too quickly.

MCG previously said it would expand five to seven new Soho homes per year, but company executives announced this week they had raised that growth target to eight to 10 new clubs per year. The company plans to double Soho House’s overall footprint to 85 homes over the next five years. But rapid growth can dilute a brand and drive away potential members who only want to join something because it’s truly exclusive.

Once-hip cycling studio SoulCycle notably struggled to maintain its hip reputation once it began expanding significantly outside of Manhattan and suddenly faced increased competition with more affordable alternatives. and the rise of at-home products like Peloton, which has encountered its own setbacks after hitting a growth ceiling amid the easing of pandemic restrictions.

Hotels have a similar conundrum over the scalability-cool factor, as analysts often argue that trendy brands lose their edge when big hotel parent companies take over. Accor seemed to have these fears in mind when it decided to spin its range of lifestyle hotels into a standalone entity with Ennismore, owner of The Hoxton and Gleneagles brands.

Soho House’s lack of direct competition in the membership club space could benefit the brand for the time being and prevent the kind of growth issues seen in other hospitality sectors.

Morgan Stanley this week issued a note on MCG, lowering the price target on the company’s stock price from $16 to $11. Shares of the company, which trade below $8 a share on Friday afternoon, have been disappointing since its debut last summer. But Morgan Stanley’s overweight rating on the stock indicates the brand could potentially perform better, and analysts noted that MCG is in a unique position to grow going forward.

But even Morgan Stanley’s memo noted, “MCG relies on growing homes, memberships, and profits, while keeping its ‘cool factor,’ which creates high execution risk.” »

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