There was a big and active turnout for the FCC’s Town Hall meeting in early April which focused on budget forecasts and the operating revenue shortfall through the Club’s renovation period and what should be done about it.
President Neil Western explained that the Board of Governors was elected to run the Club and its finances, “but given that subscription fees had been frozen for 19 years it was considered prudent to talk to the membership about it and get feedback”.
Many emails had been received already from members, Western said. There had been many suggestions to alter some operating procedures and while the Board welcomed them, they would be considered within committees rather than being discussed in detail at the Town Hall meeting.
Treasurer Tim Huxley, in his presentation “Towards a sustainable financial future” for the Club, gave an overview of the financial state play: Club membership is 2,457, of which 1,993 pay full monthly subscriptions. The total revenue for 2015/2016 was HK$53,605,241. The forecast for financial year 2015/2016 is a deficit of HK$502,694, while the forecast for financial year 2016/2017 will be a deficit of HK$5,127,398. The deficit for 2016/17 equated to HK$184 per member per month.
Huxley explained the factors that contributed to the growing deficit: the 2016/17 food cover budget was down by 3.75 % because of lost revenue during planned renovations. The payroll for catering staff was budgeted to increase by HK$1 million or 5%, in line with hospitality sector inflation and allowing some additional staff to accommodate increased membership numbers. The total administration expenses would increase by 8.9% covering admin wage increases and increased staff numbers. Rent and rates increased by 10% from January 2016 to HK$577,500 per month. The sale of RMB deposits would reduce interest income by HK$101,000. The depreciation charge would increase due to the renovations.
Through emails, phone calls, suggestions at committee and Board meetings and talk around the Bar, eight options have come forward to address the projected deficit:
Option 1: Why not use Club’s reserves to cover the deficit?
Current freely available reserves as at February 2016 are HK$42.3 million, comprising HK$30.5 million in cash and HK$11.8 million in investments, equivalent to the 2015/16 catering expenses or nine months of the 2016/17 operating budget. Some HK$10 million from reserves have been set aside for the renovations.
Reserves historically have been built up to the cover cost of relocation in event of the lease on current premises not being renewed. While we have a new lease, we need to start building reserves again taking a seven-year view. No prudent company uses reserves to subsidise daily operations unless absolutely necessary
Option 2: Let’s soak the Associates!
Not all Associates are high earners and hence a higher monthly fee for Associates compared to C & J members should be avoided. The FCC should continue to try and maintain a diverse Associate membership.
The idea of doubling the joining fee for Associates would seriously compromise the diversity we are trying to promote from people with media connections, NGOs, and other non-senior banking/legal etc. applicants.
We have budgeted for only 24 new Associate members in 2016/17, which would yield HK$600,000 in joining fees. If we double the Associate joining fee to HK$50,000 that would bring in HK$1.2 million still well short of the deficit. The 24 new Associates is a conservative figure and this will increase if we continue to replace members going absent with new Associates, but this should not be done on a one-for-one basis, as some absentees will rejoin. Admissions will also depend on number of new C&J applications received/approved.
Option 3: Increase revenue from current outlets
- The gross profit from all catering outlets from April 2015-March 2016 is HK$25,814,301 on a turnover of HK$39,874,394.56. Gross profit is the selling price less the raw material cost only. It does not include cost of service, utilities, staff, rent, etc.
- To cover the deficit from existing catering operations would require an increase in turnover of around HK$8 million to HK$48 million. With breakfast having proved to be the only significant area of under-utilisation, this will be impossible to achieve.
- An F&B price increase would not be advisable now as we have recently undertaken one and there was a noticeable drop in revenue in the months immediately following implementation. To cover the budgeted deficit from current F&B sales alone, an overall price rise of around 13.5% would be required.
Option 4: Awaken the dormant members – minimum monthly spend
- As of January 2016, there were 669 members with zero monthly spending other than subscriptions.
- A minimum monthly spend of HK$200 would raise HK$1.6 million per year from these members, not sufficient to cover the deficit.
- Minimum monthly spend would also put undue pressure on F&B outlets, particularly at the end of the month end when people would seek to use the amount.
Option 5: Club merchandise – leverage the FCC Brand
- Revenue from FCC merchandise sold between April 2015 and March 2016 was HK$426,714, with a gross profit of HK$107,326, or under HK$10,000 per month.
- Members have proposed numerous additional items such as cuff links, cloth bags etc, but sales volume and storage space precludes this.
- If every member guarantees to buy a minimum 38 FCC wine glasses every year, we would raise sufficient profit from souvenir items to cover the budgeted deficit.
Option 6: Spouse membership – double the money or double the trouble?
- The FCC currently has 1,629 spouse members. A limited number of other clubs such as Yacht Club and HK Club charge spouse membership fees of between HK$335 and HK$390 per month.
- If FCC were to charge a spouse fee of HK$300 per month, it would raise HK$488,700 per month or HK$5,864,400 per year, sufficient to cover the budgeted deficit. A HK$200 per month spouse fee would generate HK$3,909,600, still a significant contribution to covering the deficit.
- Clause 7 of the Articles of Association states that spouse members shall be accorded the use of the Club’s premises and facilities on the Member’s subscription. Any change to this Article will need an EGM and it is felt this is quite likely to be hard fought
Option 7: Reward the regulars?
Proposal from an existing Silver Member: reduce F&B prices by 30%; abolish Silver/Honorary membership; and monthly subscriptions for all members (including existing Silver members) should rise to HK$1,400 per month.
In reply, Huxley said it was not good practice to run F&B at a loss, and it would likely lose membership and face some opposition from some existing Silver members. Limited Club facilities mean that increased usage by members wishing to benefit from reduced prices could not be accommodated.
Option 8: Monthly subscriptions: a 21st century solution?
Monthly subscriptions for full members have remained the same since the last century. No other Club has managed to do this while also keeping price increases manageable. We have achieved this by increasing membership numbers, but we are now at capacity.
- HK$184 extra revenue per member per month is required to cover the budgeted deficit.
- A proposed HK$150 per month rise in monthly subscriptions for members paying HK$950 per month and HK$50 per month for those on the discounted scheme would raise HK$309,650 per month or HK$3,715,800 per year or HK$4,025,450 per year on the basis of 13 months.
While not sufficient to cover the projected deficit, if this was blended with a projected increase in joining fees from replacing members going absent with new Associates (taking into account the trend of increased absent members), the deficit could well be covered.
With the exception of the spouse membership proposal, none of the options considered here come close to covering the projected deficit.
Blending a subscription increase with a realistic target on joining fees makes managing the deficit a strong possibility. By not using more of the possible options available, we continue to have bullets available to use later.
Will we lose members? Possibly, but if HK$150 per month is a deal breaker, then these members were probably not big spenders or contributors to the FCC in any case.
We are suffering from keeping subs so low for so long. We need to educate the membership that regular increases should be the norm, not the exception.
The FCC will remain among the best value venues in Hong Kong and will not be looking to make large profits. If we find ourselves with a significant surplus, we can decide to forgive the “thirteenth month” on occasion.
In acknowledging this is a Correspondents’ Club, the value of our Associate membership should not be overlooked.
Budget forecast and revenue shortfall
Erik Floyd asked about the operating deficit which would be more than HK$5 million in 2017 because of the renovations. He said that since the renovations were a one-off cost, does that mean raising the subscription fees was to solve a one-off problem?
Huxley explained that the deficit included the depreciation on the renovation costs and the rent. And there would a 3.75% drop in revenue during renovations. Even if you increased subscriptions by HK$150 it would not solve the problem and you will still have a two-month revenue gap during the renovations.
Floyd had seen the operating deficit was a small amount in 2015, but questioned what the other income numbers listed that would generate a rather large surplus for 2015 and 2016.
Huxley said the other income was joining fees and income from Club investments (large cash reserve and a small investment portfolio). The reason the Club had an investment portfolio was because previous treasurers had quite rightly decided that cash shouldn’t be eroded by inflation in the current low interest rate environment. There had been quite a considerable unrealised gain on the investment portfolio and the Finance Committee was incredibly cautious with investments (Hong Kong blue chips investments, very well-managed funds). It is also quite a small portion of the Club’s overall assets.
Peter Caldwell had noticed a substantial increase in the depreciation because of spending money to improve the facilities, but as the depreciation would only occur over a very limited period, what would long-term position be?
Huxley said the renovation costs would come out of reserves rather than the immediate current account. It was reasonable to have depreciation over 10 years on equipment such as fridges and as the building was old it needed constant maintenance. As the Board were custodians of a Grade 1 listed building, they were obligated to maintain the building.
John Batten said the deficit numbers should be further broken down. He gave examples such as wage costs rising 10% in 2015; Bert’s was closed until 6 pm; and as members were not using the Main Dining Room (MDR) much he believed there should be a standard rate for meals throughout the Club rather than fine dining in the MDR. He said given the high cost of the renovations, could some the renovations be rolled over or could put on hold?. He suggested the removal of the health club so space could be used as another facility, such as for committee meetings instead of using the Hughes Room.
On behalf of the House Committee, Nick Gentle said the committee was examining the alterations needed in the kitchen. There had been a fear that removal of the whole floor to deal with the piping was necessary, but the committee had found a way of avoiding that resulting in lower costs. Appraising the layout had occurred and some equipment was very old and needed replacing. As the kitchen needed renovating, the committee were collating quotes from designers and devising a timeframe.
The committee were also looking at the utilisation of the MDR and Verandah as well as its soundproofing and air-conditioning. As well as how to optimise the MDR to increase revenue, for instance by broadcasting sports events.
Donald Mayer asked whether the expenditure contemplated for the MDR was in the budget and what the amount was.
Huxley said that quotes were being obtained and consultants would be evaluating them, but the allocated budget had not been prepared yet.
Mayer asked why the kitchen had to be done at the same time rather than staggering renovations over a few years.
Neil Western explained that seeking government approval would take time, while Gentle added there were problems with the audio-visual downstairs as well as in the MDR, so it made sense to try to minimise costs by doing both together.
John Hung agreed that the kitchen renovation was necessary, but pointed out that the membership had submitted answers on the survey regarding the MDR’s use as a dining area and he thought the Board should decide on its use first before doing the rest. Currently it was used for functions and members could not use it. He thought the choice element was not always there for members.
Western responded that the Board had been analysing the survey and the Club’s policy states the room should be available to members rather than unavailable. He said the Board was considering the balance and thought members should have the right to use it as much as possible.
Tony Dick had observed restaurants and bars were always full, but questioned why the Club was losing money considering the rent was also quite low. And he also asked whether an outside consultant had been tasked to evaluate the F&B service and see whether the Club was getting real value for money.
Western responded that the Club was not always full and added that the survey had been overwhelmingly positive in terms of food and service. It was hoped that members who enjoyed the food and service could use the Club more, so a consultant could could help to drive more custom
Callan Anderson did not agree with the figure of 5% as the increase in staff costs as he had analysed his own staffing costs and industry inflation. He had also seen a high turnover of staff in the Club and thought there were high costs associated with taking staff on. He referred to the industry norms where staff at the Club found it difficult to obtain matching salaried jobs when they left the Club. He said that the band costs of HK$92,000 a month was too high and queried whether it was generating money and whether Bert’s Bar was being under-utilised.
Western said that the House Committee would be considering the music spend at Bert’s when the contract came up as it was probably the biggest spend outside of staffing costs. The revenue from Bert’s Bar in the evening was probably HK$200,000-$300,000 a month so an evaluation of whether or not a band actually generated profit would take place. The survey had shown a lot of support for Bert’s, but not many were seen actually using it. However, the Club had a long reputation for jazz so it would be an emotive debate.
Regarding the staff costs, Huxley explained that quite a few of the staff were temporary which resulted in more turnover. The increase in staff costs came from an occasional staff shortfall in some areas increase. Western added that in addition to service staff, the office staff were doing more work dealing with the increase in the number of committees and more paperwork and bureaucracy from the government. The office was short-staffed and that issue needed to be addressed.
Steve Vines believed that the staff estimate of 5% was very modest considering the staff costs inflation in the F&B industry in Hong Kong.
Edith Terry asked if any marketing expenditure had been budgeted and asked whether there could be better marketing of the jazz and professional events.
Western explained said that the Club’s website was being relaunched which would help in the marketing.
Having served on three committees at the Club, Susan Liang recommended bringing in a consultant to maximise the revenue from the MDR and Bert’s Bar before embarking on increasing the subscription fees. Regarding investments, she suggested that there should be some transparency with members advised quarterly of the investment portfolio performance.
She queried whether active members should be penalised through an across-the-board rise in subscription fees or targeting dormant members instead. To deal with the under-utilisation of the Club, policy needed to be formulated before choosing the easy option of increasing subscriptions.
Western said the noticeboard and website displayed a copy of the investment performance each month.
Keith Bradsher advised that raising the monthly subscriptions would mainly affect dormant members. For instance, raising F&B costs would mainly affect those using the Club, so a far higher proportion of the money raised would come from dormant members.
Western reported that hundreds of views had been received from the survey and the House Committee were looking closely at the food and ambience. A recent dining survey had been completed and further consultation would be undertaken before any large decision was made.
However, Philip Bowring thought no more money should be spent on hiring consultants; money should be fed back to the members instead.
Wayne Ma asked whether a F&B price sensitivity analysis on had been conducted including how much it would affect member spending. And whether lowering F&B prices would increase the revenue. He also proposed rewarding members who used the Club a great deal by reducing the F&B prices, but raising the subscription fees.
Huxley confirmed price analysis had been carried out and said that when F&B prices had been increased by 5% recently, F&B revenue had dropped by 11% before recovering.
Nigel Sharman referred to Huxley’s opinion regarding not running down the reserves for operating expenditure, asking whether he had considered the right amount of reserves needed by the Club. He suggested mixing and matching some options rather than choosing only one.
Spouse membership fees
Francis Moriarty said the Club’s prices were too low compared with other places such as hotels when renting to outside groups. He recommended raising spouse membership fees instead of journalists’ fees as journalists’ salaries were going down rather than up.
Floyd recommended broadening the revenue sources to increase revenue. He suggested instigating a fee for signing rights. Although it would not completely solve the problem, he thought it would bring in some calculable revenue and then perhaps limit the size of the subscription increases as a result.
Vines agreed and believed there were a number of options within the options proposed that did not have to be acted upon in their entirety. He suggested a minimum spend as it worked well in other clubs where members could buy a bottle of wine to fulfil the minimum spend instead of using one of the F&B outlets. It would also discriminate heavily in favour of those people who use the Club regularly and was an option that needed investigating.
Bradsher was concerned that if minimum spend was introduced then there would be a greater influx of people coming into the Club in the last three-four days of the month to fulfil the minimum spend requirement and the Club wouldn’t be able to handle such a surge. The Club was already packed at lunchtimes.
Western explained the reasoning behind the decision to expand the membership in the past three years was because there were so many dormant members and it was felt membership could increase by 10% as there was room in the Club.
Kevin Egan agreed with Vines that the Club should consider the issue of minimum expenditure. There were many dormant members and he thought it was ridiculous that the monthly subscriptions had stayed the same for 19 years. He recommended its increase to HK$1,100-$1,200 a month. If the monthly subscription fees were increased and a minimum spend introduced, then some dormant members may resign and replacement members could be added who would actively use the Club. Regarding spouse membership, he didn’t think it could be changed due to the wording in the Articles of Association.
Bowring said a minimum spend would partially address silver membership and honorary membership issues and there was no need to worry about overcrowding at lunchtime as Bert’s Bar could be used.
Mathew Gallagher did not agree with the minimum spend proposal as it could penalise members who were travelling.
Huxley agreed it was a valid point and had already been raised by a few members. He suggested the minimum spend could be cumulative, so that it occurred after three months or so to take into account those away from Hong Kong.
Terry suggested some kind of payment-in-kind scheme as some other clubs did, such as Thanksgiving turkey, wine delivery, etc. Regarding subscription fees, she thought members may have become complacent and would find any increase to be a shock. She believed journalist members should not be affected, especially local journalists as opposed to Correspondent members.
Paul Christensen pointed out that not all Associate members were rich, some were retired and many Associate members had no salary.
Eric Wishart thought Huxley’s presentation had been a build-up to increasing the monthly subscriptions and thought a minimum spend was feasible and a serious proposal. He could see the argument behind the monthly subscription fees due to the upcoming budget problem with the renovation. However, HK$950 was still a lot of money and the Club should not underestimate some members’ financial situations.
Sharman said that as a former journalist he had no issue with subscription fees increasing or decreasing and thought the continuance of the Club as a place where Journalists and Correspondents could meet and mix with other Corporate members was very important and should be preserved. In terms of the minimum spend, he asked what were the experiences of other comparable clubs in Hong Kong, did they experience an end of month influx and whether they were able to manage it?
Huxley replied that the other clubs usually had a lot more space and reported there was usually a surge of members on the last Wednesday of the month. He also said that not all Correspondents were badly paid and not all Associates were well paid.
Patrick Boehler asked whether there could be space for compromise regarding spouse membership and whether spouses should have a discount membership instead.
Western explained that procedurally, such a decision would need to go before the Companies Registrar, but if accepted an EGM would then be held which requires 75% of the membership to approve it.
Francis Cassidy said as the Club was overly crowded and introducing a minimum spend would result in an influx of members. He recommended reducing the number of guests coming into the Club and levying a charge onto spouses to encourage them to buy drinks.
Western asked for a show of hands in favour of a minimum monthly spend and over 75% of the room were in favour. He also asked for a show of hands in favour of introducing spouse membership fees and the vote was split 50:50.
Jim Suttie thought that introducing a minimum spend would not generate any more revenue for the Club as it would only affect dormant members. They currently paid HK$950 a month without the Club doing anything for them. However, if a minimum spend was introduced then they may resign and could be replaced by more active members.
Andrew Work said that money was not necessarily generated through a packed bar. He suggested members could acquire double credits if booking breakfasts and devising other incentives. He had received a fantastic response from the events booking department when he had asked for a quote, but he recommended quotes should be followed-up more actively.
Nangyal Tsering thought it was important to preserve the FCC as a Club dedicated to writers, journalists and the artistic community as well as preserving freedom and exchange of ideas which separated it from other clubs in Hong Kong.
Christine Houston asked how many members were on the waiting list (200). She said that members had been lulled into a false sense of security through having no subscription fees raised for 19 years. As there was a very long waiting list, even doubling the joining fee would result in members still joining and not affect the Club badly.