I didn't know analyst reports could be this scathing...
Rumored Apple ring, private jet for your dog, and a scorching analyst report on Soho House
Hi everyone, we’re nearing the end of the semester. This week, I had my Danceworks show, a debaucherous society tap night, and my sorority formal in Long Wharf, New Haven (the Mykonos of the Northeast). A quick note to say I am extremely proud of my beautiful and talented dancers for putting on an insane show.
The main kiki today is a deep dive on Soho House and the rise of private membership clubs, the new “industry du jour”.
SNIPPETS
Temu and Shein can keep prices low because they circumvent the import tax under the “De Minimis” rule, which exempts shipments under $800 from import duty. Due to their factory-to-customer model, Temu’s packages, shipped by individual orders, rarely surpass the $800 threshold, avoiding import duties. Whereas in 2022, H&M (who delivers inventory in aggregate to American warehouses before shipping individual orders to consumers) paid $205 million in import duties.
There are rumors of Apple working on a smart ring. I am a day-1 Oura Ring user (not to flex but I have life-long free membership because I was a first wave customer), so naturally Apple’s ring piques my interest. Reported features include regular health tracking, and ability to tap your ring on payment terminals (!!!). APPLE THE COMPANY YOU ARE…
Advocacy group Consumer Reports has filed a complaint to the United States Department of Agriculture (USDA) demanding removal of Lunchables from the national free and reduced-price school lunch program because of high sodium and “elevated levels of heavy metals” (😦). Agree.
Bark Air - a new private jet service for dogs. The company BARK (sells BarkBox, a treat subscription service) is partnering with jet charter services to provide dogs and their owners a luxurious flying experience (I’m talking blankets, pillows, and gold-plated dog treats). Flight routes currently are only between Los Angeles, New York, and London, with one-way tickets costing up to $6,000. This promo vid is enticing and hilarious, and yes, it’s apparently legit.
THE MAIN KIKI: The economics of private members clubs
In Jackiki letter 4, I wrote about membership-based grocery store Costco. While Costco memberships are coveted, an even-more precious membership has been garnering more attention: The Private Social Club Membership. I remember the NYC Soho House hype in 2018, given their “prime” meatpacking location with roof-top pool. Everyone in my family was on the membership waitlist – our strategy being if any one of us got in, the rest of the family could be guests. To clinch membership, not only do you have to be recommended by a Soho House member, but also, you need to be a creative exec, run brand strategy for the next hottest makeup brand, or have started some insane company. So I was thrilled when my brother got off the waitlist. His application talked about bringing his Italian soccer fandom spirit to Soho Club, so while he is not the founder of the next breakthrough crypto, I will gladlyyyyy take it.
Each time I visited NYC, I would grab lunch at Soho House with my brother, pay $8 for a Diet Coke - completely unjustified but felt justified simply because not everyone could have said Diet Coke (you see how the exclusivity play gets you?). However, over the years the club got so crowded that it was impossible even for a party of two to find a spot.
Not getting value for money, my brother cancelled his membership. Apparently, he was not alone. Soho House has been struggling financially with mounting overcrowding complaints and churning members. In response, founder Nick Jones announced that London, NYC, and LA locations are not accepting new members. This signals key weaknesses (and the paradox) of the private social club model: Supply of memberships must be limited to create exclusivity, yet new memberships are needed to grow revenue. In other words, private members clubs must limit growth to maintain exclusivity.
GlassHouse Research, (a team of forensic accountants and analysts determined to expose fraudulent companies that deviate from its true earnings) put out a scathing analysis this past February, describing Soho House as “a company with a broken business model and terrible accounting”. The first line of the report is “We believe the Soho House & Co (SHCO) is a zero”. THEY DID NOT COME TO PLAY.
Here are the takeaways of Soho’s broken business model:
Expansion into Tier2 cities while Tier1 memberships are churning
Soho House’s expansion into less affluent (Tier2) cities exacerbates the company’s losses. Why this is significant: If Soho House (in its 28-year history) has not been able to be profitable in high income Tier1 locations like London, New York, and Miami, their investment into Tier2 cities (where members spend less per visit) have low (to zero) chances of being profitable. Coupled with decelerating new memberships, plateauing revenue/member, and membership churn in Tier1 locations (churn is so bad that the company stopped reporting retention rates in their investor decks), puts at risk Soho House’s financial viability.
Questionable accounting practices
GlassHouse accuses Soho House of dubious “creative accounting” including – pulling forward revenue (in the millions) through their new membership credits program while delaying expense recognition. What caught my attention is their 100-year useful life depreciation on their buildings. Useful life is an accounting estimate for the number of years an asset is to remain in service, and the typical useful life of a commercial building is 50-60 years. Elongating useful life on your income statement equates to lower annual depreciation which (misleadingly) increases operating income.
Rising debt
Soho House’s debt has increased for seven consecutive periods, amounting to $770.5 million in Oct 2023. When including leases, that number increases to $2.23 billion. The company’s heavy debt burden and unlikely prospect to turn a profit foreshadows a bleak financial outlook.
Worse, since Covid, Soho House now faces increasing competition from new elite members’ clubs in New York City: Casa Cipriani opened its doors in 2021 with Loro Piana-lined walls and Taylor Swift and Matt Healy as members, The Aman which opened in 2022 with a $200,000 initiation fee, and the CORE Club opened in 2023, taking the top floor of a stunning Fifth Ave building overlooking Central Park. Jennie Enterprise, CORE Club Founder (yes, her last name is really Enterprise), said private member clubs are “the industry du jour”.
A few reasons fueling members club openings…
Abundance of empty office/commercial space post Covid creating an opportunity for private members’ clubs to acquire new spaces at more affordable prices.
Need for “third places” powered by work from home culture: a third place refers to the places people spend time between home (first place) and work (second place). With increasing hybrid working, members clubs fill third-place-demand.
While the jury is out on the financial viability of elite NYC members clubs, I will track new entrants in the coming quarters/years and report back.
THINGS I’M LOVING RIGHT NOW
A guy in my senior society has a flip phone. He opted into it. The takeaway from my convo with him is that he can sit through an 8-hour flight and be perfectly content just looking at the back of the seat in front of him. So, PSA - get a flip phone if you want to reverse your self-induced short attention span.
My math project for my linear algebra class is about how to predict used car prices. This project turned out to be way cooler than I expected, and not to geek-out, you can watch our presentation here (shoutout Vinh and Simon). It was fun to use iMovie with editing tools which makes us appear to be the most eloquent speakers ever (I have mastered editing out ‘umm’s and ‘like’s).
Giant DC. For my Yalies my hack is go to Common Grounds for a massive cup of their perfect ice, and then get a Diet Coke from Gheav, and mix. So fire.
These banana pancakes at Pantry in New Haven were divine. This weekend, my brother visited me and we went for the first time. We will 100% return.
That’s it for Jackiki letter 5! Thank you for reading I am grateful <3. For this week’s comic, we have your average person who looked straight at the sun and said they’d be fine…
See you in 2 weeks!