Why Soho House isn't what it used to be

Last week, The Guardian reported about a skirmish between Soho House, the famous subscription club with locations worldwide, and Glasshouse Research, an analysis company born to « expose companies engaged in fraudulent accounting for their own benefit». Last month, Glasshouse published a 31-page study stating that «Soho House, a company with a broken business model and terrible accounting, faces material headwinds regarding its future viability as a public company. SHCO's persistent lack of profits and rising debt levels puts the company in a precarious situation where they will need to continue to dump shares on investors as time goes on». All notions that Soho House rejected, initially stating that it would present the financial results and guidance for 2024 on March 6th, then postponing the presentation to March 15th. Regardless of monetary considerations, however, the mere existence of a dispute is a bad sign - as The Guardian interpreted, observing in the comments section of @sohohousememes various grievances among online users: service delays, substance abuse rumors, complaints about menus and staff inadequacy, grievances about lack of exclusivity and overcrowding in gyms and spas. To get a clearer picture, we turned to Nadine Choe, founder of the newsletter The Stanza, and real estate private equity expert as well as former club member who provided us with a more business-oriented perspective on the matter. «I wouldn’t take investing advice from Glasshouse», said Choe, «but I do think Soho House’s model doesn’t work for a members club business. Soho House has been around for over 30 years, and yet they still haven’t cracked sustainable profitability».

But why so many problems for a simple private club? «While Soho House did maintain a sense of “cool” for several years», explained Choe, «because the company has had to expand memberships to fund operations that are backed by the public markets and institutional investors, there’s less of a strict vetting process, and therefore it’s no longer “cool” as anyone can get accepted as a member». According to Choe, «Soho House has evolved into a real estate company, which contradicts their original value proposition: a community for like-minded individuals in the creative industries», thus facing two sets of problems: the first would be about their identity («Are they a true "community" or an amenities business?» Choe wonders) since «they began to offer amenities such as food service for 18 hours per day, spa, gym, hotel, and co-working, they maybe didn’t realize that in order to fund those operations, you have to sell more memberships, [...] sacrificing the integrity of the original membership purpose»; the second concerns overcrowding of existing locations that management tried to remedy by opening new locations which however «only adds to the problem in the sense that it doesn’t solve for the opportunity cost issue of having to sell more memberships to run the business. Perhaps a better solution would be to raise membership fees and accept less members and clean out the current membership base».

The company's trajectory, as happens with businesses that have partially lost sight of their original purpose, has been altered by two factors: the first was the gap between founder Nick Jones' vision and that of majority investor Ron Burkle who entered the company way back in 2012 « to repay existing debt on the balance sheet, improve operations and margins, and fund global expansion»; the second concerns the different services provided by the club that «are separate businesses (apart from running a membership community), and therefore change the incentive structures of the business. It all comes down to sacrificing the integrity of the memberships for the sake of running the amenities. Soho House leases a lot of their space – when you run all these amenities, a lot of the square footage goes towards “back of house” spaces, which gets expensive in the cities they operate in.». For Choe, the crux of the problem remains the IPO since «a private members club that’s a publicly traded company is an oxymoron. If they chose to stick to being a pure members club (instead of expanding into several other businesses), they maybe wouldn’t have lost its exclusivity factor. But then it wouldn’t be as big of a company as it is today». Continuing, Choe delved into more personal details: «When I first joined, pre-IPO, it was a pleasure to go to Soho House […]. I’d say the IPO was the inflection point. It became way too crowded with people who aren’t good guests – aka rude, disrespectful to staff and other members, and lacking courtesy in public spaces, such as the bathroom and the bar areas. Service also became an issue because of their low staff to guest ratio», until she herself canceled her membership last year.

However, the issue of Soho House touches upon the very status of the private club as such. «The true challenge of a members club is to create an authentic community based on a set of shared values and promote real relationship building», explains Choe. «It’s not about creating another gated restaurant with an attached recurring revenue stream.». And given the movement of entrepreneurs interested in the club format, « I’m confident that there will be real competition to all the incumbents, not just Soho House, emerging soon.».