January 18, 2003
Ocean Pines Citizens Association
Ocean Pines Food and Beverage Operations Forum

Presentation by Dick Nieman

Introduction:

Dick has owned property in Ocean Pines since 1984 and retired here in 1999.  Dick has a degree in Business Administration, with a major in accounting.  He has 32 ½ years experience in budgeting, accounting, and financial systems.  Dick spent 25 of those years as a financial manager.  For the last three years prior to retirement, Dick was the Acting Director of Departmental Accounting and Financial Systems Development for the U.S. Department of Energy. 

Background:

During the past 18 years, the Yacht Club operations have never met the expectations of the community and of a good business operation.  Many different boards, managers, committees, and business management plans have all failed to achieve profitable operations at the Yacht Club.  In the earlier years, Ocean Pines was basically a second home community and part-time residents were the norm.  During that period, only the summer season could potentially be profitable.  This perception for the Yacht Club operations seems to still prevail with most of our Board of Directors and managers even though our community has grown to over 10,000 residents and has developed into a viable full-time residential community.  The Yacht Club is a premiere facility with a great location by the bay.  Unfortunately, the facility doesn’t come close to maximizing its revenue potential

Recommendations Concerning the Yacht Club Operations

On various occasions since April 2002, the following information has been presented to the Ocean Pines Board members, clubs committee members, the general manager, the clubs manager, and the head accountant.  Only one of these ideas seems to have come to fruition since then.  Hopefully, the following recommendations could be used in conjunction with other ideas to improve the potential for more successful and profitable Yacht Club operations:

Improve the Internal Controls Over Liquor and Food Inventories:

To be able to assess inventory losses due to breakage, spillage, theft, or other abuse, proper inventory controls must be in place.  Prudence seems to dictate that these controls be assessed at least weekly, and in some instances, daily.  Proper inventory assessment will enable the comparison of expected revenues from the liquor drawn down from the inventory to the amount of actual sales realized.  In discussions with the Yacht Club management in May of 2002, an inventory is taken every two weeks or monthly.  Any differences between the actual liquor on hand and what was there previously, are assumed to be the result of sales.  No other assessment for operational losses appears to be in place.

Examine and Improve the Ratio of Beverage Revenues to Beverage Cost of Sales:

The ratio of beverage revenues to the cost of sales at the Yacht Club for 2000 and 2001 was 2.8 to 1.  This means that we received $2.80 for every $1.00 spent on liquor and other beverages.  While this may be profitable, when one considers the cost of a bottle of beer, a glass of wine, or a bottle of liquor, this ratio may be low by industry standards. It also seems low when you do the math based on the cost versus the price for a beverage at the Yacht Club.  A ratio of sales to cost of sales in the 3 to 1 to 5 to 1 range appears to be more realistic.  Each one tenth of a percent improvement in this ratio represents about $10,000 less subsidy needed for the Yacht Club.  When the management was presented this concern, the answer was that the ratio was that low since a lot of the beverages sold were at “happy hour” prices and that “we pour a heavy drink”.

Only Use The Yacht Club for Revenue Producing Activities:

One of the reasons often cited for unprofitable operations at the Yacht Club is that it is being used as a non-revenue producing amenity by many clubs and organizations.  Therefore, the loss is purported to be the cost of supporting these not for profit activities.  The Board of Directors should be commended in their recent action to open the Country Club for these not for profit activities.  The Country Club can now effectively be used as an overflow Community Center thereby negating the urgency to replace the existing Community Center.  The Yacht Club should only be used as a revenue producing business.  By removing the non-revenue activities and putting them under the recreational activities at the Country Club, a true measure of the cost of running the business operations at the Yacht Club can now be measured.  As a result, a true profit or loss for the restaurant and catering operations could be determined.

Try Lower Prices to Increase Volume and Revenues:

The Yacht Club has a boring menu, and the prices seem excessive for the food and service provided.  Consideration must be given to the fact that many more patrons will be attracted by lower prices.  The converse is also true, many less patrons will show up if the prices are too high.  The prices should be lowered to attract additional business, and only increased when there is a need to limit the patrons to the size of the operation.  The revenues should increase due to the volume.  At least this theory should be tested to see if the higher volume will increase overall revenues.  Hamburger night seems to have been successful.  Even though our management espouses that “we can compete with anyone”, Hamburger night supposedly was switched to Sunday night so as not to compete with Taylors and Whiskers. 

Have Consistent Hours of Operation:

The Yacht Club is always changing the hours of operations.  Rationale for this stems from the cyclical argument that they should not be open and incurring additional losses when there are no customers.  Customers, in turn, don’t show up because the Yacht Club is closed.  However, consideration must be given to the fact that many customers don’t even consider the Yacht Club since the hours are irregular and constantly changing.  Many of the competitors have regular hours, and customers know that these establishments are open.  They don’t have to go to their television’s community bulletin board to figure out the hours of operation. 

Assess the Competing Restaurants and Use Their Successful Ideas:

The Ocean Pines management team appears to use the wrong competitors when trying to benchmark the Yacht Club operation to other businesses.  The Yacht Club prices are being compared to pricey hotel restaurants in lieu of the true competitors that many of the Ocean Pines residents frequent.  Ocean Pines management seems to believe that a profitable Yacht Club operation cannot exist during the off-season.  However, places like Whiskers, Taylors, Windows by the Bay, Seacrets, and Harborside are able to serve good food at reasonable prices, stay open during the off-season and make a profit.  These restaurants at least cover some of their fixed costs during the winter, and subsequently reduce their winter losses.  This allows them to stay open regular hours, and maintain a core of competent staff during the winter months. The clubs management would be well advised to venture out to some of these successful operations and “steal” some of the ideas that make them successful.  The competitors have happy hour appetizer specials, good happy hour drink prices, half price specials, early bird specials, and other dinner specials to name a few ideas.  For example, our lack of concern for the competition seems to be demonstrated by the fact that meat loaf is offered downstairs at the Yacht Club at $11.95, and upstairs for $13.95. 

Change Management’s and Board Predisposition that Losing Operations are Inevitable:

Based on history, the current management appears to be predisposed and readily endorses the belief that the Yacht Club will always lose money and will continue to require the residents to subsidize the losses.  Based on past experience, this logic may seem rational, but the demographics of Ocean Pines have changed greatly over the past several years.  This is now a year-round community and there is an adequate population to appeal to for patronage of the Yacht Club.  The Board, the General Manager, and the Clubs manager must improve marketing skills and operational skills to overcome this defeatist attitude.

Make a Concerted Effort to Win Back the Business of the Clubs and Organizations:

Several of the clubs and organizations that previously patronized the Yacht Club have chosen to take their business elsewhere.  Some of those that have remained “loyal” are not happy with the operations.  The most popular reason cited is that they get a better deal outside of Ocean Pines.   As a result, the residents unwittingly “pay twice” for their meals.  First they pay for their meals from establishments outside of the Pines.  Secondly, they effectively pay for the meals again as a subsidy for the perpetual losses at the Yacht Club.   Also, when the Yacht Club loses the business of the collective body of the clubs and organizations, the Yacht Club frequently also loses the extra business of the individual members of the clubs/organizations.  The Clubs Committee has recently sanctioned a simple marketing survey of the Ocean Pines clubs and organizations to help determine how to regain and retain these organizations’ business.  Hopefully this information will serve as a basis for change at the Yacht Club.

Set Higher Performance Standards for the General Manager and Clubs Manager:

The General Manager and the Clubs Manager have already demonstrated that they can meet the performance standard that allows them to receive a satisfactory performance rating if the clubs lose no more than one-third of a million dollars a year.  The Board of Directors should raise the acceptable standard of performance to require the clubs to at least break even.  The Board of Directors should then hold the managers accountable for meeting the more challenging target.

Reflect a Reserve for Anticipated Losses as a Separate Line Item in the Budget

First the Budget should reflect expenses and revenues for the Yacht Club at a breakeven point, not as a budgeted loss.  The Board could then establish a reserve for potential loss or subsidy, and require the Club’s Manager to come back to the Board as the year progresses if the planned revenues don’t materialize.  This would put more scrutiny on the losses and would require the Board to vote to release the reserve to finance the losses as the year progresses.  This would also eliminate the presentation of favorable reports on the clubs operations to the Directors and homeowners while the clubs continue to accumulate large losses. 

Give Management and Employees a Profit Incentive:

An incentive to make a profit at the Yacht Club does not seem to exist.  There appears to be no management consequences for running an unprofitable business.  The manager gets the same fixed salary regardless of the financial success or failure of the operations.  Currently, there is only a negative incentive for the current management to increase business.  Any increase in business would require an increase in the workload of the employees and managers without any increase in their compensation.  Perhaps, as a management incentive, both the managers and the employees could share in the profits, if and when a profit condition was reached.  In the meantime, a portion of the current manager’s salary should be made contingent upon making a profit. 

Increase Revenue Opportunities:

The food and beverage operations seem to overlook opportunities for additional revenues.  No food or beverages are offered at many gatherings in and around the Pines.  Opportunities exist, for example, at the summer concerts and at the various community meetings.  (In all fairness, the Club does cater some of the summer picnics held throughout the community).  Trying to expand the opportunities for food and beverage sales can help gain loyal patrons and consequently further reduce losses.  As mentioned previously, no management incentive currently exists for the clubs management to do so.

Stop the Creative Accounting to Mitigate the Losses:

For many of the residents of Ocean Pines, determining the actual loss at the Yacht Club is not possible.  There seems to be a concerted effort to stupefy or bewilder the residents.  No public notice or emphasis is given to the fact that the Board of Directors are actually approving a budget which allows the manager to lose approximately one-third of a million dollars each year and still be considered successful.  During the year, when the status of the budget is reported, if we are “on target” for the budgeted loss, the manager presents a glowing report that Yacht Club operations are successful in meeting its targeted loss.  Another example is demonstrated by recent accounting changes in Ocean Pines.  These changes by the Board of Directors have dropped the depreciation costs previously charged to the Yacht Club operations, and as of May, 2003, allocation of overhead charges are planned to be excluded as part of the Yacht Club costs.  This is another example of trying to make the operating results look better, but not be better.  Good managerial accounting principles would not support reflecting the costs in this manner.  There is no sound reason for not reporting the Yacht Club operating results before depreciation and allocations, and then applying and publicly reporting these total costs to more accurately reflect the true profit or loss for the Yacht Club.

Utilize the Talents of Concerned Citizens as Free Consultants to Help Improve Operations:

Many well qualified Clubs Committee chairmen and members have quit out of frustration because their logical suggestions are either ignored or not implemented by the Ocean Pines management or Board of Directors.  Qualified individuals that are “free labor” are turned away by management.  The Board seems to only want individuals that are “yes” men and women that “won’t make waves”.  The collective expertise within Ocean Pines could help to vastly improve the clubs operations.

Summary:

Since April 2002, I have attended many Board of Director meetings and Clubs Committee meetings, met with senior managers in Ocean Pines, and initiated a simple marketing survey of the clubs and organizations of the Pines.  This presentation is meant to inform you and increase your awareness of my perceptions and analysis of the Yacht Club operations.

The Board of Directors and their managers should team with the Clubs Advisory Committee, the Ocean Pines Citizens Association and other qualified citizens to develop a Management Improvement Plan to assess and implement all of the actions to improve the Clubs’ operations.  These recommendations have a greater chance of success if implemented together.  By working as a team, we will have an even greater chance for success.  If you agree, contact your Board of Directors to constructively express your ideas to help improve operations. The urgency is great considering the slow economy and budgetary pressures to increase our assessments. 

Finally, on February 13, the Ocean Pines Board of Directors tentatively accepted the staff recommendation for the 2003-2004 Budget that again would allow the Yacht Club to lose over $300,000.  This Board also seems to have abandoned the previous Boards’ commitment to have the Yacht Club break even.  Once again, the Board is considering an increase in our assessments to cover these losses.  At the public meeting on Wednesday evening, January 22 at 7:00 p.m. at the Community Hall, each of you has a chance to make a difference.  Please take this opportunity to express your opinions to the Board.