March 10, 2010

Closed for business

Jefferson Club shuts down and files for bankruptcy, proving not even high society is immune to a sluggish economy

Retail sales and manufacturing data released last week may have spurred growing rumors of a recovering U.S. economy, but good luck discussing that over cigars and Cognac at Louisville’s once-storied downtown Jefferson Club.

The private business club, which operated from the 29th floor of the PNC Plaza office tower, has shuttered after filing for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code, according to documents filed last week in the U.S. Bankruptcy Court for the Western District of Kentucky.

The club’s woes, its President and CEO Rick Price told Business First when the news broke last week, can be blamed on the economic downturn of the last few years: “Due to the economic climate, we could no longer operate in a positive status. We had to shut down.”

From the day it opened in 1972, the club was considered a bastion for the city’s powerful elite, particularly those who did not feel welcome at the only other exclusive downtown social society, the historic Pendennis Club, which for more than a century accepted only white males as members (a policy that has since changed).

“If you were black or Jewish, you couldn’t get into the Pendennis Club, so the Jefferson Club was where you went,” says Stephen Reisz, an attorney for Foley, Bryant, Holloway and Raluy, the law firm representing the Jefferson Club in bankruptcy proceedings. “It played a significant role in the life of this city. It’s a real shame.”

In 2004, the club boasted a membership of around 1,300, according to published reports. The Jefferson Club saw that roster dwindle by nearly 50 percent over the last 6 years to about 700 members.

“I’m terribly saddened and disappointed,” says longtime member James Goldberg, an attorney with Stoll, Keenon and Ogden, a law firm located in the PNC building just below the Jefferson Club. “I used it frequently to entertain guests and clients. The ambience was wonderful, the views spectacular, and the service was always impeccable. It’s just a really difficult time (for these types of businesses).”

Once seen as impervious to the fluctuations of a fickle economy, private clubs are now showing themselves to be vulnerable to the nation’s shifting economic fortunes — and tastes.

According to a survey conducted by the International Journal of Hospitality & Tourism Administration, in recent years most exclusive clubs in the United States have experienced a decline in dues-paying members. And the days of jockeying for position on the proverbial club waitlist have also come to an end due to an increase in the number of openings.

The survey’s conclusions may seem self-evident, and come as too-little, too-late for businesses like the Jefferson Club: “The results of our study suggest that clubs need to implement membership marketing strategies to increase the number of candidates for membership during economic downturns,” wrote study author R.R. Ferreira.

“Duh”-factor aside, some observers say the stage was set for this industry crisis long before the current financial downturn and that economics may not be the only cause for the precipitous decline in membership rosters.

Congress enacted tax reforms in the early 1990s that mostly closed the loophole previously allowing members and their corporate employers to deduct club dues as a business expense. And as the current round of economic belt-tightening has made club membership seem more extravagant than ever, the CFOs responsible for watching the bottom line have been eager to find more frugal outlets for entertaining.

As private clubs have struggled to adapt to this new reality, many have begun to do the unthinkable: Opening their doors to the public for outside events like banquets, charity functions and private weddings. The net result has been a decline in the exclusive cache that had made the private club a status symbol some found worth seeking in the first place.

In 2003, seven members of Lexington’s University Club of Kentucky sued after officials lowered the club initiation fee from $12,500 to around $6,000, claiming the reduced fee denigrated the value of their membership. The suit, which was settled privately, speaks to the perilous line clubs must walk these days: How to court new financially conscious members without alienating the old money guard.

At the end of the day, many private clubs — the Jefferson Club included — may have simply revealed themselves to be just as susceptible to a sluggish economy as any other business.