Nightclubs a tough business

MSNBC
18 clubs of the moment

Nightclub business: More ego trip than profit?
Fickle market, intense competition, license laws adversely affect business
By Lacey Rose
Forbes

Updated: 8:41 p.m. ET Aug 24, 2006

What price vanity? For aspiring Manhattan nightclub owners and their investors, the answer is anywhere between $2 million and $5 million.

Owning a club might yield a mention in the gossip columns and a date with a gorgeous girl or two. Profits, though, are quite another story.

"It's probably one of the most difficult businesses around, particularly now, when the competition is so great and the market is so fickle," admits nightlife veteran Jamie Mulholland, co-owner of safari-themed Cain.

Though no hard numbers exist, the typical lifespan of one of the 129 legally operating nightclubs in Manhattan seems to be about 18 months. We cobbled that figure from many conversations with nightclub owners, lawyers and consultants — though all declined to offer specifics on any particular club's demise, lest the bad luck rub off on their next venture.

"If you get the right lease and you're not putting in a tremendous amount of money to build the club, it can be a profitable and fun business," says Frank Ferraro, who co-owned former clubs Nocturne and Pangaea. "But so many of them are predicated on outrageous leases, [renovations] and promoter fees that it's very difficult."

If the initial down stroke for equipment, furniture, fixtures, licenses, alcohol and marketing doesn't kill you, check out the insurance bill: $25,000 to $300,000 in annual premiums, depending on the size and scope of the club, according to HGR Group, which sells insurance to nightclubs nationwide. And don't forget rent. "Two years ago, rents could be found [in Manhattan] for $35 to $45 per square foot," says Steven M. Kamali, a New York-based nightlife and entertainment broker. "Today, if you find space for $65 to $70, it's a bargain."

Next up: permission slips. You'll need both liquor and cabaret licenses if you wish your patrons to dance within the letter of the law — that's right, a slight hip wiggle is technically subject to fines in your favorite corner Irish bar. The licenses may only cost a combined maximum of $15,000, but you may spend up to 18 months applying for them. Some owners can cut through the red tape by paying a "key fee" to take over a previous owner's lease that has the licenses baked right in.

Then there are the disgruntled community groups. One local group's resistance was so fierce back in 2004, says Ferraro, that he had to shut down his club Nocturne less than a year after it opened. And with two recent nightclub-related deaths in Manhattan, chances are that push-back on new venues may only get worse — and licenses harder to secure.

Of course, just because you build it doesn't mean A-list customers will come. Enter a squad of canny promoters wielding Rolodexes filled with celebrity contacts. Quality buzz — the kind that attracts a Simpson or a Hilton (and the freewheeling fans that love them) — will cost you perhaps 15 percent to 30 percent of the night's take.

And just to make things still more difficult, throw in some clashes between testosterone-choked shareholders. Noel Ashman, former owner of NA in Manhattan, says that disagreements among his investors led to the club's demise in 2005 within a year of opening. (Ashman now co-owns The Plumm, at a venue that has housed three clubs, including NA, in a two-year span.)

The irony in all of this: Owners and investors, many of whom work on Wall Street, keep coming back for more punishment.That's because they don't expect a financial return on their investment, says Kamali. When it comes to Manhattan nightclubs, the dividends are more intangible: allure, power and top-shelf arm candy.

In other words, he says, "They're writing an ego check."