Soho House: The Illusion of Success

#75 Angelinvesting.it - From idea to Series A - Weekly Newsletter

Dear reader,

Imagine having a line of members eager to pay you thousands of euros annually for membership. Picture selling cocktails at £15 each and being a globally recognized brand. Yet, despite all this, you haven't made a profit in 30 years and you have over $600 million in debt against $1 billion in revenue.

The story of Soho House is a fascinating case study of a little-understood phenomenon in the business world: the complex relationship between exclusivity and scale.

The 43 Soho Houses Worldwide

There are 43 Soho Houses around the globe, accessible only to about 250,000 members and their guests (no more than three guests at a time and strictly accompanied by the member). To join, you face a long waiting list, need two references, and must be approved by a committee unique to each house. This process is designed to maintain a sense of exclusivity and make each house's experience unique.

The allure of belonging to an exclusive club, combined with meticulous attention to aesthetics, has created a long waiting list of applicants. Humans, as social animals, define themselves through comparison. Luxury brands exploit this principle by offering an aspirational identity that gratifies our self-esteem.

Soho House has masterfully tapped into this principle, dominating a market segment recently labeled as "long weekenders." This educated audience, aged 20 to 50, is drawn to Instagram aesthetics and values a balanced lifestyle, prioritizing health and fitness. They work and live for experiences, often working remotely on Fridays to start the weekend early or fitting a Pilates or spinning class between meetings on a working-morning-day.

The Model's Shortcomings

The golden rule of luxury is that you are either truly exclusive or you are a fake, like the counterfeit Gucci bags sold on European beaches in the summer.

Revenue, calculated as price times quantity, is the starting point for any income statement. Exclusivity inherently limits the quantity of product or service that can be sold (often artificially, as with Soho Houses, to maintain the desired perception of exclusivity).

To make a profit, revenues must keep growing, especially in the hospitality sector with its high mortgages and extensive staff requirements. But when quantity cannot increase without shattering the illusion of exclusivity, the only lever left is price.

Unfortunately, you can't endlessly raise membership prices; demand isn't elastic enough to support significant fee increases, leading to a dead end. If you're Ferrari or Lamborghini, you can raise prices to millions, keep production limited, and succeed. Rolex follows a similar playbook.

This works for few products. For services, the illusion of exclusivity is quite often short-lived, unlike the long lines for drinks at a Soho House on a Friday night.

The Ice Cream Shop Effect

As a child, I dreamed of being an ice cream seller, seeing every customer smile when they received their ice cream. It seemed like a wonderful job. Growing up, I believed it was a great business, always seeing ice cream shops full.

What I didn't realize is that ice cream shops are full only during peak times when everyone wants ice cream like on a hot weekend. On a Monday at lunchtime, the same shop is as deserted as a western movie set.

So it is with Soho Houses; people perceive them as extremely successful because they visit when everyone else does. This is a distortion of perception, which, in honor of my childhood dreams, I call the ice cream shop effect.

Have a great weekend,

Simone

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