Hotels Are Reviving Nightclubs to Boost Visibility

Don’t be boring. Be visible. Be profitable.

This is the basic drumbeat of nightclubs — a business that famously flaunts logic and frequently fails. Yet we need not mourn the last days of disco much longer. That’s because a handful of powerful hoteliers are staging a modern revival and ushering in a new era of nightlife.

“I think the rest of the hotel industry that always used to not care about nightlife or entertainment has finally woken up to the idea that not only is design and a distinctive product good business, but having various forms of entertainment is good business. We’re bringing another dimension to nightlife. And I think you’ll be seeing more and more of it,” said hotelier Ian Schrager.

Yes, that Ian Schrager — the wunderkind from Brooklyn who turned Studio 54 into nightclub legend with his late business partner Steve Rubell, created the concept of boutique hotels, and has since been dubbed the “Steve Jobs of the hospitality industry” by The New York Times.

When we met, Schrager was hard at work in his Greenwich village office — a cool guy pushing 72 in blue jeans and a black T-shirt — negotiating the design and programming of 40 planned Edition Hotels in partnership with Marriott International. So far they’ve opened nine properties — the latest of which is the Times Square Edition. The hotel includes a nightclub-cabaret hybrid on the seventh floor called the Paradise Club, which features performances by House of Yes, a wildly theatrical warehouse-style funhouse in Bushwick, Brooklyn.

Ian Schrager in his office in NYC, 2019. Photo by Jennifer Leigh Parker.

It’s a bold move by Marriott, the world’s largest hotel group. Despite this, on any given night, Edition patrons can witness barely clad singers perform these lyrics: “In paradise, you either [bleep] or fight! I want to [bleep] you like an animal, I want to desecrate you, complicate you…” before bottle service minimums, strobe lights, and a DJ conversion sets in around 11 p.m. It’s a classic nightclub model that begins only after patrons have spent from $95 to $195 per dinner theater ticket, drinks not included.

“We wanted to do a kind of very edgy, creative, iconoclastic, arty, chaotic show with people who would do it on a shoestring budget. So we went with [House of Yes], and I’m happy we did! But there are other acts that interest me, that bring another dimension to nightlife,” added Schrager.

Nightclubs are a notoriously risky investment. So Marriott is hedging that risk by opening a club in an already-built hotel, then adding ticketed entertainment that is relatively inexpensive to produce and attracts a certain kind of guest — the kind that will materially boost food and beverage revenues during otherwise dead hours. Here’s looking at you, Grey Goose.

To be clear, the Times Square Edition has the luxury of launching a club, as its location all but guarantees a healthy profit. New York City welcomed a record 65 million visitors in 2018, according to NYC & Company, the city’s tourism marketing agency. Room rates are the number one driver of hotel profitability, and no one in the business is claiming that clubs change operating margins. What hotel CEOs do claim is that clubs give hotels visibility and help drive the rate of occupancy — especially when using these tricks of the trade.

DYNAMIC PRICING & CELEBRITY FREEBIES

Paradise Club ticket prices are set according to demand and capacity, which is tracked by sales analytics provided by the event management website Eventbrite. This practice is called “revenue management” or “yield management,” which defines price as a function of demand. It is used by both the hotel and airline industries to set room rate and seat prices. If they push it too far, however, it’s called price gouging.

The concept isn’t new. American Airlines’ Robert Crandall is credited with developing “dynamic pricing” models in the early 1980s, after airline pricing was deregulated in 1978. Sometimes it works in customers’ favor. Think about that time you got a free upgrade. It’s because they didn’t sell the plane at capacity, not because you’re special.

It stands to reason that the more data hotels amass in its clubs — which already track credit card spend and food and beverage orders — the more efficient dynamic pricing will become. Though, of course, no amount of funky pricing matters unless demand is strong.

This is where celebrities and models come in. In uber-competitive gateway cities, perceptions of cool are everything. So are freebies for celebrities and models who attend club and hotel openings considered the cost of doing business?

“Yes. You know, that might have even ruined the business. By the way, Steve and I used to let celebrities into Studio 54, because they were good for the business. But we only let in about 5 to 7 percent, at that time… Now a lot of people don’t want to pay, period. That’s why there’s not many door charges at nightclubs anymore,” said Schrager.

He’s right. Bottle service is still in style, but door charges are out. As for social media influencers, Schrager doesn’t consider them valuable. “I’m just not sold on the benefit of influencers. But I myself get excited about when somebody who has done something really great and worthwhile comes to my hotel and likes it. It’s part of the gratification I get out of the whole thing.”

Not every hotelier shares Schrager’s views or vision. But they all subscribe to his main mantra: You’re only as good as your next party.

MEET ME AT THE MOXY

“In general what hotel developers and owners are looking for, more than anything, is: How do get more heads in beds? How are you going to increase your RevPAR [revenue per available room]? The way you do it is by providing various types of amenities and experiences to the guest. Clearly nightlife is one of those avenues,” Mitchell Hochberg, president of Lightstone Group, said from the confines of his sleek Manhattan office on Park Avenue.

He’s a shrewd real estate mogul in full suit and tie who is making waves in Manhattan’s nightlife scene with his newly minted Moxy hotels, an urban social phenomenon which feels more like a cultural shift than a fly-by fad. Granted, it’s not his first rodeo. Lightstone owned 20 other Marriott-branded properties in the U.S. before opening its first Moxy hotel in New York City last year. By 2021 Lightstone plans to open a total of eight Moxy hotels in New York, Los Angeles, and Miami — each with its own nightlife venues, operated by third parties.

The Magic Hour rooftop bar and lounge at the Moxy Hotel in Manhattan. Source: Warren Jagger

“Typically a hotel owner or developer will fund a substantial amount of the capital cost to build a club, and there will be some type of profit sharing arrangement with the operator,” Hochberg explained. This is exactly how Marriott opened the Paradise Club with House of Yes, and it’s also how Hochberg opened Magic Hour on the rooftop of Moxy Times Square and The Fleur Room in Moxy Chelsea with Tao Group.

His clubs aren’t typical nightclubs. While you will find bouncers behind velvet ropes stamping your hand at the door — that familiar, yet still bizarre rite-of-passage — Moxy venues are well-designed day bars and rooftop lounges with great skyline views, hip crowds, and live DJ entertainment by night. The transition from bar to club after 11 p.m. can be tricky (picture working stiffs wondering when it’s cool to start dancing) — but Moxy pulls it off pretty seamlessly. Hochberg gives credit for this to Tao Group, which owns and operates clubs in Chicago, Las Vegas, New York, Los Angeles, and Singapore.

“We have known the principles of Tao personally for many years. They are able to not only create a buzz and drive topline revenue, but they know how to make money as well. A lot of nightlife operators know how to fill a room but don’t know how to make money,” added Hochberg.

He speaks almost daily with Noah Tepperberg, the co-founder of Tao Group, who is perhaps best known for opening the original stand-alone Marquee nightclub in Manhattan. Whatever your impressions of the club post-Sex and the City, the brand has been in business since 2003, subsequently followed by Marquee Nightclub & Dayclub at The Cosmopolitan hotel in Las Vegas, Marquee Nightclub at The Star in Sydney, and most recently at the Marina Bay Sands hotel in Singapore. Marquee even has its own Harvard Business School case study [opens PDF], which Tepperberg is invited to explain to students as a guest speaker each November. Their common question: How do clubs make money?

“Know your market. You need to understand the mix between revenue and cost. Once you open, labor is your biggest expense. Be realistic when you decide how much to spend on it, and draw the most accurate road map possible by projecting at least three years out what a space can bring in,” said Tepperberg, sitting in his conference room overlooking Madison Square Garden, surrounded by iconic ’80s portraits of Rod Stewart, Billy Joel, Christie Brinkley, and Madonna.

At 43, Tepperberg seems young, energetic, and well-connected — as if you can still see the hustling club promoter he was in Stuyvesant High School in New York City. But he doesn’t talk to me about celebrities or pop culture. He talks about the bottom line, which he says gets healthier when you bring the nightclub into daylight.

DAYCLUBS & DJS

“We’ve always thought about how to operate more than just 10 p.m. to 4 a.m. Can you use these spaces for other things? You’re paying rent; why not be open 30 days a month?” added Tepperberg.

In the last 10 years, daytime brunch and pool parties have become such an organized segment of the hospitality industry that daytime programming is a modern hotel standard.

In Vegas it’s not just popular, it’s an over-the-top, bikini-clad blowout, because the common consumer isn’t local; they’re visiting for a three-to-four-day joy weekend or corporate convention. This is a marketer’s dream: a captive audience who Tepperberg is happy to charge $10,000 for each Divorce Grand Cabana to see DJ VICE at the Marquee Dayclub at 11 a.m. in the morning…

“It’s like front-row seats at a concert. Cabanas are real estate; you’re paying to have the best view of the show,” said Tepperberg, in his defense.

Famous DJs have become an integral part of the business and are sometimes paid up to half a million per concert, assuming strong ticket sales and marketing. “You can spend $100,000 on marketing, or just give your flyer promotion to a hot DJ with seven million Instagram followers, and they’ll post it for you!” said Tepperberg.

In other words DJs took the money out of traditional advertising and ran with it. For the same reason more hotels are opening clubs with DJ entertainment.

“We truly look at it as an amenity. It has to be on brand with the guests at the hotel and not really looked at as an independent profit center — although, clearly we want it to make money. That’s why we’re in business,” added Lightstone’s Hochberg.

VEGAS BABY, VEGAS

The interdependence between nightclubs and hotels in Las Vegas is stronger than in any other U.S. city. “Every hotel in Vegas has a club now. It’s become a prerequisite. It used to be a buffet and a show; now nightclubs are the biggest investment hotels make,” added Tepperberg, who is clearly a beneficiary of this trend.

This isn’t just egotistical windbaggery. Nightclubs really do boost tourism revenue. In 2018 more than 42 million people visited Las Vegas, and 58 percent of those visitors attended shows, which includes ticketed celebrity DJ performances. Of those who attended a show, the proportion who saw a celebrity DJ was nine percent, according to the latest Visitor Profile Study by the Las Vegas Convention and Visitors Authority (LVCVA) Research Center.

“The fact that our resort partners continue to add nightlife options, including world renowned DJs and residencies, indicates to us that they’re a good proposition,” said Maria Phelan, a spokesperson for LVCVA.

NIGHTCLUBS NEED HOTELS, TOO

Given the relatively strict labor laws in Vegas, it’s also more expensive than ever to open a stand-alone club on the strip.

Just six years ago Hakkasan Group spent over $100 million to build its flagship club, with a capacity for 3,600 capacity patrons, and has continued to invest “over $5 million a year in production, including DJ performances, and new lighting systems,” said James Algate, Hakkasan Group’s vice president of entertainment.

Every year it takes fresh investment and new tricks to stay competitive. As I write this Hakkasan is unveiling a multimillion-dollar “kinetic light installation,” composed of 57 3D-printed triangles that form a 30-foot sculptural showpiece called the Hakkasan Grid.

“We’ve commissioned the grid so we can continue to transform the space. On a Friday night versus Saturday, the venue will look different,” said Algate. “We’ve got to make sure we’re profitable for our stakeholders.”

Here’s the deal: Not everyone has Hakkasan Group’s capital cushion, and everyone in Vegas is always trying to outdo each other. Most club operators are thirsting for hotel partners like casino cocktails in the desert.

For his money Hochberg doesn’t buy it: “The nightlife business, from an operator’s perspective, is very capital intensive. To put together a bar or club requires significant capital, and the returns, probably as a stand-alone, really cannot be justified.”

Vegas is, shall we say, special. But in this era of accessible international travel, neither hotels nor clubs can ignore other nightlife destinations — the most lucrative of which is found in the tiny 2 square kilometer principality called Monaco, where one in three residents are millionaires.

EXTREME EXCLUSIVITY: WELCOME TO MONACO

If you’ve ever been clubbing in Monaco, you probably know of a place called Jimmy’z. It’s been operating for over 40 years, and is owned by real estate juggernaut Société des Bains de Mer (SBM).

Jimmy’z owes its staying power to SBM’s crown jewel, the Hôtel de Paris. With its Grace Kelly and Prince Rainier III legacy, the Belle Époque starlet continues to attract an international bling-bling clientele — think Russian oligarchs and Patek Phillippe brand ambassadors — with Grand Prix ringside seats, Alain Ducasse restaurants, and deep-pocketed design. Moreover SBM just spent $672 million renovating the hotel and building luxury condos on-site. In return the hotel can charge higher room rates, ranging from 600 to more than 15,000 euro a night by selling “Monaco’s hottest nightclub” as a premium amenity.

“If you want to show off, it’s at Hôtel de Paris and Jimmy’z. We’re the biggest seller of Dom Perignon in Europe. And in Monaco 30 percent of all alcohol sold is champagne,” said Sébastien Verdino, general manager at Sporting Club.

Given local purchasing power, club owners take velvet rope exclusivity to the extreme. At Jimmy’z, a waterfront nightclub encircled by its own manmade lagoon, a bijou bistro table on the dance floor will set you back 2,500 euro, while the minimum for a bottle of Dom Perignon is 800 euro. Here dynamic pricing is not only alive and well, it’s treated like an elitist privilege.

“We have to know you. We won’t just let you buy a table. We have to know who you are,” added Verdino, himself an SBM veteran and gatekeeper, the Monégasque version of Noah Tepperberg.

He tightly controls the guest list because this is a business of intangibles, where one sells a mood, a feeling, an energy. “It’s a visceral business. You have no discernible product except the magic you create,” Schrager recalled in Matt Tyrnauer’s recent Neftlix documentary Studio 54.

Not everyone can really pull it off. And given capital costs, nightclubs are too often the domain of corporate conglomerates rather than the creation of young, rambunctious revelers… the next-gen rock and rollers.

Back at work on Greenwich Street in the West Village, Schrager, king of disco, summed it up: “You need to capture the zeitgeist of a culture, which is, in itself, an amazing talent. But it doesn’t work unless you can monetize it.”

Finally hotels are starting to get this. You’re only as good as your next party.