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Examining the Findings of PKF's Inaugural Edition
of Trends in the Hotel Spa Industry
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by John R. Korpi, May 2008

WITH the explosive growth of the spa world over the past decade, spa owners and operators have all been crying for financial trends and benchmark studies that would allow them to measure individual financial results against industry averages, and to compare their historical trends alongside similar spa operations within the industry Thus, when it was announced that the well-respected PKF Hospitality Research had published an inaugural edition of Trends in the Hotel Spa Industry, there was a buzz in the air as hotel and resort spa operators examined the findings. 

First, we should express our appreciation to PKF for undertaking this study, as it really is the first time that one of the major hospitality accounting and consulting firms has done so. 

Unfortunately, the industry buzz quickly turned into an industry stir as I began receiving e-mails from spa directors whose spas ended the year 2006 with a spa departmental profit in the high 20 percent range, yet were being criticized by their general managers for performing below the industry average. They were in turn instructed to reduce payroll and other expenses or raise prices due to the PKF press release. The cause of the stir was the PKF assertions with respect to hotel spa profit margins, where the study states that the average spa departmental profit for all hotel spas averaged 31.1%, with resort spas generating 33.3% departmental profit, and urban hotels 17.9%. Having spent 25 years as a hotel and resort general manager and 5 years as a corporate VP of Operations for a hotel management company, and most recently spending 15 years involved in the spa world, I have been immersed in all kinds of financial data throughout my career and know the great benefits and pitfalls of statistics and data. Thus, when the PKF study was released, I felt it was my responsibility to tear apart the numbers and share my finding with a larger audience. 

Clearly there are large, top-performing, hotel and resort spas that are achieving 30%, or 35%, even 38%-40% departmental profits. But to assert that the overall hotel spa industry average is 31.1% does not coincide with industry reality. I would note that just two months earlier, the International SPA Association released its 2007 Spa Industry Study, prepared for ISPA by the Association Resource Centre Inc., where it was reported that spa profit margins for resort/hotel operations averaged 23.6% in 2006. So, you end up with a situation with a huge variance of 32% between the two studies. 

The ISPA study included 134 hotel and resort spas, while the PKF sample included only 46 resort and 17 urban hotel spas, all of which were concentrated in Los Angeles and Southern and Central Florida, while the ISPA sample was more geographically dispersed. The average revenue for both studies was virtually identical: the ISPA study average was $1,743,000 and the PKF study average was $1,740,000. 

The ISPA study does not include the size of the sample properties, but the hotels and resorts in the PKF study averaged 471 rooms for resorts, and a whopping 782 rooms average for the urban hotels. 

The size of the spas in the PKF study were somewhat larger, as they averaged 13,456 square feet, while the ISPA sample spas averaged 10,830 square feet of indoor square footage. 

Additionally, the spas in the PKF study generated higher revenues as they report spa treatment revenue per treatment room at $110,253 average as opposed to the ISPA survey that reported revenues at $79,474. Salon revenues per salon station were actually higher in the ISPA sample, with an average of $42,699, while the PKF study reported an average of $36,575. 

These sample characteristics with regard to size and revenues per treatment room and salon station should help individual spas to compare their own size and revenue results for 2006 and determine if they are closer to the PKF or ISPA "average spa." 

There are a number of other peculiarities in the spa sample from the PKF study. Some that would have an upward influence on departmental profits and others that would deflate the average departmental profit: 

  • The PKF urban spa properties had significant revenues derived from a membership program. Membership fees and day-use fees averaged 19.4% of total spa revenues, totaling $183,000 of $944,000 in total spa revenues. Even the resort sample included membership fee revenues of nearly $82,000 and day-use fees of $55,000 for the year 2006.  The point is that membership and use fees have a much higher "flow through" to department profit than treatment revenues would. 
  • The PKF sample reports merchandise and clothing revenues at only 6.6% of total spa revenues, while, according to the ISPA Foundation's Retail Management for Spas, the retail revenues were in the typical range of 12%-18%, with some spas reporting revenues well above 20%. Additionally, the retail cost of goods sold for the PKF urban spa sample ran nearly 70%, while the resort hotels achieved the more-accepted industry average of 48.4% 
  • Total labor costs for the PKF sample is 50% for resort spas and 55% for the spas in the urban spa sample. But I would point out that the benefit burden for the urban spas was only 16.5% of salaries and wages, which seems questionably low. The resorts averaged 24.2%, which is more realistic although I know of many spas whose benefit costs run closer to 30% with some even higher. 
  • With respect to operating expenses, the PKF sample of resort spas ran an average of only 13.5% of revenues, while the urban spas averaged 23.4%. Line items such as laundry expense of 1.5%, and linen expense of only $7,083 for resorts, look suspicious. Clearly, only top-performing spas would achieve a total operating expense percentage below 15%. 
In fairness to the PKF study, their 2005 and 2006 studies were consistent, thus the true significance of the study is the measures of trends between the two years. Therefore, the real meat of the study findings is that hotel spa revenue grew from $2,866 per available room (PAR) in 2005 to $3,166 PAR in 2006. This is a 9.7% increase, while total hotel revenues increased 8.2 % during the same period, so the increase in spa revenues outperformed the hotel as a whole. Labor costs paralleled the revenue growth at 9.6%, while operating expenses increased 6.6%. Finally, the study reports that from 2005 to 2006, hotel spa department profits increased 11.3%, which is greater that the 9.9% average growth in profits for all hotel operated departments during the same period. 

Unfortunately, I am unaware of any other studies completed by ISPA or anyone else against which these results can be compared. Until there is universal acceptance of the ISPA Foundation's "Uniform System of Financial Reporting for Spas," it will be difficult at best to conduct an apples-to-apples survey. You must bear in mind that the organization of the financial data for the PKF study was based on the 10th edition of the Uniform System for Hotels published in 2005. In the ninth edition, the word "spa" does not appear once in the entire text; there is a health center sub-schedule which mentions the words "massages and treatments" as a revenue source within the health center schedule, but that's it, clearly nothing that would resemble the ISPA Uniform System text. 

It is ironic that the task force of the ISPA Foundation and the committee for the American Hotel and Lodging Association, and Hotel Association of New York City, were working at exactly the same time on the creation and revision of the two Uniform Systems. We had one member of the ISPA Foundation who also sat on the Hotel Association committee, but he kept reporting that the process on the Hotel side was very bureaucratic and laborious, so quick acceptance of our work would be very unlikely. The good news is that the word "spa" is now included in the hotels' 10th edition as they changed the title of the sub-schedule for health center to health center/spa, with a few revenue and expense lines added. But we have a long way to go. 

There were almost 10 years between the revisions to the Hotel Uniform System. The AHLA has expressed a goal of completing the updates more frequently, perhaps every four years; that's still going to be a slow process. In the meantime, I am pleased to announce that the ISPA Foundation is organizing a task force to create the companion text to the Uniform System with the development of a second Financial Management text. This new edition will take the accounting principles of the Uniform System and bring them to life with content that will cover all of those day-today operational financial skills that a spa leader must have to be successful. 

Hopefully, more and more spas will start capturing industry-accepted benchmark key business indicators, which will make it easier to report reliable measures of the financial health of the spa industry. In the meantime, when operators see financial trends reports such as the PKF study, they need to realize that they will have to carefully examine the sample and results compared to their own experience, and identify statistics that are relevant to their operation.


John Korpi is principal of SpaQuest International, an executive search and spa consultancy company. His leadership of lSPA spans the entire 18 years of its growth. Serving as ISPA’s second President, he and the board of directors pioneered meetings with European spa industry leaders and moved the Association from volunteer leadership to engaging professional association management. As four-term President of the ISPA foundation, he initiated the development of educational resources, including the Uniform System of Financial Reporting for Spas, to enhance professionalism in the spa industry. His distinguished 25 year career in resort management includes the historic mineral spring spa resort at French Lick to several years at the PGA National Resort and Spa in Florida, where he was responsible for construction of their, Waters of the World Spa. 

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Contact:

Debra Locker
Public Relations Director
International SPA Association
2365 Harrodsburg Road, Suite A325
Lexington, KY 40504 
P 1.859.226.4374
debra.locker@ispastaff.com
www.experienceispa.com
 

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Also See: Hotel Spa Profits Rise; Spas Meet Needs Of Hotel Guests And Owners / PKF Hospitality Research / January 2008
Hotel Spas as Independent Profit Centers / PKF / March 2006
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