The New Recreational Vehicle
For Hotel Profits
|by Andrea Foster and Robert Mandelbaum, October 2005
While the spa experience may once have been considered a luxury to hotel guests, hotel owners and operators are fast realizing that it is necessary to have a spa to meet guest expectations and to remain competitive. In resort locations catering primarily to groups and individual leisure travelers, golf was once the buzzword for guest recreation and enjoyment. Now with a trend toward better lifestyles, an increase in disposable income, and less available time, spa treatments are better accommodated in a tight schedule than a leisurely round of golf.
But guests of resort hotels are not the only ones expecting to get a massage following check-in. Corporate guests are now looking for spa services while they travel on everyday business. Why? Busy work schedules, high stress levels, and a growing focus on one’s health and well-being are nudging more people to spas for regular massages and treatments. In response to this demand, spas are growing in numbers in urban and convention hotels, as well.
The demand patterns and trends in the spa industry are illustrated by the financial performance of hotel spa operations. To present a complete picture, we have analyzed information from the 2003 and 2004 operating statements of 88 properties in the United States. Included in this group are both hotels with dedicated spa facilities and properties that offer spa services through their health club. The data comes from Trends in the Hotel Industry, PKF Hospitality Research’s database of 5,000 hotel financial statements.
In 2004, spa revenue for the hotels in our sample averaged $2,076 per available room, or 2.3 percent of total revenue. Revenue contribution did vary by property type. As would be expected, where the length of guest stay is longer, spas at resort properties contributed a greater percentage of revenue to the overall hotel operations, as opposed to the spas within urban full-service and convention hotels. At resort hotels, spa revenue was $3,117 per available room, or 3.4 percent of revenue. For urban hotels, spa revenue averaged just 1.3 percent of total revenue, or $1,187 per available room.
Missing from our analysis is the square footage of the spa operation. Obviously, the size of the spa facility will have an impact on its ability to generate revenue. However, by sorting our data by the total revenue generated by each spa, we found that hotel spas generating over $1 million in revenue contributed an average of 5.3 percent of the total revenue for their properties. At the other end of the spectrum, spas that achieve less than $500,000 in revenue represent less than one-half of one percent of the total revenue at their hotels. Enhanced health clubs made up the majority of small revenue departments, while the million dollar operations were primarily true dedicated spa facilities.
Depending on the size of the operation, revenues are derived from a variety of sources. The simplest of health clubs offer fitness and training facilities, as well as a basic massage package. On the other end of the spectrum, extensive dedicated spa operations provide a full menu spa services that includes specialty body treatments, salon services, and spiritual / wellness guidance. In addition to services, spa operations earn revenue from membership fees and retail spaces offering a variety of clothing and spa-related merchandise for sale.
Larger spa operations will operate a healthy snack bar or full-service restaurant serving “spa cuisine.” Consistent with the spa focus on health and well-being, spa cuisine is typically low in fat and calories, and prepared with fresh ingredients. Due to standard hotel accounting practices, food and beverage revenues are classified within the Food and Beverage Department and therefore are not included in our analysis.
Why have spa treatments become such a revenue-generator for hotels? Among other reasons, hotels originated from personal, attentive service. As we as a society becomes busier, and process more information in less time with increases in automation and electronic solutions, hotels have followed suit. Hotels have responded to guest demand for increased efficiency and do-it-yourself solutions, such as in-room business services and kiosk check-in. But in this process, the personalized contact is depleted. Stated otherwise, with increases in “high tech” the hotel industry is less “high touch”. Spas, by nature, fill the void for personalized, human attention.
Just as spa treatments by design are tailored to meet guest needs, spas have begun to individualize their spa offerings to establish a signature reputation. This is particularly found in larger resort spas. Treatments are created that showcase a particular brand of products, which creates an additional retail opportunity, or the spa might look toward ancient spa and “bathing” traditions from other cultures and create a unique experience that incorporates these rituals.
Massage services are clearly the greatest source of revenues for hotel spas. On average, massage revenue accounted for 43.5 percent of all revenue at the hotel spas in our survey sample. Spa treatments, the second biggest source of revenue for hotel spas (22.1%), include facials, body scrubs, mud masks and seaweed wraps, and water-related treatments such as Vichy and watsu. Club/membership dues (11.0%) and salon treatments (10.1%) also represent the other major sources of revenue.
The mix of revenues did differ somewhat by the type of property. Urban hotels frequently market to local residents and businesspeople to become members of their club. Therefore, club/membership dues represent 24.9 percent of revenue at urban hotels, compared to just 4.8 percent at resort properties. At resort hotels, where the spa operations are typically more expansive, revenues from spa treatments, salon services, and clothing/merchandise sales are more evident.
Spa Growth – Comparatively Strong
While one year does not constitute a trend, it is interesting to note
that spa revenue at the hotels in our sample grew 11.2 percent from 2003
to 2004. For comparison purposes, total revenue increased 8.8 percent
and rooms revenue grew 9.6 percent during the same period for these properties.
2003 to 2004
Note: PAR* = per available room, POR** = per occupied room
Source: PKF Hospitality Research, Select group of same-store properties that offer both golf and spa.
Massages, already the largest source of revenue, grew the greatest amount
(19.4%) from 2003 to 2004. Salon treatments, along with clothing/merchandise
sales also enjoyed double-digit gains in revenue. The 5.0 percent
decline in club membership dues could be reflective of the replacement
of local members with the increased demand from hotel guests.
Expensive, Yet Profitable
In accordance with the Uniform System of Accounts for the Lodging Industry, only those costs directly associated with the operation of the spa are charged to the department. Like other operated departments within a hotel, the major cost components are labor, cost of goods sold, and other operating expenses.
Not included in the direct operating expenses would be such items maintenance, marketing, utilities, accounting, and security. These costs are accounted for in the Undistributed Expenses of a hotel. Without these “overhead” expenses, it is difficult to compare the financial performance hotel spas with day spas and destination spas.
The average spa operation in our survey sample achieved a 20.5 percent
profit margin in 2004. This compares to profit margins of 72.8 percent
for the rooms department and 31.0 percent for the food and beverage department.
The larger spas at resort hotels achieved an average profit margin of 23.2
percent, compared to 14.5 percent for the typical urban hotel.
In order to deliver the “high touch” experience desired by spa guests, spas are labor intensive operations. Labor costs make up the largest expense item within the spa department. Salaries, wages, and employee benefits combine to represent 69 percent of all dollars spent to operate a hotel spa. Other significant expense items include operating supplies, health and beauty products, the cost of merchandise and clothing sold, and laundry and dry cleaning.
From 2003 to 2004, spa operating expenses grew 11.2 percent, the same growth rate as spa revenue. Labor costs grew the greatest in terms of absolute dollars. However, it is interesting to note that the 7.3 percent growth in labor costs pales in comparison to the 21.1 percent growth in other operating expenses and the 19.1 percent growth in costs of goods sold.
Evolution of Spas
Not only have spas infiltrated the hotel market in resort, urban, and convention locations, but they have also begun to evolve as brand segments. Hotels have begun to brand their own spa concepts and standardize their services. Hotel companies such as Fairmont and Marriott have established a consistent brand identity for the spas within their properties. Additionally, known spa brands are being brought into hotels to gain a competitive advantage.
Though the spa industry has been around for years, it still remains in its infancy. Rapid growth in the popularity of resort and hotel spas, and the increase in its departmental revenues, are among the first steps toward the future success of spas. With an aging population, significant disposable income, and people focused on taking better care of themselves and living more luxurious and healthier lifestyles, the spa industry is poised to permeate other aspects of our daily lives. With the same force and direction that the information age has become a part of our everyday lives, we can expect that the societal trend toward improved health and better lifestyles will result in a surge in the number of, demand for, and success of, spas.
To assist hotel spa managers evaluate the financial performance of their operations, PKF Hospitality Research has developed a series of Spa Benchcluster reports. For more information, please visit the firm’s website at www.pkfc.com, or contact Claude Vargo toll free at (866) 842-8754.
Andrea Foster is an Associate in the Los Angeles office of PKF Consulting. Robert Mandelbaum is the Director of Research Information Service for PKF Hospitality Research. He works in the firm’s Atlanta office.
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