Trends® in the Hotel Spa Industry 2011 by PKF Hospitality Research (PKF-HR) gives an in-depth report on how the US hotel spa industry fared in 2010 and what lessons owners and operators can learn from this moving forwards.

Now in its fifth year, the 2011 report is based on the largest sample yet – 151 properties, of which 64 per cent (97) were resort and 36 per cent (54) were urban hotels.

At an average of 14,646sq ft (1,361sq m), the resort hotels are 80 per cent larger than urban hotels and offer an average of four more treatment rooms, as well as other non-revenue earning amenities.

It’s important to note that unlike hotel EBITDA, spa departmental income in this report is before undistributed expenses – such as marketing, utilities, maintenance and administration – and fixed charges such as finance charges are taken into account.

Key findings
As with previous years (sb11/2 p32), findings show that larger properties achieve significantly higher revenues and departmental income per square foot, particularly when analysed by spa turnover. Hotel spas with revenues of over us$3m and an average of 22 treatment rooms generate us$144 (€111, £89) per square foot and us$43 (€33, £27) in departmental income – representing 30 per cent of turnover. The smaller spas, with revenues of under us$1m, generate a departmental profit of 16 per cent, us$77 (€59, £48) and us$12 (€9, £7) in departmental income per square foot.

This is to be expected according to Mary Tabacchi, associate professor of spa development and management at Cornell University, who regularly contributes to the report. She says: “The fact that those resorts with an average of 22 treatment rooms tend to make more money on a per spa basis is likely as they have a captive guest; a guest who has time to use the spa – and who in fact may plan to spend money in the spa as part of their vacation experience – these guests are there for leisure and for a longer time. In the smaller urban spas, hotel guests tend to be there on business: they’re not likely spa goers – they are usually there for a short period of time, do their work and head home. They’re also likely to be travelling alone”.

However, when analysed by square feet, it’s the smaller spas which have a higher revenue and departmental profit. This is significant for investors as these spas are therefore likely to have a higher return on investment levels. Tabacchi adds, “the reason smaller spas often do better on a per square foot basis is because there is less ‘non-revenue’ space – few luxurious spa lobbies and relaxation rooms.” The profit conversion of smaller spas is nevertheless lower than the larger ones – 19 per cent versus 25 per cent when measured on a square foot basis.

Interestingly, the middle-sized spas – those which PKF-HR categorises in the us$1m-3m turnover category – appear to have suffered the most in 2010. When measured on a per treatment room basis, this middle category saw revenues decline by 14.3 per cent. In comparison, larger spas (with revenues of over us$3m) had an 8.8 per cent drop in revenue and smaller spas (with revenues less than us$1m) only suffered a 1.9 per cent decrease.

Furthermore, middle category spas also showed departmental profit declines of 38.9 per cent compared with a 13.1 per cent fall and a rise of 1.0 per cent for the larger and smaller spas, respectively. This is partly explained by higher payroll costs in the middle category: us$74.14 (€57, £46) spent on payroll per square foot, compared with us$71.53 (€55, £44) in the larger spas and us$46.60 (€36, £29) in smaller spas.

When analysed on the basis of the number of treatment rooms, the declines in the middle category are even more significant. At departmental profit level, the middle category (10-20 treatment rooms per spa) experienced declines of 46.5 per cent, compared with an increase in profits in both the larger (up 8.1 per cent) and smaller (up 4.8 per cent) spas.

Overbuilding in spas
PKF-HR attribute the decline in the middle-sized group in part to possible overbuilding. They believe that “medium-sized spas
are often found in hotels that likely should have a spa as a guest amenity, but the property is not specifically known for its spa facility or experience. Therefore, it is neither an intimate, boutique spa nor is it a grand showcase spa for the property’s marketing and reputation.

“Additionally, the spa facilities may have also been built as a ratio of spa treatment rooms to total guestrooms, rather than built to an actual projection of hotel spa demand and capture [rate]. Either individually or combined, these factors result in a greater potential negative impact on spa revenues during recession and early
recovery periods.”

Elaine Fenard managing partner of consultancy Spa Strategy agrees that it’s possible to overbuild, saying she would “never recommend that a spa be built simply as a ‘guest amenity’... we would recommend against development unless there is a strong business case for the spa alone. Spas should always be a profit centre, however small. Along with the spa economics, the benefits to the hotel also need to be considered.”

Although more research needs to be undertaken on the value of spas to the hotel business itself, it’s clear as Jeremy McCarthy, director of global spa operations and development at Starwood Hotels & Resort, says, “sometimes the value of the spa transcends the numbers that appear on the bottom line... hotel operators have to look beyond the metrics of the spa to what a spa does for the rest of the hotel: does it improve ADR? Does it attract leisure, wedding and honeymoon travellers? Does it attract group business? Does it create more awareness of the hotel in the local community through day spa use? There are lots of factors to consider.

“It doesn’t surprise me that larger spas which are possibly above the economic ‘high water mark’ and less affected by the fluctuations in the economy, and smaller spas – which may be underbuilt – would not be as affected by a decline in the economy,” he says. “This doesn’t necessarily mean that medium-sized spas are overbuilt. The facilities in these medium sized spas have also allowed many of them to cater to a local clientele in a way that they couldn’t if they were merely designed to serve as a hotel amenity.”
Tabacchi adds: “Departmental income from spas is small compared with room sales – so that needs to be kept in perspective also when considering this. After all, if spas increase ADR they may pay for themselves in that way. And there is another theory that people who go to the spa also spend more money elsewhere in the hotel.”
Turn to p26 to read Spa Business’ investigation on the overbuilding of spas.

Spa director importance
In the face of declining revenues, all spas have been cutting expenses. In 2010, the larger spas, with revenues of over us$3m, reduced their total labour and operating expenses by 7.7 per cent. This is significantly more than the middle and the smaller-revenue spas where total expenses were cut by 2.8 per cent in each category.

PKF-HR attributes these variations partly to differences in management expertise. “Larger spas with greater revenue streams can afford to carry the expense of a seasoned spa director, while smaller spas often do not have that luxury. Therefore, expenses may be more carefully and creatively managed in larger hotel spas.”

However, McCarthy says: “[although] it is difficult for smaller spas to afford a manager who has all of the skills and experience necessary to master all of the complexities of the spa operation, hotels can overcome this by bringing other resources to support the spa, for example, having the hotel’s marketing, PR and sales teams helping to build the business and not expecting a junior manager to do this while also managing the staff, controlling costs, etc.”

Fenard feels education and training are key industry challenges: “There’s a gap in educating spa directors. As an industry we need to consider how to address this. How we mentor and support junior spa directors and managers will ultimately dictate how our spas operate as profit centres.”

Tabacchi agrees: “Experience and business education alone are not predictors of good management. We have spa schools that teach technique but not much business and universities that teach excellent management theory but not much technique. Strong business students may not understand how an excellent practitioner works, while those interested in being practitioners may not be interested or have the aptitude for a strong business curriculum. In summary, increasing management ability is not well studied.”

Spa Business explores the state of global spa management education in depth on p38.

Showing profitability
Although overall spa profit levels declined in 2010 by 27.4 per cent, there was an improvement in the number of hotel spas which show positive profitability and above average profit margins.

The departmental profit of hotel spas as analysed in the PKF-HR survey ranges from us$99,000 (€76,000, £61,300) on average per spa for those spas with revenues under us$1m to a departmental profit per spa of us$1.2m (€0.9m, £0.7m) for the larger spas with turnover greater than us$3m. The profitability of the smaller spas is therefore relatively low once undistributed expenses and fixed charges are deducted. Every PKF-HR Trends® in the Hotel Spa Industry survey has shown that smaller hotel spas struggle to convert revenues into profit.

Future challenges
It is widely reported that 2011 was a better year for most spas. The 2011 ISPA US Spa Industry Study (sb11/4 p38) which surveys all spa sectors, shows average revenues for the resort/hotel sector to be us$1.461m (€1.1m, £0.9m). This is not too different to the average revenue reported in the 2011 PKF-HR survey – us$1.4m (€1m, £0.8m).

Colin Mcllheney, global research director at PwC, who conducted the ISPA study says: “When asked about the trend in profitability, resort/hotel spas responding to the survey were more likely (64 per cent) than other spas (49 per cent) to report an increase in profitability when comparing the six months of September 2010 to March 2011 to the same period in the previous year.”

But it’s clear, nevertheless, that many spas are yet to see profits increase and that improving overall profitability remains a major challenge for the industry against the backdrop of a fragile economy.

The full Trends® in the Hotel Spa Industry 2011 report costs us$295 (€226, £183) and can be purchased at www.pkfc.com/store or by calling +1 866 842 8754.