The economic downturn hit the US hotel spa industry hard, affecting demand, revenues and profitability, reminding us that spas are not operated in a vacuum and that hotel spas are impacted by the economy at large and by the performance and trends of the lodging industry in particular.
Demographics, psychographics and behaviour trends also play an important part in the performance of spas. We know health-related deaths are fuelled by poor lifestyle, and increase with age and it’s well-known that the deterioration of the health of the US population and rising rates of obesity are resulting in record healthcare costs. Added to this, the US has an ageing population that includes 76 million baby boomers.
Self-care is at the core of the spa philosophy and as more attention is given to the importance of proactively maintaining good health through better lifestyle choices, we can expect to see demand for spas increase. Synergistically, spa marketing and messaging should play to this trend toward a more wellness-based lifestyle approach. The potential result? Hotel spas sustainably ‘doing well, by doing good’.
Fortunately, we began to see an uplift in hotel spas ‘doing well’ in 2011, according to findings from PKF Hospitality-Research (PKF-HR) in its 2012 Trends® in the Hotel Spa Industry report.
Led by Lodging Performance
The recovery of the US lodging industry has been driven by a surprisingly strong surge in demand – an annual average growth rate of 5 per cent since 2009. And hotel managers are now beginning to leverage improved occupancy levels by raising room rates.
What has lagged, however, has been the ability of managers to increase the extra spend of guests while inside the hotel. In 2010, the first year of the recovery, PKF-HR noted increases in the volume of rooms revenue (5.3 per cent) and food and beverage sales (5.6 per cent), the two biggest sources of revenue for hotels. Yet the combined revenues from all other sources declined by 1.4 per cent that year.
One of the other revenue sources for some hotels is a spa. Unfortunately, hotel spa department revenue declined by 10.5 per cent in 2010 (see SB12/2 p44). This is not entirely surprising. If we look to Maslow and his hierarchy of needs, we understand that basic needs include food and shelter, and do not include perceived luxuries such as spa treatments. In a recession, and the initial recovery that follows, consumers are hesitant to spend on products and services that are beyond basic necessities. The latest PKF-HR research focuses on US hotel spa performance in 2011 and the good news is that as the economy slowly improved, we observed a very strong 8.3 per cent increase in spa department revenue in that year. While spa revenue is still below pre-recession peak levels, we do anticipate continued growth in the foreseeable future.
Revenues Rise For All
The beginning of the recovery in 2011 was enjoyed by all types of hotel spas regardless of location, volume of revenue, or size of the facilities. In general, mid-sized hotel spas registered the greatest gains in revenue from 2010 to 2011. Based on number of hotel rooms (200-700), square feet (6,000-15,000), and number of treatment rooms (10-20), all hotel spas in the mid-categories of these measurements saw their revenue increase by double-digits (10 -11 per cent) in 2011. Analysing the data by type of hotel, we observed similar revenue increases for spas located in resort (8.4 per cent) and urban (8.2 per cent) hotels.
While total spa department revenue increased 8.3 per cent, when measured on a dollar per occupied hotel guestroom basis, the revenue increase was just 3.3 per cent. This implies that spa managers benefited more from an increase in the capture of in-house guests, as opposed to a higher spend per guest. The increased customer count could also have been influenced by a rise in the number of local clients.
Massage services continue to generate the most revenue for hotels spas. Sales from massages averaged 57 per cent of total department revenue and grew by 9.2 per cent from 2010 to 2011. Other significant spa services enjoying strong growth in revenue during 2011 were Skin Care and Body Work (8.0 per cent), Salon Services such as hair and nail services (8.1 per cent) and Retail (13.4 per cent). One thought on the higher percentage increase in retail revenue might be the spa guest taking home spa products in an effort to extend the effects of the spa treatment, before committing to more frequent spa visits.
Only two service categories suffered a decline in revenue in 2011. Daily Facility Fees dropped by 7.5 per cent, while Fitness and Personal Training revenues fell by 2.2 per cent. It should be noted that Membership Fee Revenue did increase by 6.4 per cent, therefore some of the daily facility patrons may have converted to spa members.
Expenses Under Control
While revenues rose by 8.3 per cent, spa managers were also able to limit the growth in total departmental expenses to just 5.5 per cent. Please note, however, that in line with the Uniform System of Accounts for the Lodging industry, and similar other hotel revenue departments such as food and beverage, spa department expenses don’t typically include overhead costs such as administration, sales and marketing, maintenance and utilities.
Like most operating departments in a hotel, labour costs are the single largest expense item for spas. In 2011, the combined costs of salaries, wages, bonuses and payroll-related expenses equalled 55.6 per cent of spa department revenue, or 72.9 per cent of total departmental expenses. From 2010 to 2011, spa labour costs increased by 4.9 per cent.
Hotel spas that sell clothing and merchandise experienced a stout 14.7 per cent increase in the cost of the retail goods sold. Unfortunately this doesn’t compare favourably to the concurrent 13.4 per cent increase in retail sales. All other departmental operating expenses (supplies, laundry, linens etc) rose by a combined 4.7 per cent.
Profits Prevail
Like revenues, all types of hotel spas enjoyed growth in profits in 2011. On average, the hotel spas in the survey sample achieved an 18.5 per cent increase in departmental profits from 2010 to 2011.
The level of profit growth was relatively consistent with the overall results when analysed by the location of the hotel, and the number of square feet within the spa. However, when segregating the sample by the total volume of spa revenue, PKF-HR observed some distinctive differences in the per cent change in profits. Hotel spas with more than US$3m in revenue saw their profits rise by 8 per cent. On the other hand, smaller spas with less than US$1m in revenue enjoyed a very strong 61.4 per cent rise in profits. Of course, it needs to be noted that the large volume spa operations average 13 times more dollars in profits than their smaller counterparts, which has a significant impact on the size of the percentage increases.
Growth By Price
Based on its December 2012 Hotel Horizons® forecast report, PKF-HR estimates that RevPAR (revenue per available room) for US hotels grew by 6.8 per cent in 2012, and will continue to grow at an annual average rate of 6.4 per cent through 2016. It is important to note that going forward, the majority of RevPAR growth will be achieved through increases in room rates, not gains in occupancy. This trend is particularly true for luxury and upper-upscale properties, the two lodging categories in which most hotel spas are located.
The implication for hotel spa managers is clear. The pace of growth in hotel guest counts is going to diminish over the next few years. Therefore, in order to perpetuate the recovery that started in 2011, hotel spa managers will have to generate revenue growth by increasing the capture rate of in-house guests, sourcing additional local customers, and/or raising the amount spa customers spend per visit.
As the spa industry moves forward, there are, as mentioned earlier, catalysts in existence and sweeping changes that will begin to radically change how we think about – and make choices related to – our health and wellbeing. Spas of all types are ideally positioned to be at the forefront of this change. To be effective, leaders in the spa industry need to be adept at monitoring and evaluating the changing economy, demographics and psychographics of our population, and proactively applying such knowledge to their programming, marketing and guest interaction.
