HOTEL OPERATORS MASSAGE MORE PROFITS FROM THEIR SPA OPERATIONS

by Robert Mandelbaum and Gabrielle Lerner

It is commonly understood that spas were once an afterthought for operators of hotels and resorts. Yet as living a healthy and better lifestyle has become one of the population’s top priorities, spas have grown in popularity and are viewed as essential elements to a hotel or resort’s success rather than being just a luxury.

While we have become accustomed to seeing spa services as a standard hotel amenity, the spa landscape is extremely dynamic and hotels must adjust accordingly in order to keep up. The new generations of spa goers are “spa-wise” and demand an authentic spa experience during their hotel stay. The growth of destination spas, medical spas, nutrition and wellness centers imply that travelers are living a healthier lifestyle and are embracing the enhancements to both body and mind that come from a visit to a spa. These core spa consumers view their treatments and experiences at spas as part of a larger wellness lifestyle while others are still tantalized by the luxury and pampering of a spa experience and look to hotels to provide that service.

While the majority of new full-service hotels will include a spa without hesitation, owners of existing hotels lacking this amenity have felt compelled to add spa facilities in order to remain competitive. For resorts, the addition of a new recreational facility is not that dramatic a decision. However, for corporate and convention oriented properties, the decision to invest in an expensive amenity that has historically been associated with leisure travelers is more difficult.

To aid hotel owners and operators during the spa investment decision process, and well as assist spa department managers benchmark their operations, PKF Hospitality Research (PKF-HR) has analyzed the 2006 financial performance of hotel spa departments. The sample was divided into two categories; resorts and urban hotels. The data comes from PKF-HR’s Trends in the Hotel Industry database. It should be noted that our analysis did not include statistics from day spas or destination spas.

Ahhh…..

From 2005 to 2006, total hotel spa revenue grew from $2,887 per available room (PAR) in 2005 to $3,166 PAR in 2006. This 9.2 percent increase compares favorably to the 8.2 percent increase in total hotel revenues and 5.9 percent gain in sales from all other operated departments.

While the average urban hotel spa operation earns just $1,207 PAR in revenue, these facilities did enjoy a 12.1 percent gain in revenue in 2006. Resort spas, on the other hand, saw their revenue grow 8.7 percent to $4,368 PAR.

On average, spa treatments such as massages, body wraps, and facials comprised 72.9 percent of the revenue generated by hotel spa departments in 2006. Due to use of the facilities by local residents, membership fees made up 15.2 percent of the total revenue earned by urban hotel spas, but were only 4.0 percent of total revenue at resort spas.

Being the largest sources of spa revenue, the 9.1 percent growth in spa treatment and massage revenue drove the overall 9.2 percent increase in total departmental revenue. Clothing and merchandise sales exhibited the greatest gains of all revenue sources during the year (19.9 percent) and represent 6.6 percent of total departmental revenue.

Lagging in growth were the revenues generated from the salon. Hair and nail treatment sales grew just 1.0 percent in 2006, but still represent 7.4 percent of total spa department revenue. The stagnant shift in this area can be attributed to the hotel guest’s decreased usage of the hair salon. More times than not, salons are utilized for their manicure and pedicure services, while hair stations sit empty.

Ouch…..

In an effort to provide truly hands-on, personal levels of service, hotel spa departments are labor intensive operations. Salaries, wages, and benefits combine to comprise 73.6 percent of all spa department operating expenses. The battle of increasing labor costs still persists in the spa industry due to the increased commissions paid to spa therapists and inefficient scheduling.

Other major operating costs include contract services (5.2 percent), cost of merchandise and clothing sold (4.8 percent), professional products and supplies (4.8 percent), and operating supplies (3.6 percent).

Since hotel spa departments are managed as an other operated department within the property, it should be noted that they do not get directly charged for such overhead expenses as accounting, marketing, maintenance, and utilities. These costs are shared among all hotel departments and classified as undistributed expenses on a hotel financial statement.

Not directly burdened with its overhead costs, the majority of spa department expenses are variable in nature. Therefore, it is not surprising that the increase in operating expenses paralleled the 9.2 percent gain in revenue. In 2006, total spa department operating expenses grew 8.5 percent. Exhibiting the greatest gains were labor costs (9.1 percent) and cost of goods sold (8.5 percent). Combined, all other operating expenses grew 6.2 percent during the year.

Mmmm…..

Due to the extensive labor requirements, spa departments achieve profit margin ratios less than the average for all other operated departments. In 2006, the average hotel spa department achieved a profit margin of 31.1 percent. This compares to a 40.8 percent profit margin ratio for all other operated departments combined. Slightly higher profit margins were achieved by resort hotels (33.3 percent) compared to urban hotels (17.9 percent).

With revenues growing greater than expenses, U.S. hotels enjoyed growing profits from their spa operations. From 2005 to 2006, hotel spa department profits increased 10.9 percent. This is greater than the 9.9 percent average growth in profits for all operated departments during the same period. Although the profits for the average urban hotel spa ($217 PAR) are just 15 percent of the typical resort spa ($1,456 PAR), urban spas did enjoy a healthy 44.7 percent gain on the bottom-line from 2005 to 2006. Resort spa profits increased 8.6 percent during the same period.

With a stronger focus on staffing and a better understanding of the local community, both urban and resort spas have an incredible opportunity to increase their profit margins. Further, a properly operated and marketed spa facility can enhance the overall hotel’s performance in terms of rate potential, occupancy, and guest demand diversity.

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Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research in Atlanta. Gabrielle Lerner is an associate in the Los Angeles office of PKF Consulting. To purchase a copy of the 2007 Trends in the Hotel Spa Industry report, visit www.pkfc.com/store or call (866) 842-8754. This article was published in the January 2008 issue of Lodging magazine.