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Evaluating Your Return on Investment When Adding a Spa to a Hotel
There have been many recent discussions surrounding the idea of adding a spa to an existing hotel and how to determine if it is a worthwhile investment. Unfortunately there is no simple solution and every property and marketplace is unique. Many things must be considered before making icing a decision. It is first important to identify the reasons why you want to build a spa. Next, you must evaluate your marketplace, competitors, current financial data and projections to determine whether or not a spa is right for your property. Working with a spa and/or hotel consultant is an important step that you need to take to help to analyze the viability, assist with the decision making process and the details of the design, but this article will at least give you some insight on how to evaluate the feasibility of adding a spa to your hotel. This article will take a look at the reasons a hotel would add a spa and the financials to back it up.
It is first important to begin by understanding a few things about the spa industry. In Diagonal Report’s 2010 USA Spa Market report, the size of the spa market in 2009 was a $15.5 billion dollar industry. According to ISPA’s 2010 industry report, spa consumers made 143 million visits to 20,600 spas across the US. While these numbers show a decline from the previous year (in both reports with contradictory figures) we must remember that 2009 was very different from today. With a stabilizing economy and consumers becoming more aware of the benefits of receiving spa treatments, these numbers are only expected to grow. Diagonal Reports points out that the spa industry will start to see a 1.5% upturn in 2011 which most spas are seeing more than that with some reporting 15% or more. The spa industry has experienced exponential growth since 1999 when there were only 4,140 spa businesses serving $4.2 billion dollars spread over 4.2 million visits. If we relate the spa market to the leisure industry, it falls in 4th place behind Golf, Health and Racquet Clubs and Cruise Lines. The reason I point this out is that the emerging trend in the spa world is to create a synergy with the other leisure industries like those mentioned above, which means that spas are also making up a small percentage of these industry’s revenues. This is a trend that will only continue and club and hotel owners are noticing this in a big way.
It is also important to profile your clients to make sure that the demographics of your client match up with those of the spa goer. This information also varies by age, for instance some spa consumers are interested in alternative healing, some in fitness and education, and some in just relaxation. As you can see there is a lot to consider to determine what your spa’s concept will be and it is important to find a consultant who understands your guest and what they want. A spa designed for the business traveler is very different than the one designed for the vacationing young professionals, baby boomers, and families (and yes there is an emerging market for family spas). That being said, according to Coyle Hospitality’s 2011 consumer priorities study, relaxation and stress management remain the primary reason that consumers visit the spa. And what is the primary reason that people vacation? Now you can see the correlation between the spa and the hotel which is nothing new. Bottom line, spas remain mostly a luxury as does vacation and the two go hand in hand with one another. Now on to the point.
According to July’s issue of Hotel Management, there are 2,951 new hotels and 354,100 new rooms being built as of Q1. While there is no data available that I could find, I would guess that at least 70% of the 4 Star or better projects will include spas. Why? It really is a very simple answer when you look at the reason that hotels build a spa in the first place. You likely already know the disadvantages to having a hotel without a spa which is why you are reading this. Let us identify the advantages and why adding a spa would make sense. The most prevalent disadvantage is that you are likely losing market share to your competitors who already have a spa and you are likely discounting your rooms in attempt to attract some of that market share. While you can make an argument that not every person who books a hotel wants a spa treatment, you also need to realize that there is a large population that does. Even if your guests are not interested in having a massage or facial, they can still enjoy your spa by utilizing non-treatment areas such as sauna, steam rooms and pool. This is also a huge advantage that hotel spas have over free standing spas or day spas. Traditionally, the spa industry calls these areas “non revenue generating space” because it is considered as part an amenity for guests who are receiving a treatment. The same is true for hotels, but to improve your revPOR, you can charge a fee for your guests to use just the wet areas, in some cases as much a $75/day.
Other reasons a hotel would want to add a spa besides gaining market share or prevent losing it to hotels with a spa include the following. First, you can increase your ADR because of your additional “frills” which will improve your revPAR and your revPOR. Another wonderful advantage of adding a spa to your hotel is that you can begin to attract a local and loyal clientel and increase your package sales and offerings. This also allows you to continue to generate revenue in your low season. This makes the potential of the spa revenue nearly limitless with good marketing strategy in a receptive market. So if you have been keeping up, you gain market share, retain guests, increase your occupancy rate, increase your ADR by sometimes as much as 10%, and increase local business. It would appear that you are already ahead right? On the surface, it certainly makes sense but there are a lot of things to consider and evaluate. You must perform a feasibility study, competitive analysis, and crunch some consider then consider the finer details such as how big the spa should be, what theme, what treatments, what products, etc. While these things are equally important and will determine the spa’s success or failure, the aim of this article is to discuss evaluating the benefit and impact of adding a spa and how it can impact your bottom line.
Often times, hotel owners tend to look at a spa as a single unit to determine if it is profitable or not or a viable investment. While it seems to make sense it is not always the best to decide whether or not to add a spa. Where the spa fits into your income statement also depends on how you structure the management of the spa (tenant, hotel owned and operated, hotel owned but run by management company, etc.). Spas are extremely labor intensive and you must work hard to develop a steady stream of clients. Most hotel spas, according to a recent report published by STR Global run at a 33% treatment room utilization rate. There are many fixed labor costs but in most compensation models for spas create an incredible amount of variable labor costs. This makes the COGS very high and profit margins very low. The other thing to remember about having a spa is that the treatment rooms can be occupied multiple times per day unlike a hotel room that can only be occupied once per day. This is also important to consider when determining the size of your spa. There are also countless compensation models and cost structures to evaluate to decide which will be most profitable for your business. This is why reporting a profit for the spa alone becomes very challenging and sensitive. The point is that the stand alone spa, in most cases, is not an especially attractive investment unless it serves a unique and attentive niche such as a health or specialized resort. Monte Zwang of Wellness Capital Management announced in Nashville’s Day Spa Association’s Pro Knowledge Network that the average day spa has a net profit of only 4 to 15%.
Because of these few topics, you must look at a hotel spa differently to determine its value. This is best illustrated in an example. Suppose a hotel decides to build a moderately luxurious 6000 square foot spa which costs $2,000,000. Your feasibility study forecasts the spa will generate an additional $1,200,000 as a department. After undistributed operating costs, the spa’s income is approximately $240,000. This obviously seems that you ROI will be a long time coming. But let’s look at this a different way.
Suppose in the same example, the hotel has 300 keys at an ADR of $150.00 and is running at an occupancy rate of 70% yielding a revPAR of $64,695 and revPOR of $253 including additional department revenues. Its total revenue is $19,408,623 with a net operating income of $6,573,664 The feasibility study forecasts that by adding a spa, occupancy will increase 5.7% and the hotel can increase its ADR by 10%. Since the hotel’s occupancy will increase, it can also expect similar increases in other department revenues. With this forecast and adding the additional revenue generated from the new spa department, rooms revenues will increase 16.29% ($1,872,450) and total revenue will increase 22.47% ($4,360,834) before departmental expenses and undistributed operating costs. Net operating income improves by 19.11% ($1,256,328). By analyzing the addition of a spa this way, you can see that the ROI is much greater and happens more rapidly than if you were to only evaluate the ROI using the spa’s 20% profit ($240,000) Factor this into your capitalization rate and you can see how much your property’s value has increased. To simplify, see the summary below.
Total Revenues: Without Spa – $ 19,408,628; With Spa – $ 23,769,456; Increase – $ 4,360,834 (22.47%)
NOI: Without Spa – $ 6,573,664; With Spa – $ 7,829,992; Increase – $ 1,256,328 (19.11)
Net Profit: Without Spa – $ 4,351,377; With Spa – $ 5,153,389; Increase – $ 802,012 (18.43%)
RevPAR: Without Spa – $ 64,695; With Spa – $ 79,232; Increase – $ 14,537 (22.47%)
RevPOR: Without Spa – $253; With Spa – $293; Increase – $40 (15.81%)
Occupancy: Without Spa – 70%; With Spa – 74%
Average Daily Rate: Without Spa – $150; With Spa – $165
Some of you may be thinking that this is too good to be true and you might be right. These projections are based on a feasibility study that was performed in a market that made sense to add a spa. Not all spa’s can project $1,200,000 in revenue and not all hotels can get away with increasing their ADR and every hotel’s expenses are different. You have to relate this example to your own situation. Having said that, let’s look at another example. If the same property does not increase their ADR but did improve their occupancy, they would sill realize an increase in net operating income of $561,397 and improve the net profit by 7.9%, still making the investment attractive. On the flip side, if the spa makes no money ($0 in revenue) and you do not increase your ADR, your NOI declines 3.1% and your net profit decreases by 7.4%, which after spending $2,000,000 which would not be the best situation given the opportunity cost of the investment. Another thing to look at is if the spa makes no money ($0 in revenue) and you can at least increase the average daily rate and occupancy, NOI improves 7% and net profit 3% which is still up, but think of the investment. It would take 15 years to see any return. The challenge is, and this does not take any expertise to realize, if you aren’t making money in the spa, you are still spending it. Then at this point, you can investigate either renting the space out, doing a joint venture or working with a management company who shares the revenue but absorbs the operating costs.
I hope that this has not confused you and remember that this idea is only to be applied to your situation and expenses and especially your market and consumers. It does not work for everyone and doing the proper feasibility, structuring, budgeting and projections is crucial. This has not been reviewed by any financial guru or accountant, this is simply the way I look at the investment for a hotel to make my recommendations.
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