A little over 20 years ago when resorts were just starting to examine the value of adding a spa, the spa was expected to be a "loss leader," but it needed to be a marketing tool to sell rooms. About 10 - 15 years ago, resort owners and operators realized that it costs too much money to build and operate a spa so the emphasis shifted . . . the spa needed to be a "break even" venture, but it still needed to help with marketing. In the last 5 ñ 10 years the mantra has been the spa needs to be a "profit center," and the marketing value is more important than ever because now spas help sell hotels rooms and lifestyle real estate.
If your goal is to have a profitable spa, it is important to understand, compare, measure and monitor some of the key metrics (ratios) related to revenues, payroll, operating expenses and net profits. Once you create your metrics, you can establish some benchmarks. Metrics and benchmarks can help you identify potential problems or inefficiencies and monitor your business on a daily, weekly or monthly basis. When you see variances between your ratios and your benchmarks, you can analyze the situation then make the necessary adjustments. The solutions may require strategies to:
Increase Revenues: improve pre-arrival and on-site marketing; emphasize link-selling and up-selling treatments and retail; adjust treatment prices based on cost per treatment; encourage people to redeem gift certificates; etc.
- Control Payroll: re-structure compensation program by looking at base pay, incentives, commissions, fee per treatments; monitor staff scheduling system for higher productivity per employee; etc.
- Reduce Operating Expenses: lower the cost per treatment from over-use of professional products; reduce shrinkage with better inventory control systems; etc.
While it is important to have your own internal benchmarks for historical, budget and spa-specific goal analysis, you should also be able to compare your spa's performance with your competitive set and with industry averages so that you have a broader frame of reference. Reliable benchmarks can only be established when everyone uses the same metrics.
The challenge in the spa industry is that there has not been a uniform system of accounting so it's been difficult for spas to collect and analyze data in a consistent and meaningful way. In November 2004, the spa industries trade association, ISPA, in conjunction with the Educational Institute, published the inaugural version of the Uniform System of Financial Reporting for Spas (USFRS). This is a valuable reference book, but it will probably take several years before the spas change their current financial reporting systems so that there can be a consistent means to collect and analyze data. In the meantime, however, you can still move ahead by focusing on or improving ways to measure and monitor your spa's financial statements so that you can maximize the value of both the spa and the resort.
I thought it would be helpful to share some of the more important spa metric tools which my company, HFD, has identified and used in the numerous spa economic studies that we have conducted since the early 1990s. Some of these ratios are also mentioned in the USFRS book. HFD has found that spas are able to provide meaningful and useful data when we give them detailed definitions and examples of each metric, the formulas and where to find the information (based on if the spa collects data manually or via a computerized scheduling and POS system). As you look at the list, you can focus on top-line ratios as well as drill down for more detailed information.
Basic Baseline Metrics
Here are some general ratios that help keep you focused on the "big picture." (Note: "/" means divide by; "–" means subtract)
Resort Capture (Utilization) Ratios
Number of Hotel Spa Guests Using The Spa (Facility plus Treatments) / Number of Hotel Guests
- Can drill down for capture rates based on Facility Utilization; Treatment Utilization; and by Resort Market Segment
Treatment Room Utilization
Number of Treatments Performed / Maximum Number of Treatments That Can Be Performed
Gross Margin by Treatment
Treatment Revenue - Treatment Direct Cost (Payroll plus Operating Expenses for that Treatment)
Sales Contribution Percentage by Treatment Category (Spa Department)
Total Treatment Category Revenue / Total Treatment Revenue (e.g. Massage Revenue / Total Treatment Revenue)
Number of Treatments per Guest per Visit
Total Number of Treatments Given / Total Number of Guests Taking Treatments
Faddish economic research shows that most of the spa revenues come from treatments (ala carte and package). If there is a health club component, then membership dues can be significant; otherwise, the other revenue generators are retail and facility fees.
Revenue per Guest
Total Revenue / Total Number of Guests
- Can drill down for Resource or Department Revenue per Guest for Facility Fee; Treatment; Retail; and by Market Segment
Treatment Revenue as a Percentage of Total Revenues
Spa Treatment Revenue / Total Revenue
- Can drill down by Resource or Department: Facility Fee; Fitness (classes and training); Massage; Body; Bath; Skin Care; Nail Care; Hair Care; Retail
Revenue per Available Treatment Room (RPATR)
Spa Treatment Revenue / Total Number of Treatment Rooms
- Can drill down to Treatment Revenue as well as Retail Revenue per Available Treatment Room
- Can also do this as Per Occupied Treatment Room (RPOTR)
Revenue per Treatment
Spa Treatment Revenue / Total Number of Delivered Spa Treatments
Retail Revenue as a Percentage of Total Revenue
Retail Revenue / Total Revenue
- Can also do Retail Revenue as a Percentage of Treatment Revenue
Revenue Generated per Employee per Treatment
Total Revenue per Employee / Total Number of Treatments Given
- Can also drill down to Treatment Revenue as well as Retail Revenue
Revenue per Square Foot
Total Revenue / Total Square Footage
- If you know how many square feet are in each department, you can do Departmental Revenue per Departmental Square Foot for Salon/Image Center; Treatment Area
Revenue per Occupied Hotel Room
Total Spa Revenue / Total Number of Occupied Hotel Rooms
Note: To get an accurate "resort only" number, deduct the following from the total spa revenue: membership fees, package-related room and F&B fees and local community (if this is a significant part of your business).
Payroll is the most costly expense in a spa. Compensation and productivity are the two key factors in controlling payroll. HFD research has shown that payroll with benefits is typically in the range of 45% - 55% of total revenues.
Payroll as a Percentage of Total Revenues
Total Payroll / Total Revenues
Treatment Payroll as a Percentage of Treatment Revenues
Total Treatment Payroll / Total Treatment Revenues
Total Payroll Cost per Treatment
Total Payroll / Total Number of Treatments Performed
- Can also do this as Treatment Payroll per Treatment
Productivity Percentage per Employee
Number of Treatments Given / Number of Total Available Treatments
- Can also do this per Employee and per Department (massage, skin care, etc.)
Operating expenses can vary significantly from spa to spa based on what direct and indirect expenses are charged to the spa. HFD research has shown that when a spa is positioned as a department and is responsible only for direct costs and limited indirect costs, the operating expenses are 15% - 20% of total revenues. When the spa is a semi-independent business unit (IBU) and charged for all direct operating costs as well as many of the indirect costs, the operating expenses are 20% - 25% of total revenues. When the spa is a full IBU responsible for all direct and indirect costs (excluding rent), the operating expenses are 25% - 30%.
Operating Expenses as a Percentage of Total Revenues
Operating Expenses / Total Revenue
Cost of Retail Sales
Cost of Retail Goods Sold / Retail Revenue
Cost of Product (Supply) as a Percentage per Treatment Revenue
Cost of Professional Products Used / Treatment Revenue
Operating Expenses per Guest
Total Operating Expenses / Total Number of Guests in the Spa
- Can drill down for each operating expense line item such as laundry, guest refreshments, marketing, utilities, etc.
NET OPERATING INCOME
HFD research has shown that the NOI for a spa that is operated as a department is 30% - 40% of total revenues; spas that are a semi IBU are 20% - 30% ; and for a spa that is a full IBU, the NOI is 10% - 20%.
NOI as a Percentage of Total Revenues
Net Income / Total Revenue
Although spas are currently the "darling" of the hospitality industry as evidenced by their widespread development in four and five star hotels and resorts, there will be increasing emphasis placed on their economic viability. Developers, investors and hotel operators want and need reliable metrics and benchmarks so that there are realistic feasibility studies, budgets and pro formas. Spa controllers, general managers, sales and marketing managers and spa directors are working together to help their spas be more marketable and profitable. Asset managers are focusing more energy on understanding the economic realities of spas. As the spa industry continues to evolve in resort and lifestyle mixed-used real estate communities, spa economics will be of increasing importance. Identify your key metrics then start collecting and using this data to help manage your business.
In an up-coming article, I will share the latest findings from Faddish most recent 2003 and 2004 economic research study. In the meantime, here is an overview of some of the top-line 2003 findings. How does your spa compare?
Source: Faddish 2003 – 2004 Spa-Specific Revenue Per Occupied Room & Snap-Shot of Top-Line Financials (N = 36 U.S. Resort Spas)
Judith L. Singer, Ed.D., ISHC, is the President & Co-Owner of Pompano Beach, Florida-based Health
Fitness Dynamics, Inc. (HFD) (www.hfdspa.com) an internationally recognized spa consulting company that
specializes in the planning, marketing and management support services of spas for fine hotels and resorts,
day spas and mixed-use developments. HFD is also actively involved in conducting economic and
consumer spa research. Since its inception in 1983, HFD has been the consulting firm to over $650 million
of completed spa projects. A partial list of clients includes: Little Dix Bay, Four Seasons Hulalai, Miraval,
Malliouhana, Cranwell, Pinehurst, The Homestead, The Greenbrier, Bacara, Silverado, Delano, La Posada
de Santa Fe and Hotel Crescent Court. Dr. Singer is also the past chairperson of The International Society
of Hospitality Consultants (ISHC). Ms. Singer can be contacted at 954-942-0049 or firstname.lastname@example.org