Hotel Spas as Independent Profit Centers.
By Andrea Foster and Adam Wohlberg
Friday, 10th March 2006
The spa industry has become a major player in the hospitality sector with spas appearing at resort and hotel properties at a remarkable rate. 

The International SPA Association (iSPA) cited the existence of over 1,662 resort/hotel spa properties as of 2004, a number which has continued to grow into 2006.  As the industry continues to develop, spas are becoming independent profit centers, responsible for providing detailed cost accounting to the hotel property and justifying their existence with bottom line income. 

With the increasing number of resort spas and an emerging trend towards consistent accounting metrics, patterns are emerging in the financial data.  In order to continue our investigation of these emerging trends in the industry, we have analyzed the financial statements of over 35 spas in resort properties and segmented the data by the number of treatment rooms within the spa.  The data used in our analysis comes from Trends in the Hotel Industry, PKF Hospitality Research's database of over 5,000 hotel financial statements.

Included in this study are resort hotels, which are defined as properties where guests are offered full-service spa facilities as well as extensive recreational activities such as golf and tennis.  We excluded from our analysis urban hotels and hotels offering only limited massage services as part of an enhanced fitness club.

Spa Revenue

The data confirms a high correlation between the number of treatment rooms and total spa revenue, as seen in the graph below.

Clearly, spas with more treatment rooms have a greater ability to generate revenue. Of course, sufficient demand must be present to justify the additional rooms. 

Merely building a large spa with dozens of treatment rooms does not guarantee that demand from guests will fill those rooms.  However, if the demand is present, spas with a larger number of treatment rooms are better able to capture the demand that exists. 

Due to the cyclicality of demand in the spa industry, spas need an adequate number of rooms to capture revenue during periods of peak demand so as to cover costs during slower periods.  Spa operators are getting savvy to this fact with many of the resort properties we contacted currently renovating their spa facilities to add more treatment rooms.  During periods of high demand, additional guests can potentially be accommodated by offering treatments in guest rooms or in outdoor cabanas, when weather permits. 

This, however, does not provide the full "spaaah" experience that is often the guest's primary objective.  During periods of low demand, properties are encouraging local usage by offering value-added services or discounts to local residents or spa members.

What is RevPAT?

As spas become independent profit centers, performance metrics typically applied to hotels can be used to analyze the profitability of a spa.  Thus far, resort/hotel spa revenue has been calculated primarily as a percentage of total hotel revenue.  Consistent with spas becoming independent profit centers, it is useful to look at spa revenue per available treatment room per day, or RevPAT. Hoteliers who are familiar with RevPAR will find this new performance metric fairly intuitive. RevPAT is calculated simply by dividing the total spa revenue by the number of treatment rooms in the spa. 

The average RevPAT for the properties studied was $367 per day with a range of $241 to $443 for all the properties studied.  These numbers may seem high in comparison with the familiar RevPAR (Revenue Per Available Room) figures, especially for a treatment room that is small in comparison to a hotel room (a typical massage room is only 120 square feet or 10x12).  However, unlike typical hotel rooms, the treatment room can be rented out numerous times throughout the day which contributes to a higher RevPAT. 

In fact, many spas have reduced treatment times to 50 or 80 minutes rather than 60 or 90 minutes in order to do just this, provide more daily treatments per room.  Unlike hotel room revenue, though, there is a substantial cost associated with each occupied treatment room in the form of therapist labor expense.  Less revenue filters to the bottom line than from a hotel room as the labor expense captures a large portion of the treatment room revenue.  The exhibit below shows the RevPAT by the number of treatment rooms for our data sample.

RevPAT is a measure of how well the spa has been able to fill rooms and generate revenue from each treatment room.  As can be seen in the previous exhibit, RevPAT analysis reveals that some of the spas in the 11 to 15 room range in our sample may have been overbuilt.  On the other hand, those spas with 6 to 10 rooms performed quite well, bringing in as much revenue per treatment room as some of the mega-spas with over 21 treatment rooms. 

Spas Operate like Mini-Hotels

For many in the hotel industry, spa operations are seen as somewhat mysterious, perhaps due to the esoteric nature of Reiki, Watsu® and other types of bodywork.  Certainly, proper design, aesthetics, and the experiential elements of the spa services are perhaps more essential to the success of a spa than to the success of a hotel.  However, some of the mystery around spa operations can be dispelled by realizing that spas operate essentially like mini-hotels:

  • Both spas and hotels have check-in and check-out processes at the front desk
  • Both are service operations with high labor costs and extensive staffing needs
  • Both are in the business of renting rooms for a duration of time
  • Both require extensive laundry and housekeeping services
Both have high fixed costs  The most relevant similarity in our analysis is that the cost structure of spas and hotels are similar, both with high fixed costs.   This similarity between spas and hotels helps to explain the higher margins in large resort spas.  As in any business with significant overhead, a large amount of revenue needs to be earned to cover the fixed costs of the operation; however, after this breakeven point has been reached, the revenue from the additional rooms flows to the bottom line at a greater rate.  This is consistent with the data in our analysis whichshowed that spas with a large number of treatment rooms both brought in more revenue and, as illustrated in the chart below, kept a higher percentage of each dollar of revenue earned. 

Resort/hotel spas have a significant advantage to profitability over stand-alone spas.  On the revenue side, many spas are primary demand generators themselves, while others benefit from the demand base that has already been generated to the hotel/resort property.  On the expense side, resort/hotel spas are able to share many fixed costs of rent and marketing with the operating hotel property as a whole. A free-standing day spa would have to bear such costs individually, as many do not have the same extensive, and captured, demand base.  As a result, resort/hotel spas have the potential to operate more profitably than their stand-alone day spa counterparts.

The graph below shows both the revenue earned by the spas in our sample as well as net operating income per available treatment room.

As noted before, hotel spas with a greater number of treatment rooms operate more efficiently as indicated by the higher profit margin.  It is also interesting to note that these same large spa operations generate more dollars per treatment room in net income.

The Future of Hotel Spas: A Uniform System of Financial Reporting

Historically, the major challenge in analyzing spa data has been the lack of a uniform accounting system.  Without this type of system, the profitability of any individual spa was difficult to determine and it has been even more difficult to establish benchmarks and compare the performance of one spa to another.  

In addition, the spa industry as a whole has suffered from a lack of a consistent definition of what constitutes a spa.  As a result, the financial data from fitness centers with a single massage room were being compared to the financial data from full-service spas offering an extensive variety of treatments and spa amenities.  

However, a committee assembled by the International Spa Association (iSPA) recently developed a Uniform System of Financial Reporting to establish a standardized accounting system in the industry.   As more spas begin to implement these standardized accounting procedures, it will become easier to establish industry benchmarks and compare the profitability of spas.  Although we have begun to see emerging patterns in the financial data, the next few years will provide a wealth of data from all the newly built spas being reported according to a uniform system of accounts.

Andrea Foster is an Associate in the Los Angeles office of PKF Consulting (andrea.foster@pkfc.com).  Adam Wohlberg is a candidate for the Master of Management in Hospitality (MMH) degree, with a concentration in the spa industry, at Cornell University. Robert Mandelbaum, Director of Research Information Services of PKF Hospitality Research in Atlanta, assisted in the preparation of the article.  

To learn more about the resort/hotel spa industry trends, design, and spa operations, join Andrea Foster and her panel of spa experts at the Resort Management Conference in Pinehurst, North Carolina on March 20th www.resortconference.com 
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