There has been a lot of discussion recently about 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 market is unique.
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Many things need to be considered before a glaze decision is made. First, it is important to identify the reasons why you want to build a spa. Then you need to evaluate your market, competition, current financial data and projections to determine whether or not a spa is for your property.
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Working with a spa and / or hotel consultant is an important step that you need to take to analyze sustainability, assist in the decision-making process and design details, but this article will at least give you an insight into how to evaluate the feasibility of adding a spa to your hotel. This article will look at the reasons why the hotel added a spa and financial assistance.
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First it is important to start by understanding a few things about the spa industry. In the 2010 Diagonal Report on the US spa market, the size of the spa market in 2009 was an industry worth $ 15.5 billion. According to a 2010 ISPA industry report, spa consumers made 143 million visits to 20,600 spas across the United States.
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Although these numbers show a decrease from the previous year (in both reports with contradictory data), we must remember that 2009 was very different from today. With the economy stabilizing and consumers becoming increasingly aware of the benefits of receiving spa treatments, only that number is expected to grow. Diagonal reports point out that the spa industry will start to grow by 1.5% in 2011, which is higher than most by some 15% or more.
The spa industry has experienced exponential growth since 1999, when there were only 4,140 spa companies serving $ 4.2 billion and expanding to 4.2 million visits. If we link the spa market to the leisure industry, it ranks fourth behind golf, health and racquet and cruise clubs.
The reason I mention this is because the trends in the spa world are to create synergy with other leisure industries like the ones mentioned above, which means that spas also make up a small percentage of this industry’s revenue. It’s a trend that will only continue and club and hotel owners are noticing it all.
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It is also important that you profile your clients to make sure your client’s demographics match those of the spa. This information also varies with age, for example, some spa consumers are interested in alternative healing, some in fitness and education and some in relaxation alone.
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As you can see, there is much to consider to determine what your spa will look like and it is important to find a consultant who understands your guest and what he or she wants. The spa designed for business travelers is very different from the one designed for the vacation of young professionals, babe boomers and families (and yes, there is a market for emerging family spas).
That said, according to a 2011 Coile Hospitaliti Consumer Priority Study, relaxation and stress management are still a major reason why consumers visit spas. And what is the basic reason for people to rest? Now you can see the connection between the spa and the hotel which is nothing new. Bottom spas, spas remain a luxury as well as a holiday, and the two go hand in hand with each other. Now on to the thing.
According to the July issue of Hotel Management, 2,951 new hotels and 354,100 new rooms are being built in the second quarter. While there is no data available that I could find, I would assume that at least 70% of 4-star or better projects will have thermals. Why? That’s a really simple answer when you look at the reason why hotels are building spas.
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You probably already know the lack of a hotel without a spa, which is why you’re reading this. Let’s identify the benefits and why adding a spa would make sense. The most notable drawback is that you are probably losing market share from your competitors who already have a spa and are probably discounting your rooms in an attempt to attract some of that market share.
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While you can make the argument that not every person booking a hotel wants spa treatment, you also need to understand that there is a large population that does. Even if your guests are not interested in massage or facials, they can still enjoy the spa using non-treatments such as sauna, steam rooms and pool.
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This is also a great advantage that hotel spas have over freestanding or day spas. Traditionally, the spa industry in the area has been referred to as a “non-revenue-generating area” because it is considered part of the convenience of guests receiving treatment. The same goes for hotels, but to improve your revPOR, you can charge your guests for using only wet areas, in some cases, $ 75 per day.
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Other reasons why a hotel would like to add a spa other than gain market share or prevent it from losing to spa hotels include the following. First, you can increase your ADR because of the extra “extras” that will improve your revPAR and your revPOR.
Another wonderful benefit of adding a spa hotel to your hotel is that you can start attracting a local and loyal customer and increase sales and package deals. It also allows you to continue to earn revenue in the low season. This makes the potential of health resort revenue almost limitless with a good marketing strategy in the receptive market. So if you have been keeping up, you are gaining market share, retaining guests, increasing your occupancy rate, increasing your ADR by sometimes as much as 10% and increasing your local business. Looks like you’re already making progress, right? On the surface, it certainly makes sense, but there are many things to consider and evaluate. You have to do a feasibility study, a competitive analysis and a few to consider, and then consider finer details such as what the spa should be like, what topic, what treatments, what products, etc. While these things are just as important and will determine the spa and the success or failure of the company, the goal of this article is to discuss the benefit and impact of adding a spa and how it may affect your last line.
Hotel owners often look at the spa as a unit to determine if it is a worthwhile or not or a sustainable investment. While it may seem to make sense, it is not always best to decide whether to add a spa. Where the spa fits in with your income statement also depends on how you structure the spa management (tenant, hotel owned and operated, hotel owned but operated by a management company, etc.) The spas are extremely hard working and you need to work hard to developed a steady stream of clients. Most spas, according to a recent report published by STR Global, operate with 33% use of treatment rooms. There are many fixed labor costs, but in most spa compensation models they generate an incredible amount of variable labor costs. Because of this, COGS are very high and profit rates very low. Another thing to keep in mind when a spa is that treatment rooms can be occupied multiple times a day, unlike a hotel room that can only be occupied once a day. This is also important to consider when determining the size of your spa. There are also a myriad of reimbursement models and cost structures to evaluate which will be the most profitable for your business. This is why applying for a health resort becomes very challenging and sensitive. The point is that freestanding spas, in most cases, are not a particularly attractive investment unless they serve a unique and attentive niche, such as a health or specialized resort. Vellness Capital Management’s Monte Zvang reported to Pro Knovledge Netvork at the Nashville Dai Spa Association that the average day spa has a net gain of only 4 to 15%.
Because of these few topics, you need to look differently at a hotel spa to determine its value. This is best illustrated by the example. Suppose a hotel decides to build a moderately luxurious 6,000 square foot spa costing $ 2,000,000. The spa’s feasibility study forecasts will generate an additional $ 1,200,000 as a department. After unallocated operating costs, the revenue for the spa is approximately $ 240,000. This obviously looks like your ROI will be a long time coming. But let’s look at it a different way.
Suppose in the same example, a hotel has 300 keys with an ADR of $ 150.00 and operates at a 70% occupancy rate resulting in a revPAR of $ 64,695 and a revPOR of $ 253, including additional departmental revenue. Its total revenue is $ 19,408,623, its net operating income of 6,573,664 feasibility studies predict that by adding a spa, occupancy will increase by 5.7% and the hotel can increase its ADR by 10%. As hotel occupancy will increase, similar increases in other departments’ revenue may also be expected. With this forecast and the addition of additional revenue generated by the new spa department, room revenue will increase 16.29% ($ 1,872,450) and total revenue will increase 22.47% ($ 4,360,834) before the department and retained operating expenses. Net operating income improved 19.11% ($ 1,256,328). By analyzing the addition of a spa this way, you can see that the ROI is much higher and is happening faster than if you just had to estimate the ROI using a 20 percent spa profit ($ 240,000) Include that in your capitalization rate and you can see how much value your property has grown. For simplicity, see the summary below.
Total income: no spa – $ 19,408,628; With Spa – $ 23,769,456; Increase – $ 4,360,834 (22.47%)
NOI: No Spa – $ 6,573,664; With Spa – $ 7,829,992; Increase – $ 1,256,328 (19.11)
Net Profit: No Spa – $ 4,351,377; With Spa – $ 5,153,389; Increase – $ 802,012 (18.43%)
RevPAR: No Spa – $ 64,695; From the Spa – $ 79,232; Increase – $ 14,537 (22.47%)
RevPOR: No Spa – $ 253; From the spa – $ 293; Increase – $ 40 (15.81%)
Occupancy: No spa – 70%; With Spa – 74%
Average daily price: no spa – $ 150; With Spa – $ 165
Some of you may think this is too good to be true and you may be right. These projections are based on a market feasibility study that made sense to add to the spa. Not all spas can project $ 1,200,000 in revenue and not all hotels can get away with increasing ADR, and the cost of each hotel is different. You need to relate this example to your situation. Having said that, let’s look at another example. If the same assets did not increase ADR but improve their occupancy, they would increase their net operating income by $ 561,397 and improve their net profit by 7.9%, still making the investment attractive. On the other hand, if the spa does not make money ($ 0 in revenue) and you do not increase ADR, NOI declines by 3.1% and net profit decreases by 7.4%, which after spending $ 2,000,000, which would not be best situation given the opportunity cost of the investment. Another thing to look at is that the spa is not making money ($ 0 in revenue) and you can at least increase your average daily rate and occupancy, NOI is improving 7% and net profit is 3% which is still increasing, but consider investing. It would take 15 years to make any return. The challenge is that this does not require any expertise to understand that if you do not make money in the spa, you are still spending. Then you can explore either renting space, doing a joint venture or working with a management company that shares revenue but absorbs the costs of doing business.
I hope this did not confuse you and remember that this idea only applies to your situation and costs, and especially to your market and consumers. It doesn’t work for everyone and if proper feasibility, structuring, budgeting and projections are crucial. This has not been reviewed by any financial gurus or accountants, this is simply the way I invest in a hotel to make my recommendations.