Hotel SPAS: The Value May Not Be in The Profits

Written by Rachel White, HVS International

During the last development cycle, numerous full-service upscale hotels opened in resort locations. Although these hotels varied in size, amenities offered, and orientation, many of them had one commonality: a spa. Like irons, ironing boards, and coffeemakers in mid-scale hotels, the spa became a compulsory amenity at upscale lodging facilities. As upscale resort hotels with spas sprang up, hoteliers and developers, not to be outdone by their new competitors, created larger and more elaborate havens of health and beauty in existing hotels as well, both in resort and urban settings. As hotel developers and operators started building and running spas, in light of limited market data and their limited experience in spa operations, factors such as the impact on RevPAR, profitability, size of facility, and amenities often went unexplored. Spas were considered necessary forms of competitive defense. Now that the spa industry has evolved and spa operations have stabilized, these questions can now be addressed.

What makes a spa?

Visitors to hotel spas know that no two spas are alike. The differences among facilities are found not only in their individual ambience, but also in the variety of amenities offered. Efforts are being made from different segments of the industry to characterize and outline the spa trend. These efforts will add to the credibility of the product being offered. However, a strict definition of a spa’s components may not always be necessary. Just as fitness rooms across the nation vary in their size and contents, so do spas. As long as a guest is able to enjoy a workout in a specifically designated area, no matter the size or facilities offered, the hotel can advertise having a fitness center. If an urban hotel is equipped with a fitness room, a swimming pool, and a few treatment rooms, the hotel’s management may find it beneficial to label the facility a spa if it meets the needs of the clientele. Obviously, the facility just described differs greatly from a ±40,000-square-foot spa facility in a resort setting that offers dozens of available treatments, but then, hotels are unique in many ways. If it works for the property and if it serves the needs of the guests, a hotel owner or manager may be justified in labeling their facility a spa, whether or not it meets with an industry definition.  

When is a spa profitable?

Determining the profitability of a spa is a second challenge. Financial statements that we see at HVS International show that, similar to food and beverage facilities, most hotel spas are not treated as independent business units. Rather, departmental expenses are subtracted to determine departmental profitability but costs such as energy, maintenance, marketing, and the like remain undistributed to the operating departments. Only when these costs are allocated in the operating statements of the spa itself can it be determined if the spa department is adding incremental net income to the hotel’s bottom line. Health Fitness Dynamics, an independent spa consulting firm, has created a uniform system of accounts for spa facilities in order to assess them as independent business units. This accounting system aids the spa operator in allocating undistributed and fixed operating expenses to the spa’s operations and helps to clarify if the property is generating profit as if it were a stand-alone business.

During the initial influx of spa development, the expectation was that spas would generate departmental profit before the allocation of undistributed and fixed expenses ranging from 30% to 40% of departmental revenues. Now that many hotel spa operations are stabilized, the opportunity has arisen to determine if this is a realistic goal. A preliminary look at data from 20 hotel and resort properties evaluated or appraised by HVS in the past year shows departmental profit ranging from 28.8% to less than 0.0%, prior to the allocation of undistributed operating expenses and fixed expenses. Though this data is inconclusive, it does indicate that spas may be less profitable departmentally than what was originally anticipated to be the case.

While it appears that the operating performance of some hotel spas may fall short of original expectations, the overall impact of a spa to a property’s net income must be analyzed to get a true picture of whether a proposed hotel spa will enhance property value and generate a return on investment.

Consider the following example:

However, add to the equation the impact that the spa’s presence has on the hotel’s operations.

In this example, the value contributed by the hotel’s enhanced rooms revenue far outweighs the value contributed by the spa’s departmental profit. Intuition suggests that the above-inflationary rate growth in hotel and resort properties in the past ten years has likely been partially attributed to the addition or expansion of the spa component. 

Thus, while it is important to run any business efficiently, for hotel spas, generating departmental profit may not be the principal objective. Though investing money in amenities such as fresh fruit, fresh-cut flowers, or an extra type of service may seem excessive, if these tokens enhance the spa experience and increase RevPAR, they may be well worth it. If the presence of a spa increases the property’s occupancy and/or average rate, the contribution could more than make up for any potential departmental losses. Alternatively, if adding the spa prevents loss in occupancy or average rate to competitors, it can also be considered a worthwhile investment. 

In general, it is believed that the presence of spas adds significantly to the quality of lodging facilities. In the future, we can expect spas to solidify their roles as fundamental components of upscale hotels. As the hotel spa industry stabilizes, developers, operators, and analysts will continue to explore the impact that spas have on the lodging facilities they inhabit. Our ability to analyze and compare the spa industry will be further enhanced as spas become more consistent in their offerings. Close studies of operating revenues and expenses and the implementation of a uniform system of accounts will likely enhance the operator’s ability to control expenses and enhance departmental profitability. However, the greatest impact that spas have on their respective hotels is likely to be on overall room revenue enhancement as opposed to departmental profitability.

 
Contact:

HVS International
Rachel White
Suite 620
116 New Montgomery Street
San Francisco, CA  94105
415-896-0868
415-896-0516 FAX 

Website:  http://www.hvsinternational.com

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