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Wed 13 Feb 2008 04:00 AM

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Money maker

Investing in the spa business is potentially very profitable, provided some important considerations are taken into account, says Rohun Bevan.

As health, wellness, and prolonging youth become more important considerations in peoples' lives, the number of spas and wellness retreats has increased significantly worldwide and the trend doesn't look like it's slowing down.

It's predicted that there will be more than 300 spas in Dubai by 2015. As the population desires to stay healthy and live longer, investment opportunities in leisure projects will continue to grow and some will out perform other more traditional investment vehicles.

After all, even during the slow-down in hotel investment after the tragic events of 9/11 in New York, the investment in the spa segment of the market continued to grow, suggesting that the risk of investing in spas and health facilities was minimal.

The driving force behind the tremendous growth of the industry stems from consumer demand. Increasing numbers of the general public continue to support leisure and recreation facilities through both frequency of visits and retail sales, as supported by industry data.

Estimates suggest there is a requirement for an additional 5000 to 8000 therapists and beauticians in the region over the next five years.

So, what can you expect by way of a return on investment (ROI) in a spa?

Firstly, the investor must understand the type of spa that is being considered. Will it be a day spa, medical spa, resort spa, destination spa, a ladies-only spa? Will the spa include fitness and health facilities and sell memberships?

As with any business, it is crucial that the due diligence and planning phase is conducted thoroughly, in order that a business plan can be developed and executed.

Avoiding the pitfalls

Investors must conduct careful needs analysis and feasibility studies before investing and consider the following:

• What is the anticipated demand for treatments in your chosen location?

• How big should the spa be (how many treatment rooms)?

• What is the competition and what are average treatment price thresholds in the immediate area?

• Is there ample parking and easy access to the spa? Is it visible?

• Is the spa ladies only or mixed? A mixed spa requires far higher capital outlay because duplication of locker rooms, wet areas and treatment rooms.

Once the concept for the spa has been decided, the most important part of the planning process is to build accurate assumptions for the number of treatments the spa can expect on a daily basis.

Only once these assumptions have been made can the size of the spa and number of treatment rooms be decided. The number of treatment rooms drives the rest of the design elements such as locker rooms, robe lounge, wet areas and retail space.

It is too common for a developer to build a spa based on available space and not the number of treatments expected. In this case, too many treatments means too high a capital cost, while too few treatment rooms means turning away business (and therefore revenue) at peak times.

Investor guidelines

Here are some industry guidelines that should be adhered to when considering investing in a spa facility:

• When conducting the feasibility and determining the number of treatment rooms to be built, the average treatment room occupancy should not be less than 40% or exceed 65%. This may sound odd as one would think that 100% occupancy is the goal. However, if the average occupancy is higher than 65% it will mean that business is being turned down at peak times and revenues are not being maximised. If occupancy per treatment room is less than 40%, then there are too many treatment rooms and the capital cost for the spa will have been too high.

• Salaries, wages and associated costs should not exceed 40% of gross revenue.

• Facial and body treatments should generate an average of 30% of total treatment revenue.

• Spa retail will generate an additional 30% of those gross revenues generated from facial and body treatments. Facials and body treatments will drive retail sales whereas massage, manicure and pedicure services do not have the same positive effect on sales. Products should be displayed so they are visible on the way into the spa as well as on the way out. To save costs, the front desk staff should handle product sales but therapists should also lead clients to the display area when they are checking out after their treatment.

• The most common treatments are massages, typically contributing around 60% of gross revenue.

• Typically, spas do not become operationally profitable until 18 months after they have opened.

• Although there are no accurate figures or industry data for the spa industry in the Middle East, it is estimated that more than 60% of spas currently operating would lose money if capital repayments were to be taken into account.

Return on investment

As there is a vast difference in a day spa's operation and that of a health club and spa that sells memberships, the return on the investment will also show different returns. Investing in either model can be profitable, but the capital investment in a health club and spa can be far greater and the operational costs higher, as operating hours will be longer than a spa.

Typically, a standalone spa (one that is not attached to, or integral to, a resort and does not have fitness facilities) will generate between 8% to 23% in net operating profit (NOP). This does not take into account the capital and interest repayments to an investor.

An investor can expect an ROI in excess of 12% for a successful spa after debt and any interest repayment.

On average a treatment room generates between AED 275,000 (US $75,900) to AED 350,000 ($95,300) in revenue per year. Therefore, an eight-treatment room spa should generate between AED 2.2 million ($599,000) and AED 2.8 million ($763,000)annually.

In addition to this, spa retail will generate an additional AED 198,000 ($54,000) to AED 252,000 ($68,625)- this being 30% of facial and body treatment revenue.

For a spa that includes fitness facilities and sells memberships, the NOP can be higher (from 15% to 35%) because the direct costs of membership revenue are less than costs from revenue generated from treatments. In this model, greater square footage, higher capital outlay and higher operating costs must be taken into account.

Forecasting the trends

If the market in the United States is anything to go by, the future for the spa industry is positive.

The US spa industry alone is estimated to be worth $20 billion, even though it is considered to be in its infancy. It has surpassed Box Office ($14 billion) and Amusement/Theme Park ($16 billion) revenues.

If forecasting the trends will optimise profits, then predicting the growth in the Middle East spa industry, and investing in it as a business, must be a consideration.

However, there are dangers and risks as with any investment opportunity.

"Build it and they will come" is truer in Dubai than anywhere else in the world right now, but the message to spa investors is "proceed, but with caution".

It must be remembered that leisure is a people business and that physical attributes alone must not be relied on to create long and fruitful returns.

The smart investors will seek opportunities where the treatments, programmes, people and long-term planning for repeat customers has been included in the business plan.

Rohun Bevan is the general manager of Body and Soul, a Dubai-based leisure company that owns operates health clubs and spas, as well as providing consulting and spa facility management.

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