As discussed last week in Spa Business Model Series : #1 Self Manage, many hotel owners or general managers often don’t know what their options are when it comes to operating a spa in their property. Last week we looked at some of the considerations if the hotel was to decide to manage the spa themselves. In this week’s instalment, we will take a look at appointing a Spa Management Company to run the spa. This can be a great option for many hotels, but not necessarily the right solution for all scenarios. Again, as mentioned last week, maybe some elements of this business model, combined with others, might be the best fit for your spa.
Once a hotel has decided they don’t want to operate the spa themselves, they invariably turn to the most common alternative. That is, appointing a spa management company. This is a business model that makes sense to hotels. After all, most of the people running hotels are themselves essentially employees of hotel management companies. Sure, it might be the hotel owner who ultimately pays their salary and signs their employment contract but in practical terms, they are appointed by the management companies.
Appointing a good spa management company to operate the spa allows hotels to provide a quality spa offering for their guests without the headaches of doing it themselves. Obviously, the hotel usually needs to forego a sizeable chunk of the revenue, and there are a number of other considerations involved.
Deciding on the right financial structure for the agreement is the first step, and one of two financial models is usually adopted. First, there is a straight Revenue Share model. This would see the hotel receive a percentage of the top line revenue of the spa, and nothing more. Then there is what I call the Fee & Profit model. With this model, the spa operator receives a percentage of the spa GOR (Gross Operating Revenue) and a percentage of the spa GOP (Gross Operating Profit). The remainder of the GOP is retained by the hotel. Let us take a look in more detail at the variations within these models.
Revenue Share Model
A Revenue Share Model is in many ways the simpler option, for both parties, but don’t ignore the many potential issues that could lead to conflict. As with any contract, when entering into a Revenue Share Model agreement, it is crucial to be clear on the rights and responsibilities of each party. The most common causes of disagreement in these contracts are about guest billing and payments and also the allocation of operating expenses between the parties.
As the core principle of the agreement is the sharing of revenue, both sides will need to have full oversight of the revenue generated. Most hotels prefer that guests charge spa treatments to their room account. Most hotel guests prefer this too, and it helps ensure that the spa operator is not tempted to cheat the hotel out of revenue by not putting it through the cash register or Point of Sale system. Still, there will occasionally be guests who prefer to pay directly at the spa.
If it is a city hotel, hopefully the spa will also be attracting guests from outside the hotel. In this situation, the spa guest obviously does not have a room account to charge to. I know one hotel that refused to let the spa accept cash or even credit card payments at the spa. Instead, any non-hotel guest needed to go to the hotel reception to pay for their spa treatment. That was not a great guest experience, but such was the lack of trust between this hotel and their spa operator that they felt it was the only way to protect their revenue.
Battle for Data
Another contentious issue can be the interface between the spa system and the hotel system. In the early days of hotel spas, it was not really an issue as there was no dedicated spa software available. If the spa needed a billing system, they just made use of the existing hotel PMS or POS system. Today, however, it seems there is a tailor-made spa software solution to fit any size business. And the battle today is for the data of the spa guest.
If the spa guest is a regular hotel guest, chances are the hotel has a guest history profile that includes a lot of useful marketing data. Maybe that guest has even given the hotel permission to market to her. She wants to hear about the latest restaurant promotions and room package deals. But does that permission extend to the spa? Technically, in most cases the answer would be no because the two companies are separate entities. Even if the guest is happy to receive email blasts from the spa, maybe the hotel is not willing to give the spa access to that guest’s information.
The recent implementation of the General Data Protection Regulation (GDPR) in many countries has made it even more difficult for hotel spas to get access to any data from the hotel. It is worth noting that the impact of this regulation is only just beginning to make an impact at the time of writing this book.
It may seem counterintuitive not to share any data that will help the spa make more money. After all, the hotel also makes more money in such a scenario and it is a short-sighted approach. But it is sometimes also smart business. Imagine if the spa operator only has six months to run on their contract and the hotel is planning to take over the spa themselves. If the spa operator has access to the hotel guest database, they can use it later to target the guests away from the hotel spa.
Guest complaints, disputed charges, etc., are another grey area when it comes to the hotel / spa operator relationship. In an effort to minimise the impact of negative guest experiences, hotels often like to empower their front-line staff, or at least their supervisory staff, to remove disputed charges from guest accounts, whether from a service failure, an administration error or just a lack of communication between hotel and guest. It is better to lose the $100 and retain a loyal customer. Empowering the hotel team to activate a service recovery makes sense, but what about when the dispute is related to the spa? What right does the hotel have to take away this revenue from the spa operator? It is vitally important to have a clear procedure agreed upon between the hotel and the spa operator to cover such situations.
The Expenses Discussion
Revenue issues are not the only concern. Allocation of expenses is another area that needs close attention when the contract is negotiated. When the spa is using shared facilities with the hotel, what happens with the cost allocation for utilities like electricity and water? If the air-conditioning is centrally controlled, how does the hotel charge the spa for their portion of that expense? Same with water charges for the showers in the spa. It can be a relatively simple task to install meters measuring usage and cost of utilities per area, but they come at a cost. And in a lot of older buildings, upgrading of the M&E Systems (Mechanical & Engineering) may also be required. The onus should be on the hotel to install a meter if they want to charge. After all, they control the facilities.
The same also applies to shared services such as laundry and staff meals. It is much easier to track these costs based on a count of the laundry and the number of staff on shift during meal times, but the systems need to be in place.
A smart spa operator would also include benefits for their management team similar to those of the hotel department heads, for instance 50% discount on eating in the restaurant, free rooms for the HQ team to visit to inspect operations, etc.
All of these things can result in delays and disputes over the monthly reconciliation of revenue versus deductions unless they are clearly established and agreed in the contract.
In addition to the big issues of payments and expenses, there can also be disconnects between the two parties on marketing and operational matters. On marketing, the spa operator and the hotel will each have their own brand standards and creating collateral that is acceptable to both sides can be a big issue. Operating hours, menu pricing, in-room treatments, promotion of the spa around the hotel, packaging spa with rooms and food & beverage offers, FOC treatments for hotel VIPs, travel agents and media…. All these issues need to be agreed, and the purpose of the two sides may not always be aligned.
Discounts are another potential area for conflict. The hotel is likely to be more bullish on offering discounts at the spa to drive revenues, simply because they do not have to worry about any expenses. But there are also cases where the hotel does not want the spa offering discounts because it can create an expectation in the mind of guests that they can get discounts at other outlets.
In a similar vein, hotels like to create packages which include rooms, F&B and spa, and in such cases, the hotel sales team often looks to the spa for a discounted rate to make the offer more attractive. These packages can be a great was to increase business in multiple departments in the hotel, but conflicts can occur. Imagine a situation where the F&B revenue is behind on budget and so the hotel decides to offer a higher discount on the room component and a lower percentage discount on the F&B component. This will mean more revenue for F&B, but for the spa, they have only one revenue opportunity and may not have the flexibility to be so generous with their discounting. Once again, the parties are at cross purposes.
If the spa operator has more than one outlet in the same city, they may also have a local membership program. Such programs usually involve a member paying up-front for special privileges, coupons, offers, etc. Problems can arise when the membership is purchased at one location but redemption occurs at a different spa. Logically, the revenue should not be realised until the redemption occurs as the spa providing the services for the redeemed coupon is incurring the costs. But in reality, the actual accounting and tracking of such a system can become quite complicated. This is especially true for a smaller spa operator. Invariably, questions of transparency can arise and conflicts will emerge.
Fee & Profit Model
For all the reasons mentioned above, a Fee & Profit Model is sometimes preferred. At least with this model, both parties have a vested interest in driving the overall profitability of the spa, as both share in the profits. The spa operator will usually try to push for a higher percentage at the top – ie: GOR Fee – as this gives them a stronger financial base. It could be argued that in this model the spa operator has less incentive to control expenses. With a straight revenue share, all profits go to the spa operator, so of course the better they control their expenses, the more money they make, while with a Fee & Profit model, they share the profits with the hotel. But with both models, the more profitable the spa is, the better it is for the spa operator.
It should also be noted, that a Fee & Profit model will still encounter many of the same issues discussed above. Regardless of the model, the hotel and the spa will, at various times throughout the partnership, have different priorities. Even if they are both committed to the long-term goal of a profitable spa, there will be times when their immediate goals are not aligned. The difference is, with a Fee & Profit model, the parties do at least have the same financial end-goal.
Money is Power
Remember that the hotel is always the one holding the money. Most, if not all, of the revenue will be charged to the guest’s room bill and settled on departure from the hotel. In practical terms, this means the spa operator is somewhat at the mercy of the hotel in terms of when they get their share of the revenue. The hotel has the leverage. As a result, when disputes arise that impact the financial statement, the spa operator is sometimes forced to relent. Even if the spa is not at fault, until the issue is resolved, the hotel may delay the monthly settlement, and cash flow for the spa operator now becomes a critical issue. I have personally been involved in situations where, as the spa operator, I have just relented for the sake of getting the rest of the payment released.
In a partnership between a hotel and a spa operator it is inevitable that there will sometimes be conflicts. Such conflicts are not always about financial issues. Many of the robust discussions I have had with hotel operators over the years have been on operational matters. Issues such as staffing, operating hours, in-room treatments, spa menu variety, etc. Even the most harmonious business relationship can be tested, and while it is impossible to factor every possible scenario into a contract, a little extra effort at the contract stage can save a lot of grief further down the track.