The State of the Day Spa Industry Address

By Skip Williams

As the year 2007 closed I felt it important to address the State of our Industry.  It has been a tough year for Day Spas and it is critical to understand why, and how to overcome recent adversities.  According to ISPA, Day Spa revenues declined 22% from $6.794 billion in 2005 to $5.294 in 2006.  While at the same time the number of Spas (Day, Resort, and Medical) has grown by 6%.  Many Day Spa Owners have really felt the pinch throughout the US and not fully understood why.  Other Spa Owners have weathered the storm and though they have not lost ground, they have not grown at their anticipated rate.  I think that it is important to understand the dynamics at play so that Spa Owners can adjust their business model and continue to grow despite this “Bear Market”.

The US economy and the devaluation of the US dollar has much to do with the situation but that does not tell the whole story, let us explore further:

1. In an economic downturn luxury items are the first thing that the consumer cuts back on, and as much as we would like to consider our services a “necessity”, not all Spa consumers agree. 
2. While Day Spas have increased in number, Medical Spas have doubled in revenue and grown in number significantly faster than Day Spas in the same period.  They have successfully siphoned off some of the Day Spa’s best customers, those customers for who price is not a factor.
3. There are more Day Spas sharing the diminished revenue.

Is this the end for the Day Spa business?  Definitely not, but we will have to adjust our thinking, and there will probably be a big shake out within the industry.  In order to adapt we must first understand the marketplace and how to make profit within our operation.

The Market has changed!

Within the last 18 months, and without many of us knowing it at the time, the market has shifted from an “excess demand” marketplace to an “excess supply” situation.  That is to say we have more Spas selling to fewer Consumers today than we did in 2006.

In economics, when a marketplace shifts from excess demand to excess supply (and this happens often in many industries) the consumer looks for market differentiators.  Unfortunately the biggest, easiest, and most important differentiator to the consumer is PRICE.  Electronics is a good example of what I am talking about.  When a new electronic gadget comes to the marketplace consumers are willing to pay top dollar to be the first to own such a device.  When the several manufactures begin to catch up with this new demand prices begin to drop, and when the gadget becomes common place then the prices hit rock bottom.  If a manufacturer wants to continue to charge top dollar then they must be innovative, and create some other market differentiator that sets them apart from their competitors, or continue to compete in a battle of pricing.

These principles hold true for the Spa Industry as well!  We have seen the proliferation of Spas on every corner and the consumer has few ways of distinguishing the value of one from another.  Further, with many competitors they expect to see more discounts and in fact can sit back and wait for offers to come to them and cherry pick the Spa or Salon that is giving the discount that week.  For many Spas this “value oriented” customer is not an ideal Client for their business, but there is a silver lining:  This budget shopping for services shows us that there is another whole class of Spa Goers that want to come to the Spa but can not afford to come.  In fact studies like “The Marketing Demographics of a Day Spa Goer” (available through the Day Spa Association) tell us that the reason 62.58% of respondents “never” or “rarely” go to Spas is because it is too costly; it is not that they don’t understand the importance, not that they don’t have a Spa available to them, not even that they think it is too indulgent.  This is an opportunity knocking at our industry’s door if we can just get our expenses under control we can then deliver these services to these budget minded masses.

We Must Learn to Adapt!

As much as the Spa Industry has grown over the past decade (our Bull Market period) with record startups and record revenues, if we are honest with ourselves we must admit that we have never had “record profits”.  Our business model has been broken for a long time and we have primarily survived by way of the “excess demand” that we have enjoyed.  Well the time to pay the piper has come, and as an industry we must adapt or perish, as this is the way of the “free market economy”.  The hard facts are that our compensation system has been upside down, and frankly just plain wrong for a long time, we have been chasing the high end consumer while virtually ignoring the middle class consumer, and we have done a poor job at building brands and loyalty that are results based (necessity) instead of pampering based (luxury).

The purpose of being so blunt in this message is to wake up an industry that has enjoyed a fruitful “Excess Demand Market”, but is about to pay the price of “Excess Supply”.  While I remain confident that money can and will be made in the Day Spa world I know that it will become harder and harder unless we start working smarter and smarter.  Just as on Wall Street, anyone can make money in a “Bull Market”, but it takes a smart business person to make money in a “Bear Market”.  I know that many of you have struggled to earn profit while demand was high; you must now be even savvier if you are to turn things around during this “lower demand” period.  I also know that of the thousands of full service Day Spas in the US about half of them will go out of business or change hands to new Owners within the next 24 months.  Will you be one that survives or one that perishes?  Do you have the cash reserves to weather the downturn economy?  Can you still make money doing fewer services next year?  Do you have the marketing muscle to increase your market share in a shrinking market?

It is not my intent to bring “doom and gloom” or to be pessimistic, rather exactly the opposite, to sound the alarm so that each of us can adapt our business to be recession proof.  To put into place sound compensation systems that assures prosperity for your business.  To allow you time to adjust your business model through market differentiators and to adapt to the new “excess supply” marketplace. 

My Recommendations

First we must throw away an antiquated form of compensation that has prevented Day Spas from earning healthy margins.  We need a compensation system that allows us to be more efficient and deliver services more economically and more cost effectively today than we were able to deliver them yesterday.  We need to adopt a system that attracts a stable workforce that can contribute to the greater good of the company instead of only building their own personal clientele or book of business.

Second we must learn to either create a market differentiator that not only distinguishes us from our competitors but creates a “need” instead of a “want” in the consumer’s mind; or learn to make money at lower price points, and let that be your market differentiator.

Lastly we must band together as an industry and stand our ground against the Doctors and Legislators that would seek to take business away from our industry.  We must band together to educate ourselves to be better business Owners, giving us greater understanding of how to compete and operate effectively and efficiently.  Today’s Day Spas should belong to important Trade Organizations like The Day Spa Association to facilitate this “coming together”, “standing our ground” and “becoming better business Owners”.  More will be accomplished through collaboration than through competition.  Organizations like the DSA can help each of us accomplish this.   

Last Thoughts

While the state of the Day Spa Industry is changing I am ever “bullish” that the strong will survive and thrive, new Spas will be built and made successful, and that there is even more opportunity in this market for those who operate intelligently and creatively.  My pledge is to work more closely with Spas to overcome these obstacles and effect change throughout our industry through building better compensation programs and market differentiators.  I know that it is easier to sit here and tell you what needs to be done than it is for you to implement these changes, therefore we can work together so that the load becomes lighter.  I invite you to attend industry events and obtain the education, networking, and interaction that will have a profound effect on your business.  Look for industry business workshops like those being organized by the DSA at The Day Spa Expo and the IECSC, and remember that the more we can shift the whole industry toward success the easier our personal success will manifest itself.

IMPORTANT NOTE: Let what is happening to the Day Spa Industry be an early warning and lesson to the Resort and Destination Spas as they may be affected by these same economic dynamics!  As I write this message, they should be preparing for a similar downturn next year.

And if I am all wrong about the future of our industry, do these things anyway as they make good business sense and will help your business skyrocket.  But if I am right then they are the things that will save your business from demise.  Those who survive this economic storm will emerge as the pinnacle of success within their respective marketplaces, and be poised to take full advantage of the “Bull Market” that will come once again.

 

Best Wishes & Healthy Profits

Skip Williams