With the dismal 2009 behind us, the first three months of 2010 showed a remarkable turnaround in room demand. Arguably, a partial explanation of the positive numbers can be found in the very easy comparables against the first quarter of 2009, so things could only get better. With a continued rise in corporate profits and a halt in the increase in unemployment numbers, the underlying fundamentals that drive the hotel industry are stabilizing. The corporate transient travelers are back  and even group demand is showing signs of life—although at vastly reduced room rates.

In the luxury hotel spa industry, our observations also show stabilization.   However, the performance for the first quarter still indicates some worrisome signs. Our sample universe includes 45 luxury hotel spas. These properties have chosen to participate in the Spa STAR report over the past 48 months. They share performance metrics for the three main spa areas: treatments, salons, and retail.

The hotel performance for these properties with spas is dominated by room rate discounts that started during the economic downturn of 2008. In the first quarter of 2009 we observed year-over-year rate discounts of around 13 percent. In the most recent quarter, those discounts amounted to around 7 percent.

At the same time, our data reveals that the spa treatments and services were discounted as well. It is worth noting that the magnitude of discounting is by far smaller than it is on the rooms side; nonetheless we are entering the second year of continued treatment rate decreases. The achieved treatment rate in the first quarter of 2010 was $136—in other words, a 60-minute treatment costs a little more than $2 per minute. In the first quarter of 2010, treatment rates were 4.1 percent lower than the first quarter of 2009, which were 5 percent lower than the first quarter of 2008. We continue to argue that the most recent wave of discounts of about 10 percent to 20 percent will be hard to reverse. The slope of the price decreases in a recession is so steep that it is hard to regain the lost pricing power even in an upturn, as consumers are now trained to expect price competition and “more for less.” At the same time that spa operators decreased their treatment rates their average treatment room utilization held steady and is on average between 27 percent and 34 percent per month.

A small silver lining is found on the salon side. Manicures, pedicures, and facials are less expensive than full-blown treatments, and anecdotal conversation with practitioners suggests that consumers choose these types of services because of their perceived value and smaller time commitment. Average revenue per salon service for the first quarter of 2010 was around $61. This actually is 4 percent higher than it was in the first quarter of 2009—an encouraging sign.

As the U.S. hotel industry starts to rebuild demand and pricing power, spas will continue to play an important role at the upper end of the market. Whether they are an amenity with a focus on client pampering or they serve the wellness and health niche, spas have proven to be a key differentiator in the quest for the upper-end guest. As the luxury client’s demands evolve, it will be important for the operators to continue to redefine their luxury spa treatments. Increasing offerings of less time-intense treatment in the salon seems to be one approach that yields results.

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