Are We Overbuilding the Spas of Our Future?

Please, please please, let’s not start building the Taj Mahal again. It's wonderful that we've had a run of three years of good growth. The economic news is good, and we are feeling optimistic. More and more, I am starting to see bigger and more expensive spas and medical spas being designed. Did we not learn from what happened in 2008? Why are we moving up to 5-6000 (and beyond) square foot day spas with opulent water features and relaxation areas?? Why am I seeing newcomers to the industry designing and building facilities that must do revenue of $3m per year to survive? It's deja vu all over again! The Taj Mahal was completed in 1653. It does not need to be built again. Many of these new and opulent projects are being funded by venture capital. The owner proudly tells me that the first two million was raised via a first round of financing. They are expecting to raise more by offering preferred stock and higher equity positions. After all, that’s what happens in tech startups. Wonderful. Nothing is built yet except for a 100-page business plan and a promising website. These new spa operators are looking for their first location and are in negotiations with a prospective landlord. Which brings up another issue; in most major markets, current leasing rates for retail space are upwards of $45 per square foot plus triple net charges (another $5 per foot). These rates are continuing to rise. Hmm, 6,000 square feet at $50 comes out to $25,000 per month. Remember, rent needs to be 10-15% of Gross Revenue. How are we going to do the numbers that are going to support these big leases that we are signing on for? It sure puts a lot of pressure on you when you're trying to start a business. And the build-out? The numbers I am seeing are $250-$300 per foot on some of these places. Yes, the landlord said that they would provide $40 per square foot in Tenant Improvements. That's $240,000! Now you only need to come up with $260 per square foot or $1.56mm! Amortized at 5.5% over 10 years, that equals monthly payments of $16,930. How does that fit into your projections? Debt service should be no more than 50% of Net Income. Is this the case in the fancy new place you're building? If not, you'd better re-assess before you build. The number of day spas and medical spas is growing. The clientele of our current and future is getting younger; millennials & deal seekers. If you are planning on building an empire of several units (or franchises) but you don't have a profitable prototype, you need to fix the original before you seek investment capital and clone it. Let's not be naive and think that we are bringing the first spa of its kind to the market and that clientele is lining up outside your doors. Let's remember that we are not the first business to this party and that we exist in a very competitive market. Build smaller, be humble, and don't let ambition, arrogance, or your ability to sell get ahead of you. Be honest with yourself and your concept. Please, do not expect that you will immediately outperform the existing market or your original prototype. Think soundly and conservatively. You are not the first one to this rodeo. Make sure you have a sound and feasible business plan. Do you see this business being a freak of nature? Are you planning on this being the greatest thing since sliced bread and that the market has never seen anything like it? I'm not trying to burst your bubble. I hope you are wildly successful and that you exceed your financial projections. However, I would recommend that you build a smaller spa, with the most possible revenue producing space you can put into your location. Don't be swayed by the fact that the market is currently strong and forget that things can change in a hurry. Protect your investment and the investment capital you are seeking. Make your numbers work on conservative (not pessimistic) projections. Then you can be surprised and celebrate when you perform above projections. You are smart, passionate, and ambitious. Great! Now, do the right thing. Make your business plan and projections reasonable and sensible.