Hotel Business Review

Mr. Walter

Spas, Health & Fitness

New-unit Site Selection and the Use of Quantitative Modeling Around Guest Demographics and Psychographics

By Todd Walter, Chief Executive Officer, Red Door Spa Holdings

"Where to open next?" - that is the $64,000 question every retailer asks itself as it pursues growth. Whether you're selling products or services, the first three rules of real estate remain: location, location, location. But how to identify and prioritize those locations to maximize your probability of success, particularly in a difficult economic environment, is the question that matters most.

This is the question we at Red Door Spas faced as we looked to expand our geographic footprint across North America. In late 2006, our senior management team identified 21 major metropolitan markets, or "gateway cities," that we felt we should be in. At the time, Red Door Spas had locations in just six of the 21. But even with the markets identified, we then faced the challenge of prioritizing those markets and finding specific sites within them. In addition, as a private-equity-backed company, we wanted to be able to articulate our expansion strategy in a way that not only made sense, but that could be easily understood by our owners and other financial constituents. For help, we turned to Site Analytics Co., a real-estate services firm that has been helping retailers and developers for the past 15 years.

The first step in our process was to develop a thorough understanding of our existing spas' performance and to identify critical success factors that contribute to their relative financial performance. This analysis involved both site-specific considerations (e.g., local demographics and psychographics, host location attributes, co-tenants, and competition) as well as Red Door-specific considerations (e.g., physical space attributes, staff turnover, and manager tenure). Through regression analysis, over 1,000 variables within these and other categories were tested for their predictive value in determining a spa's actual, historical revenue. A revenue forecasting model was then built using those variables showing the greatest predictive influence. For the statistics junkies out there, our model's coefficient of determination, or R2, is .78 (an R2 value of 1.0 represents perfect correlation).

With our predictive model in hand, we then mapped out all 21 North American metropolitan markets and forecast by one-square-mile areas what we should expect a Red Door Spa to generate in revenues if situated in each area. In total, we have identified approximately 125 target areas that could contain a Red Door Spa forecasted to perform at levels similar to our most successful Red Door Spas. Next, we prioritized gateway cities based on their respective total market potential (i.e., how many successful Red Door Spas the model tells us the market can sustain) and further, we prioritized areas within those cities based on the predictive model (i.e., pursuing first those areas that are expected to yield the highest revenue per spa).

In addition to free-standing sites, the model also allows us to evaluate potential hotel partners within these markets. Given our thorough understanding of our guest demographic and psychographic makeup, we can target specific hotel flags that share a similar guest profile. Widely available data demonstrates the benefits to a host of having a branded spa amenity (e.g., higher ADR and higher occupancy rates than comparable hotels without a branded spa amenity). What is less widely known is the impact that having a branded spa can have on a host's REVPAR. At the seven Red Door Spas currently operating in a hotel or resort, only 30% to 50% of the spa revenue comes from the hotel guest. The remaining 50% to 70% of the spas' revenue comes from local community residents who come to the hotel specifically to visit the spa. While there, they take advantage of the host's other amenities. As a result, it is important to Red Door to select a host environment that also has strong surrounding demographics to maximize the spa's productivity.

Just as important as where to open next, our quantitative modeling and deep understanding of our guests' demographic and psychographic makeup has highlighted those geographic areas and potential site locations that we should avoid. Nothing is more deflating than allocating both human and capital resources to a new location, only to have that location underperform once opened. While our new-unit site selection is significantly more proactive today than it was prior to developing our predictive model, we still receive inquiries from hotel and real estate developers who would like to have a Red Door Spa in their project. By running a specific address through the model as an initial filter, we are able to respond much more quickly to developers and hoteliers who approach Red Door with a preliminary "go" or "no-go" response. This filter allows us to use our own internal resources more efficiently, and it ensures that we are respectful of other peoples' time as well.

An additional benefit of our predictive model for new-unit site selection is the evaluative power it provides to our existing spas. While the tool itself is not a panacea for an underperforming location, it does help to address whether we have followed the first three rules of real estate (remember location, location, location?). How do our individual spas perform relative to how the model suggests they should? Spas that are operating below expectations represent opportunities for operational improvements. Conversely, spas that are exceeding expectations may yield insights and best-practices that can be applied to all other locations. In either event, the model can help defuse tension that can arise between operations and real estate development in retail organizations.

So whether you're looking to evaluate and prioritize markets in total, identifying areas within those markets to pursue (or as important, areas within those markets to avoid), or simply evaluating your existing portfolio's operating performance, quantitative modeling around guest demographic, psychographic, and other information can be an important first step in your selection criteria.

Mr. Todd Walter is COO of Red Door Spa Holdings. He has experience in financial restructuring and turnaround management. Mr. Walter has provided financial and senior operating leadership to struggling companies in varied positions including: CFO and acting COO of Naked Juice, CFO of Cluett American Corp., acting Vice President of Operations for MobileMedia Corporation, and Treasurer of a private, post-secondary education company. Mr. Walter has a BA from Middlebury College and an MBA from the Darden Graduate School of Business Administration at the University of Virginia. Mr. Walter can be contacted at 203-905-1779 or twalter@rdspas.com

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