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An Up and Coming Spa Chain Diversifies its Real Estate Strategy

An Up and Coming Spa Chain Diversifies its Real Estate Strategy

These days, when a retailer tweaks its real estate strategy, the decision likely is the result of endless hours spent on site selection studies and grueling strategy meetings of its executive board.

Sometimes, however, it’s possible to find a successful strategy by listening to the people who run the operations on the ground.

This turned out to be the case for Hand & Stone, an up-and-coming chain that specializes in affordable spa and massage services.

When the chain first launched, in 2005 in Toms River, N.J., its founder John Marco, a former physical therapist, sought locations at grocery-anchored centers and smaller power centers. In 2009, after Hand & Stone appointed Todd Leff, an experienced franchise operator, as its president and CEO, the chain completed a GIS study, which concluded that it was a better fit for regional malls and power centers that were at least several hundred thousand square feet in size.

Then last year, one of Hand & Stone’s new franchisees, Alain Goulet, happened upon the idea of opening a spa inside a fitness club run within a hotel complex. Goulet, a former pharmaceutical marketing professional, spent some time over the years at the Hyatt at Headquarters Plaza in Morristown, N.J.

Upon hearing that that the operators of The Club, a fitness center at the hotel, were looking to partner with an upscale spa, he brought it up to the real estate team at Hand & Stone. In spite of some constraints the location presented—it was slightly smaller than the average Hand & Stone spa, and the deal involved a sublease with the fitness club rather than a straightforward lease with the owner of the property, the spa’s corporate management went along with the idea.

“They were very enthusiastic, they had no idea about the extent of the possibilities this location presented,” Goulet says.

Aligning interests

In Goulet’s view, once the spa at The Club is up and running (it’s currently scheduled to open in early April), it will allow multiple synergies between the fitness center and Hand & Stone. Hand & Stone customers will be able to benefit from the existing on-site day care center, salt water pool and exercise equipment. Meanwhile, the people who come to The Club to work out and passing hotel guests will become an additional source of business for the spa, which normally gets about 40 percent of its customers from on-site exposure.

Hand & Stone’s management liked the concept so much it’s now looking for more locations within hotel properties, according to Leff. The chain is already negotiating a deal in Delaware and will explore similar opportunities in small towns that fit its demographic criteria.

Operating inside upscale hotels with national names “adds credibility to our brand and gives us an ability to target unique real estate where there may not be a shopping center that fits our needs,” says Leff.

At the same time as Hand & Stone will pursue the hotel/fitness club strategy, it plans to continue seeking more traditional locations within large retail centers in upscale areas. Today, the chain operates 43 spas, with another 19 under construction. By the end of the year, Leff would like to see 40 new units, with growth going forward averaging 30 to 40 spas a year.

In Leff’s view, the massage industry has a lot of potential because many people view massages and facials as an affordable treat at a time when they might no longer be able to spring for a new car or an elaborate vacation. In fact, last year, same-store sales growth at Hand & Stone spas rose more than 40 percent. (The leap in sales was in part due to the fact that Hand & Stone added facials to its list of services. Facials now bring in about a quarter of its business).

“We really believe that because we are serving the upper middle class market and people are recognizing the health benefits of massage when their stress levels are up, the current economic environment helped our sales,” Leff notes.

Shopping center strategy

Hand & Stone prefers to be in locations where household incomes average above $79,000 a year and, because its customer base is predominantly female, it likes to go into centers anchored by supermarket chains like Wegmans and Stop & Shop and by discount retailers including Target, Marshalls, Kohl’s and TJ Maxx. The chain’s spas average about 2,400 square feet and have 10 treatment rooms with running water in each room, which means its build-outs tend to be a bit on the expensive side—about $150,000 to $175,000 per spa. (The chain has to saw open the floors to put the faucets in.)

So far, however, shopping center landlords have welcomed it with open arms, according to Leff. Hand & Stone currently operates locations at Developers Diversified Realty-owned 1.1-million-square-foot Nassau Park Pavilion in Princeton, N.J. and the Irvine Co.-owned 1.6-million-square-foot The Market Place in Tustin, California, among other centers.

“We are quiet, there are no odors, we bring about 250 female customers to the center every week and we don’t take a lot of parking,” Leff notes.

While most of Hand & Stone locations are run by franchisees, the chain prefers to handle site selection and negotiations on a corporate level. Its real estate department includes three people—a project and construction manager, a lease negotiation specialist and a person who coordinates relationships with third party leasing brokers in local markets. In the majority of cases, the corporate real estate team handles the entire real estate process, from site selection to lease negotiation, on behalf of the franchisee, to make sure that the chain’s real estate needs are handled by experienced people.

There are exceptions to the rule, however. For example, when Alain Goulet decided to go after the location at The Club, he handled most of the lease negotiations himself, though with input and support from Hand & Stone’s corporate team.

“In my years in the pharmaceuticals industry, I was transferred seven or eight times, so I have a lot of experience in negotiating real estate,” Goulet notes. In spite of the fact that it took him approximately six months to negotiate the transaction because of the multiple parties involved in the sublease, Hand & Stone’s real estate people were “very, very patient with me,” he adds.

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