January 2012

CRISIL Opinion
Optional heading (Arial 10)

Salon chains more lucrative than gym and spa chains

CRISIL Opinion

Analytical Contacts: Monisha Majumdar Analyst, CRISIL Research Dipali Modi Team Leader, CRISIL Research Ajay Dsouza Head, CRISIL Research

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Last updated: 31 March, 2011

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Beauty and wellness services

Beauty and wellness services

Salon chains more lucrative than gym and spa chains

Rising income coupled with modern lifestyle (and, as a consequence, the increasing incidence of lifestyle-related diseases) and greater awareness about beauty and fitness will propel growth of gym, salon and spa services in Indias beauty and wellness market. Revenues of gym, salon and spa outlet chains are likely to grow 1.5 times over the next three years.
Gyms

Beuty Services

Fitness services

Solan Services

Spa Services

Medical spas and beauty clinics

Salon chains will be the most lucrative among the three segments with the potential to earn returns of about 25 per cent the highest among the three services.

Source: CRISIL Research

Salons, spas and beauty clinics are the major segments of beauty services. Gyms dominate fitness services. Salons mainly offer hair services haircut and hair colour, and skin services facials and pedicure, whereas spas concentrate on massage services such as foot massage and head massage. CRISIL Research has excluded medical spas and beauty clinics from this analysis as these service providers typically offer surgical procedures and treatments such as Botox under medical supervision. Salons dominate beauty and wellness services
Beauty and wellness market (2010-11)
(per cent) Spa Services 6 Fitness Services 17 Others 6

Salon chains to grow the fastest over the next three years
Revenues of salon chains will grow at 25 per cent CAGR to ` 17 billion in 2013-14, outpacing revenues of spa and gym services. Two key factors will drive this faster growth first, consumers use salon services more frequently than spa services; second, lower bill size and greater consumer awareness about its services makes the salon business more scalable in markets other than metros and mini-metros. We expect revenues of gym and spa chains to grow at a relatively slower rate of 19 per cent and 17 per cent CAGR respectively despite the low base. Moreover, in the current economic environment, when consumer sentiment is subdued, expenditures on spa treatments and gym memberships will be governed by caution.

Salon outlets earn higher revenue per sq ft but are moderate on profitability
Greater transaction volumes driven by relatively shorter turnaround time per customer and relatively smaller size enable a salon outlet to generate more revenue per sq ft than either a spa or a gym outlet. However, despite higher revenue per square
Salon Services 71

feet, salons earn lower operating margins than gyms primarily due to three major cost heads consumables, employees, and lease rentals.
Revenue per sq ft and margins of gyms, salons and day spas
Parameters Revenue Gross margins EBITDA margins Rs per sq ft Per cent Per cent Gym 3,500-4,000 30-32 Salon 80-82 20-22 Day spa 80-82 15-17 10,000-10,500 6,500-7,000

Source: CRISIL Research

The beauty and wellness services market was worth ` 100 billion in 2010-11. With revenues of ` 71 billion, salon services accounted for the lions share in this industry. The market for gym and spa services is estimated at ` 17 billion and ` 6 billion respectively.

Source: CRISIL Research

CRISIL Opinion
Shift in preference towards chains expected
Share of chains (2010-11)

The cost of consumables such as shampoos, styling gels, oils and creams eat into the gross margins of salons. By contrast, gyms make negligible use of consumables. Employee costs as a proportion of revenues are the highest for salons (around 30 per cent) followed by spas (around 18 per cent), and is the lowest for gyms (8-10 per cent). The density of employees is higher in a

88%

72%

56%

salon than a gym. Unlike a gym, every customer in a salon would need at least one dedicated employee for delivering the service. Also, the average salary of stylists is almost double that of gym trainers. Although, like a salon, a spa would also require one available employee per customer, the lower volumes of transactions per day results in lower density of employees compared with salons. Salons also incur greater lease rental per sq ft than gyms; gyms, unlike salons and spas, can be located in residential areas and on higher floors and, therefore, save on rental per sq ft.

1 2% Salo n services

28%

44%

Fitness services Chains

Spa services

No n Chains

Source: CRISIL Research

CRISIL Research defines chains as players with two or more outlets offering similar services. We expect an increasing number of players to establish chains as consumers become more brand conscious. In salon services, chains accounted for only 12 per cent of revenues in 2010-11. As gym and spa services are relatively new concepts in India, the share of chains in these segments is significantly higher than that in salons. Salon services are least discretionary Salon services are the least discretionary of the three services. A salon service would typically cost less than half that of a spa service. Most consumers would consider salon services a necessity for a well-groomed appearance whereas many would still consider spa treatments an indulgence. On the other hand, gym memberships entail a significant cash outflow upfront (for yearly memberships). Also, with alternatives like walking available, gym memberships can experience a slowdown with muted consumer sentiment.

but generate higher returns

In CRISIL Researchs assessment, amongst the three segments, salons generate the highest equity IRR (around 25 per cent) despite their profitability being lower than that of gyms. Setting up a gym involves a sizably higher capital outlay for equipment, approximately 50 per cent of the total capital cost. A gym also needs to replace the equipment at regular intervals 5-6 years for cardio equipment and 10-12 years for strength equipment due to which their returns are lower than that of salons.
Equity IRRs and cash break even
Salon Equity IRR Cash breakeven Source: CRISIL Research 25% Year 4 Gym 21% Year 4 Day spa 15% Year 5

Fixed costs for gyms, salons and day spas

Param eter Interiors Fixed costs Equipment / styling Rs mn stations, etc Source: CRISIL Research Gym Salon Day spa Rs per sq ft 1,500 1,600-1,700 2,000-2,200 6-7 0.3-0.4 0.3-0.5

Assumptions
Parameters Size Membership fee No. of members Transactions per day Average bill size Outlet revenue growth
Year 1-5 Year 6-10 Year 11-15 Year 16-20 per cent per cent per cent per cent 12.5 10.0 7.5 5.0 12.5 10.0 7.5 5.0 10.0 7.5 7.5 5.0

Gym Sq ft Rs per member p.a Yr 1 (p.a) Yr 1 Rs 4,500 9,500 750 -

Salon 1,000 20-21 500

Day spa 1,500 9-10 1,200

Capital exp Rentals Avg salary of employee No. of employees

Rs. per sq ft Rs. per sq ft p.m. Rs p.m.

3,000 90 5,500 15-16

2,000 140 11,500 14-15

2,500 140 9,000 12-13

Note: p.a - per annum; p.m - per month Source: CRISIL Research

CRISIL Opinion

Notes

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