Expand your day spa’s profit margin by applying five simple inventory strategies.
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In their efforts to bolster profits, most spa managers and owners focus on the revenue side of the equation, and understandably so. But what if I were to tell you that there are likely two, or even three, additional percentage points of profit sitting in your spa at this very moment? These profits can be found in something you come into contact with every day: your professional and retail product inventory.
Products are among the most important tools in your spa, helping to deliver the relaxation, enjoyment and therapeutic benefits clients expect—and their retail versions allow your guests to build upon their treatment results, while providing sensory memories of the spa experience. Despite the primary role of products, however, we often overlook the importance of proper inventory management.
Fortunately, chances are good that by instituting or tightening some of your inventory management procedures, you can positively—and immediately—improve your spa’s bottom line.
Take Inventory of Inventory
Before you get down to deciding par levels and re-order points, stand back and look at the big picture. How many lines, or brands, do you use? Once you have that number, ask yourself how many product manufacturers are really required for you to deliver all of the services on your treatment menu. Many spa owners, in an attempt to provide plenty of choices to clients, and/or because of their technical staff’s insistence on particular products or brands, end up with an oversupply of inventory. With the wide array of wonderful lines available today it can be difficult to narrow down your list of purveyors.
So how to decide? First and foremost, the manufacturers that you partner with should strongly align with the specific branding and image of your spa. If your spa has a botanical or holistic orientation, then skincare products made with animal-derived ingredients would not be a good fit. Then there is the matter of quantity; if your spa has six or fewer treatment rooms, you may not need to carry three different skincare lines. Rather, you might cover all of your bases with one brand that offers options for different skin types, plus a second, smaller or niche brand that addresses a specific need or is oriented to a particular ingredient or technology. Other important considerations concerning brand selection are price point, packaging and efficacy.
Working in harmony, all of these components are part of the decision process.
Once you’re settled on the minimum number of product lines for your spa, you’ll want to create an “approved” list of items from each manufacturer. Each item that you carry in a particular size has its own SKU (stock keeping unit) or ID number. Maintaining a minimal total SKU count is key to keeping inventory costs under control. If you’ve been in business for a while, you can simply analyze what is regularly selling, but if your spa is new, this process will take time. Either way, evaluate your selection of SKUs on a continual basis. You may have to resist the assistance offered by product reps to place orders, because your and their assessment of your quantity needs may differ. Never let anyone pressure you on SKU selection or quantities; carry only what makes sense for you and your clientele.
Next, identify the maximum quantity to stock, and the minimum point at which a re-order should be triggered. Factor in order frequency and the time it takes to receive an order (see diagram).
It takes work to identify these numbers for every SKU that you carry, but once it’s done, the reordering process becomes much easier. (Most spa management software can handle this task quite effectively, though you’ll need to make some seasonal adjustments. Professional or back bar products are more difficult to track because only small portions are used for each service, and therapists often switch out one product for another from within a given protocol.)
By instituting or tightening some of your inventory management procedures, you can positively—and immediately—improve your spa’s bottom line.
Build a Budget
Beyond understanding your required units of inventory is the importance of creating and living with a budget for inventory procurement. An existing spa will have a base of retail and professional product usage data to build from. To help establish your inventory budget, Charles Compton, president of retail consulting firm Mars Solutions, has a rule of thumb: “The amount of dollars of inventory you have on hand should be no less than three months’ and no more than six months’ worth of your monthly sales, valued at wholesale.”
Let’s look at this in practice. Suppose you only sell branded products with a 50% cost, and your monthly sales at retail total $5,000. You are then selling inventory valued at $2,500 at wholesale. Your target inventory value, then, would be between $7,500 (three months’ worth) and $15,000 (six months’ worth), at wholesale. If you perform physical inventory counts monthly, as advised, you will know the difference between your target inventory level and the amount you actually have on your shelves; that difference is what you have to spend this month.
Once you know your target spending level, you need to decide how to apportion that budget among your departments. “Look at your retail sales by category,” suggests Compton. “If 50% of your total retail sales come from skin care, then that’s where you spend 50% of your budget, allowing for some adjustments for seasonality.”
Stay On Track
Maximizing your inventory’s profit-making potential goes beyond having the right amount of product on your shelves. A key portion of successful inventory management is setting up your general ledger (see page 114). For those of you who “hate numbers” and want to skip this section—don’t! Remember, we can’t improve what we can’t measure. Inventory should be separated into categories or departments that reflect the design of your service menu, and then into professional and retail segments. If your main service categories are massage and skin care, then those categories should exist for your products. Every product that you purchase has to be coded to the correct general ledger account or you will never be able to accurately track expenses, much less forecast revenue or profit.
Let’s say that you carry latex gloves for professional use in both your skincare and nailcare departments. When you receive an order of a dozen boxes of gloves, the skincare department claims the entire shipment, and is charged for those professional supplies by coding the invoice to that general ledger entry.
However, the nail department decides that they also need some gloves, and takes 3 of the 12 boxes for its own use. As a result, at the end of the month, your nail department professional supply costs will not reflect the use of those gloves, and will look lower, in relation to sales, than it really is. Conversely, the skincare department will have paid for all of the gloves but only used 75% of them, inflating their costs unfairly. Now, if the shipment were coded correctly (using random codes as in the ledger example on the right), the total amount of the order of 12 boxes with a cost of $3 each would have resulted in a general ledger entry of $9 to department 820.01 and $27 to 820.03.
Now that you’ve identified and accounted for brands and quantities, turn your attention to internal protocols for ordering and handling products. The key here is that speed is money; the faster you can recognize you are low on a product, order it, receive the order, open the box and get the product on the shelf to sell, the higher your revenue and the lower your costs. This is why systems are so important; relying on the “old school” ordering methods of wandering the retail area with pad and pen in hand does not yield the best results, as it is easy to overlook an item, or to not understand how a particular SKU is trending. Accuracy and speed in the cycle are your keys to higher profits.
Inventory should be separated into categories or departments that reflect the design of your service menu, and then into professional and retail segments.
Sweat the Small Stuff!
The finer points of inventory management can make all the difference. Consider the following:
Timing. Don’t place your orders on Monday or Tuesday if this means you’ll receive them on a busy Friday. Chances are those products will spend the weekend in a box on the floor instead of on your shelves making money. The longer the limbo between when you receive the actual shipment and when the products are ticketed and placed on shelves for sale, the higher the likelihood they will encounter any number of fates: being misplaced, damaged or even stolen. The shorter the cycle between placement of the order and presence of the product on the retail shelf, the lower your inventory costs.
Paper trail. Whether you use purchase orders generated by hand or via software, make sure that when a shipment is received, the person who opens it can retrieve the packing list and compare its contents to the original order. Receiving items that were not ordered throws a wrench into the proceedings; the SKUs and pricing may not exist in your software, or if the products are not on the purchase order you may not be able to digitally receive them.
Stocking protocols. Both professional and retail supply require detailed protocols on stocking and storage. This is particularly important with products used across departments, such as the gloves in the previous example. Each department should have assigned storage for professional and retail supply. Everyone should be clear on protocols for putting products into storage; typically, newer products are placed at the rear of the shelf behind existing products. This is often essential with spa products as they tend to have a limited shelf life.
Assess Success
Now that you have controls and protocols in place, it becomes possible to measure your performance and strategize potential improvements. Remember that increases in retail sale totals are not a measure of profitability—not if these increases are accompanied by more dollars tied up in products on your shelves! The retail industry measures efficiency with inventory turns, the formula for which is “annual retail sales (wholesale value) /average $ of inventory in stock” (see above chart). Let’s use our example in “Build a Budget” on page 110 to illustrate:
Compton advises that spas target an annual inventory turn number of at least two, and preferably three to four—so the result above would be considered quite good. Salon Transcripts Software offers an additional tool: a report that ranks inventory according to sales and breaks it into a four-category report. “This is a great way for spas to quickly determine which products are turning more quickly, and thus should be ordered more frequently,” says company president Jeff Mason, who adds that the use of this tool has created substantial returns on profit in a short time frame.
The info you glean from employing effective inventory management strategies can prove invaluable, allowing you to analyze the performance and profitability of each department, and perhaps even adjust your space allocation or service mix to positively impact future results. And it all comes from making sure that you have the right amount of products, in the right place, at the right time.
