Strip Mall Spa: How Massage Envy Created -- And Dominated -- A New Franchise Niche
For years Rick Davis was a tech executive who helped raise millions of dollars in venture capital. Then he decided to try a different kind of investment. In 2004 he considered buying a fast-food franchise before choosing an alternative: the massage-and-facial franchise chain Massage Envy. In fast food, Davis reasoned, you never know how many customers will walk in the door, but Massage Envy sells one-year memberships for $59.99 to $79.99 a month, which means recurring revenue.
Today Davis owns five Massage Envy clinics in the Seattle area and says 70% of his revenue comes from those membership fees. "I've raised big money in Silicon Valley," says Davis, 59, who went to high school with Steve Jobs and was employee No. 10 at Apple spinoff Claris, "but this is the most successful and fun business venture I've ever been in."
Over the past 13 years Massage Envy's affordable-membership model has propelled the chain and its eye-catching purple-logoed storefront spas to more than 1,000 locations in 49 states. It's the nation's largest employer of massage therapists--more than 22,000--and has topped $1.2 billion in annual systemwide sales, averaging out to $1.2 million in annual revenue for each spa. The chain has a nearly 50% share of the franchised day-spa market, according to a December study by research firm IBISWorld, and it is adding 100 more locations this year. Its largest competitor, Hand and Stone, has 215 locations altogether.
In some ways Massage Envy's biggest challenges now involve overcoming its own success: For one, it has gotten a lot harder to find qualified massage therapists--its growth has coincided with a decline in massage-school enrollments. More important, the chain is besieged by a slew of fresh competitors.
The company's cofounders, massage therapist Shawn Haycock and entrepreneur John Leonesio, and its current president, Dave Crisalli, met back in the '90s through a national fitness chain. After the chain was sold in 1999, Leonesio and Haycock decided to try bringing the fitness industry's membership model to massage. Back then most massages took place at pricey spas, in a medical office or in a therapist's spare bedroom. The founders' vision was to offer affordable massage at convenient mini-spas that would stay open nights and weekends. The name was inspired by a business Haycock admired called Hair NV.
Finding a first location wasn't easy, given the reputation of massage parlors as sleazy places that traded in sexual favors. In fact, many commercial leases prohibited the operation of massage businesses, so the duo sneaked their first unit into a strip mall on a sublease. Finding therapists to staff the store, however, was easy. "We'd put out one small want ad and get 25 résumés," says Haycock.
Interest from would-be franchise owners was immediate, Haycock says, and within a year they were signing up regional developers to recruit franchise owners to open and operate clinics in their territories. In 2008 Massage Envy was sold to a conglomerate based in India, which in turn sold to a New York City-based private equity firm, Sentinel Capital Partners, in late 2009. Leonesio, a serial entrepreneur, says he was happy to move on to his next ventures, including a growing chiropractic franchise, The Joint, where he was CEO. Haycock is a business consultant who still owns two Massage Envy locations in Utah.
Why did the chain connect? Its model hits the sweet spot for clients, massage therapists and franchise owners. Clients get lower-cost massages at convenient locations with soothing environments. The pricing allows 58-year-old speech pathologist Mary McCracken of Silverdale, Wash., who has scoliosis, to get a weekly massage, where previously she could afford only one a month. "Massage Envy," she says, "keeps me vertical."
For therapists Massage Envy employment offers an opportunity to gain experience without the risks of business ownership. Entry-level pay starts low--and varies widely by region--but therapists have schedule flexibility and many opportunities to earn raises, says Silverdale Massage Envy manager Jessica Guzikowski. Some locations even help pay therapists' health care premiums.
From the franchise owner's point of view, Massage Envy's key selling point is the recurring revenue, which makes the initial investment--between $414,000 and $961,000, depending on leasing costs--feel less risky. Once open, franchise owners pay a 6% royalty on sales to Massage Envy, plus a 2% fee for national advertising.
The brand's franchisees have faced some challenges. A 2011 consumer class action centers on a policy that stipulates that customers who cancel their membership forfeit unused massages. Customers claimed the contract was misleading, and a proposed settlement would require franchisees to make good on some massages due ex-members. (Massage Envy said it could not comment on the suit.)
More alarming, sexual-molestation allegations have been leveled against some Massage Envy therapists. Last fall Atlanta station WSB-TV reported that there have been more than 50 different civil and criminal complaints around the country. Some civil lawsuits have been settled, but several criminal cases resulted in convictions of therapists. The litigation has focused on individual therapists and franchise owners, and Massage Envy says it has a zero-tolerance policy for franchisees who don't create a safe environment.
So far, the legal problems don't seem to have affected growth or retention. Only nine Massage Envy locations have closed in the chain's entire history--an impressive 99% continuity rate. "We're very careful about background-checking who we hire, and we haven't been affected," says Jim Gunderson, a franchisee who co-owns two clinics. "When a chain has given 90 million massages, statistically problems will happen."
Meanwhile, Massage Envy's success has encouraged competitors. Top challenger Hand and Stone offers month-to-month memberships and does 25% of its business in skin treatments (Massage Envy does 6%). Hand and Stone was purchased in April for an undisclosed sum by management and Levine Leichtman Capital Partners, and according to Todd Leff, Hand and Stone's CEO, it plans 45 more openings this year. Perhaps the most ambitious up-and-comer is the lower-priced Massage Green Spa, which has just 75 locations open but more than 800 units in development, according to CEO Allie Mallad.
Other chains are going upscale, such as Texas-based Woodhouse Spas, which has more than 40 full-service day spas and charges up to $280 for an 80-minute massage. In addition, some tanning salon chains, such as Planet Beach, are adding massage services, says Scott Lehr, senior vice president of the International Franchise Association. Two other competitors, Massage Heights and Elements Massage, are expanding into Canada.
For now, Massage Envy president Crisalli says the chain is focused on filling in U.S. markets, but he, too, sees potential outside the U.S. In 2012 Sentinel sold Massage Envy to Roark Capital, a private equity firm that Crisalli says won out over 100 other interested buyers. Roark, which declined to comment for this story, owns nearly 30 franchise brands, including Anytime Fitness , Il Fornaio and Carl's Jr. The parent firm's expertise will be helpful, Crisalli said, if Massage Envy enters foreign markets. "Roark is in 50 countries," Crisalli says. "There's a ton of opportunity."
Meanwhile, franchisee Davis says he's not worried about the competition. For one thing, the chain is the only national brand that commercial real estate agents know, which helps Massage Envy snap up the best locations. And the chain has customer data that competitors can't match. "Those insights give us a sustainable, unfair advantage," he says.