(I got a call from Forbes the other day about this same topic)
Tuesday, November 21, 2006
By Rhonda L. Rundle, The Wall Street Journal
Jeff Nebot thought he had struck gold. Two years after opening a laser hair-removal franchise in St. Louis, annual revenue hit $3 million. And over time, the lavish salon added other cosmetic services as Mr. Nebot joined the rush of entrepreneurs into the emerging business of medical spas.
Medspas (also called medispas) offer such medical treatments as Botox injections and laser hair removal in a luxurious environment rather than a doctor’s office. The field has been rapidly expanding in recent years as entrepreneurs and doctors alike have sought to profit from the dual quests of many affluent consumers: prettification and pampering. For an increasing number of those who entered the business, the boom is proving a bust.
In Mr. Nebot’s case, what initially was viewed as a golden opportunity began to lose its glitter when he realized that the cash coming in lagged behind the cash going out for marketing, staff and franchise fees. The gold was gone altogether last April, when he sold the shop’s assets for $2.
Mr. Nebot largely blames his franchiser, Sona MedSpa International Inc. Among his complaints is that the marketing, advertising and other support services Sona provided, in exchange for fees that amounted to about one-quarter of revenue, were inadequate and that he had to develop marketing programs on his own. He also says that while Sona said its patent-pending laser treatment permanently removes 93 percent to 97 percent of hair in an average of five treatments, such wasn’t always the case.
Sona, of Franklin, Tenn., declined to comment.
In the past three years, the number of medspas has more than tripled to about 1,500, according to estimates from the International Medical Spa Association. No one tracks the failures, but scores of interviews with industry consultants, franchisees and others familiar with the business indicate numerous casualties. Medspas “are coming up like mushrooms and then they are gone,” says Hannelore Leavy, executive director of the International Medical Spa Association, an industry trade group in Union City, N.J.
Ms. Leavy says entrepreneurs underestimate the challenges of a business that is both a medical office and a beauty salon. Owners must figure out what technologies to use at a time when laser makers and pharmaceutical companies are introducing – and heavily promoting – a confusing array of new skin-rejuvenation technologies and antiwrinkle shots. Medspas also must comply with rapidly evolving government regulations, including some spurred by medical doctors who don’t like nonphysicians invading their turf.
Licensing rules differ from state to state. Many states don’t have specific rules for medical spas. In general, the health-care professionals who work in a medical spa must be licensed by their respective professional groups. For instance, nurses must be licensed by a state nursing board.
State rules also dictate who can use medical lasers or inject cosmetic drugs.
In Florida, a law took effect in July saying that only dermatologists and plastic surgeons can supervise a medical spa, unless it’s the physician’s own office. The supervision issue also is under review in California, but stricter enforcement of existing rules has already begun.
Lawmakers and regulators say they are reacting to complaints about burns and other serious mishaps involving lasers and injectables. Last year, a North Carolina woman died from an overdose of a numbing cream she was given before a laser hair-removal treatment.
Medspa ownership turnover generally reflects business stumbles rather than safety issues. Ms. Leavy says many of the troubled spas are affiliated with franchise chains with flawed business models, such as those requiring too much of a franchisee’s revenue to go for marketing. (She estimates that about 10 percent of medspas are franchises, although other industry experts put the percentage at 30 percent or higher.)
Several Sona franchisees, though not Mr. Nebot, are in private arbitration over problems that include misrepresenting a complicated business as a turnkey operation and failing to provide needed support. Sona officials declined to comment.
Several franchisees of Radiance MedSpa Franchise Group PLLC, a franchiser in Scottsdale, Ariz., say the company’s financial projections overestimated revenue and underestimated initial start-up costs, including working capital.
The president of Radiance, Charles L. Engelmann, recently said: “There are currently 32 open stores and we will have 47 or 49 open by the end of the year. None of the stores have closed.” He also acknowledged that some franchisees are attempting to get their money back.
One common pitfall for medspa operators is the failure to properly account for prepaid services, such as discounted packages of laser or light-based facial treatments. At Mr. Nebot’s shop, for instance, clients would routinely pay $1,000 in advance for a package of laser hair-removal treatments to be delivered over a year or more. The shop’s rooms were then filled with nurses treating customers who had paid months earlier. Finding new customers with fresh cash was a constant struggle.
Mr. Nebot says he felt like a cartoon character, “running faster all the time but falling further behind.” He used radio advertising to draw more clients, moved to a larger space and extended his operating hours. To avoid alienating customers, he gave away free treatments to those who complained that their hair kept growing back after they finished the five-treatment regimen they purchased.
In the wake of the recent legal changes in Florida, some medical-spa owners there must shell out an extra $60,000 a year or so to a dermatologist or plastic surgeon to oversee operations.
“I can’t be my own medical director any more, which is an added expense I can’t afford,” says one Florida physician who is not a dermatologist. He says he is “facing personal bankruptcy and trying my best to get out while there is something left for my family” after miscalculating what it would take to market, advertise and build his business. Indeed, many medspa owners are doctors who hope to make easy cash at a time when income is shrinking from their traditional medical practices.
Some franchisers have run afoul of state regulators by violating laws against the corporate practice of medicine. In February 2005, California denied a franchise application from HealthWest Inc., a Los Angeles firm that had more than a score of Inaara MedSpas around the country. California ruled that HealthWest had “falsely represented” to owners that they could legally own a medspa without a medical background. HealthWest has gone out of business, but some Inaara shops broke away from the founders and still are operating as independent, stand-alone shops.
Another bust was Skin Nuvo International LLC, which filed for bankruptcy and sold its 37 stores to a private equity firm that in turn sold them to Pure MedSpa, a Toronto company. Sleek MedSpa, a closely held chain in Boca Raton, Fla., recently acquired SkinKlinic’s Fifth Avenue flagship in Manhattan, but SkinKlinic’s two other stores, one in Las Vegas and the other in Greenwich, Conn., have closed. SkinKlinic’s founder, Kathy Dwyer, is a former senior executive of cosmetics giant Revlon Inc. Attempts to reach her for comment were unsuccessful.
When SkinKlinic closed in Las Vegas, clients were forced to look elsewhere for promised follow-up care. “I had a patient call me in a panic” after the place (in Las Vegas) closed a week after she received treatment, says Joel Schlessinger, an Omaha, Neb., dermatologist.
SkinKlinic in Las Vegas closed about a year ago because “it wasn’t doing the numbers they were projecting,” says Andrew Rudnick, chief executive of Sleek Medspa, acquirer of the New York City store. He said any customer who thinks they paid for services that weren’t delivered should contact him because he will arrange for them to be treated by other medical spas in the Las Vegas area.