Spa Makeover

Mel Zuckerman and Jerry Cohen were hiking in the Arizona mountains in 1995 when they wound up having the conversation that determined their company's future. Zuckerman is the founder of Canyon Ranch, the Tucson-based spa resort; Cohen is vice chairman. Canyon Ranch has a devout following among affluent travelers and, to capitalize on that, companies were constantly pitching to Zuckerman licensing deals to stamp its name on frozen food, fitness equipment and face cream. Guests, meanwhile, were urging him to open more locations. Amid the desert scenery, the two men talked about the headaches and risks of trying to expand—particularly as Zuckerman neared 70. Cohen played devil's advocate. "You built this place to get away from stress, and you love your life," he said. "What do you want to grow for?" Zuckerman pondered, then replied: "Once an entrepreneur, always an entrepreneur." And after a few final moments of respite, they hiked down the mountain and began the work of turning Canyon Ranch into an empire.

The dilemma that faced Zuckerman—to grow or stand pat?—commonly faces small companies. But Zuckerman faced unusual circumstances. He decided to embark on this growth spurt at a time when most company founders are contemplating retirement—and unlike hard-charging, type-A CEOs, Zuckerman and his brand are all about balance. But driven by his desire to bring his company's healthy-living message to more people, Zuckerman has hired a new generation of managers to lead a drive for growth. This fall, the first

residents will move into a Canyon Ranch Living condo complex in Miami; another is under construction in Chicago. Today the Canyon Ranch name is on skin-care products and day spas. Outsiders see a brand just beginning to tap its potential. "I consider Canyon Ranch to be one of the great business inventions of the last 25 years," says Michael Silverstein, managing director at Boston Consulting Group.

Zuckerman will turn 80 next spring, but he looks remarkably fit. He and his wife, Enid, live on the Tucson property and work out daily. Each week he gives a talk to guests describing the personal transformation that led him to create the resort. In 1978, he was a 50-year-old Arizona real-estate developer who was 40 pounds overweight. His father, a lifelong smoker, had just died of lung cancer. For years Zuckerman had tried to get into shape, without success. So he decided to spend a week at The Oaks at Ojai, a California "fat farm." "Mel walked in and he kind of knew he needed to be here, but he wasn't convinced this was where he wanted to be," says Sheila Cluff, the Oaks' owner. But under guidance from a fitness instructor, Zuckerman blossomed. Instead of a week, he stayed a month. He lost weight and felt revitalized—and he wanted others to experience the same feeling. Returning to Tucson, he sold off all his investments and cobbled together $5.8 million. He bought and renovated an old dude ranch at the base of the Santa Catalina mountains. Nine months later, he opened Canyon Ranch. It had 66 rooms, served an 800-calorie-per-day menu and cost a pricey $85 per night, double occupancy. Like Zuckerman, most early guests were overweight and looking for a change.

It wasn't an overnight success. But within a few years, as the formula evolved, it caught on. The company replaced the ultra-low-cal menus with light gourmet food (including lots of vegetables, chicken and fish), though it remained alcohol-free. Zuckerman added doctors to the staff, figuring guests might really change their lifestyle if medical pros told them to. Celebrities like Jane Seymour began arriving, and travel magazines gushed over the attentive staff and lush surroundings. "During the '80s, this became a vacation of choice, not a vacation of need," he says. Profits began flowing, so Zuckerman bought an old mansion in Lenox, Mass., which became the company's second location. Today Canyon Ranch has 184 rooms in Tucson and 126 rooms in Lenox. The average guest spends $900 a day, including extra fees for massages, nutrition consultations, trainers, diagnostic blood tests and bone scans. (The staff also includes a clairvoyant, astrologer, sex therapist and tarot-card reader.) The resorts boast occupancy rates of 85 percent (many hotels average below 70 percent), with 60 percent of business coming from repeat guests.

It's a nice franchise—but to grow, Canyon Ranch had to move beyond Arizona and the Berkshires. The first step was in 1999, when Zuckerman opened a day spa in the Venetian Hotel in Las Vegas. In 2002, the second SpaClub opened at Florida's Gaylord Palms resort; the third opened in 2004 on the Queen Mary 2. Opening day spas was a big compromise: Zuckerman believes the heart of the Canyon Ranch experience requires multiday, total-immersion tutorials in fitness, nutrition and health, not the drop-in, 50-minute, $160 Thai Massage With Wild Lime Blossom scalp treatments that are the day spas' specialty. "I had no desire to create a place with pampering," he says. But he defends the day spas as giving "a taste of Canyon Ranch" to hundreds of thousands of visitors a year—some of whom might try the real deal. "It's a feeder … but the main guts of our business are the resorts."

The bigger drive for growth began in 2001, when Zuckerman hired a real-estate developer named Kevin Kelly, now 49 and the firm's president. "My job was to come in and think about how to grow the brand creatively," Kelly says. His biggest deal was announced in 2003, in Miami. When complete, the six-acre oceanfront site a few miles from South Beach will house 467 condos (prices start at about $700,000), 150 hotel suites (rates start at $600 per night) and a 75,000-square-foot spa facility with restaurants, a juice bar, yoga studios and 23 treatment rooms. To do the deal, Canyon Ranch partnered with a local developer who's responsible for construction and sales; Canyon Ranch collects fees for helping to design the property and putting its name out front, as well as up to 7 percent of the sale price of the condos and management fees for running the spa. The developer is supplying the capital, but by using the Canyon Ranch brand, the condos have been selling for an average of 49 percent above comparable properties.

The project is nearly sold out, and Kelly says Canyon Ranch stands to earn tens of millions on the deal. But there are some big ifs. The Miami condo market has tumbled since the project launched, and Canyon Ranch Living could face the same high cancellation rates afflicting other builders. "The question becomes how many people, in a worsening environment, are going to be closing?" asks Lew Goodkin, a Miami consultant. Kelly says surveys show that less than 20 percent of his buyers are speculators who are prone to cancel. The other big variable: will the beaches and Miami nightlife distract guests and residents from spa outings? Kelly's team has created models to anticipate these utilization rates, but he admits it's a gamble, akin to the one taken by developers who build golf-course communities and bet buyers will play a certain number of rounds each year.

As Canyon Ranch's new businesses come online, they should spark growth. Today, the firm's revenues are about $150 million a year, Kelly says, with profit margins of 18 to 20 percent. Zuckerman and Cohen still own a controlling stake, but sold off a piece of the business a decade ago; today Morgan Stanley owns 48 percent. Zuckerman says the firm is currently worth about $600 million—but if the expansions go well, he says, Canyon Ranch could be worth $3 billion in five years. There are hurdles beyond the real-estate risks. Its payroll will double over the next few years, and managers worry whether new employees will be able to match the current staff's legendary attentiveness. Another worry: the new locations in Miami and Chicago could lure big-spending guests away from Tucson and Lenox. "We talk about that all the time—will there be cannibalization or dilution of the brand?" Kelly says.

Canyon Ranch also faces competition as it expands into resort real estate. Ritz-Carlton and Marriott now sell time shares. Rival healthy-living resorts like the Greenbrier in West Virginia, La Costa Resort and Spa in Carlsbad, Calif., and the Cooper Institute in Dallas sell homes or condos on-site. Like Zuckerman, the rivals say the communities let people live a year-round spa lifestyle. "They essentially get rid of the excuses for people being unhealthy," says Tyler Cooper, who runs Cooper Living. Real-estate deals also make it easier to finance expansion since selling condos offers a faster payback on investment than renting out rooms by the night.

Canyon Ranch's closest competitor, the Tucson-based spa Miraval, is also expanding. The company, majority-owned by AOL founder Steve Case, is converting a 41-story building on Manhattan's Upper East Side to become Miraval Living. Apartments will start at $700,000, and the complex will feature a spa with swimming, yoga, basketball and fitness classes. Kelly says Canyon Ranch considered opening a branch in Manhattan—home to many of its most loyal guests—but couldn't find a deal that would provide enough space. Among serious spa-goers, opinions differ whether Miraval or Canyon Ranch is better. South Carolina stay-at-home mom Kelly Lewis has visited both; she prefers Canyon Ranch's programming and seminars, but says Miraval is slightly more luxurious, couple-friendly and exclusive. But Miraval's move illustrates the risks of staying in place: if Canyon Ranch's Big Apple customers can sample Miraval without getting on a plane, they may come to prefer it for vacations, too.

Canyon Ranch also face challenges as its core client base ages. Fundamentally a boomer brand, its average clients cluster around 50. The company has been trying to woo younger travelers and, back at the Tucson headquarters, there's evidence it's working. In the gyms there are still some older, out-of-shape guests who look at an elliptical machine like it's some futuristic gizmo—the kind of folks you really don't want to see naked in the locker room. But there are younger people, too, including a few pregnant women. When NEWSWEEK joined a late-afternoon class that teaches a new exercise called yamuna body rolling, a few guests were in their 30s, hard-bodied and hot.

And even as he approaches octogenarian status—at which point he'll reduce his day-to-day duties—Zuckerman remains engaged in finding new ways to please guests. The company's close to a deal for a new resort in Costa Rica. There's a new partnership with the Cleveland Clinic to provide $3,700 executive physicals—though it's off to a slow start, signing up just 202 guests in its first year. And while he remains leery of putting the Canyon Ranch name on too many products, more brand extensions feel inevitable. "For 20 years, we said no to everything," Zuckerman says. "We were single-minded about the main purpose of our business—to get people to understand their own power over their aging process and quality of life." In the future, it's clear Canyon Ranch will be saying yes a lot more often.