Aggregation Transformation

By Vet-Advantage
April, 2017
Given a plethora of practice ownership models, distributor sales reps have to keep on their toes

With an estimated 10 percent to 20 percent of America’s 26,000 pet hospitals corporate-owned, Veterinary Advantage readers have cause to question the future of the one- and two-doctor practice. Industry headlines – such as Mars Inc.’s recent acquisition of VCA Inc. and its 800 hospitals and 60 diagnostic laboratories – keep the question front and center. Aggregation -  the growth of corporate veterinary medicine

Independent practitioners and small practices aren’t going away, according to observers. But they do face tough competition from aggregators, who seem to be racing to buy the best-run practices in the country or to build their own. At least for the time being, there’s no slowdown in sight. Industry information suggests that between 7,000 and 8,000 independently owned hospitals remain that fit the current aggregator sweet spot of three-or-more-doctor hospitals, says Ben Coe, senior director of strategy and development, Veterinary Study Groups Inc.

In the midst of this change, distributor sales reps may find themselves calling on an independent practice first thing in the morning, a corporate entity next, a different corporate entity after that, a roll-up in the making, and then a practice tied into yet another group purchasing organization.

To succeed in such an environment, sales reps must do their homework, understand how each of these various entities wishes to be approached, and maintain a firm focus on the health of the practice and the pets they care for, according to those with whom Veterinary Advantage spoke.

 

Trend lines will continue

“When you examine the growth of corporate veterinary medicine over the past 10 years or so, it seems plausible to expect that those trendlines will continue,” says Jeffrey S. Douglas, MS, APR, Fellow PRSA, communications director for the Association of American Veterinary Medical Colleges.

“There have been examples in other health professions where the basic operating model for the business has fundamentally changed over the course of three or four decades,” he continues. “Pharmacy is one that comes to mind. Whether or not veterinary medicine will follow remains to be seen.”

Heather B. Loenser, DVM, who serves as veterinary advisor to the American Animal Hospital Association, says, “Because of the diverse needs of the public and the profession, I believe that there will continue to be diversity in the business models that will allow for top-quality veterinary care.

“I am confident that our AAHA-accredited member hospital teams will continue to practice in the way that best cares for pets and their people, regardless of who owns their hospital.”

Christine Q. Shupe, CAE, executive director of the Veterinary Hospital Managers Association, adds, “The evidence suggests that the corporate growth of veterinary practices is a trend that is here to stay. However, the corporate model is just one business model that characterizes practice ownership.

“VHMA will continue to closely monitor developments in the industry and provide education that is germane to managers, regardless of the setting in which they practice. The core management competencies are the same for all managers, regardless of the ownership model.”

 

Contributing factors

Factors contributing to aggregation include the following, says one observer, who preferred not to be named:

  • The fact that older veterinarians who seek retirement are selling their practices to consolidators, not younger vets (who, because of student debt, can’t afford the asking price).
  • Price concessions and the opportunity for centralized diagnostics, both of which can be enjoyed by aggregators.
  • The growth of pet insurance, which is embraced by some vet consolidators.
  • An increase in the number of female veterinarians, who may resist the burden of starting and operating their own clinic, as they want to make time to raise a family.

“True, there may be some undercurrents that could slow the growth of corporate practices,” he says. “For example, it’s true that among some, vet consolidators still have a bad reputation as practitioners of ‘cookie cutter’ veterinary medicine, who place profits before patient care.

“Another is the belief that consolidators have ‘cherrypicked’ the best-performing clinics, reinforcing the conventional wisdom that the medical skills of most veterinarians outweigh their business acumen. Rather than acquire other, poorer performing practices, they are building new ones – a longer process than acquisition.”

 

Low-hanging fruit

“At least for the next five years, it appears the land grab will continue,” says Coe. “If you track hospital acquisitions during the last 15 years, consolidation has accelerated year over year, with few exceptions. By 2021, I predict that 20- 25 percent of traditional practices in the United States will be owned by an aggregator if the current acquisition models remain consistent, and positive economic trends continue. More important, by 2021 the larger hospital size coveted by consolidators suggests that 40-plus percent of veterinary market share revenue will reside with corporate aggregators.”

If the expansion of mobile clinics, basic-care “minute clinics,” humane organization veterinary hospitals, startup practices (by independents and corporate), and other models take hold, the percentages could change dramatically.

  • Driving the trend are several factors, says Coe, including:
  • A strong economy
  • Continued low interest rates
  • Investor confidence
  • The growth of additional consolidators
  • High multiples
  • Large numbers of successful owners reaching retirement age and the inability of current hospital employees to purchase the practice.
  • Additional models, such as “roll-ups,” which accelerate consolidation.

“VSG believes that each VMG member should and will make their own future business decisions,” he says. “Our goal is to ensure that our members are well-informed so that they can evaluate multiple options throughout the life-cycle of their business.

“We continue to enhance our member services, which include succession planning, accounting resources, improving practice valuations, and other useful educational programs. The most powerful resource of all occurs when our groups meet twice a year. When members collaborate, they ask tough questions but seek solutions in a supportive atmosphere. For instance, numerous discussions include work-life balance and leadership.

“If you love what you are doing, don’t have to work 40- plus hours per week, the culture is fulfilling, and the practice is highly profitable, why sell?” For distributor sales reps, consolidation presents challenges and opportunities, says Coe, who started in distribution in 1978, then left in 2014 to join VMG. “Personally, I believe distribution will continue to play a vital role in veterinary medicine, but will evolve and change.

“Where I see the rub is that many – though not all – distributor territory managers tend to treat and approach different customer segments in the same way.” For instance, discussing promotions with an account that has a corporate contract is a waste of time (though there are big differences between corporate accounts).

“My advice: If your company has not provided you with education or understanding regarding the different dynamics in the market, take the time and do the research. Learn where opportunities exist, differentiate yourself and your company, then plan your approach and time accordingly. Ask yourself, ‘If the top 10 percent of my accounts vanish tomorrow and margins continue to erode, what is my plan?’

“I believe that delineation of account responsibilities within animal health will continue to evolve and specialize. To be successful now and in the future, today’s distributor representative must be well-rounded, educated, and prepared!”

Topics: Trends

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