The Cost of Independence

By Graham Garrison
October, 2017
Increased attention in the marketplace has put the spotlight on independent veterinary practices. 

Editor’s note: Consolidation among animal health businesses and the rise of corporate veterinary medicine are two trends affecting your veterinary practice customers. In the first part of a two-part series, Vet-Advantage looks at these topics from the point of view of the independent veterinarian – how the demographics are shifting, how practice owners can compete in the marketplace, and how DSRs can help. Look for more coverage from the corporate practice side in the December issue of Vet-Advantage.

With success comes attention. In today’s marketplace, if a veterinary practice’s revenues rise, chances are they’ll soon receive a letter in the mail from a consolidator, inquiring whether the practice owner is interested in selling. Then another shows up, and another.

“It can be fairly overwhelming to just see the interest people have in their practices, especially if their practice is creeping up to that mark between $1.5 million and $2 million,” says Adam Little, DVM, president, Exponential Vet Inc., and Director of Innovation and Entrepreneurship at Texas A&M’s College of Veterinary Medicine & Biomedical Sciences. “We work with some practices who went from having no offers, to receiving a letter of interest in exploring an acquisition almost every day. For some people, the speed at which consolidation is beginning to happen – shifting the balance of power – is exhilarating,” Little says.

“And for others, it’s concerning.”

The animal health industry as a whole is seeing an increasing rate of attention. Companies already in the animal health space are pouring in more money and resources. Outside investors have been looking for ways to enter the marketplace.

It’s easy to see why. Overall spending in the pet industry has surpassed previous spending by more than $6 billion, according to the American Pet Products Association (APPA) annual industry-wide spending figures. Pet industry spending for 2016 came in at a record high $66.75 billion, up from $60.28 billion in 2015, or a 10.7 percent growth.

Veterinary practices are well-positioned in pet spend with veterinary medicine as the No. 2 category, behind pet food. Thus the interest from companies and consolidators. The question then becomes, what is a practice owner to do?

 

Changing hands
Based off of age demographics, many practice owners will soon be making a decision on the future of their business, experts say. Rich Morris, CEO of The Veterinary Cooperative, says based off of what he’s seen, somewhere between a third and half of veterinarians may be at an age where they are ready to retire, “so that’s how many will change hands in the next few years. At TVC, we probably see a least one veterinary practice a month changing hands. Not necessarily going corporate, but we see one a month changing hands.”

Little says historically there was an unwritten rule that if you were a long-time associate, you were going to buy into the practice. “So there was a good faith understanding that ‘Hey, I’m going to pay my dues and then become the person in charge.’”

But in the face of increasing pressure and incentive to consolidate, both owner and associate are changing some of their behaviors. “Because of the money that consolidators are going to pay, practice ownership is looking maybe a little bit less attractive than it used to, and in some cases is probably not even an option.”

There are several reasons an independent practice owner will consider selling to a corporate group. The first is money. Ease of the transaction is another.

However, Morris says that if a distributor rep hears about one of their customers considering retirement or selling his/her practice, they should sit down to discuss all the options. The practice owner may not realize other routes are available.

“What some of these veterinarians may not consider is if they sell to their own employees, they can do an employee stock ownership plan (ESOP),” Morris says. “If they do an ESOP, they won’t pay taxes on the transaction. What looks like a great deal from a corporate group could turn out to be better if they sell to their own employees.”

If the practice owner is planning to sell to someone not currently on staff, they could bring them on for a specified amount of time as an employee before completing the sale, he says. Or, the outgoing veterinarian could start to work part time for the practice as he or she begins to receive payments from either the group of employees or veterinarian acquiring the practice. With all of these scenarios, Morris recommends that the veterinarian touch base with companies that help businesses with these sort of transactions.

“If a veterinary practice owner wants 100 percent out, does not care about a tax free transaction, and doesn’t want to get their money over time, then I think that selling to a big group is an advantage for their situation,” Morris says. “Sometimes selling to a corporate group makes sense, but I think there is equal good sense in selling to employees.”
 

The new wave
There is good sense in not selling the younger generation short when it comes to owning or acquiring veterinary practices, Morris says. “There is this notion that the younger generation does not want to own a practice and put in the same amount of time as the older generation. That perspective is not wrong, but it’s a bad perspective to have.”

The younger generation of veterinarians – millennials and those a little older – are looking for family and workplace balance, Morris says. “The perception that these folks don’t want to work 80 hours a week is correct, but the perception that they don’t want to work as hard is inaccurate.

“The facts are the same, but you’ve got to pull out that generational bias,” Morris continues. For example, he’s seen instances where several veterinarians bought a practice together and managed it together rather than using the one-person model. This agreement allowed them to split up responsibilities and better space out days off to spend with family.

“It is a generational choice,” Morris says.
 

Change is in the air
The choice to remain independent comes with its own set of challenges, chief among them – how to remain viable in an increasingly competitive marketplace?

In 1997, Anna Coffin, DVM moved back to her hometown of Guthrie, Okla., and purchased Guthrie Pet Hospital. Since then, the marketplace has changed “dramatically,” she says. “Corporate veterinary practices are consuming many locally owned practices. These corporate clinics have better buying power and resources than individually owned practices. Another major change since 1997 is the rapid growth of online pharmacies. Pet Meds Express and Drs. Foster & Smith’s used to be the main ones, and now there are a plethora of them.”

In order to compete with those new business models, Dr. Coffin says veterinarians that choose to remain independent need to be flexible and look at what is trending in society. “I try and expand my business model and look for areas that will help my practice grow,” she says. 

Morris says a reminder of how drastic business models can change is evident every time we fill our cars up with gas. It wasn’t all that long ago when gas stations were full service – offering gas along with oil and fluid changes, tire rotations, and repairs. That’s not the case anymore.

“Now, probably 80-90 percent of all gas stations don’t do service at all,” he says. “They are in the business of selling things like soda, snacks, and milk. If you want to get your car serviced, you go to a place that specializes in service only – and those places don’t offer gas.”

Morris says in the same way, veterinarians need to understand there is a change in the air, to the marketplace and to what veterinary practices must do to succeed. He recommends independent veterinarians consider one of two different routes to help their practice grow. “The first option is specialization – surgery only, cancer only, emergency only. They need to go down some sort of specialization route. Even mobile vets are a specialty.”

The other option, Morris says, is to fully commit to the opposite route. “The opposite route includes making sure that they are selling retail items such as pet food,” he says. “That’s the only way they’re going to survive. Specialize or go head to head with what’s coming at them, which are these corporate practices that are selling everything. Corporate practices are going to be able to maintain their pricing on the service side by making more money by selling everything, and that’s going to squeeze the independent veterinarians’ margins to the point where they’re going to go out of business if they don’t specialize, or if they don’t do everything, including selling pet food, leashes, collars, the whole nine yards.”

A key indicator for which route to take can be from the practice’s own client base. Several years ago, Dr. Coffin noticed spending for pet supplies was skyrocketing, so she started carrying retail pet supplies. “I started out with a small selection and slowly increased over time,” she says. “The profit margin for pet supplies is better than pet food and the demand is great. Other revenue streams that work well for veterinarians are grooming and boarding. It doesn’t take a lot of extra staff to do these and it’s a great source of income that can also help boost my veterinary practice income because of vaccine requirements. I have also started offering obedience training, which has been slow to start but very little cost to me to start up.”

Whether the practice decides to specialize, or generalize, the ultimate goal is to maximize the fixed costs, Morris says. Empty exam rooms mean lost revenue, just like empty plane seats for an airline mean lost revenue. “It’s all about filling those air plane seats for the airlines,” Morris says. “In the veterinary practice, at least 8-10 hours a day, those exam rooms need to be filled up because those are fixed costs that they won’t make up like they used to with higher margins.”

Purchasing power
As the margins shrink, more and more independent veterinary practices may seek ways to make up for it in savings for the costs of goods and services. One recent trend is the rise in number of practices joining purchasing groups or cooperatives. For instance, The Veterinary Cooperative, founded in 2012, has current membership totals of about 2,300, and is projected to reach about 3,000 clinics by the end of the year, according to Morris.

Included in that growth was the announcement over the summer that a regional co-op based out of Kennesaw, Ga., Veterinary Products, Inc. (VPI), would dissolve and its members join TVC.

VPI was a co-op founded in 1994 by a group of 10 veterinarians to create a veterinary-owned distributorship focused on preserving the independent veterinary practice model. They had 600+ stockholders/members in 15 states, primarily in the Southeast. They had their own warehouse stocked with over a thousand items. Like TVC, VPI distinguished itself from GPOs by funneling all profits back to its shareholders/members.

“For the past year, VPI’s board has been studying the impact of consolidation trends sweeping across every major segment of the veterinary industry and how it’s affecting VPI,” Bob MacDonald, President of VPI, said in a release. “Eighteen months ago, there were six ‘first tier’ manufacturers; today there are four (Elanco, Merck, Merial/BI, and Zoetis). In distribution, three companies (MWI, Patterson, and Henry Schein) own a large percentage of distribution sales. Two GPOs (PSI and VGP) and TVC have aligned with one of the big 3 distributors. Cumulatively, they represent over 8,000 hospitals in the under 3 doctor classifications.”

Based on those trends, “the VPI Board believed that, as the smallest distributor in the industry, VPI should seek to align its stockholders with a larger buying group with greater buying power and thus greater leverage in negotiating prices,” McDonald said in a release.  

In 2016, TVC member/owners took in a combined revenue of over $1.5 billion, and TVC expects that figure to be about $2.5 billion in 2017 in sales revenue with TVC member/owners purchasing from over 100 TVC vendor programs designed to help member clinics compete with big box stores and corporate accounts. That purchasing activity generates about a 7 percent savings to the average member. There is also additional profit potential for TVC owners from participating in TVC educational, marketing and Best Practice Programs.  

Although often referred to as a group purchasing organization (GPO), TVC is actually a not-for-profit cooperative, the largest cooperative in the veterinary industry. Any profits are re-distributed to the member-owners at the end of the year in a dividend check. In 2016, TVC distributed a Participation Rebate comprised of profits of about $1,200 in dividends back to each eligible participating member-owner (on top of their rebates and discounts).

“I joined TVC because I needed help competing with the corporate practices,” says Dr. Coffin. “TVC has over 2,000 members, so we are able to negotiate deals with manufacturers and vendors just like the corporate practices do.”

All positives from the independent practice point of view, but what about the vendors who service their practice? Morris says he has talked with many sales reps who mistakenly believe that if they work with a group like TVC they will eventually put go out of business.

“I don’t see it that way,” Morris says. “If they do not help make their clients competitive through extra discounts and rebates that we provide because we look like a corporate group, they are going to self select only the clients who are not competitive in the marketplace. If I were a salesperson, I would first and foremost want to make sure that my clinics are going to succeed. By joining a group such as TVC, the veterinary clinics can take advantage of the group pricing, but also receive business education.”

Honest evaluation
Whether they sell or remain independent, consolidation is forcing practice owners to look at some of their internal processes from more of a business standpoint, says Little. And that’s a good thing.

“Historically, veterinary clinics have been successful small business because they were clinics,” Little says. “It’s almost like a lot of the operations involved in running a small business were never top of mind. Things like human resource training, staff evaluation, marketing to customers – these pieces of the business were never on the forefront of the practice owners. It was solely about prioritizing the care of their patients. Now practice owners must find time and space to evaluate the business.”

Practice owners see now that consolidators are looking at their practice from a business perspective. Owners have to pay more attention to what their clinic looks like as a business, Little says. “So they need to start asking themselves, ‘How can I bring in people to help create more of a process to things like staffing and client communication?’ ‘What are the opportunities to make this look more attractive in the eyes of a consolidator,’ whether that’s optimizing inventory or bringing in consultants to help with other aspects of the practice?”
 

March of the independents
A lot of people believe that consolidators are the future, and there’s no way independent practices can compete with them. Little sees this differently. “The research has shown that people trust their local veterinarians. They really like that bond that they have with their individual veterinarian.”

However, sometimes local veterinary practices can be inaccessible, unaffordable, challenging or frustrating for the client, Little says. Independent veterinary practices need help to eliminate those barriers. But how they do that looks very different than it did even a decade ago.

“If I wanted to build a business 10 to 15 years ago, it would cost me a lot of money to get started. If I wanted to offer e-commerce, build a website, do any of these things, I would have to hire people with expertise to be able to put those business pieces together and have those capabilities. What used to take entire teams of people to do has now been reduced to a few lines of code. Whether you are the largest practice group in the country or a smaller two-doctor practice in a rural setting, you have access to many of the same tools.”

Today, through software and contracted services, small businesses are able to grow quickly, serve more people, and offer that high-touch experience, without necessarily having to throw more and more staff at the problem, Little says.

“I think independent veterinarians today, and over the next 10 years, are going to have the ability to offer services like 24/7 access to their veterinary team, extended payment plans, in-home veterinary care and home delivery for food. Those capabilities exist today.” Independent veterinarians need to understand what tools are available for them to plug in to extend the reach of their practice and better serve their customers, without necessarily coming to the mindset that they have to do it all themselves.

“The practices I see that are more successful have taken the tools and resources available to them, and bolted them on to their practice to create high-touch experiences. That’s something individual practitioners are in a unique position to do. Unlike bigger companies, if you are operating 1-2 practices, you have a really good understanding of your customers, the pet owners. You’re able to move more quickly. You’re able to better figure out their needs, so there’s a degree of innovation that can occur within these small business that I just don’t think big companies are able to do.”

Seize the Sales
How veterinary practices can capture more of the animal health spend

First, the good news. Overall spending in the pet industry has surpassed previous spending by more than $6 billion, according to the American Pet Products Association (APPA) annual industry-wide spending figures. Pet industry spending for 2016 came in at a record high $66.75 billion, up from $60.28 billion in 2015, or a 10.7 percent growth.

Veterinary care spending remains the second source of spending in the pet industry at $15.95 billion, according to the APPA figures. “While routine veterinary visits have not necessarily increased, new advances in health care and services available may be contributing to the 3.4 percent growth,” APPA said in a release. “Additionally, there is growing research on the human health benefits of pets and research from the Human Animal Bond Research Institute shows that the more pet owners become aware of the health benefits of their pets, the more likely they are to take care of them.”

The bad news? Call it a case of opportunity. According to industry experts, veterinary practices could be capturing more of the pet spend than they do currently. Much more.

Rich Morris, CEO of The Veterinary Cooperative, says veterinary practices that don’t make efforts to capture more of the pet spend are letting revenue dollars simply walk out the door. TVC’s goal is to have the same purchasing power and marketing prowess as the big box stores by growing to 5,000 independent animal hospitals that would have sales and purchasing power equal or greater than these corporate competitors. Vet-Advantage asked Morris what were some ways veterinary practices can increase their revenue potential.

Dig into pet food
Pet food is tops in pet spending with $28.23 billion, according to APPA figures. “Interest in high-end, premium pet food and treats continues to be a key driver for increased spending in the pet food category,” APPA said in a release.

Morris says a typical practice may see somewhere around 5 percent of total sales through pet food – 10 percent if they are doing a great job. And those sales are predominately through prescription.

“Imagine if you could get 100 percent,” says Morris, who encourages TVC members to think big with revenue drivers. “It’s like in baseball – you don’t hit the ball 100 percent of the time.
A good hitter has what, a .300 batting average? But veterinary practices have to ask 100 percent of the time if you’re going to get a higher percentage to walk out with pet food.”

Morris says the best practice is not to let any customer leave without first asking about their pet food purchase. Practices can stay competitive with big box retailers by setting up online ordering through their website, and being sensitive to the prices offered at competitors. Which leads to the second point…


Monitor the marketplace
Morris says veterinary clinics should try and match what they are selling with the marketplace. Otherwise, customers may see them as price gouging. There is a balance to it, he says. “I’d be the first to say don’t undercut what things are sold for in the marketplace,” Morris says. “That’s giving money away. But, it’s better to make a dollar on something than nothing because you don’t sell it (due to having a much higher price).”
 

Expand the product shelf
Look for other things pet owners are spending money on, whether that’s dog beds or toys, says Morris. According to APPA, $14.71 billion was spent on items such as beds, collars, leashes, toys, travel items, clothing, food and water bowls, and other accessories. There is no reason why a practice can’t offer those at the checkout counter. “Anything that would make that dog or cat mentally, physically healthy,” Morris says.

Pet Industy Spending Breakdown 

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