Industry stakeholders explain how veterinary clinics can prepare for the next round of economic uncertainty.
At the beginning of the summer, talk of the early 1980s was in the air. The reason? Inflation. Consumers were feeling the pain of increased prices at the gas pumps and checkout lines. The consumer price index soared 9.1% over the past year. It was the biggest yearly increase since 1981, with nearly half of the increase due to higher energy costs.
“We haven’t seen levels like this in quite some time,” said Dr. Matthew Salois, president of Veterinary Study Groups (VSG). Dr. Salois is the former chief economist of the American Veterinary Medical Association (AVMA). “There’s so much about the economy that’s unprecedented these days. Forget textbook economics – everything is being rewritten here.”
Vet-Advantage asked several industry stakeholders to provide their insights on the best economic indicators to monitor, as well as best practices veterinary practices can implement to weather any economic uncertainty.
“Noise in the numbers”
There are more pieces of the economy at play than just inflation, and how they affect the typical veterinary practice is going to depend on the strength of that practice. Looking at industry dashboards such as Vet Watch and VetSuccess, there has been a general normalization in spending and visits across veterinary practices, Dr. Salois said. “But those averages are going to bely individual experiences,” he said. “You’re going to have some practices that probably are experiencing negative growth rates right now, and you’re going to have some that are doing quite well and outperforming where they were last year.”
When looking at the economic fundamentals in the U.S. economy from places like the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the U.S. Census, the doom-and-gloom headlines don’t always match the reality of what’s happening, Dr. Salois said. “It’s more complicated than that. I think we’ve got to be careful not to let the headlines dominate our thinking.”
For instance, some economic fundamentals, like unemployment, are hard to read. On one hand, unemployment is at a record low, which is great for the overall economy. On the other hand, hiring and retaining staff is a major pain point for most businesses across all economic sectors, not just veterinary practices.
Consumer spending is still strong, which is the biggest component of the U.S. economy. And traditionally, when unemployment is low, and consumers are still spending at healthy levels, the economy should be in good shape, Dr. Salois noted. So why is gross domestic product growth not in line with that rosy picture? “We should see GDP matched with those types of economic conditions, but we don’t.”
We should be careful about projecting the current state and the future state because our economy has experienced so much volatility the last couple of years. “There’s a lot of noise in the numbers, and you’ve really got to tease out that noise to understand where you’re at and where you’re going,” Dr. Salois said. “We’ve got to be careful about short-run indicators like growth rates, because if you go back in time to springtime 2020, that’s when things were rock bottom. Practices were closing, people were under lockdown, and there was a lot of talk around veterinary practices going under permanently. The industry saw revenue take a nosedive, and then recover through the remainder of 2020.” Fast forward to 2021 around those same time periods (March-June), and the growth rates shot up. If veterinary clinics compare that period to now in 2022, their growth rates are softening, but they’re being pitted against those epic highs (2021) that were never going to exist going forward.
Coming off the epic highs of 2021 is like a bad caffeine rush, Dr. Salois said. If you’re a business, and you’re comparing things to where they were this time last year, it’s going to look “a little south.” But that’s because you’re comparing to highs that were never going to persist. There was pent up demand that got released. Disposable income went through the roof because of economic stimulus payments. “The stimulus bill was like a sugar rush that we’re letting down from,” Dr. Salois said. People weren’t spending in other areas of their budget (like family vacations) because of COVID. Things like home improvement and veterinary services were beneficiaries to people spending more time at home, paying more attention to their pets, enjoying that companionship and being more focused on it.
The danger of raising prices
Fritz Wood, a veterinary industry veteran with a special interest in finance, said inflation’s impact has been most evident in veterinary workforce issues. Wood, who works with Triune Financial Partners, said labor costs are higher than ever, and that’s the single largest expense in companion animal practices. “To date, clinics have been able to raise professional fees to accommodate the higher labor costs, but the number of visits or transactions is flat or shrinking,” he said.
Dr. Salois agreed that the largest cost center is, and will probably continue to be, talent. “And that’s going to affect the bottom line for veterinary practices.”
How do veterinary practices promote top line growth to accommodate those increases? In the current market economy, it’s a real challenge. Do veterinary practices raise prices, and pass on those costs to their clients? Certainly, there’s margin there, “but you have to be extraordinarily careful when you’re talking about the overall affordability of that care, and how that’s going to affect household budgets,” Dr. Salois said. The biggest chunk of inflation has been in the food and fuel segments of the economy, and those prices hit the middle- and low-income households the hardest. Depending on what the demographics are for a veterinary practice’s location, you’re going to see a different impact of inflation on clients, depending on their own situation.
When Costco CEO Craig Jelinek went on CNBC’s “Squawk on the Street” program this summer to discuss the economy, Kelly Baltzell took note. While the retailer giant leader said that, overall, the average consumer is “not doing bad,” he also acknowledged that some people are experiencing a recession because of the high costs of food, gas, and other essentials. Indeed, consumers are already “making tough purchasing decisions about what they’re eating, where they’re traveling, and what they’re buying,” said Baltzell, CEO of the marketing agency Beyond Indigo Pets.
Baltzell said what’s particularly worrisome is that she’s noticed food banks across the country have reported an uptick in demand. “People are coming out of the woodwork to food banks who have never used a food bank before,” she said. “That’s concerning, because they’re first-time users of the food bank, not repeat visitors. That means there is a new group of people that are being hit by inflationary concerns.”
And those people may have to make tough choices on their pet’s care in the future, if they haven’t already. Choices like, do they have enough to buy food or school supplies for their kids and take their pet to the vet? Or, do they put off the wellness care visit for their pet until they can take care of the family first?
“What happens to the pets in the house?” Baltzell said. “What are the emotional decisions that happen with that? Veterinary hospitals are going to be in the vise grip of their own costs rising, and their customers’ costs rising.”
Baltzell said as summer turned to fall, there was a rise in the number of elapsed client visits, and not just because veterinary clinics were too busy to fit pet owners in for appointments. Some veterinary clinics were seeing a 10% to 20% lapse in client visits. Some reported lapses just shy of 40%, she said. For small businesses like veterinary clinics, all those factors can add up quickly. “You’ve got those animal owners not coming in, plus inflation, plus costs,” she said. “Well, maybe you should start looking at these things now, before you wake up one day and wonder why you don’t have any clients.”
Safeguarding veterinary practices
What would a slowdown or recession mean to veterinary clinics? Think fewer visits, and/or less spent per visit, Wood said. “History shows that most pet owners will still buy preventive services (albeit less timely than normal), but more expensive elective procedures will decline.” During difficult economic times, some pet owners will feed their pets less expensive diets, and practices will see more single-dose parasiticide dispensing. The good news, though, is that Wood expects the labor market to loosen up. “It should get a lot easier to find help.”
Wood said maintaining liquidity is mission critical to every veterinary practice. “If a clinic runs out of money, it quickly fails.”
During tougher times, it’s smart to maintain extra levels of cash and access to cash. Since cash preservation is more important than usual, veterinary practices should minimize on-hand inventory, looking for products to discontinue. Accounts receivable should always be minimized, but especially now, Wood said. “If you buy new equipment, try to minimize your cash out of pocket. Have you established a business line of credit? Have you established a home equity line of credit? The Ark was built before the flood!”
Finally, Wood said veterinary clinics should make sure their big expense items are in-line: total labor should be 40-45% of gross income, and cost of goods sold 22-24%.
To safeguard their practices against inflationary and recessionary pressures, Baltzell recommends veterinary clinics do a deep dive into several metrics for their clinics, starting with wellness visits for senior pets (especially the number of visits for aging cats). Veterinary clinics should also examine the top 20% of their average client base, because they’re the ones who spend the most money. “What is that top 20% doing? They may be doing just fine. But what if they’re not doing fine?” Baltzell said. “Numbers really tell the story. What’s the true story? Look at the data. Start looking instead of reacting. Veterinarians need to be proactive, not reactive.”
Veterinary clinics can be proactive by adding payment options like care credit or financing on their website. Wellness plans and pet insurance are also ways to boost income coming into the clinic. By advocating for a pet insurance plan, veterinarians are hedging their financial bets for a bad time. “I would highly encourage [clinics] sign up every single new puppy and kitten on a pet insurance plan,” Baltzell said. “People with pet insurance spend 30.5% more, according to a recent industry study.”
Another best practice? Listing all the services a pet owner can purchase at the veterinary clinic for under $100. “People are more likely to bring in their pets if they know how much it’s going to cost them,” Baltzell said. “It’s scary for pet owners when they don’t know how much something costs.” People’s credit cards are getting maxed out and studies are showing that savings are running dry. So where will the money for pet care come from? Keep it small or bite size, and then started focusing on marketing and preventive care and how that will save clients money in the long run – $50 now might save you $500 later. “Veterinarians need to start the cost savings narrative because most people’s understanding of vet care is it’s expensive. “So how do you get around that narrative and counteract it with data?”
Dr. Salois listed several strategies that he believes will set veterinary practices up for success in today’s marketplace:
No. 1: Don’t be over-leveraged on debt. Carefully leveraged debt can be a powerful tool, but it can be poisonous in a period of economic uncertainty and economic decline. “So those practices must work aggressively to eliminate that debt, which gives them cashflow. That’s the lifeblood of a practice or any company during these times. They can be more agile and seize opportunities that surrounding competition can’t because they have so much debt.”
No. 2: Explore ways to differentiate, and then communicate that differentiation. Run-of-the-mill veterinary practices risk being commoditized. “What is your niche?” Dr. Salois said. “And more importantly, do your clients understand that? Do they see it? Figure out what makes your practice different from the rest and what will make it stand out. Then make it your mission to embrace and leverage that, “and then communicate the heck out of that to your clients.”
No. 3: Innovate and simplify. This is not just about incorporating new technologies or transforming how a practice delivers veterinary care. “It can be that,” Dr. Salois said, “but it can also be about rethinking and innovating the staffing or the practice culture.” The Great Resignation is real, both inside and outside the veterinary profession. This period of change in culture is fluid. “So, what are you doing to rethink your practice culture? How are you positioned to be the practice of choice for your staff and for potential hires that you want?”
No. 4: Address workflows. What are veterinary practices willing to do differently with respect to their workflow? Are they actively removing bottlenecks within their practice, either in exam rooms or within inventory management? There are things that they can do beyond just new technology or automating that set them up for success, Dr. Salois said.
No. 5: Optimize the available workforce. Are they effectively leveraging their technicians, practice managers, and staff, so that they’re getting the best out of them? “And, are they giving the best back to team members so they’re feeling engaged and effectively performing at levels that match their experience?”
Indeed, there’s a laundry list of things that veterinary practices can do during uncertain times that set them up for success and help mitigate issues like inflation, Dr. Salois said. “These are good behaviors in any economic climate, but especially in an environment like we’re in right now.”
The difference between success and failure
Moving forward, relationships are going to be even more important than they were before, Dr. Salois said. “I think that’s one thing that’s been very clear,” he said. “Veterinary medicine is very much a relationship-driven business. It’s going to be important to build, nurture and leverage those relationships in a way that works for both sides, because partnership is a true two-way street. Those relationships are going to be even more important during a period of economic uncertainty, because it can mean the difference between going out of business, surviving or thriving during those times. For veterinarians, that includes relationships with vendors, distributors and other industry contacts, as well as relationships with clients and their own team and staff.”
Relationships with distribution and suppliers in particular are essential because veterinary practices will always need the inventory, equipment and supplies to keep their business running. “As a veterinarian, you’ve got to lean on those relationships during challenges like we are seeing with the significant supply chain issues we’re experiencing, and probably will continue to experience, for quite some time,” Dr. Salois said. “As a veterinarian, how can you leverage those relationships to deliver what you need in a time of crisis?” It’s an area of opportunity, and an area that’s always going to be important for any veterinary practice.
The link between automation and well-being
One way to deliver savings so that veterinary practices don’t necessarily have to resort to higher prices to accommodate the rise in wages is to lean into automation, Dr. Salois said. “How do you explore workflows within your practice and optimize the existing talent that you have, and how to better utilize them and leverage their skill sets in a way that delivers more performance to your practice? That’s going to be important to an individual practice and to our profession to find ways to enhance efficiencies and productivities.”
This ties into well-being for veterinarians and their staff. The industry was talking about burnout as a critical issue long before COVID. The pandemic “ripped a fissure in well-being across all veterinary professionals,” Dr. Salois said, “and veterinarians, technicians and other team members have never had to work harder.” The nature of doing their job has become more difficult. There have been more barriers to doing their jobs that have surfaced because of COVID. It’s become more difficult to deliver veterinary care, and that’s introduced new inefficiencies. How do veterinary practices tear those barriers back down so that they make it easier to deliver veterinary care?
“Solving those problems will pay dividends to the performance of the practice and the ability to mitigate things like inflationary pressures,” Dr. Salois said. “And, it’s going to pay a dividend that makes it easier to be a veterinary professional, which is going to enhance well-being and reduce burnout.”
What to watch
VetSuccess provided Veterinary Advantage with a few metrics to watch in relation to the impact of inflation on veterinary practices:
- Year-over-year revenue growth is up 6.5% August 2021-2022, which is less than half of the 14% growth we saw the prior 12 months on average.
- Year-over-year visits growth is down -1.2% August 2021-2022, which is down compared to the 5.4% growth we saw the prior 12 months on average.
- Lapsing patients are on the rise, up nearly 30% to 35% on average in the first half of 2022 compared to the first half of 2021.
Source: VetSuccess transactional data from nearly 5,000 veterinary practices in the Veterinary Industry Tracker on VetSuccess.com.
Photo credit: istockphoto.com/Djavan Rodriguez