Year 2000 Was OK for Distributors
Edition: December 2001 - Vol 9 Number 12
Financially speaking, medical products distributors did OK in 2000. Revenues were up; so were inventory turns. Unfortunately, receivables climbed as well.
Eighty-two companies, representing $9.5 billion in revenues, participated in the most recent HIDA Financial Survey, which will be discussed at length by participating companies at the HIDA 2001 Conference in San Diego. Fifty-seven percent of the respondents were focused primarily on the non-hospital market, 25 percent on hospitals, and 25 percent on the long-term-care market. Moreover, 36 percent had revenues below $5 million, and 14 percent had levels exceeding $100 million.
Although HIDA publicized many of the survey results, only participants were allowed to see the data on industry profits.
The Industry at Large
The 82 participating distributors experienced an average growth in revenues of 10 percent. Growth was uneven across the three key markets, however. Average growth for non-hospital distributors was 13 percent; for hospital firms, 6 percent; and for long-term-care firms, 3 percent.
Based on the number of participants, it is difficult to tell if the 10 percent figure is indicative of the industry at large, says Bill Cron, professor of marketing at Southern Methodist University, Dallas, and author of the survey. After all, says Cron, a growth in the demand for products is only one cause of revenue growth. Two others are price increases, and growth stemming from a company's own decisions (e.g., whether to buy another company, hire more sales reps or take on new lines).
Ten percent of the participating firms made acquisitions in 2000, down considerably from previous years. The difference in overall growth rates between acquiring and non-acquiring firms was only two percent, with acquiring firms reporting an average total growth rate of 12 percent (and 6 percent on continuing business), and non-acquiring firms reporting a 10 percent overall growth rate.
The 6 percent growth rate on continuing business among acquiring companies is ''significantly below'' the rate found among non-acquiring companies, notes Cron. Presumably, companies making acquisitions are more focused on those acquisitions than on continuing business.
Continuing a trend of recent years, distributors in all three markets reported inventorying products from fewer manufacturers compared to previous years. Among hospital firms, the number of SKUs in inventory was also down significantly from last year. Among non-hospital and long-term-care distributors, however, the number of SKUs actually increased slightly.
The reduction of SKUs among hospital distributors shows that the distributors are exerting more influence over the purchasing behaviors of their customers, says Cron. He also calls the slight increase in SKUs among non-hospital distributors misleading, pointing out that the big drop in SKUs among them occurred two years ago.
An increase in inventory turns has been a trend among distributors in all sectors for five years, says Cron. Offsetting that trend, however, at least from a return-on-assets point of view, is the fact that accounts receivables have been steadily increasing for the past three years.
Among the non-hospital distributors, 64 percent of their revenue came from physician offices,
10 percent from clinics and HMOs, 9 percent from industrial customers, 3 percent from outpatient surgery enters, and 14 percent from other sources.
On the bright side, inventory turnover among them was relatively higher than in previous years, continuing a trend from last year.
But at $742,000, sales per salesperson were significantly lower than in 1998 or 1999. At $281,000, gross margin per salesperson, at $281,000, was also down. ''This is something you clearly don't want to see,'' says Cron. ''You're really looking for a higher number, which would indicate increasing sales force efficiency.'' The issue is extremely important for non-hospital distributors, because their sales force costs already are higher than those of their hospital counterparts, he adds.
Cron cautions that some of the dip in efficiency may be due to the fact that a different set of distributors participated in the 2000 survey than in previous years.
The drop could also reflect the inexperience of new reps hired to replace or augment more experienced ones, says Cron.
Accounts receivables were up slightly at 52 days, compared to
51 days in 1999 and 50 in 1998. Small firms enjoyed much lower accounts receivables- 44 days- than large ones, helping them achieve a higher level of asset turnover (4.0x).
''This is pretty consistent across all three sectors,'' says Cron. ''The complexity of the [accounts receivables] task they're trying to manage is less than in large firms, simply because of the sheer number of accounts [the large firms have].'' What's more, given their smaller geographies, small firms enjoy less ''separation'', both psychological and physical- from their customers. ''You have the collections department working closely with customers,'' says Cron. ''As you get more customers, that becomes more difficult.''
The largest non-hospital firms achieved much greater inventory turnover rates (11.3) than their smaller counterparts, but larger accounts receivables days outstanding (59).
Larger firms also reported sales-per-salesperson rates of more than double those of the smallest firms, and significantly lower selling costs as a percent of gross margin. ''They face different sales situations,'' says Cron. Large firms carry a certain amount of clout in the market, giving them a natural advantage. What's more, large firms tend to sell higher volumes of commodities, he adds. Naturally, that brings selling costs down.
While the average sales rep's income was approximately the same in 2000 as the year before ($55,000), the relatively low ($42,900) and high ($72,000) figures had both increased.
Like their non-hospital counterparts, hospital distributors continued to increase inventory turnover in 2000, bringing it to 8.3 times. Unfortunately, that rise was offset by higher accounts receivables days outstanding (52 days), resulting in no overall gain in asset turnover.
Employee costs as a percent of gross margin a critical indicator of the operating health of a distributor was up significantly in 2000, to 57 percent. ''We tell distributors that they want to get those labor costs down to 50 percent,'' says Cron, noting that last year's average was 52 percent. Again, the makeup of this year's survey participants could account for part of the rise, he says. A larger number of smaller, more specialized hospital firms participated in the survey this year than last. Typically, such firms have less automation in order-generating and order-processing, and hence, higher employee costs. Even so, ''I don't doubt that some increase has occurred,'' says Cron.
When the survey results are compared by the size of the distributor (small firms being those under $40 million in revenue, larger ones being over $40 million), the following differences emerge:
* The leverage ratio for small non-hospital firms is 2.0x, but for large firms, 3.3x. (The higher the leverage ratio, the more a company's assets are being paid from debt or the bank.) A ratio of 2.0x is low, says Cron. But given the shaky economy and the desire of investors to put their money into ''safe harbors,'' such as health care, Cron ''really expects leverage ratios to go up next year.''
* Accounts receivables days outstanding for small firms were 44 days, compared to 50 days for large firms.
* The average invoice size for small firms was $231, compared to $440 for large firms.
* Year 2000 sales growth among small firms was 10 percent, and among large firms, 4 percent.
* Among small firms, sales per outside salesperson were $1.6 million. Among larger firms, they were $7.1 million.
Twelve percent of accounts receivables among hospital distributors were seriously (60 days or more) past due, up significantly from previous years. In addition, the average income for salespeople was reported as $67,000, but this average varied from a low of $54,350 to a high of $82,500.
Long Term Care
Among the long-term-care distributors who participated in the survey, 67 percent of their revenues came from the distribution of supplies and equipment. Smaller firms (under $10 million in revenue) generated 26 percent of their revenues from Medicare Part B patients, while larger firms (over $10 million) averaged only 9 percent of revenues from Medicare Part B. Moreover, larger firms generated 13 percent of revenue from equipment rental, while smaller firms averaged only 1 percent of sales from equipment rental.
Perhaps the most important change among long-term-care distributors was a disturbing one: Accounts receivables days outstanding climbed to 72 days in 2000.
Looked at in terms of size (that is, companies under $10 million in revenue and those over $10 million), the distributors' performance shaped up like this:
* Smaller firms collected their receivables in 60 days, compared to 92 days for the larger ones. This could be a function of the small companies being ''closer to their customers,'' suggests Cron.
* The average invoice size of small firms was much larger ($600) than of large firms ($308). Cron was at a loss to explain this finding, but suggested that one reason might be that larger providers are demanding more just-in-time delivery, accounting for smaller (but more frequent) invoices.
* Larger firms experienced much faster growth (10 percent) than smaller ones (1 percent).
* Selling costs as a percent of gross margin were much lower for larger firms (7 percent) than for smaller ones (15 percent). This could be due to the ''bulk sales'' approach of larger distributors, as well as the fact that larger distributors probably have larger customers, which boosts the productivity of their salespeople.
Among long-term-care distributors, 27 percent of accounts receivables are seriously (that is, more than 60 days) past due. In addition, the average income for salespeople was reported as $66,300, but the average varies from a low of $56,000 to a high of $75,000.
More discussion of the HIDA Financial Survey will take place at HIDA 2001.