Schein Maps Out Future Strategy
Edition: May 2002 - Vol 10 Number 05
What's Henry Schein doing right? The company's Medical Group reported sales of $271.6 million in the fourth quarter of 2001, a 17.3 percent increase over the prior year. For the full year, the Group posted $930 million in sales, a 19 percent increase over the prior year.
In an interview with Repertoire, Schein President and CEO Stanley Bergman laid out the strategy that has brought the company forward in the industry, and which he firmly believes will propel it into the future.
Repertoire: To what do you attribute the strength of Schein's most recent earnings statement?
Bergman: This isn't new. For the last 20 years or so, our Medical Group has grown nicely, but it's only the last five or six years that people have noticed. This growth speaks to our strength in the physician marketplace, and to our outstanding field sales force and telesales group.
There are four major reasons for our growth. First, we have increased the number as well as the productivity of our field sales consultants each year. Our objective isn't necessarily to have the largest sales force, but to have the most productive one.
Second, in the telesales area, we have the most sophisticated database marketing technology in the office-based practitioner market. This helps us ensure that we mail the right direct-marketing literature to the appropriate decision-maker in the physician's office. Our telesales people are then able to follow up and close the sale. The most important thing is that the literature lands in the right hands. We have some tremendous technology in our telesales area. In the physician's office, there are potentially many decision-makers for supplies and equipment, and they may differ depending on the product. But our technology allows us to reach the correct person, since our database maintains this information, along with other valuable information, such as which products the customer is buying from us, and more importantly, which products they are not buying from us.
It may not pay for us to develop this technology if we were serving the medical marketplace only. We use this information for all of our businesses and are able to amortize it over $2.6 billion in sales for the benefit of our medical, dental and veterinary customers on both sides of the Atlantic. By medical industry standards, this capability is very unique, although it is present in other industries.
Third, we have the opportunity to cross-sell and up-sell key products that are available to us on an exclusive or semi-exclusive basis. This is particularly true with vaccines, which is one of the fastest-growing areas in the physician market. Henry Schein purchased Bastian, VA-based General Injectables and Vaccines, a provider of vaccines, injectables and other pharmaceuticals, in 1999. We are a leading distributor of vaccines in the United States to the office-based practitioner, and we have tremendous expertise in this area. This expertise is used to the benefit of the entire Henry Schein organization. GIV procures vaccines that are ultimately sold through GIV, Henry Schein and Caligor. And if a physician buys vaccines from us, chances are they'll buy other products from us as well.
Fourth, we offer a formulary program designed for specific groups of customers. Our program with the American Medical Association was the first formulary, to our knowledge, in the office-based environment. We've set up others, for such groups as the American Academy of Dermatology and the American Society of Plastic Surgeons, as well as others in the dental and veterinary markets. These formularies offer pharmaceuticals, as well as other products ranging from gloves to needles. Through programs such as these, not only do we provide tremendous value to our customers, but we also provide tremendous value to manufacturers, because we can increase their market share of these products.
Within the Medical Group, you have the telesales group and Caligor. How big is each? What are their respective rates of growth?
In the physician market, our primary focus is on the Caligor field sales business, which accounts for 40 percent of our sales today. And it's growing rapidly. We're strong on the East Coast, Midwest and South, and we're rapidly expanding in the Western states Texas and the Southwest. The Henry Schein core business national direct marketing and telesales accounts for just over a third of our business. And GIV [General Injectables and Vaccines] is about a quarter of our business.
All these business are growing at a multiple of the market.
You've said that because Schein serves just 35 percent of U.S. medical practices, the company has a considerable opportunity to grow medical sales, not only by increasing the number of customers served, but also increasing sales to current accounts. How will you bring about this growth?
First of all, market dynamics are facilitating our growth. The 45-to-65-year-old age group is expected to double in next 20 years. Couple that with the continued migration of procedures to physician/alternate-care settings, and you can see that the market dynamics are very favorable.
Since only a third of the physician practices in the United States are active customers of ours, there is an exciting opportunity for us to add new customers from the remaining two-thirds.
Given the fact that we can offer exclusive and semi-exclusive products, unparalleled customer service, which includes a 99 percent fill rate and rapid delivery of over 28,000 SKUs, we also have an opportunity to offer our existing customers additional products.
And there are still lots of opportunities to acquire regional players. We've been successful at integrating acquisitions. People who have merged with us have done well.
Our infrastructure differentiates us from our competitors. It is geared toward this particular section of the market. We own highly efficient ''factories'' for the production of packages that contain six to eight line items. We offer high fill rates with low error rates. Eighty percent of our customers get their package the next day, with a 99 percent fill rate. I don't think there's any other distributor in our market that provides that kind of service. This is what we do. This is what we focus on. And we do it at a lower cost, so we can provide it at a competitive price.
But it's really the four key areas I previously mentioned our field sales consultants, our telesales and database model, the opportunity to cross-sell and up-sell with key product lines, and the formularies that are driving our business. We remain optimistic about our growth. Although it's not reasonable to expect 22 percent growth every quarter, we expect many high-growth quarters.
Can you describe some of the recent changes you've made to your infrastructure?
We've made two major moves in the United States. The first was in Indianapolis. We had a large facility there. But over the past three or four years, we made several acquisitions and had to add some offsite storage facilities. We recently merged them into one highly automated 280,000-square-foot facility. This will help us bring down our operating costs and strengthen our Midwest presence.
Second, we are scheduled to open up a distribution center in Jacksonville, Florida, this summer. This will give us an opportunity to consolidate the businesses of local dealerships that have operated under the Caligor name in the South. We'll be able to offer the entire Henry Schein product line there pharmaceuticals, private brand products and others. With that in place, we'll add a significant number of field sales consultants, and at the same time, make room for more acquisitions.
Will you build more distribution centers?
I don't think so. We will be operating five centers in the United States, including Jacksonville, covering 80 percent of the country with next-day delivery. We're comfortable we can provide excellent service with high fill rates to our physician, veterinarian and dental customers.
Our warehouse consolidation has been pretty seamless. We have a professional group of infrastructure/supply chain managers with significant talent and experience. While you may see this in some of the larger acute care distributors, no one has taken it to the physician marketplace as we have.
You mentioned growth in the West. Can you describe that?
Within the past six months, we've added a wider variety of products in our Reno, NV facility. Prior to that, the center was serving primarily dental, veterinarian and mail-order customers. Now, with the expansion of our product line there, we're expecting to add a number of additional field sales consultants in the Western states.
In your remarks to the financial community following the release of your fourth quarter earnings, you said that Schein will sharpen its focus on gross margin management. How do you expect to do that?
We can continue to expand our margins by providing excellent service on behalf of our vendors. We can move market share. We send out about 7 million direct marketing pieces a year, just to physicians. Our vendors are willing to fund some of that.
We can't equally focus on all of the 28,000 medical products we carry. But we can focus on certain products that help our customers, our manufacturers, and our margins as well.
A year and a half ago, we established a vendor relations team to help us grow market share for specific manufacturers. We had a vendor relations function before then, but we expanded and formalized it. We have people focused on specific products lines, such as gloves, pharmaceuticals, injectables, equipment, instruments, paper goods and infection control. Each of them reports to a vice president.
We've always been good on the supply chain side, and we've always been good on the marketing side. And, in the last four or five years, we've focused on our sales efforts, which have now caught up with both.
Is it difficult for Schein's telesales consultants to introduce new products or technologies over the phone?
They won't be the right people to introduce a new MRI. But when it comes to new pharmaceuticals, disposables, consumables, instruments, there's no product whose market share they can't increase.
It all depends on focus. We have only so much ''shelf space,'' that is, the time of our telesales representatives and direct marketing efforts. And we market that to those manufacturers with the most appropriate products, and who are prepared to support us.
Many people in the medical market don't fully understand the power of direct marketing and telesales, combined with field sales. Our telesales consultants have relationships with decision-makers in the office. Telesales isn't just giving someone a phone; you need the technology, call centers and the right management.
Schein emphasizes to its customers that they can order products in multiple ways: over the phone, personal sales calls and the Internet. Where are you seeing the greatest growth? Have there been any surprises or lessons learned vis-à-vis the Internet?
Regarding the Internet, we learned that it's really about brand recognition. Just like everyone else, we were concerned that these big software and Internet-focused companies would come in and cause us problems. But it has turned out to be just the reverse. The Internet is there to be lost by the traditional companies. If a company with brand recognition and excellent customer service can take advantage of the Internet, it will do well.
How can you take advantage of it? You have to provide the kinds of tools that customers are looking for. Especially user-friendly ordering software. We developed software to allow practitioners to browse our catalog on-line. Again, we probably couldn't have afforded it for the medical business alone, but we could by amortizing it over almost $3 billion of sales worldwide.
We were linked to all the big healthcare portals, but didn't get more than a handful of orders through them. So, we've found that we can do business with our existing customers over the Internet, and that the more user-friendly we make it, the more likely they'll buy more products from us. Someone who likes our Internet ordering system is likely to buy a wider range of products from us.
The Internet is the future. Every day that goes by, more business will be conducted electronically. And it won't be just between us and our customers, but also between us and our suppliers.
How does the Internet change the role of your telesales consultants?
Our strategy is this: The field sales force drives customers to telesales, and telesales drives them to the Internet. This helps customers save money on the procurement side, and frees up our people to provide them with consultative ideas and products that help to increase their practice efficiency and profitability, while at the same time providing a high level of quality care.
We are increasing the productivity of the field salespeople. From there, we want to make the telesales people more productive. If we can do that, our overall profitability goes up. Our biggest tool to do both is driving ordering through the electronic catalog and ordering system. It's not only a way to receive orders less expensively, but we've found that customers who use these systems tend to give us a greater portion of their business.
What's the most important thing in running your business?
The atmosphere in the company. This is a great place for people to hang their 40-to-50-hour-per-week hat. We have a ''Team Schein'' concept that makes this a fun place to work and to grow. We are focused on our customer. But our single biggest asset is our people.