3.5 Factors Driving Laboratory Consolidation
3.5 Factors Driving Laboratory Consolidation
"Change is inevitable. Growth is optional."
It has widely been reported that our profession of dental laboratory technology has been consolidating. From an estimated 15,000 labs 10 years ago to less than 12,000, with another 300 or so labs disappearing from the business census this year. Moving more production offshore has had an impact and caused some closures, but most feel that has stabilized. There are three (and one half) other important forces accelerating further consolidation: demographics, investment and digitalization. When dentists expand digital imaging to include intraoral impression scanning, that will be the half force that will really get things going.
Demographics
According to research, prior to 2008, Baby Boomers owned 12,000,000 private businesses with a market value of more than $10 trillion. The average age of a dental technician has been rising. When you wander the aisles of Lab Day or attend the Vision 21 Meeting, you do not feel overtaken by a youth movement. This will continue to precipitate transitions or closures of labs and accelerate consolidation.
Investment
DTI-Microdental (my employer) is owned by Health Point Capital out of New York. Welch Carson owns National Dentex, Dental Services Group reports to Boulder Capital and Birch Tree owns Novadent. All of the large lab groups are owned by investment capital companies. Coincidence? I think not. Health care and dentistry are attractive investment plans. DTI and NDX were publically traded and taken private in the last few years. Our profession has several investment attractions at play; gross margins that can be improved by leveraging technology, a fragmented mom and pop preponderance for the industry business model and a recession resistant product and service mix. Investment money and/or stock in the parent fund will provide an economic incentive that helps owners find and fund an exit strategy that drives towards fewer individual business entities.
Digitization
Capital costs make it challenging for small and medium labs to keep up with technology. Outsourcing helps but does not replace the efficiencies and marginal improvements (financial) harvested from CAD/CAM running three shifts in a central production facility. Accuracy, consistency, fit, production time and the broader material choices today are not changing the way we make stuff. It HAS changed the way we make stuff. The technology train has left the station and is up to speed on a few tracks. Will analog manual building and contouring still have a place in our world? For a while. Eventually it will settle at some level that is a small fraction of the 100 percent that it used to constitute. And still some day when computer aided ceramic laser sintering arrives, who knows. Maybe the porcelain brush will go the way of the telegraph or vinyl LPs. More labs will sell to or merge with mega-groups or form new ones to reach escape velocity. Some will choose this path as a strategic responses to stay efficient.
Digital Impressions
The final half accelerator was the dentist getting late to a party that started years before. Digital dentistry is not a future vision. It is evolving now. Think about a future where nearly every dentist sends a digital impression to the lab. How well can you handle that today? How ill you handle that in five years? What impact will this have on your ability to serve your clients? Like the analog film processing centers that used to print out our pictures for us, labs that do not change and adapt will suffer and die. Norbert Ulmer from Sirona uses Kodak's sleeping through the digital revolution in the personal camera segment to illustrate this point. The digital lab has to be built and ready before the dentists go digital. This will rapidly decrease the number of individual labs that operate in our space.
"Those who do not learn from history are doomed to repeat it."
