Coexisting in a Consolidating Industry
How the little guys can learn to swim with the bigger fish
Every industry experiences structural changes as it matures and adapts. These changes can occur from both within and from without, as outside forces press the industry to readjust. During its more than 100-year existence, dental technology has been largely immune to these forces, existing as a largely fractured industry composed of small, independently run businesses. However, the convergence in the last two decades of major factors such as the rapid adoption of automated production technologies, looming industry regulation, and, to an extent, globalization, may be moving the industry toward a major structural shift.
As a $7 billion industry, dental technology has drawn the attention of a number of capital investment and private equity firms. In the 1990s, there was an acquisition frenzy in the laboratory space as these firms vied for the most valuable real estate. Although buying activity has slowed, Bennett Napier, Executive Director of the National Association of Dental Laboratories, still regularly fields inquiries from new players. “I get at least three calls each week from private equity firms looking to enter the laboratory market,” says Napier. “They are looking at this industry as an opportunity. So depending on how many of these firms actively enter our market, it could change the landscape of dental technology significantly.”
Currently, large corporate laboratory groups, plus independently owned Glidewell Laboratories, account for only 6% to 12% of the industry’s total $7 billion in annual sales. The remaining 88% of market share is held by small, independently owned laboratory businesses. “We still are a fragmented industry,” says Warren Rogers, CEO of Knight Dental Group, CDL, DAMAS, ISO. “Although we have seen major consolidation on the distribution and manufacturing side of dentistry, we are still a long way away on the laboratory side.”
Mark Murphy, Clinical Director of Micro-Dental, agrees. The flurry of merger-and-acquisition activity experienced in the 1990s, he says, has slowed to “a snail’s pace.” However, as the industry matures and laboratories adopt automated technologies for setting up large centralized manufacturing facilities, the pace of acquisition will intensify. “We are becoming a more mature professional industry that is ripening for consolidation, more so today than 10 years ago.”
As an example of how quickly an industry can restructure, the consolidation tipping point hit the optical laboratory industry in the 1990s and completely changed the industry landscape, from optical outlets and laboratories to distribution channels, suppliers, and manufacturers. Prior to consolidation, highly skilled optical laboratory technicians would grind lenses to prescription by hand, and the majority of laboratories were family-owned operations.1 Today, however, these independent laboratories are a scarcity. Ed Greene, CEO of The Vision Council, an organization that represents the manufacturers and suppliers of the optical industry, says that in their case, consolidation happened extremely rapidly. “It peaked very quickly,” says Greene. “There were a number of large optical laboratories as well as small and medium independently owned labs, mostly entrepreneurial in nature. When it began, one large company started purchasing businesses and others followed suit. The initial process targeted geographical locations, focusing on regionally strategic acquisitions. Today, there are still companies making acquisitions, but those are happening on a national and international scale, rather than at a local level,” he explains.
The Harvard Business Review identified a lifecycle pattern that all large industries undergo, from industry emergence and maturity to consolidation and final structure.2 In the beginning, there are no large business leaders in the industry and market share is more or less equally owned. As the industry begins to mature, major players emerge and start to buy up the competition. In the third stage of the lifecycle, the major players emphasize their core competencies and focus on profitability, tending to move away from weak business endeavors. In the final stage of the lifecycle, the major players claim 70% to 90% of the market share and smaller companies find it increasingly difficult to stay in business.
Is this the lifecycle dentistry may face? As the CEO of one of the major players in the dental technology industry, Kimberly Bradshaw of MicroDental is not sure. “While it is hard to predict who the major players ultimately will be and what total market share they will own, the industry will likely mirror the HBR lifecycle pattern,” she says. “We are, however, in the very early stages of consolidation and a lot is yet to be determined relative to the technologies and outputs as well as the regulatory forces that are going to get us to our final destination.”
Primed for Consolidation
While it is unclear whether or not, or when, the dental technology industry will find itself in the second stage of the Harvard lifecycle pattern, there are indicators it is an industry that may be primed for consolidation. A number of capital investment groups have already been strategically buying laboratories or large laboratory groups and building networks that operate under the management of a single parent company.
Jennifer Stewart, Managing Partner at the private investment firm Beacon Bay Holdings, says that dental technology is a draw for investors because it is both highly fragmented and developing at an extremely rapid pace. “The sheer volume of technological advances in terms of materials, equipment, and software over the last many years has really helped dental technology come of age, as well as increase the benefits that investment groups could potentially reap from consolidation in the industry.”
In addition, Stewart sees the currently fragmented nature of the dental technology industry as an opportunity. “There is still room for leaders to emerge, and that’s one of the reasons capital investment groups are so interested in the industry,” she explains. Currently, Beacon Bay Holdings is actively seeking acquisitions to add to its laboratory portfolio company, which currently owns the da Vinci, Nu-Life, and Cal Ceram dental laboratories, and is one of a handful of groups trying to establish a foothold in the industry.
However, until one or more of these groups becomes an influencing factor in the dental technology space, the industry will remain in its fragmented state. Rogers, who spent 25 years on the dental manufacturing side, heading up Bayer aspirin’s dental division, has witnessed firsthand consolidation on the dental distribution and manufacturing sides of the industry. “Twenty years ago there were more than 500 players on the dental distribution side of the dental industry,” he says. “Today you probably have only four or five major players in that space. Currently, in the laboratory industry, there is only one major player that is actually influencing the direction of the industry. The impact of the equity partner groups is still relatively small.” But Rogers concedes that could change in the next decade as major players emerge and begin to influence the market.
An industry composed primarily of small players and undergoing major structural changes from within is extremely attractive to outside investors who understand how disruption within an industry can foster unrest and create interest among small- and medium-sized players to sell their businesses. One of the major disruptive and influencing factors in the laboratory space has been the rise of automated production technologies. Many laboratories are finding it necessary to invest large sums of capital in their production processes and extensive technician training in order to effectively compete. Smaller laboratories without access to liquid capital, but wishing to enter the digital dentistry arena, are at a disadvantage, unless they ally with a larger company or laboratory. According to Bradshaw, many laboratory owners in this situation are now playing an active role in industry self-consolidation. “I probably receive four or five phone calls a month from laboratory owners looking to sell ownership of their business,” says Bradshaw. “While I very rarely accept offers like this, it shows me that laboratory owners are open to this new type of business model.”
Self-consolidation is also taking place in a much less public arena and on a much smaller scale. Bennett Napier says that some dental technology industry consolidation is happening at an extremely local level, with moderate-sized, 10-to- 20 technician laboratories buying out small, one- to two-technician operations. “Essentially, the bigger laboratory is able to expand their business and inherit the smaller laboratory’s accounts, while the previous owner of the smaller laboratory becomes an employee of the bigger laboratory,” explains Napier, who adds that low-profile consolidation such as this is happening much more often than most people in the laboratory industry realize. “Because this is on such a small scale we don’t hear about it in the industry, but pretty much every week I’m on the phone with someone who has gone out and acquired a couple of smaller satellite laboratories.” For the acquired laboratory, acquisition by a larger entity allows the owner and technicians to focus on their work, rather than the business aspects of running a laboratory. It also pushes them into an environment that is much more likely to have the capital necessary to purchase the technologies and training they need to remain competitive in a globalized market.
Staying competitive in a globalized market has become ever more critical as increased price competition forces the average smaller operation to invest capital in expensive technologies and creates a barrier of entry for technicians wanting to break away and start their own businesses. In an industry like dental technology, where the price of the final product continues to be challenged downward, small operations making restorations by hand are unable to function on the level of their much larger counterparts. They cannot afford the equipment and production setup, let alone support the customer base that would allow them to compete with the bigger corporations on price. This situation gives laboratories backed by a larger company an advantage unavailable to smaller independent equivalents.
The Potential for Industry Change
As an industry matures, indicators emerge that further impact its move toward a structural shift. Regulatory standards from within the industry and from government agencies play a larger role in business operations and day-to-day manufacturing activities, technologies replace key skill sets that were once highly prized and new skill sets are created, and larger businesses within the industry begin to focus intently on best-practices manufacturing principles. These changes challenge the average small business to react sufficiently either in the capital required or operational sophistication that is needed to compete.
Warren Rogers believes that if the industry does mature to this level and truly consolidate, it will be the result of the disappearance of the smaller businesses within the dental laboratory industry and growth of the larger operations. As the larger players get bigger, the industry will become a blip on the radar of regulatory forces and, in the end, make the industry healthier and more profitable overall. “I think regulation is good for the industry, and it’s good for the patient, because ultimately, he or she will get a better product with a higher degree of consistency,” says Rogers.
Regulation is exactly what Kimberly Bradshaw is anticipating for her network of laboratories. In her mind, regulation is just around the corner. “As someone who came to dental technology from the medical device industry, it is hard for me to comprehend that we had to get a 510(k) for an electrode that was taped to a cardiology patient for a 3-minute reading, yet a crown can be placed in a patient’s mouth for 10 years with minimal FDA requirement,” she remarks. Bradshaw has taken a proactive approach to what she considers the inevitable enforcement of regulatory standards, and has insisted that every MicroDental branded laboratory move to become DAMAS certified. While this will be a costly and time-consuming endeavor for any laboratory, the support of a large company helps shoulder the burden. Bradshaw explains that while the process has sometimes been arduous, she will continue to make this a requirement of MicroDental laboratories. “We have proven to ourselves that DAMAS certification has increased the quality, consistency, and reproducibility of our products, because now we have standard operating procedures.”
A Changing Distribution Model
A smaller more unified industry also has the potential to upend the supplier/buyer relationship, which can have far-reaching effects. Again using the example of the optical industry, as the bigger players began purchasing laboratories, they gained buying power and saw an opportunity to further control their space in the industry. “By owning a laboratory, you control the quality of your product, as well as your brand and its identity,” explains Ed Greene. “It removes the third-party manufacturer. Laboratories were able to go straight to the supplier, receive raw materials, and make the product themselves onsite. It completely changed the distribution model.”
Warren Rogers sees some of these changes already taking place in the dental space, as well as their effect on the end product delivered to patients. “Laboratories are no longer dealing with the local dentist but with a purchasing agent that wants to get the best price,” explains Rogers. “It is changing how these groups purchase laboratory products and often results in that work going offshore.”
On the other side of the spectrum, some of the larger, more entrepreneurial laboratories in the dental technology space have by-passed the traditional buyer/supplier relationship by purchasing raw materials directly from the manufacturer and producing the materials they need to manufacture the end product, such as zirconia milling blocks.
The Dentist/Technician Relationship
If smaller players in the industry continue to diminish and larger players grow in size, the levels of service local dentists are accustomed to receiving from their local laboratory partners would be impacted. “The average dentist is a small business owner himself and likes dealing with local laboratories that can respond to their needs, especially when it comes to an emergency case or repair,” says Rogers. “I’m not sure many dentists would be happy with a scenario that reduced these types of services.” With fewer laboratories left on a local level, and the majority of dental laboratory work being done in larger manufacturing facilities, it may be much more difficult for clinicians to find local laboratories to partner with. In Bennett Napier’s opinion a reduction in the number of physical laboratories will definitely affect the close relationship many dentists have with their laboratory partners. “It will almost certainly be an issue for dentists that once had six to 10 laboratories in an area to choose from, and now they may only have one or two,” he says. Napier also notes that while the number of laboratories to choose from may decrease, this constriction may help the laboratory industry as a whole. “It could potentially drive up business for the laboratories that still exist. Their services will be in much higher demand, which will increase their profitability.”
While consolidation through mergers and acquisitions is not the only path the industry could take, it is certainly one possibility. Both fragmented and profitable, the dental technology industry represents an opportunity for capital investment groups and larger laboratories determined to invest time and money to move the industry toward a more unified business structure. While the major players vie for a larger portion of market share, there remains the probability that a significant number of the smaller, independently owned laboratories that have always made up the majority of dental technology’s demographics could exist with them, side-by-side. Mark Murphy believes that the future of the dental laboratory industry has room for both business models. “There will always be a fairly large number of small laboratories, because they will be able to offer a level of personalized service that the big players won’t be able to match. Small laboratories with expertly-honed personalized service will definitely survive,” he says. The dental technology industry is, as Rogers puts it, “feeling the birth pains of consolidation” and may be on the cusp of major structural changes. However, the final form of these changes is yet to be seen.
1. Sutherlin S. The Optical Laboratory: What’s Emerging from a Decade of Consolidation. Refractive Eyecare. Updated May, 2012. Accessed August 6, 2013. http://www.refractiveeyecare.com/2012/05/the-optical-laboratory-what%E2%80%99s-emerging-from-a-decade-of-consolidation/.
2. Deans GK, Kroeger F, Zeisel S. The Consolidation Curve. Harvard Business Review. Updated December, 2002. Accessed August 6, 2013. http://hbr.org/2002/12/the-consolidation-curve/ar/1.
Laboratories by the Numbers
The number of dental laboratories in the United States has been steadily declining since 2008, dropping from approximately 12,000 to 7,050 dental laboratory businesses reporting a payroll in 2013 to the US Bureau of Labor Statistics. These are in addition to another 2,100 laboratories with no payroll—one-person operations. Between 2012 and 2013 alone the industry lost 852 laboratory businesses, most of which were one-person laboratories. This decline is multi-faceted and involves a number of complicated factors. The downturn in the economy, retirement, rapid adoption of automated production efficiencies, and offshore competition have all played major roles in the closing of United States’ laboratories.
Finding a Balance Between Technology and Art
One of the challenges that may come with the rapid adoption of automated technologies is finding a balance between the using technology to optimize output, while still delivering consistently esthetic and beautiful work. In the case of the optical industry, the improved quality of technology and materials that came with the infusion of automated production changed the process for creating lenses almost entirely. Ed Greene describes that the new technology moved the optical industry from creating hand-ground lenses to using highly sophisticated equipment and robotics. He is careful to note, however, that while the grinding of the lenses now requires an entirely different process than used in the past (one that is mostly automated), it is still necessary for optical laboratories to employ artisans capable of fitting a lens into a frame. “That part of the process remains untouched by technology,” he says. What automated production technologies did change were the skill sets of highly trained technicians. “The skill sets and on-the-job knowledge of optical laboratory technicians have evolved to keep pace with this new technology. Technicians working in an optical laboratory are more sophisticated and are now required to have an advanced understanding of computer systems,” says Greene.
The future of the dental laboratory industry will likely have to find a similar balance that takes into account both the technical prowess required to meet high output demand, while maintaining a level of artistic mastery.