The Most Important Challenges for the Textile Rental Industry in the Health Care Sector

 

There are four main challenges that I see for the textile rental industry in serving the healthcare sector. My presentation attempts to highlight these challenges:

2. The increasing number of regulations and new standards

3. Profitability in the Healthcare Market

4. Structure and Dynamics of the Textile Rental Industry

 

Ladies and Gentlemen,

I am not an expert in the healthcare sector and I did not have sufficient time since Frau Dr Krekeler invited me to address this important symposium to become an expert. But as we know, an expert is defined as someone who knows more and more about less and less. I think of myself as relatively expert in a few areas. However, as a former banker, I prefer to try to look down on an industry, like onto a battlefield, to see if I can understand what is happening and whether I can develop ideas and strategies to help those in the battle who need it most - and who are willing to pay me for my advice. I therefore present myself today as an impartial observer, commentator, and adviser to the textile rental industry.

I have done some homework on the healthcare industry and in particular, what has been happening in Germany. However, the reason I was invited to speak to you is because of my knowledge of and role as an adviser to the textile rental industry in Germany, Europe and in the United States. My comments today will focus mainly on the situation and outlook for the textile rental industry in serving the healthcare market. You will have some excellent speakers today and tomorrow, as has already been the case with Mr Thiess. I have no doubt that you will be well served by Mr Fastenau and the other speakers on the German healthcare market. There are several speakers focusing on the new standards and regulations, which is an area I will cover briefly as regards the demands being placed on textile rental companies. My main areas of focus will be profitability for textile leasing in the healthcare market and the changing structure and dynamics of the textile rental industry.

The Healthcare Market

In a survey and study of the German textile rental industry, which I did in June 1999, I considered the changes and trends in the healthcare market. These will no doubt be well known to you, and they do not appear to have changed much in the intervening period. One exception has been the apparent slower than expected growth in the number of new nursing homes, based on an ageing population. A study by the BWKG last year found that older people are staying home longer instead of retiring to nursing homes. This however supports one of my other projections for the healtheare market: that there will be a growing market for services and supplies for people at home who need medical care. In the United States, for example, it is estimated that over the next five years, the number of home health aides will increase by more than 100% to a total of 832.000. This is two or three times greater than the projected growth for other medical staff.

One of the most important developments in the German healthcare market has been the introduction of the Fallpauschalsystem. According to some experts, this new way of charging for services will have a number of significant effects (some considered bad for the hospitals and the customers) on the German healthcare system.

Other important changes and trends are:

What do these developments and trends mean for the textile leasing industry and the services it supplies to the healthcare market?

1. Concentration and specialization have also been occurring in the textile services industry. This is a general business phenomenon, international in scope and not limited to healthcare or Germany. Companies are constantly confronted with the dilemma of whether to specialize or to diversify. Companies must also decide if they want to grow with the market, faster than the market, or to remain relatively small. Each of these strategies must be seen in the context of the changing structure and needs of the healthcare market.These decisions are not easy to make and there are no simple formulae for making the right decision. Both specialization and diversification work - it depends mainly on the markets, the management and the resources. The same is true for big versus small. One DBL partner told me that he considers DM 20 million turnover to be the optimum size for a laundry. Boco, with its DM 125 million Bielefeld laundry, apparently would not agree. There are some poorly run and not always profitable big companies and some very well run and highly profitable smaller companies. It largely boils down to vision and management.

Nevertheless, in serving the healthcare market, textile rental companies are becoming more specialized and the industry is consolidating. It may seem strange that the biggest textile rental company in the healthcare sector in Germany is from Denmark. Maybe it required fresh ideas before someone could envisage the consolidation of this sector of the textile rental industry. It certainly required lots of courage.

The DTV estimates there are 2,700 laundries in Germany. Supposedly 0.7% of them or around 19 account for 28% of market volume. Another 216 or 8% supply 36% of the market and the remaining 2,465 laundries also supply 36% of the estimated total market volume of DM 2.7 billion. This volume includes only DM 1.9 billion of leasing business. Since there was not a Boco, Mewa or Bardusch dominating the healthcare sector, as there is in workwear, Berendsen needed a very good plan to get from a zero turnover four years ago to around DM 220 million today.

At the same time, there are many small and medium size companies specializing in healthcare that are profitable. However, many are only marginally profitable at best. Mewa got out of this business completely in Germany last year. It continues to focus on workwear and industrial wipers. And Rentex continues to prosper as the market specialist for healthcare. It is important to recognize that the average turnover for a German Rentex partner in healthcare is only around DM 10 million! Apparently contradicting the trend toward specialization, Bardusch, a workwear specialist, expanded further into healthcare a few months ago with the purchase of Rattmann in Geldern? I think this is an exception.

2. Niche specialization within the healthcare market has not been prevalent. The most profitable service is sterile packs for operating rooms. However, this is a limited market, estimated at less than DM 150 million annual turnover, and requires significant capital to supply. It is also not easily separated from the other less profitable services, especially linen. Nevertheless, I think that smaller and medium size companies that want to supply the healthcare market should look closely at niche areas, for example incontinence packs. There is also the at-home healthcare market, which should not be ignored. Maybe it requires more imagination to figure out how to make this a profitable business. Niche suppliers need better products, better services, and of course better prices than other suppliers. This means focusing on all aspects of a service niche and reducing costs to the lowest possible levels through economies of scale.

3. Low profitability in this textile rental sector compared to the other sectors has been one of the main results of cost cutting by hospitals and nursing homes. (Profitability is considered in detail in the third section of this presentation.) By requiring leasing companies to make big investments to comply with new standards and rules while at the same time negotiating lower prices, the healthcare market is forcing textile leasing companies to make important decisions. The main one is whether to remain in the business. If the decision is positive, then solutions must be found to the demands on management and staff to comply with the new standards and rules. This means time and money. The next section looks into this challenge in more detail.

Regulations and Standards

If I were running a textile rental company and had to deal with the new hygiene regulations and other standards being imposed on the hospitals and on the textile rental companies, I might want to get out of the healthcare business and focus on sectors that require less effort. However, it is also true that the more difficult an area of business, the less competition there should be. If I ran a small or medium size company, the new rules and regulations might help me to compete more effectively against small companies not able to comply with the regulations and also against the less efficient bigger companies. The problem is: Can I afford the time, human resources and money necessary to introduce and implement the new rules, to monitor them, and keep up with future changes? It will not be easy.

Certain textiles are covered by European Directives e.g. the Medical Device Directive and national laws resulting from it. Textiles for surgical and incontinent care are regarded as medical devices. Surgical textiles are already covered by a draft European standard, which specifies performance requirements for these products. For the first time in the laundry business, the performance, that is, the quality required by the end user, of a delivered reprocessed textile will be prescribed quite precisely. Quality standards apply not only to the product bought by the textile rental company, but also demand that the performance is maintained through reprocessing. Providing sterile surgical gowns and drapes turns the textile rental company into a medical device manufacturer, additionally competing with manufacturers of single-use products. This means the use of quality management systems according to EN ISO 9000 series and EN 6000 series including e.g. risk-analysis and bio-contamination control systems according to EN 4065 on hygienic quality processed in industrial laundries.

For the Rentex partners and for the bigger companies, dealing with these new rules and standards will be a lot easier than for the small independent operators. The burden will result in many small companies withdrawing from the healthcare sector. Well-run small and medium size companies will have already dealt with the new rules and standards and will have decided how they will compete on the new playing field.

Profitability in the Healthcare Market

This sector of the German textile leasing market can be divided into two main segments and four services:

Segments:

Services:

It is expected that many community and public hospital linen and OR contracts will be privatized during the next few years. This is part of the general movement toward privatisation and outsourcing. Some demand for nursing homes will be channeled into "home care" since private care for relatives is being encouraged by financial considerations.

* Size of the market

The total market for hospital laundry is around DM 1.2 billion. Except for the OR sector it is difficult to say with too much authority how big the other services are. This is mainly because of the rapidly changing leasing market. In general, it is estimated that the ratio between non-leasing and leasing at this time is around 70/30. The ratio will be higher in former East Germany. Even some of the leading hospital leasing companies have a fair proportion of non-leasing turnover. Assuming a DM 1.2 billion hospital market, leasing would be of the order of DM 350 million. Of this amount, the proportion of OR will probably be of the order of one-third or DM 120 million. Available estimates, suggest there are ca 6 million operations p.a. It is even more difficult to estimate the nursing home segment. It needs to be recognized that in this segment there is little acceptance of standarlzed uniforms and textiles. This is howevere not the case for incontinence textiles. The whole segment is probably potentially worth DM 700 million.

Nursing homes have traditionally had in-house laundries. However, with the trend to outsourcing gaining momentum in the entire economy, there is probably potential for a 40% share of the market for leasing, or some DM 280 million,

* Profitability and Pricing

The approximately DM 230 million of leased hospital garments and linen (less OR) is much less profitable than OR but still more profitable than nonleasing business. Experts estimate that the breakeven price for non-leasing goods is ca. DM 1.45 p. kg. The prices currently being obtained for nonleasing are in some cases well below this level. For leasing non-sterile garments and linen the price had been in some cases over DM 2.00 p. kg. This appears to be coming down at the moment. Since entry into general hospital linen and garments is relatively unrestricted, there are many companies among the ca. 2,700 laundries competing for this business. In fact one of the leading companies suggests that prices have stayed stagnant for the last 10 years. Other companies say this would be a positive development since the prices have actually fallen. Non-leasing prices have fallen by 20 to 30%. Since competition is not expected to decline in the near term, prices, other than in OR, but including non-sterile leasing, are expected to remain depressed. In fact this is illustrated by the fact that Mewa has exited from the hospital business, except for one remaining contract in Berlin, and in their Austrian operation. Many other leading companies, with the notable exceptions of Bardusch and Larose, are not in the hospital business, or are reducing their involvement. It is therefore interesting that Sophus Berendsen has decided to concentrate on this sector.

In general the profitability of the hospital sector has been far less robust than for garment leasing. It is difficult to put margins on this business except to say that anything above break even appears to be welcomed by the suppliers. The outlook for the next five years is more negative than positive. This sector requires a period of rapid and strong consolidation in order to make the business profitable.

Against this rather depressing background, what can well-managed small and medium size companies do to achieve good profit levels? There are no secrets or magic formulas. Smaller companies must simply do everything right, the same as successful big companies. If competition becomes too cut-throat for too long and capital and financial resources are not sufficient to ride out the storm, then decisions need to be made sooner rather than later about getting out of the business. However, to sell the services at break-even prices or even below cost in order to retain market share is generally a good way to go broke. Sadly, however, this is often what happens in industries with too many competitors and where there are no market leaders able to dictate prices.

Unreasonable price competition is even occurring at this time in the workwear sector, which is largely controlled by a few major companies and one big marketing group. Smaller and medium size companies can be badly hurt if the bigger companies decide to use price competition to gain market share.

Very qualified and experienced Management (not necessarily from the laundry business) is even more important for smaller companies than for the big companies. Of all the factors needed for success, this one is crucial. I can not over-emphasize this. However, I also recognize that hiring high quality management to help run a private, family company is not something many companies want to do. This is not much different than using your own skills to deal with your health. If you are ill, you normally go to a doctor. However, it is better not to get sick in the first place, if you can avoid it. Most companies wait until their problems are too far advanced before they seek outside help.

Structure and Dynamics of the Textile Rental Industry

Healthcare is only one of the markets served by the textile rental industry. It can be analysed separately from the other sectors, but it should be recognized that there are very few important German textile rental companies focusing exclusively on healthcare.

Markets for textile rental services are both

Each of these five markets is separate, but they overlap and in some cases are connected. The structures and competitive dynamics of the markets are different.

The Healthcare market for textile rental is the second biggest sector by turnover after the industry,company and craftsmen market. It uses more of the textile rental products than any of the other sectors. Hospitals and nursing homes need dust mats and washroom hygiene services in addition to all the services and products usually associated with hospitals. Because of this diverse product requirement, serving the healthcare market can be either desirable or undesirable for a supplier. The biggest and most profitable textile rental company in the world, Cintas Corporation in Cincinatti, Ohio, (www.cintas-corp.com) is not in healthcare. Cintas specializes in uniforms. If you do not know Cintas, I suggest you look at their website - they are one of the most successful and best managed companies in any industry. This is quite a compliment for a humble laundry company.

On the other hand, a less successful textile rental company is Angelica Corporation in Missouri (www.angelica-corp.com). They say they are the world leader in the healthcare market. Take a look at their website and you may see some difference between them and Cintas.

This dichotomy is not intended to suggest that healthcare is a less desirable market for textile rental companies. However, the facts in the USA and in Germany suggest that it is much more difficult to master healthcare than uniforms. The challenges in the healthcare sector are greater.

We looked at some of these challenges earlier. Why then, if healthcare is difficult, did a well-managed and experienced international company like Sophus Berendsen decide to concentrate in this sector in Germany. Would it not have been more sensible for them to start out in the uniform business? Yes and No! Boco (Haniel Textile Services), Mewa, Bardusch, Alsco, DBL, Profitex, Permaclean and many other companies are concentrating or would like to concentrate on uniforms. Isn't the dance floor already a bit crowded?

On the other hand, healthcare and the Horeca sectors have been very fragmented and without any market leaders. Rentex is market leader in Healthcare, but it is not a company. It is a brand (a very good one) and a system (also very good). Because it is a franchise organization, Rentex is as vulnerable to its members leaving the organization as is DBL and Profitex. When I spoke at the R&W symposium here in Munich last March, I suggested that I did not think that Profitex had a long life expectancy. I was therefore not surprised when the franchisor and main Profitex member, Bilger Schwenk, sold out to Rentokil Initial a few months later. On the other hand, I suggested that Rentex and perhaps to a lesser extent, DBL, were the two laundry groups that could have a more secure future.

Well, even I could not anticipate that Rentex would seek a partner and decide late in 2000 to sell the franchise organization to Sophus Berendsen. Having discussed this with Rentex, I am aware what happened. It appears to me that both Rentex and Berendsen were very forward looking in their evaluation of the future of the textile rental market. Although the transaction was structured as a purchase of the Rentex franchise organization by Berendsen, there seems little doubt in my mind that the transaction is actually a merger.

Why do I think this? Because, I think the textile rental market will be dominated in the near future by several big groups. Berendsen and Rentex have together created one of these very large groups. I have prepared a table of the leading German textile rental companies and groups showing Berendsen and Rentex separately and as a single entity. The difference is obvious. Berendsen-Rentex is the second biggest German rental company.

Of course a merger of Berendsen Germany and Rentex would have to be worked out by all concerned. I do not think that the logic, importance and value of a merger would be lost on the Rentex members.

As the clear market leader in the healtheare sector, I expect that Berendsen-Rentex will welcome some "healthy" competition from companies that do not compete primarily on price. These mainly smaller companies will compete using their expertise, high quality and excellent service at the right price. They will also have a strong marketing capability. Medium size companies might find themselves caught between the power of the big companies and the agility and well-honed competitiveness of specialized small companies. The major mixed services companies, Bardusch and Initial-Profitex will have to decide at some point how they will continue to compete in the healthcare sector against strong, profitable and efficient suppliers like Berendsen and Rentex.

I am suggesting that Berendsen and Rentex will dominate the Healthcare market together with one or two other major companies. "Medium size" companies and the members of the other healthcare franchise group may find it difficult to grow with the market while remaining sufficiently profitable. They will be increasingly marginalized by the big companies on one side and the aggressive smaller specialist companies on the other.

If this scenario proves reasonably correct, it will mean that the Healthcare market for textile rental services will become more stable, more efficient, and sufficiently profitable for the companies serving the sector.

I would like to end on this positive note and thank you all for your attention and patience in listening to me. I appreciated this opportunity to address such a distinguished audience.