Veterinary Market Trends - October 2023
The veterinary industry has enjoyed a long trajectory of growth, but never more so than in the period from 2018-22. After a strong and relatively steady bedrock Compound Annual Growth Rate (CAGR) of 5-7% in the preceding decades, pet health spending dramatically increased to a CAGR of 10.9% from 2018-22. Furthermore, that stretch can be further divided into two clear chapters: Pre-pandemic and pandemic periods. The former 7.3% CAGR in 2018-20 is reflective of the consistent and moderately accelerating “bedrock” growth of the industry, and then the latter 14.9% CAGR in 2020-22 includes “frothy” pandemic consumer spending trends.
Consumer spending trends come and go, but the underlying industry drivers in the pet health sector continue to grow in three impactful areas :
Total pet ownership
Rising standards of veterinary care
The societal trend of increasingly perceiving pets as immediate family members rather than property.
Putting that optimism aside for a moment, 2023 has not been a continuation of the explosive pandemic era growth for veterinary practices. According to Vetsource data obtained from over 5,000 practices nationwide, average veterinary practice revenue growth for the last 12 months (LTM) is a more modest 6.5% and LTM patient visits are down 1.8% in a continuation of 2022’s trend of cooling patient visits. While 6.5% revenue growth is generally in line with pre-pandemic growth trends, declining visits is a negative trend to watch closely.
Anecdotally, one of the primary drivers of slowing visits appears to be in wellness and preventative care, thus driving higher average transactions values (ATV) as sick visits on average have higher ATVs than wellness visits. While higher ATVs are considered a good thing in a vacuum, decreased wellness/preventative care compliance can be viewed as an indicator of increasing owner sensitivity to cost as they trim back on the care that they view as least pressing while continuing to see pursuing full care at illness visits as a necessity.
Economic trends around the pandemic added significant discretionary cash into the hands of consumers, introducing froth on top of bedrock industry growth. As Americans have now spent nearly all their excess pandemic-era savings, spending habits are normalizing.
Coming down from an unsustainable peak is different than a trough.
In interpreting the trend of slowing growth, we need to have a healthy interpretation of “normal”. Even if we assume ongoing slowing of growth relative to the peak of the pandemic era, a CAGR of 5-6% over coming years for veterinary health services would represent objectively strong tailwinds matching the industry’s historical pre-pandemic growth rate and would crystalize the “pandemic puppy and kitten” growth into the industry bedrock.
Importantly, slowing caseload demand represents a necessary exhaust valve for the industry after unsustainable consumer spending habits overburdened veterinary practices.
The pandemic surge of caseload resulted in significant disruption in access to veterinary care for pet owners, resulting in multi-week and sometimes multi-month waiting lists at many practices and flooding ERs with non-emergent cases. While the shortage of veterinary healthcare workers persists and is likely to continue for many more years, moving out of acute shortage is something to celebrate for veterinary practices and pet owners alike.
Thoughtful buyers of veterinary practices will need to continue to be diligent in how they interpret pandemic era financial data.
Overeager buyers from the pandemic era, particularly private equity-backed consolidators who went on a buying spree while interest rates and overall cost of capital were low will likely continue to sour on many of their investments made during that period. This is due to the multiplicative impact of underwriting frothy pandemic era EBITDA performance multiplied by the Institutional Imperative of EBITDA multiple inflation around that time. Fortunately, thoughtful buyers (and partners!) like AVP who followed good discipline in underwriting, did not over-leverage with debt, and can drive genuine operational improvements at their practices will see ongoing success via bedrock industry growth despite the receding froth.
As the froth recedes, it behooves veterinary practice owners to reassess their strategic approach.
Pricing is not the near-infinite lever during normal market conditions that it was perceived as during the pandemic era. This is especially to the detriment of large consolidators who have leaned heavily on price increases as their primary avenue of value creation, in lieu of focusing on driving actual operational improvement at acquired practices. With marginally slower caseload, practices will need to become more selective in terms of the growth and quality of their teams. As a result, we can likely expect some (relative) softening of the veterinary job market, particularly the relief veterinarian market which became an outlet for many overburdened practices that found it impossible to hire associates in the immediate post-pandemic period, although the job market will likely remain highly competitive relative to pre-pandemic demand.
AVP is committed to being the partner of choice for veterinary practices and teams. The Success Center team carefully follows trends in veterinary economics, operational best practices, and team member engagement to best support our partner practices in providing better medicine, better business, and better professional lives for their teams.
If you’re a practice owner interested in finding out more about opportunities to partner your practice with AVP, or a veterinarian interested in becoming a co-owner, please contact me at firstname.lastname@example.org.