Thursday, July 1, 2010

5-10 year Future: Red Ink, Mergers, Boomers?

More impressions from talking to Senior Marketing Specialist, Rob Love, of Love and Co:

Over the past decade Rob has been concerned to see many communities run a negative operating margin and make up the difference on their investment portfolios (often heavily dependent on interest income). They had lots of cash flow but were actually losing money on operations.  Now that their portfolios have shrunk and investment income is down significantly, their previous operating practices are clearly unsustainable.

The next 5 to 10 years are likely to be volatile for the CCRC industry.  Stronger players will acquire or merge with weaker ones.  Many top managers will resist this necessary development for a while.  Rob expects that most of these mergers will be local affairs, with several (say 4 or 5) established communities coming together to achieve economies of scale - to provide similar levels of service, but with just one Director of Nursing instead of five (for example).  Mergers will be challenging, requiring the Executive Directors to sit around a table and negotiate 4 of 5 of them out of a job! 

Rob mentioned Erikson, one of the biggest players in the CCRC industry, as an example of the economies of scale that smaller regional CCRC mergers may try to emulated.  I asked if Erikson will be one of the big consolidators but Rob thinks it unlikely, due to Erikson's current dance with bankruptcy.

On the demographic front, the U.S. population is moving South and South West.  The CCRC industry generally serves an audience that is upper middle class and above.  The growth over the next decade is likely to come in the higher end of this market.

But the big question is whether affluent Baby Boomers will actually buy into the CCRC or Life Care model and move into communities the way their parents did.  It remains to be seen.

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