The Effect of Consolidation

State of the Industry

The National Association of Dental Laboratories' (NADL) 2019 Business Survey reported that 78.8% of respondents were primarily independently owned and operated.³ Another 8.7% work in or own laboratories that are part of a conglomerate, 5.9% are in dental offices, and most of the remaining 6.6% are in military or government facilities; part of a manufacturer enterprise; in schools of dentistry or dental technology; and in hospitals or clinics.³ In terms of total annual sales revenue, 49% reported less than $250,000, and only 13.6% reported $3 million or more.³

"Despite the consolidation that has occurred, it is important to note that the dental laboratory industry remains massively fragmented compared with other industries," says Reed Nunnally, President of Derby Dental Laboratory in Louisville, Kentucky. "Most consolidated industries have a few major players that occupy 90% of the market, but even the largest laboratories' market shares are only a couple percent."

Consolidation has occurred on the clinical side as well, as large dental establishments with more than 500 employees grew at a CAGR of 12% from 2002 to 2015.⁴ As of 2017, the American Dental Association (ADA) reported that 7.4% of US dentists were associated with DSOs (dental service organizations, also known as dental support organizations).⁵

"Historically, both dentistry and dental laboratories were relatively unconsolidated markets, and I do see the growth of DSOs as a harbinger of the consolidation that will continue to occur in the laboratory industry," Dentsply Sirona CEO Don Casey says. "What it means is laboratories must become more efficient, operate at scale, and either compete on price or have a very service-oriented or specialty-oriented model."

Driving Forces

The growth of DSOs shows no sign of slowing down and undoubtedly will continue to impact the consolidation of dental laboratories. Tom Daulton, CEO of GDC Holdings, Inc., which owns National Dentex Labs (NDX) and West Coast Dental Labs, says industry forecasts estimate that 33% to 40% of dentists will be affiliated with DSOs in the next 3 to 5 years. While some independent laboratories have found success working with DSOs, larger organizations have some inherent advantages.

"These are still dentists, and they have the same basic needs, but they are in a very different structure," Daulton says. "They might have a centralized billing system or a centralized dentist who helps decide on care protocols. That is a different customer than a solo dentist with two chairs. They are still treating the patient the same, but the structure behind them can make them a challenging customer for a smaller laboratory."

The President and CEO of the world's largest dental laboratory, Jim Glidewell, CDT, says the key lies with the DSOs' vendor managers, who negotiate service and supply with dental laboratories; while a DSO cannot demand that participating dentists use "preferred laboratories," they can make it more difficult through financial incentives tied to gross margins of the dental office income.

"Gone are the days when the small laboratory simply visited the local dentist and arranged a business relationship based on mutual trust," says Glidewell, who employs more than 4,300 at Glidewell Dental. "DSO vendor managers leave no money on the table."

Price pressure does not come only from DSOs, however. Dentists of all kinds have faced price pressures that they have passed along to laboratories. The average price of a zirconia crown has decreased from $218 in 2010 to $143 this year.^3,6 Meanwhile, large capital investments are becoming increasingly necessary for many laboratories, as more than 60% of laboratories own or lease a CAD/CAM system, and another 14% plan to buy or lease one in the next 5 years.⁷

While those conditions make opening a new laboratory challenging, laboratory owners continue to get older and, in many cases, seek exit strategies. Research indicates that 49.8% of NADL members are 55 or older, including 13.7% 65 or older.³

"Laboratory networks can be a very attractive option for an owner seeking an exit strategy," says Laura Kelly, AAACD, CEO of MicroDental Laboratories and Modern Dental USA. "Different types of business agreements can be made beyond just a sale. It is all about finding the right fit."

In addition to industry-specific forces driving consolidation, the overall evolution of the US and global economies also cannot be ignored. More than 52% of the US workforce was employed by firms with 500 or more employees as of 2014.⁸

"It is the natural progression of an industry," Nunnally says. "Fighting it is not the right approach. Baby boomers are aging in to our patient pool, so significant amounts of dentistry remain to be done. We can all grow."

A Different Industry

While the natural progression of an industry is inevitable, some of the unique elements of dentistry are shaping that evolution. Collaboration, customer service, efficient turnaround times, and other factors lead many to believe that local and regional operations will always have some advantages. The business models of companies such as NDX, MicroDental, and Crown World are evidence of that.

"They have not closed all these locations and built huge warehouses," Nunnally says. "I do not know that their customers notice the difference. They still have the name and those relationships; their ownership is just headquartered in another state."

Kelly notes that, for any sort of complex casework, dentists typically prefer to work with someone local, whether they are independent or part of a network.

"Maintaining strong local presences is definitely important for us—local service, local manufacturing, local continuing education, etc," Kelly says of MicroDental's strategy. "Our laboratories also can utilize our network, but dentistry has a lot of nuances to it, and dentistry is a relationship business. Our customers, the dentists, are very close to their patients, and laboratories provide an extension of their team. There are some products and services we can provide for which being local is not entirely critical, but other the more technique-sensitive products and services require more collaboration between dentist and technician for case planning and chairside assistance, so for those cases it is important to be a local provider."

It is the growing complexity of cases facing dentists today that is driving the increased demands on laboratories.

"Even though there are fewer laboratories, they are producing more products today," says recently retired Ivoclar Vivadent CEO Robert Ganley. "The increased demand by dentists is due to the high level of complexity of the implant-supported and combination cases they are seeing where occlusion is a really important requirement."

Keeping that local presence and name recognition is important. NDX understands the importance of maintaining its laboratories' name recognition within each locale while building the NDX brand. The company has only partially modified each laboratory's name upon acquisition, creating brands such as NDX Thayer and NDX Keller.

"NDX is a network," Daulton says. "NDX Stern Empire in Houston, Texas, is more than 100 years old and holds license No. 1 in the state of Texas. NDX Albensi in Pittsburgh, Pennsylvania, is well known. We do not think local laboratories are going away. Different dentists have their own preferences and needs, so while some may prioritize economy pricing, others will continue to value the local laboratory. To be successful in a local market, you probably need to have a laboratory there."

Daulton notes the differences between an operating company and a holding company and says the former likely would not succeed in dentistry.

"An operating company such as McDonalds or Delta Airlines has very little variation across the company," he says. "A holding company model is very different, and larger dental laboratories such as ours are in between. It is not a system where everyone owns their own laboratory and can do whatever they want; the industry does not allow for it, because some of these larger customers are very sophisticated and want consistency across multiple locations. So we have tried to split it in the middle. We get economy of scale in purchasing. We standardize where we can, so that we can be faster or more consistent. We manage our inventory of materials carefully. However, if a dentist wants Albensi, or Dental Art in Michigan, that is fine."

Jerry Ulaszek, CDT, President of Artistic Dental Laboratories in Chicago and Bolingbrook, Illinois, says he makes a conscious effort to avoid ever appearing corporate.

"Many dentists object to large laboratories, so we always try to make our laboratory appear smaller than what it is," Ulaszek says. "Do you really feel good about calling AT&T about your cellular service? Even though the people on the phone are really pleasant and are trained well to deal with frustrated customers, it is not a pleasant experience. Somehow, talking with your customer needs to be a positive, friendly experience at all times. There can never be any pushback or hesitancy because otherwise they are reluctant to call and decide to just deal with someone else."

Still, the larger entities continue to grow. Dental Services Group (DSG) lists 40 locations nationwide on its website, NDX, 27, and MicroDental, 17. Crown World lists 31 "Field Technical Advisor" areas on its website.

"NDX was never necessarily built to be a nationwide company; it was a combination of acquisitions," says Daulton, whose company has acquired nine laboratories since the beginning of 2018. "We have been careful. We are acquiring laboratories in places where we do not have any. I do not think we will slow down. We have sufficient capital to continue to expand across the United States and maybe eventually up to Canada. We will need to decide if we want to go to Western Europe. But you will not see us slowing down in acquisitions."

Similarly, MicroDental, which was acquired by Modern Dental Group in November 2016, "definitely" plans to expand its footprint in North America, Kelly says.

"We want to offer both avenues—local and national—for our clients," she says. "There are ways to maximize our synergies with manufacturing centers and other centralized resources that can complement our local services well."

How to Coexist

In such a complex market, executives on both sides say they can coexist. Independent laboratories likely will always have certain inherent local advantages, and the successful ones are taking steps to remain competitive in the evolving market.

"We always tell laboratories, ‘There is a place for you,'" says Thomas Leonardi, Group Vice President Consumables for Dentsply Sirona. "The No. 1 thing the small and medium laboratories need to do is choose their technology carefully. We are in a unique industry where we are very comfortable working with others, so many small and medium laboratories are successfully outsourcing design, printing, and/or milling. When they make the investment decision, they can add one technology with the knowledge that they can outsource another. They need to be very smart about that. The single biggest thing for them to concentrate on is to make sure they are really connected to their dentist customers. You are their partner. The small or medium laboratory clearly has some challenges, but they are challenges that can be met with good business thinking."

For some, that means simply running an efficient operation and making smart decisions. For others, it can mean transforming their business model.

"Before a strong DSO presence existed in my area, I had a more economical price than some of my competition," Nunnally says. "Now, I am the premium price in my market. I need to adapt my business such that I am not competing directly with businesses that have significant cost advantages over me. Rather than zirconia crowns, we focus now on product lines where the hub-and-spoke model is less of a benefit, such as removables, implants, same-day dentistry, and our sequential aligner business. I do not have the resources to compete on price with the larger entities."

Various types of partnerships and collectives can help independent laboratories compensate for some of the scaling advantages that larger entities enjoy. Organizations such as TEREC and the CNC group help laboratories pool resources. The latter is a purchasing organization that negotiates more competitive prices on products for laboratories.

"The CNC group allows us to purchase at similar costs to the larger organizations," Ulaszek says. "Without that, you are already at a percentage or two disadvantage, which can be all it takes in a price competition. We need to at least be operating in the same playing field."

Ulaszek also recommends strategic outsourcing, whether with milling centers or through arrangements with other laboratories.

"Many years ago, in the Chicago area, a group of laboratories all had their own clients, but they sent work to each other so that they each specialized in one area," Ulaszek says. "That is what the big conglomerates are doing in many cases, just on a larger scale. That might be a good option for smaller laboratories until they can invest in necessary equipment."

Other resources that can help level the playing field include laboratory management software to easily offer online ordering and payment; a payroll processing company that takes over HR responsibilities and negotiates pricing for health insurance; and more.

In many cases, large corporate entities prefer to deal with similar counterparts, so the rise in DSOs poses a challenge to independent laboratories. However, that is not always the case. Ulaszek says even DSOs can present promising opportunities for some independent laboratories.

"They are not all prioritizing price above all else," Ulaszek says. "Many of them are. However, when some of these larger DSOs consolidate their laboratory work, those laboratories cannot or do not want to handle esthetic anterior cases or complex cases. That is where we have an opportunity. I know independent laboratories that are working with Aspen Dental because the primary laboratories that Aspen works with do not do certain things well. Always look for opportunity, and the threat that you perceive might really be an opportunity that you are missing."

Kelly notes that the average dentist works with three different laboratories, often based on different specialties, as evidence that independent laboratories and larger organizations can coexist into the future..

"Dentists will always work with whoever is meeting their needs," she says.

What's Next?

The landscape could change dramatically at any point in time. Nunnally notes that some of the large organizations change leadership frequently, so the current vision might not remain for long.

New players could prove to be disruptive as well, including established entities from outside the industry.

"They are just testing the water at Walmart, and there are some successes," Glidewell says. "Another 5 years and the bugs will be worked out. I think Amazon will facilitate the clear aligner business."

Regulatory developments could play a role in the evolution of the market as well. As the FDA's recent emphasis on CAD/CAM implant abutments has shown, regulatory complications can make certain services difficult for smaller laboratories to offer.

"The medical industry is highly structured and regulated, and while the laboratory industry is not there yet, it is coming," Daulton says. "As the implant market grows, laboratories push the boundaries. The FDA will continue to be interested in that. Meeting GMP or ISO requirements is possible for a smaller laboratory, but you need to be really serious. It is not getting easier."

Still, executives with independent laboratories and larger organizations seem to be in agreement that the amount of work that continues to be available will allow those laboratories that operate intelligently to thrive well into the future.

"The demands on laboratories continue to increase," Ganley says, "but it is a great time to be in the dental laboratory business. It is a challenging time. It forces you to make the right decisions in a timely manner, but this is what we all do every day."