Consumer Healthcare: Creating Value by Crossing Industries

Many areas of healthcare are changing, with providers becoming more customer-centric and consumer-inspired. Their goal is to capitalize on several trends related to how patients seek and access healthcare services. At the same time, healthcare businesses continue to provide essential services that resist the forces of disintermediation transforming much of the retail world.

Clearly, there’s value to generate at the intersection of retail and healthcare, particularly for investors that bring the right blend of expertise. Here, senior professionals from the Harris Williams Consumer and Healthcare & Life Sciences Groups share their definition of this dynamic space, the forces behind growing investor interest in it and how to unlock its value.

Five Criteria Defining the Space

As with any developing space—especially one that crosses two major industries—there is more than one way to think about the subsegments it includes. Harris Williams has identified five major criteria determining the scope of consumer healthcare:

1. Choice. What degree of choice and agency do consumers have in selecting a provider? In consumer healthcare, patients have some degree of choice, versus being referred to a specific specialist (or one of several).

2. Interaction model. What is the nature of the consumer interaction? Consumer healthcare businesses engage in recurring relationships with the patient (e.g., dental, dermatological or veterinary services, etc.), or those where the need is more acute, but convenience and awareness are driving factors behind consumer choice (e.g., urgent care). By comparison, consumer healthcare is less focused on one-time, high-acuity service models, such as ambulatory surgical centers.

3. Location. While certain businesses that we consider part of consumer healthcare may have practices in medical office buildings, we are mainly focused on those that provide service in free-standing, highly visible retail environments or via a “store-in-store” model.

4. Branding and patient experience. In consumer healthcare, some degree of branding, consumer awareness and direct-to-consumer engagement are meaningful parts of the strategy that operators are pursuing. In contrast, “pure” healthcare businesses put much less emphasis on such marketing efforts. Likewise, while successful consumer healthcare businesses prioritize an enjoyable patient experience, more traditional healthcare providers tend to focus less on this.

5. Payor dynamics. Consumer healthcare businesses tend to have a higher degree of patient/cash pay and commercial insurance, with less government pay than other healthcare businesses.

When we overlay these criteria on the healthcare landscape, the following subsegments fall within consumer healthcare:

It is important to note that even within segments that we consider part of retail healthcare, certain subsegments will fall outside, and vice versa.

A Massive, Highly Investable Opportunity

While individual segments within consumer healthcare are at various stages of evolution, overall the industry offers investors strong long-term growth, which is supported by three macro trends:

  • Higher healthcare costs and health insurance deductibles are pushing consumers to take more control over how and where they spend their healthcare dollars.
  • Increasing transparency around healthcare options and their respective quality, service and price enables consumers to shop for healthcare much like other goods and services.
  • Today’s consumers are increasingly demanding better, faster and more personalized customer experiences, from home delivery of a growing range of items to the proliferation of do-it-for-me services.

“We’ve seen a major shift toward consumers taking greater ownership of their self-care, from daily routines to medical needs,” says Kelly McPhilliamy, a managing director in the Harris Williams Consumer Group. “The rise of higher-deductible insurance plans has played a significant role in patients researching better and more affordable options. Fundamentally, consumers want more transparency and convenience without sacrificing quality, and there is a wave of new business models addressing their needs.” 

This transformation is also being fueled by practitioners’ growing desire to improve differentiation and customer retention by providing better experiences. This experiential approach is already rippling through the retail world: Brick-and-mortar operators know that the in-person experience is vital to their survival and differentiation in today’s environment. Recognizing this dynamic, numerous retail concepts have sought to enhance the customer experience in concert with their traditional offering.

Athletic apparel retailer Lululemon is one recent example: The company has been opening new “experiential megastores” that feature exercise studios and snack bars in addition to more typical retail space.1 While still relatively rare in healthcare, a few forward-thinking consumer healthcare providers are following this lead, offering perks like more comfortable waiting rooms, iPad-enabled self-check-in functionality, Wi-Fi, and food and beverage service. 

The Right Time to Pay Attention?

Many of the trends just discussed have been in motion for several years. That raises the question of timing, and the factors driving investors to get more involved in consumer healthcare now.

“We’re seeing an evolution in the type of investor who is participating in these transactions,” says Geoff Smith, a managing director in the Healthcare & Life Sciences Group. “It’s not just healthcare-focused groups anymore, but increasingly consumer- and retail-focused investors looking to deploy their toolkits.”

According to Corey Benjamin, a managing director in the Consumer Group, multiple factors are driving this growing interest. “Investors are looking for opportunities to invest in ‘four-wall’ concepts that are largely Amazon-proof and that provide higher degrees of recurring revenue. Healthcare fits the bill, with stickier relationships and less discretionary services,” he says.

According to Andy Dixon, a managing director in the Healthcare Group, consumer and retail investors also value the opportunity to take what they have learned from years of experience to drive the next leg of growth for retail healthcare businesses. “In several subsegments of retail healthcare, the coming wave of value creation will be driven by proven retail and consumer approaches in concert with pure healthcare strategies,” he says.

Benjamin agrees: “More broadly, the retail healthcare sector offers consumer and retail investors an opportunity to add value in areas such as patient acquisition and retention, effective branding, site selection, and staffing and labor models, all of which are core to successful retail concepts.”

Bringing the Right Blend

Ultimately, a combination of skill sets and track records will unlock the full potential of the retail healthcare opportunity, says Smith: “You need to understand what drives healthcare value and what sets leading consumer businesses apart. Either background falls short without the other.”

Which, says Smith, is why Harris Williams typically staffs retail healthcare transactions with bankers from both the Consumer and the Healthcare & Life Sciences Groups. “In a sense, it’s similar to what hospitals are doing with the dyad leadership model, which pairs clinical talent with business and operational talent. Both perspectives are required to understand how to move consumer healthcare businesses to the next level.” 

Benjamin echoes Smith’s point. “There are attributes from both industries that ripple across all of these sectors,” he says. “For example, it’s vital to understand payor dynamics, clinician recruitment and retention, outcomes tracking and clinical efficacy, as well as the unit economic model and principles of consumer engagement.”

That said, Harris Williams bankers point out that consumer healthcare businesses exist on a continuum, with consumer on one end and healthcare on the other. While subsegments such as behavioral health and fertility services are closer to the healthcare end, med spas and weight-loss businesses are on the consumer end, and investment strategies vary accordingly.

“There are substantial opportunities at both ends of the spectrum for buyers with the right expertise,” says Smith. “But the middle is where our cross-industry approach is most helpful. By tapping into what we’ve learned from leading healthcare and retail businesses, we’re in a unique position to unlock the potential of this emerging space.”