Arthur Andersen Article - New Opportunities for Hospitality as Demographics Change
As the baby boom becomes an elder boom in coming decades, profound changewill occur across North America and Europe as the elderly become a dominantpart of the population. In the United States, 80 million babyboomers beganto turn 50 in the last year and many are already looking to early retirement.Almost half of Europe's population could be over 60 by the year 2050as population growth slows.1Those approaching retirement agetoday are at the vanguard of this much heralded demographic change, andwith it, radical change in society's structure and business opportunity.Among those sectors expected to accelerate in demand is the assisted livingmarketplace.Assisted living represents a middle ground for the elderly. Housingaccompanied by some assistance allows seniors to remain independent aslong as possible. Services are tailored to the individual as they needthem. Meanwhile, Wall Street has eagerly embraced offerings made by leadersin the industry, recognizing the significant growth prospects for assistedliving. This $16.5 billion market is projected to exceed $20 billion inrevenues by the year 2000 in the United States alone.2Assisted living represents a prime opportunity for hospitality companieswilling to use the core competencies of hospitality to develop and operatecommunities for seniors. While most of the major hospitality entities havemerged, consolidated or entered new market segments in last few years.only one hospitality company is currently a major player in the assistedliving industry, Marriott International, which expanded into assisted livingin 1989, now occupies the number two position on the chart for the top 25 U.S. Senior housing Owners and is ranked third in the top 25 U.S. SeniorHousing Managers. In June of 1996, Marriott completed its merger with ForumGroup, in the process acquiring an additional 42 assisted living facilities.As of October 1997, Marriott operated 82 assisted living communities, andthe company plans to triple that number in the next five years.3Does Marriott's path in assisted living make sense for other hospitalitycompanies? Clearly there are "cross-over" resources and skills betweenthe hospitality and assisted living industries. Food and beverage and otherprocesses in hospitality can be translated into assisted living operations.Indeed, hospitality companies with brands that represent service and qualityhave two of the most import ant ingredients when consumers make buyingdecisions in this industry. There are also challenges for a hospitalitycompany expanding in this industry, however, given its mission of providingcare services to the elderly. Nevertheless, the prospects may be attractiveto hospitality companies with significant resources, given that assistedliving is likely to be the fastest-growing segment in the long-term careindustry.Trends DrivingAssisted LivingThree primary demographic trends will shape growth of the assisted livingindustry in the next few decades. Advances in nutrition and medical sciencehave resulted in an increased life expectancy, and consequently growingnumbers of elderly people. Many seniors are living longer, more activelives.Second, as an increasing number of women enter the workforce, theirability to serve as the primary caregiver to aging parents has been greatlyreduced, thus changing the role of the family in providing elderly care.Third, a greater number of elderly are now living in isolation in manycountries. In the United States, for example, the average family movesonce every five years. Many families are widely scattered, leaving elderlyparents alone. Family structures have radically changed in recent decades.The end result is an elderly population that has been left without thetraditional sources of assistance needed to perform their daily activities.Families must increasingly rely on alternative solutions to fulfill theirprevious roles as caregivers.Proactive companies in the assisted living industry have stepped into provide these services to a market that is forecast to grow at a recordpace. The number of people aged 65 and over in the United States is currently34 million, accounting for 13 percent of the total population. That numberis projected to grow to 69 million, or 20 percent of the total population,by the year 2030.4 The number of elderly will only increasewith the aging of the baby boom generation, those individuals born between1946 and 1964. As this generation ages and retires, an increasing numberof people over the age of 75 will require some level of care or assistanceduring the final years of their lives. The number of people aged 85 andover is currently 3.7 million and is projected to increase to 8.5 millionby the year 2030. Demand will be driven by increases in how long peoplelive. The average life expectancy for women aged 65 is projected to increasefrom 84.2 years in 1995 to 87.4 years in the year 2050.5The demographic shift in the European Union (EU) may be even more extremethan in North America, where the demographic structure of society is moregreatly influenced by immigration and slightly higher birth rates. Thepopulation aged 60 or over in the European Union had climbed by 50 percentin recent years, reaching 68.6 million by 1992. Estimates place the numberof older people in the European Union at 80 to 100 million by the year2020, of which 27 to 29 million are estimated to be over 80 years old. The average life expectancy in Europe is estimated at 78 years for menand 82.5 years for women. This is reported slightly lower in the UnitedKingdom at 77.6 years for men and 81.7 years for women.6Also of urgent concern is the financial strength of the aging in theEuropean Union, with poverty remaining a source of worry for many olderpeople in EU countries. A 1993 Eurostate survey revealed that 48 percentof older people in the then 12 EU countries had financial difficulties.7 Health and social services or older people vary widely across Europe. Generally,however, the trend is toward de-emphasizing institutionalization and promotingprivate care or assistance.Although needs and resources vary greatly among the elderly in NorthAmerica and Europe, assisted living will almost certainly sustain significantgrowth in the near future for a variety of reasons:
- Increased life expectancy of population as a whole, and of the assistedliving target market;
- Decreased need for acute care by elderly;
- Increased relative wealth of elderly population;
- Decreased role of traditional substitutes to assisted living, particularlyhospitals and nursing homes, as a result of cost pressures;
- Increased awareness and acceptance of assisted living services as an alternativeto family care;
- Decreased lime available to traditional care providers, principally familymembers, creating the need for alternatives.
Assisted Living - How Does It WorkInspired by the Dutch and Scandinavian systems, assisted living programsoriginally offered housing and sheltered services for the frail elderly.Today, the industry provides long-term care in a homelike environment atless expensive rates than nursing homes. Elderly residents gain an abilityto live a more autonomous lifestyle, while enjoying the comfort and securityof on-site services, including health programs and other types of support.As residents age, their level of need increases, and the community becomesresponsible for providing more complex levels of care. This is commonlyreferred to as "aging in place." Residents are able to customize theirlevel of care based upon their needs.A Merrill Lynch industry report indicates that the average assistedliving community comprises 58 separate private living units.8 A typical resident is a widowed or single female, 84 years of age, whoneeds assistance with three activities of daily living. Some 30 to 40 percentof residents suffer from Alzheimer's or some other form of dementia.Due to the focus on lower acuity care, assisted living communities canoffer the elderly the level of care that is individually required at pricesthat are typically two-thirds of what a nursing home would charge. Mostassisted living communities in the United States offer a tiered pricingschedule in which residents pay a basic rate for room and board, and arethen charged additional fees depending on the level of service they select.This economic structure is beneficial for both the provider and the customer.The customer is able to obtain an individualized level of service at pricessubstantially less than at other higher acuity centers, like nursing homes.The provider is able to continuously serve customers as their needs change.Assisted living companies in the United States are currently able tooffer affordable services to their residents with monthly costs for assistedliving (housing, meals and additional services) ranging from $1,500 - $3,000,9 with certain markets ranging as high as $6,000 - $7,000. Privatepayers represent 96 percent of the industry's total revenue. Costs to residentscould increase substantially, however, depending on the extent of futureregulation. While U.S. nursing homes and other healthcare providers areheavily regulated on a federal level currently, the American assisted livingindustry is free of many of the costly compliance burdens of federal regulation.Regulation of the assisted living industry, however, looms on the horizonas the expansion of this industry has stimulated greater scrutiny of assistedliving providers.Opportunities for HospitalityThe assisted living industry is highly fragmented, with a growing trendtoward consolidation. The supply of communities has been unable to keeppace with demand and consolidations have begun to accelerate. The top 50operators in the industry housed an estimated 20 percent of the residentsin 1996 until their needs required that they move to nursing homes or otherhigher acuity programs.10 Providers look to gain criticalmass and strengthen their presence in particular geographic regions. Thisenvironment will create opportunities for strong operators and developerswith loyal employees, an established marketing process, and access to capital.The Competitive LandscapeCompetition among companies in the assisted living industry exists onthree levels - national, regional and local. To effectively competeon a national level, a company may need to have a strong brand name, accessto sufficient capital and an ability to effectively execute appropriatedevelopment decisions. On a regional level, a company will need to takeadvantage of regional demographics, maximize efficient use of resourcesand establish brand equity. On a local level, competition varies widely.Factors influencing the local markets include geographic location, knowledgeof the elderly population trends currently and going forward, and regulatoryissues. Also critical are supply-and-demand forces shaping the local marketin its current phase and what is expected for the future.Marketeting to CustomersTo effectively position companies within key markets, it is essentialto understand the distinction between the prospective resident of the assistedliving community and the customer who may be an adult child caring foran aging parent. In the assisted living industry, there are unique challengesto target and market to the consumer (the potential resident of the assistedliving facility). The customer, however, may be the adult child who isthe primary caregiver. Most residents - or their family caregivers - choosean assisted living community within a certain radius of their family. Thishighlights the importance of careful target marketing to identify not onlythe demographics of the resident, but also of the family.Access to CapitalAs competition continues to increase, access to capital will be a majorfactor in success. Currently, the ability to obtain capital in the publicand private markets in the United States is at an unprecedented level asinvestors recognize the opportunities and returns of the assisting livingmarket. Within The last 24 months, there have been 16 public equity offerings,six convertible offerings and multiple REIT financings by assisted livingcompanies in the United States. In a capital-constrained environment, thosecompanies with access to capital through relationships with strategic partnerswill have a competitive advantage. Again, strong hospitality entities wouldbe able to supplement local assisted living operators.Competitive andMarket ConclusionsThe fundamentals driving the assisted living industry - including theaging of populations in advanced economies and the drive to better managehealth care costs - will continue to provide exceptional demand for assistedliving services. Given the industry's fundamentals, a company with accessto capital, strategic focus and commitment to operational excellence shouldbe well positioned to be a leader in the market. As competition in thisevolving market increases, consolidation will provide companies with anopportunity to expand both within their own niche of service and into otherlevels of the care continuum. This is particularly the case in the UnitedStates, for example, where there is currently no dominant provider of assistedliving services.Although hospitality companies may have the brand equity and the operationalexpertise of running a housing community, it is essential for them to providethe other health - and support - related services to elderly residents.Residents of assisted living communities require more services than a hotelguest. That is the core difference between hospitality and assisted living.Competitors for elderly residents offer communities and services at allpoints of the senior care continuum, from skilled nursing communities andacute care hospitals, to companies providing home-based health care. Hospitalitycompanies considering the assisted living market may want to consider partnershipswith current operators. The hospitality companies can offer critical mass,brand reputation and general operational expertise, while the care-givingexpertise would be provided by the assisted living company.The prospects for providers of assisted living housing look extremelypromising. The number of potential customers is rapidly rising, and theycan be expected to have lengthy stays at assisted living communities. Atthe same time, there is currently a limited supply of assisted living communities.This all translates into opportunities for proactive companies. The hospitalityindustry may be one of the beneficiaries.
| 1 | Aging a bigger worry than population size. UK...News,Electronic Telegraph, June 19, 1997 |
| 2 | Merrill Lynch, The Assisted Living Industry: An Introductionto the Sector, April 1997, p.5 |
| 3 | More on Marriott/Sodexho Merger, AMREX, October 8,1997 |
| 4 | Source: US Census Bureau |
| 5 | Source: US Census Bureau |
| 6 | Older People in the European Union, Oaps.html at |
| 7 | ibid., p.1 |
| 8 | Merrill Lynch, The Assisted Living Industry: An Introduction to the Sector, April 1997, p.7 |
| 9 | Jefferies & Company, Inc. The Assisted Living Industry:The Missing Link, August 1997, p.20 |
| 10 | ibid., p.37 |