Industrial Mutation: Labor Productivity & Innovation
A question more foundational than the one posed in my last post, whether it’s better to innovate or imitate, is why even innovate when one can just differentiate? Let’s begin with senior housing operator profitability as we explore this question. According to the American Senior Housing Association, median operating margins grew from 1995 to 2015 only to deteriorate by the end of 2019.
What happened from 2015 on? Supply grew at annual rates not matched by new residents or demand. Compounding this, labor force productivity struggled for over a decade and never outpaced supply growth, adding to operational pressures.
This drop in margin following a period of healthy growth suggests a shift in the underlying level of competitiveness in the market, prompting one of two strategic responses: differentiate or innovate.
Differentiation protects one’s own niche or market space by creating a mini-monopoly of sorts. Often, this occurs at a local level but can occur at a regional or corporate-level in terms of targeting different lifestyle or socioeconomic segments. Price competition in competitive markets is ultimately fruitless because prices reached their market rate due to pre-equilibrium price competition. As such, major pricing differences reflect different housing products or types. It’s fair to say that at any given point in time local senior housing products are differentiated.
Innovation, however, fundamentally changes the “rules of the game” so to speak. These “rules” present as new consumers, new products, or new ways of meeting consumer needs. Economist Joseph Schumpeter, mentioned in my last post, even compared innovation to mutations in evolutionary biology. Changing the rules is often expensive, and innovation is noticed in hindsight. That said, it’s also fair to say that senior housing has innovated before.
In the 1990s, the typical senior housing resident was a member of the Greatest Generation, roughly born between 1900 and 1925. The eldest were 95 years old in 1995 and the youngest were 70 years old. Average age of entry into senior housing was in the late 70s. Continuing care retirement communities (CCRCs) and assisted living emerged to create more homelike environments for a new generation with more financial resources than the Lost Generation.
With the shift to the Silent Generation in the 2010s, we see independent living emerge - often in non-CCRC campuses - and memory care spin-off from assisted living. In 2015, the typical resident was a member of the Silent Generation born between 1926 and 1945. The eldest were 89 and the youngest were 70 years old. Average age of entry into senior housing was the early 80s. Even with the growth in the 65+ population, occupancy rates fell notably for assisted living and CCRCs. For independent living, however, occupancy rates were stable as providers adapted to rising care and support needs as age of entry grew. The consumer changed, providers responded, and new settings grew. Over time, the market became more competitive.
As the Baby Boom Generation transitions from the “adult child” of a senior housing resident to prospects and residents themselves, innovation unlocks new market spaces in contrast to protecting existing ones. While some of these innovations could involve the programming and design of living environments as they have in the past, I wonder if more will involve the management and delivery of personal care, support, and lifestyle services. Care and support seem ripest for disruption since they are labor intensive and productivity has been an issue.