I found Wednesday’s conference in Shanghai particularly good: the level of insightful and substantial China-centric information was extremely solid today. In particular, the presentation by Chip Marshall of Merrill Gardens was one of the most valuable presentations attendees received. Chip shared an overview of the market research his company has done as it prepared to move forward in China. In providing those in attendance with an overview of what they have done, Chip was particularly generous; however, in respect to both what Merrill has funded and the value of attending the IMAPAC conference, let me paint with very broad brush strokes (in other words – if you want more detail – come next year!): Merrill’s analysis – based on speaking with 3,000 Chinese across 5 cities – sets several widely held notions about the senior care market in China on their head.
One set of conclusions revolved around the role of service versus facility as perceived by potential Chinese customers. Suffice it to say that Chinese elderly place a very high value on service, what one respondent described to Merrill as wanting someone with a “loving heart.” Chip made the point that service will matter more to this current generation of elderly people because of what they have lived through. The historical turmoil they have witnessed – the Civil War, Great Famine, Cultural Revolution, and thirty-years of volatile economic reform – have made them tough and wise. Consequently, their approach to healthcare decisions – and senior care specifically – will be highly rationalized. Yes, they understand they need care; but they are going to choose care options predicated not only on cost, but with a highly focused sense of what Mark Spitalnik called later in the day “needs versus choice.”
Chip also pointed out that the life cycle of how this industry might well evolve would be marked by rural families moving into urban settings only to turn around and pursue more suburban environments. This cycle will take place against the backdrop of the demographic shifts the industry is already watching, but also the likelihood that the grandparents will begin to place more emphasis on building relationships with, and staying close to, their grandchildren. The latter may prove to be a more likely means for receiving care in a suburban setting than the generation in-between the grandparents and grandchildren. As Chip sees it, trans-generational housing models that take into account both the urban-to-suburban transition coupled to the increasing emphasis on grandchildren taking care of grandparents.
Towards the end of Chip’s presentation he shared a concern that “many developers won’t be around in a couple of years.” This concern, one that has much to do with larger questions about China’s real estate market, was very much the focus of Bromme Cole’s Wednesday presentation as well. During his time, Bromme shared his belief that “in the near term, supply could outpace demand and the imbalance will likely persist for some time.” This analysis, and a subsequent exchange with Mark Spitalnik of China Senior Care, helped focus everyone’s thoughts around a point that Joe Christian made towards the end of the day: errors made in the real estate portion of senior housing are not only likely but, given the environment today in China, very likely. Smart operators can still make money in this market, even if short-term over capacity proves to be a reality. Yes, this means assessing counter-party risk in terms of the financial viability of your development partner is more important than ever; however, it also should help investors and operators think more discretely about how to segment their market and focus less on housing and more on sustainable models that may have housing either as a trivial part of their model (i.e. short term stays), or that emphasize higher acuity care in conjunction with a housing model.
On this point, I know everyone left the IMAPAC Retirement Living World conference eager to see Mark’s project move forward. He shared with the audience that last money they bought their land at auction last month, a major step towards CSC opening in 2013. As Mark said, “we have the design, we have the site.” He followed these affirmative statements by reminding the audience how challenging it has been to secure trained staff. Mark stated, “The key problem for us is who is going to work there … the job descriptions for what we need just don’t exist in China.” One of the clear market needs China’s senior care industry is crying out for is a scalable training program. Whether it would be something sponsored by government or a hybrid public-private partnership, the need for trained staff remains one of the main structural challenges that could easily derail broader absorption of senior care as an actionable market opportunity for seniors, developers, operators and investors.
Reflecting on the last two days, several points jump out to me: first, the need segment the market more carefully than perhaps we have in the past (something I have been guilty of myself). On this point, the less we think about solutions that may well be “luxury” or “mid-market” and the more we couple these niches with the “needs versus choice” paradigm, the more focused our conversation will be. Second, the idea of due diligence on potential development partners is going to be increasingly important. Marrying Joe Christian’s confidence in the ability of savvy operators to find good developers and together build profitable business models brings me back to the need to do very thorough on-the-ground vetting of potential partners. If in fact, as many suspect the broader Chinese real estate market is entering a period of instability during which time developers could well go out of business, then reputational due diligence on potential developers is going to be very, very important (more on that will be coming in a subsequent blog). Third, the role of up-front market analysis is incredibly important. Without divulging the full extent of Chip’s presentation, to say that Merrill’s analysis offered meaningful insights and challenges to conventional thinking about what both Chinese seniors (as both payers and receivers of care) and adult children were interested in would be an understatement. The money you spend doing this sort of analysis given the particular elements of your existing business model you believe might be easiest to transition to China will be easily recouped in time and avoidance of costly mistakes. Fourth, the need for a mid-market solution remains extraordinary. Mitch Presnick, the founder and former-CEO of Super 8 Motels in China, made the point that he sees this as “the fat middle” begging for a solution. The top 1% will have a range of luxury-based choices available to them; the Chinese government will subsidize a solution for the bottom 20%. Everyone in between is fair game, and is the most pressing and compelling business opportunity where a solution has not yet presented itself. Watching how the industry first proves itself in higher acuity care and more luxury settings then moves into this segment remains one of the most interesting outstanding questions the conference ended on.