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Resilient hearing aid industry records rising sales despite a troubled economy

Kirkwood, David H.

doi: 10.1097/01.HJ.0000365479.62986.f3
Cover Story

During a time when most industries were slumping, the hearing aid market proved to be relatively immune to recession. As the fourth quarter began, sales for the year were up by more than 6% from 2008. Why? Two industry analysts offer their explanation.

David H. Kirkwood is Editor of The Hearing Journal. Readers may contact him at David.Kirkwood@wolterskluwer.com.

In ordinary times, the 6% increase in hearing aid sales during the first three quarters of 2009 over last year would seem respectable, but nothing to celebrate, especially since most of the growth was the result of an enormous increase in the Department of Veterans Affairs (VA). However, these are not ordinary times.

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Last summer or possibly December 2007 (depending on which definition of recession you use), the nation's economy became mired in its worst downturn since the Great Depression. Among the lowlights have been four consecutive quarters of decline in the gross domestic product (GDP), a near meltdown in the financial markets, a 53% drop in the Dow between October 2007 and March 2009, plunging home prices, and an unprecedented number of home foreclosures.

While the 2.8% growth in the GDP in the third quarter of 2009 officially ended the recession and stock and existing home prices have begun to rebound, for many Americans conditions are no better and in many cases worse today than when the year began. The unemployment rate rose to 10.2% in October, the highest since 1983. Consumer confidence remains low, and many industries continue to see sales plummet. For example, sales of new cars and other passenger vehicles dropped by 18% in 2008 and are expected to decline by another 20% to 25% by year's end.

Against this backdrop of hard times, the latest statistical report from the Hearing Industries Association (HIA) looks remarkably good. As of September 30, net domestic unit sales by manufacturers for the year were at an all-time high of 1,956,821, up by 111,953 (6.07%) from that date last year. Third-quarter results were especially good. Sales totaled 669,431, the largest single quarterly figure ever, and 8.75% ahead of 2008's 615,593.

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VA LEADS THE WAY

The unprecedented increase in VA purchases accounted for 70% of overall growth in manufacturers' sales during the first 9 months of 2009. For several reasons, including relaxed eligibility criteria, the aging of the Korean and Vietnam War veterans, and an influx of younger veterans who have suffered audiologic damage while serving in Iraq and Afghanistan, VA medical centers have been fitting more and more hearing aids during this decade (see Figure 1). As of September 30, the VA had purchased 359,231 hearing aids, 27.7% more than the 281,251 it bought in the first three quarters of 2008. These accounted for 18.4% of the entire market in 2009.

In the third quarter, the year-to-year increase in VA purchases was 32.3%, the largest ever. However, the private, non-governmental sector also did well in this period. After small gains (0.4% and 1.8%) in the first two quarters, the non-VA sector purchased 539,481 hearing aids from manufacturers in the most recent quarter, 4.3% more than in 2008. Overall, through September, this sector accounted for sales of 1,597,590 hearing aids, up by 2.2% from last year.

While conditions have been sluggish in the private sector this year, especially in the first half, they were far better than in the second half of 2008. Non-VA sales declined by 4.7% in the final 6 months of 2008, the largest downturn since the mid-1990s when U.S. Food and Drug Administration allegations against the industry put a major dent in sales. The VA continued to increase its hearing aid purchases last fall, despite economic conditions. However, that was not enough to keep the total hearing aid market in 2008 from shrinking by 0.7% from 2007 and by 2.4% in the second half.

Using a formula based on the historic relationship between the final quarter and the preceding three quarters, The Hearing Journal projects that manufacturers will sell 620,821 hearing aids in the fourth quarter, 10.3% more than in 2008. That would result in an annual total of 2,577,642 and a healthy 7.06% gain over 2008 (see Figure 2). Although predictions never come with guarantees, HJ's method has usually proven reasonably accurate. Last year, we predicted annual sales of 2,406,441, which was only 1118 (0.05%) fewer than the actual total.

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EXPERTS WEIGH IN

We consulted two experts on the industry for their insights on why hearing aid sales this year have proven largely insensitive to gloomy economic conditions. One was Carole M. Rogin, the long-time chief executive officer of HIA.

Rogin points out that historically hearing aid sales have not reflected ups and downs in the overall economy. Thus, she says, it is not surprising that the market has grown this year. She contrasts hearing aids with “virtually every other medical device and procedure,” including dental implants, treatments for cataracts, and hip and knee replacement surgeries, which have all declined in number in 2009, even though, unlike hearing aids, they are very often covered by health insurance.

What makes hearing aids different? Rogin says it's that, despite what has often been said, they are not generally discretionary purchases. When people finally make the decision to buy hearing aids, she explains, in most cases they have been putting off that decision for as long as they could, usually 8 to 10 years. She adds, “They turn to amplification as a final resort when they absolutely need it.”

There are occasional exceptions to the industry's ability to withstand broader economic troubles, the HIA leader concedes. For example, last fall, when the global credit crisis threatened economic catastrophe, non-VA sales dropped by nearly 5%. At that time, says Rogin, “Uncertainty about the future was affecting every aspect of people's lives. People were paralyzed.” However, by the beginning of 2009, the private market had bounced back to levels slightly above 2008, even though the economy remained in recession.

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An outside perspective

Our other guest expert is a financial analyst (FA) who specializes in healthcare. While he follows the hearing industry, he is not employed in it. The FA agreed to comment on condition that his name and employer not be disclosed. Like Rogin, he states that, despite the recession, the “hearing industry has held up very well.” While some consumers have deferred hearing aid purchases for economic reasons, he says it is not a major factor. “If you are a typical new user,” he says, “you've been putting off buying hearing aids for a decade despite being told by your spouse or daughter to get them. When you finally buy one it's because you need it.”

Another development that the FA observes is a greater increase in sales of the more affordable hearing aid models. For example, he notes Sonova, parent company of Phonak and Unitron, reported that in the year ending March 31, 2009, unit sales of its mid-tier products (“business class”) increased by 25% from the year before and its “economy” products by 18%, while sales of “first class” products declined by 6% from 2007-2008. While not all manufacturers are required to make their results public, the analyst sees an overall shift toward the affordable models. He notes that a major factor in the increased popularity of lower-end products is that they come with many advanced features that used to be reserved for a company's top-of-the-line instruments.

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Reasons for growth

Our experts' thesis that purchasers view hearing aids as a necessity rather than a discretionary acquisition is a convincing explanation of why the economic environment has had little negative impact on sales this year. However, it does not explain what factors are having a positive effect on the market.

In addition to the continuing growth of the older population, our guest contributors both cite product improvements as a significant factor. Says Rogin, “A lot of new features are being introduced that benefit users in more circumstances.” She points to noise reduction, connectivity to other electronic devices, and micro-BTEs as examples.

She says that these advances are especially effective in generating purchases by experienced users, who are already aware of the benefits of amplification and want to upgrade to new technologic improvements. On the other hand, she says, hard-of-hearing people who are still resisting getting their first hearing aids are less likely to be motivated by improvements in technology since are unlikely to really understand their importance.

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Thoughts on 2010

We asked both the experts that we consulted how they expect the market to perform next year. While declining to make any hard predictions, Rogin sees reason for optimism. She states, “Our companies are very vibrant and they are fully connected with their customers.”

The financial analyst is “fairly confident” that the industry will continue to grow in 2010, though he notes that there will continue to be large disparities in how well the various leading companies perform. One positive factor he cites is the overall stability of the manufacturing sector, which is dominated by a handful of major players that are unlikely to face new challengers because of the high barriers to entry. He also sees a strong distribution system and the fast pace of innovation, especially in software, as reasons to expect growth to continue.

How much does our FA expect sales to increase next year? Around 4% or 5% in units and about 5% or 6% in revenues, he says, hastening to add, “These estimates may be too conservative.”

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IT'S A BTE NATION

A decade ago, few would have predicted that the behind-the-ear (BTE) hearing aid style would ever regain its dominance in the United States. Ever-smaller in-the-canal models seemed to be the future of the product. However, documenting a trend that began slowly several years ago and has skyrocketed since, the HIA statistical quarterly reports that 63.4% of hearing aids sold thus far this year were BTEs. That's 7% more than last year and triple their share in 2000 (see Figure 3).

Two-thousand-and-nine is the first year in which most (56.3%) of the hearing aids being dispensed by the VA are BTEs. Outside the VA, 65% of all hearing aids sold by manufacturers this year have been BTEs.

It's not known precisely what percentage of BTEs being fitted today are of the new breed. However, the statistics that HIA collects from manufacturers on which battery size their BTE instruments use give a good idea of the relative breakdown between the new, micro-BTEs and the traditional, larger models. As seen in Table 2, about 60% of the BTEs sold this year use one of the larger batteries (#13 or #675) and thus are probably traditional BTEs.

Table 2 also gives an idea of how the popularity of the new, micro-BTEs of the receiver-in-the-aid style (called “traditional” in the table) compares with the receiver-in-the-canal style (called “external” in the table). Assuming that the BTEs that use #10 or #312 batteries are mostly micro-BTEs, then about two-thirds of them have their receiver in the ear canal.

As seen in Table 3, the various types of in-the-ear instruments are all becoming less popular at about the same rate. Currently, ITEs represents just 36.6% of the market.

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GEOGRAPHIC TRENDS HARD TO SPOT

An examination of hearing aid sales by state (Table 1) reveals little in the way of geographic patterns. The closest thing to a strong regional performance is in the Southeast, where seven of nine states have enjoyed increased sales thus-far this year. However, the most populous state in the area, Florida, saw sales decline by 7000 units (6.2%), the most in the country, so overall sales in the Southeast rose by only 1.2%.

The HIA statistics showed a wide range between states. The big gainers were Alabama (+20.6%) and Texas (+20.5%), where unit sales grew by nearly 23,000, the most in the country. The other double-digit gainers were scattered far and wide: Mississippi (+13.9), Washington (+12.8), and New Mexico (+12.8).

On the negative side, the outlier was North Dakota, which saw a 57% year-to-year drop in 2009. That followed increases of 42% and 38% in the preceding two years. Also in negative double digits were Virginia (-12.1), Colorado (-11.3), and Montana (-10.3).

Based on past years' HIA reports, it is likely that few of the big gainers or losers will be the same in 2010 as this year or last. But we'll have to wait a year to know for sure.

© 2009 Lippincott Williams & Wilkins, Inc.