Cover Story: Consumer skittishness turns hearing aid sales sluggish

Figure: © Images.com/SteveDininnoIt's shaping up to be another lackluster year for hearing aid sales in the United States as jittery consumers, concerned about the nation's economy, keep a tight grip on their wallets. Growth in unit sales slowed to a trickle in the second and third quarters of 2011, up a mere 0.99% and 0.94%, respectively. The industry experienced modest growth in the first nine months of the year. Unit sales totaled 2,079,258, an increase of 2.26%, according to the latest statistical data reported by the Hearing Industries Association (HIA). In the same period in 2010, manufacturers moved 2,033,378 units, a 3.9% gain. Excluding sales to the Department of Veterans Affairs (VA), manufacturers sold 1,659,930 units during the first three quarters of the year, a 1.85% increase over the previous year. Unit sales totaled 1,629,783 during the same nine months in 2010, representing a 2% increase. Experts who follow the industry say hearing aid purchases reflect uniquely personal decisions to invest in the technology, often after years of delay or denial. Ultimately, longer-term demand is driven by the perceived need for hearing assistance. But in the short term, when a sharp deterioration in consumer confidence occurs, it inhibits hearing aid purchases, said Klaus Madsen, Head of Equity Research for Handelsbanken Capital Markets in Denmark. “I think that's exactly what we saw during Q2 and Q3,” he said. Renewed fears about the nation's debt ceiling and other lousy economic news fueled consumer skittishness. The nation's jobless rate, at 9.1% in September, remained mostly unchanged throughout the year, while consumer spending slowed in the second quarter, reflecting a decline in purchases of durable goods. The Conference Board's Consumer Confidence Index, a barometer of economic health, reached 70.4 in February before pessimism began to set in. Negative sentiment pushed the index downward to 44.5 points in August from 59.2 in July. And in September, the United States misery index, a gauge of unemployment and inflation, reached a 28-year high. Amyn M. Amlani, PhD, an Assistant Professor of Audiology in the Department of Speech and Hearing Sciences at the University of North Texas in Denton, studies the economy's impact on the hearing aid industry. He said the current downshift is affecting existing and new hearing aid users in different ways.Figure: Amyn M. AmlaniIndividuals looking to replace existing hearing aids are waiting for the economy to improve, Amlani said. “What they're saying is, ‘Let's hold on to our money just a little bit longer, and then once we know that the economy's heading in a better direction, we'll go ahead and start purchasing.’” Inexperienced users, on the other hand, he said, “don't really know what they're missing so if they don't spend the money, they're ok. They're willing to wait for economic conditions to improve before investing. For them, it's not the technology that's important. It's the service.” Alex Morozov, the Director of Healthcare Research at Morningstar, Inc., an independent provider of investment research in Chicago, sees a similar dynamic playing out in the medical device industry as a whole, with many consumers delaying elective surgeries to reduce their out-of-pocket spending. That behavior has stifled demand this year for orthopedic devices such as artificial hips and knees.Figure: Alex Morozov“I would say that hearing aids have held up pretty nicely given the fact that they are completely out-of-pocket expenditures,” he said. THE VA PULLS BACK Thanks in part to relaxed eligibility criteria, sales of hearing aids to the VA have propped up the industry overall in recent years. The VA acquired 484,384 instruments in 2009, 28% more than the prior year. Those units represented 18.5% of total unit sales in 2009. The following year, the VA bought 536,499 instruments, 10.75% more than the previous year. That accounted for 24% of overall hearing aid sales for the year. Growth in VA hearing aid purchases slowed considerably in 2011. Nine-month sales volume inched 3.9% higher, for a total of 419,328 units. Sales flattened out in the third quarter, growing a mere 0.27%. A representative from Starkey Laboratories, Inc., noted that growth in VA hearing aid purchases has been slowing each consecutive quarter since reaching a peak in the third and fourth quarters of 2009. During the eight consecutive quarters of double-digit growth, the VA's audiology staff was increased to accommodate demand resulting from the expanded eligibility for hearing aids. At this point, the VA no longer has a backlog of patients. “With such sustained growth for such a long period of time, it seemed inevitable that the VA would begin to reach capacity in terms of being able to see so many patients and fit so many hearing aids,” the representative said. “We believe that this is what we're finally starting to see. It looks like the final quarter of the government fiscal year will have approximately one percent growth.” The Veterans Health Administration does not acknowledge a slowdown in acquisitions, however, noting in a prepared statement: “The available data [do] not provide a sufficient basis to establish a trend. The Fiscal Year [FY] 2011 data indicated an increase in hearing aid utilization, compared with FY 2010 for the Department of Veterans Affairs. [The] VA continues to provide the full complement of resources needed for comprehensive hearing health care services to the nation's veterans.” BTEs LEAD THE WAY HIA's report shows steady gains in the sale of behind-the-ear (BTE) hearing aids. Through Sept. 30, BTEs accounted for 70.53% of all non-VA volume, versus 67.65% in 2010, 65.70% in 2009, and 59.02% in 2008. Morozov said BTEs remain superior in quality, a benefit bolstered by manufacturers’ design efforts to make the units more aesthetically pleasing. “It's no longer just this really ugly, huge shell behind the ear,” he said. “As good as BTEs are becoming, over time they're essentially going to be replacing in-the-ear devices at a pretty rapid pace,” he predicted. Meanwhile, another category of hearing aids—the nearly invisible devices known as micro-CICs that fit completely in the canal—are gaining traction. (For the first three quarters of 2010, CICs accounted for 26.7% of non-VA sales; compared with just 8.53% in 2010.) Madsen said a number of these products are now on the market, and increased marketing of this category could slow the shift from CIC to BTE devices. OTHER FINDINGS Hearing aid sales tend to vary from one state to the next, and 2011 was no exception. North Carolina (14.01%), Nevada (11.49%), and Delaware (10.19%) posted the largest gains during the January-to-September period. In North Dakota, which has experienced huge swings in recent years, sales slid 43.37%. Other states experiencing losses were Montana (-23.94%) and Vermont (-9.24%), which due to their small size typically experience either an increase or a decline with just the sale of 500 more (or less) hearing aids. Returns for credit in the commercial sector were consistently in the double digits in each of the first three quarters of 2011. Across hearing aid types, average rates of return ranged from 13.52% for traditional BTEs that use size 10 batteries to 22.67% for traditional BTEs with size 675 batteries. The return rate of 22.63% for CICs, though, said Donald Kim, a Research Analyst at iData Research in Vancouver, Canada, is “somewhat surprising” given the discrete appearance of these devices. BEYOND 2011 Madsen said he expects roughly 2% growth in unit sales for all of 2011. Analysts agree that once the economy improves, hearing aid sales will perk up, but when that shift will occur is anybody's guess. If economic conditions remain depressed, there's a chance that sales in the first quarter of 2012 will be at their flattest, Madsen said. “But I think there is a good chance that in Q2 and onward we'll pretty much see a normal market, so I would estimate somewhere in the range of three to four percent growth next year.” Amlani said an economic turnaround will generate growth of three to five percent per year, which is typical for the hearing aid sales in the United States in less troubled times. “That is just basically growth in the population of the hearing impaired, nothing more.” FUTURE CHANGE? So what will it take to boost growth beyond the standard three to five percent? Hope may lie in the technological enhancements employed by manufacturers. “First of all, wireless will continue to be the key theme when it comes to innovation, and there's a high probability that we'll see a number of new platform launches during 2012 from some of the key manufacturers,” Madsen said. He said the next generation of products will likely offer new or improved connectivity to external devices, such as televisions and mobile phones, and improved directionality. Even the increasingly small CICs offer wireless connectivity and wireless ear-to-ear features, he said. Until now, HIA has not tracked Bluetooth compatibility or other wireless features, but that could soon change. Carole Rogin, the Executive Director of HIA, said that enhancement is being contemplated, and the HIA board will have to approve any changes to the statistical reporting program. “If we are able to do that, we would start that reporting with the first quarter of 2012,” she said. As for cosmetic improvements, Madsen said he expects continued growth of the micro-CIC segment. Presenting at the European Union of Hearing Aid Acousticians Congress in Nuremberg, Germany, this October, Sonova Holding AG executives said the next generation of Lyric is in clinical trials. The company plans to begin marketing the new version early next year. Technological innovation, such as improvements in sound quality and immediate post-fit satisfaction, will also be a main driver of increased unit sales. “Innovation improves the quality of a manufacturer's devices, and serves as a marketing strategy, drawing consumer attention with cutting-edge features,” Kim said. Several manufacturers have released products that give hearing aid users more control over program settings, Kim added. The devices include the S Series IQ from Starkey Laboratories, Inc., that automatically adjusts to different listening environments, the Epoq line from Oticon, Inc., which improves sound awareness, and the ePen, ePocket, and Pro Pocket remote control systems from Siemens Hearing Instruments. Overall, Morozov said performance is crucial. “Consumers, especially in the United States, are getting more and more picky. And while price-conscious shoppers buy hearing aids from their local warehouse club, at the end of the day, the performance that you get from those devices and the performance that you get from higher-end hearing aid devices, it's drastic.” To view last year's report on the state of the industry access this link online: http://bit.ly/StateoftheIndustry2010

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