Arnd Kaldowski explains how things will continue after the lockdown, how he wants to win over the baby boomer generation with its high purchasing power and why the omni-channel strategy is becoming increasingly important.
The coronavirus pandemic has hit the hearing aid manufacturer Sonova with full force. The company's stores were temporarily closed from March to mid-May, and where they were open, customers - most of theme are over 70 - no longer dared to go out in public. Step by step, however, consumers are now returning to the shops.
«At present, we think that around the middle of 2021 we will again achieve a similarly high turnover as before the crisis,» says CEO Arnd Kaldowski in an interview with The Market, thus giving hope for a tentative but nevertheless sustainable recovery.
Apart from Covid-19, Sonova is looking forward to golden times. «The baby boomers have accelerated market growth,» says the 52-year-old CEO. For the time being, he wants to inspire this affluent generation with Sonova's next technology platform scheduled for the fall, which is focused more strongly on hearing performance and peripheral applications. But even in the longer term, the innovation opportunities are far from exhausted.
According to Kaldowski, the combination of innovative hearing aids and the company's own retail network also offers a lot of synergies. «Retail is a high-margin business, and it increases loyalty to the brand», he argues.
Mr. Kaldowski, the Corona pandemic is causing problems for the hearing aid industry. Nevertheless, it seems that clients are returning to audiologists faster than originally thought. Do you see signs of a sustained recovery, or rather, are catch-up effects responsible for this?
In our view, the recovery is sustainable. Those markets that have been out of lockdown for some time are gradually approaching their old levels.
When will the pre-crisis level be reached again?
It is still hard to predict this exactly. The visibility is simply too low for that. At present, we think that around the middle of 2021 we will again achieve sales at a similarly high level as before the crisis.
During the financial crisis, your customers have switched to less expensive hearing aids. Is that another threat in view of the deep recession that is looming?
Our customers are mainly older people who draw a fixed or retirement pension and in many countries also receive government subsidies for the purchase of hearing aids. For this population group, a recession has little impact on their income and prosperity. We therefore do not expect any change in the price mix in most markets.
Does this also apply to the USA?
There, the economic situation of pensioners is more dependent on their own savings, and many have invested into shares to provide for their retirement. So income depends more on the valuation level of the stock market than elsewhere. We felt this during and after the financial crisis. However, the stock market recovered relatively quickly from its shock back then.
With the new Marvel product technology platform, they are the only provider in the industry that can connect their hearing aids with other end devices, regardless of the operating system. Does the reluctance of buyers lead to a lower than expected return on the investments made in Marvel?
The pandemic certainly has had an impact. However, we sold significantly more Marvel-based hearing aids than expected before the crisis. Thanks to Marvel we have clearly gained market share. The return on invested capital will therefore be better than planned in any case. Nevertheless, we are already working on the development of the next technology platform.
Sonova's last major innovation was the aforementioned connectivity to other devices and only secondarily the improvement of sound quality. It seems as if the opportunities for innovation in core functions have become smaller. Do you share this view?
Although we have achieved a lot over the years, there is hardly anyone who does not wish to see further hearing improvements. Especially in a noisy environment we see still significant upside. Ultimately, it is the algorithms that lead to better quality. However, better algorithms require more powerful hardware, which, due to the small size of the hearing aids, must under no circumstances consume more energy or grow larger in their space need than is the case today.
Are there other ways in which you can improve your hearing aids in the longer term?
Another topic is sensors with which, among other things, side effects of hearing loss can be measured and treated. I am thinking, for example, of assistance functions for balance, which is often a challenge for people with hearing loss. And then there are applications for mobile devices that make life easier in many ways for those affected, used in conjunction with the hearing aid. Our hearing solutions are designed to become Healthy Living Companions, providing the wearer with optimal hearing performance, while combining this with applications for digital communication and medical assistance.
When will the next technology platform be launched?
We launch a new technology platform every two years. Marvel was launched in September 2018, so we expect to launch a next one in the coming months. The launch will depend on whether the market has recovered from the effects of the Corona pandemic in the autumn, as a new launch is only worthwhile once the platform has reached a certain size. If we reach around 65 to 75% of the old sales level in the first half of the year - i.e. by the end of October - that will be enough for a launch.
What will be the unique selling point of the new technology?
In terms of connectivity and rechargeable batteries we will continue to lead the way for some time to come, thanks to the Marvel technology. That's why the focus of the upcoming platform will be on sound quality improvements. In addition, there are other applications that we have developed and expanded.
With the acquisition of AudioNova for €830 million in 2016, they became the world's second largest stationary hearing aid retailer - a bold decision in view of the trend in the retail sector towards online. How important is the Internet in your retail business today?
We believe that addressing customers digitally is a basic requirement in our business today - without it, a provider can no longer keep up with the market growth. Today many people who are newly interested in hearing aids first obtain information on the Internet. Leads are therefore increasingly generated on the Internet. However, the online channel will never completely replace personal contact in our business. We are therefore pursuing an omni-channel approach in our retail business, where we aim to serve all channels offline and online.
How does your business differ from electronics retailers, where most transactions nowadays take place purely online?
It takes our average customer around seven years from the time he/she is diagnosed with hearing loss to decide on a hearing aid, because many people do not want to admit to hearing loss for a long time. To convince customers to use a hearing aid, a high level of consultation is therefore required. And even after the purchase, we remain in contact with the customer as a retailer because of the regular diagnostics, adjustments of the hearing aid and repairs. All this usually happens physically.
Omni-Channel sounds simple, but its implementation is fraught with pitfalls. Do you have the necessary know-how?
This approach is indeed challenging. We are building up additional competencies, especially in marketing and IT. The complexity has certainly increased.
Investments in IT infrastructure cost and therefore reduce profitability. Will Sonova investors have to expect a lower return on invested capital in the future?
If the Omni-Channel approach is to be implemented well, we will have to invest, but in return we will gain market share. But it is true: We have to fund the investments we make in the Omni-Channel segment in the business elsewhere. Here we are pursuing a dynamic approach. If more interactions take place in a region or city via call centers or remote access, we no longer need a specialty store every two kilometers.
While your competitor, GN Store Nord, focuses on strategic retail partnerships, you and your other competitor, William Demant, focus on your own network. Wouldn't it make more sense for Sonova to concentrate on its core competence, the development of hearing instruments, as well?
We have shown that we understand the retail business. Today we have the same return on invested capital as before the acquisition of AudioNova. Retail is also a high-margin business, and it increases loyalty to the brand. After all, there are many industries where such forward integration is pursued precisely because of the online relationship with the customer.
Hearing aid manufacturers should actually be looking forward to golden times. The baby boomer generation is getting older, which tends to lead to a higher demand for hearing aids. How do you make sure that the generation with the highest potential purchasing power buys your hearing instruments and not those of your competitors?
Baby boomers have accelerated market growth. This will continue. This generation has a high digital affinity and is extremely active. We therefore want to address the baby boomers with innovative products - whether through additional applications or solutions that enable remote fitting of hearing instruments. The Baby Boomers should also be able to obtain our products and services around the clock via as many channels as possible.
With new offerings such as the treatment of tinnitus, you have recently expanded into related areas. Why this step?
People with hearing loss sometimes have disorders which are in some way related to the hearing loss. Here too, the retail business helps us. Consultations like those we offer for tinnitus promote loyalty, and they can convince customers of the benefits of a hearing aid who were previously unaware of the associated benefits. 20% of the world's population suffer from tinnitus. Of these, 80% also have hearing loss and would benefit from a hearing aid. That's why we offer tinnitus care in our larger specialist stores.
Your industry neighbor Straumann has achieved significantly stronger revenue growth in recent years thanks to expansion into neighboring regions and into the business with less expensive equipment. Are you also striving in this direction?
Sonova took this step some time ago by acquiring Cochlear's implant business and by purchasing brands that cover a lower price segment. But we are still expanding our business where it makes sense to do so, in order to make better use of our sales channels with new products. Last year, for example, we acquired a Dutch company in the field of hearing protection to broaden our product offering in our channels. For example, the remaining 20 to 30% of tinnitus patients who cannot be treated with hearing aids today would also be interesting if a product enabling its treatment would be available.
Younger generations are not even aware of their hearing loss or do not want to admit it. Hearing aid manufacturers therefore actually operate in a market that is far from being exhausted. Have you noticed an increase in penetration?
Penetration is improving slowly but steadily. In the USA, the increase from 2014 to 2018 was around 4 percentage points. Here, too, access to customers via digital channels is helping us. A good example is our online listening test, which we use to acquire many young customers. We have also started to convert larger specialist stores into centers of expertise. The facilities, the consultative services and also the product portfolio are very modern and therefore appeal to many younger customers.
Non-industry groups such as Bose and Apple are pushing into the hearing instrument market with OTC products that are sold without the advice of an acoustician. Do the ambitions of these two give you a stomach ache?
We welcome simple hearing solutions for patients with mild hearing loss as long as they are really helpful and do not lead to a loss of image for the industry as a whole due to poor quality. Thanks to them, younger generations will also become aware of hearing aids, which will expand the market. However, the more the hearing loss progresses, the more urgent the need for a higher quality hearing aid becomes. The products offered without the advice of an acoustician will not really replace our devices.
How great is the danger that the major tech consumer goods manufacturers will initially simply test their potential with OTC devices and then at some point enter the right hearing instrument market anyway?
Selling a higher quality hearing aid requires not only the product, but also advice and support. It is hardly possible to buy a device online, fit it independently and then achieve a comparable success in hearing improvement. I don't think that large tech companies have the necessary expertise in audiological consulting today, and in view of the, - in their view - small size of our market, they most likely don't want to build it up.
Can you imagine entering the OTC market?
Technologically, we could certainly develop a competitive product for the OTC market. But for us, the question is whether such a product would really be successful with consumers across the board without the support and advice of experts. Before making such a decision, we would certainly observe the market closely.
Your newer markets include India and China. How are you making progress there?
In the western markets the penetration rate is 30 to 35%. In China and India it is currently 2%. So the growth potential is much higher than elsewhere. It is important that we can raise awareness of hearing instruments and our brands among people with hearing loss. In China, we are doing this well because we were the first to adapt hearing instruments to Chinese tonal language and offer targeted training in our own training center. We also manufacture half of our products in China globally. This increases our brand awareness.
What share of sales are you aiming for China and India in the long term?
In clinical diagnostics, China accounts for 15 to 20% of the world market. In the market for hearing aids, the share is 2%. Over time, we therefore want to enter the double-digit percentage range.
When you started at Sonova, you announced an optimization of processes and structures. This week you said that you wanted to speed up the restructuring process again and thus save CHF 50 to 70 million in operating costs. What will you invest the funds in, that you have freed up in this way?
We want to invest the money primarily in innovations in order to continually develop our hearing systems. We need to build up additional expertise, particularly in the areas of sensor technology, applications and artificial intelligence. However, the proceeds will also be used to further expand our retail business and other channels we need to reach more customers.
Your strategy sounds consistent. However, a look at the competition shows that they are planning something similar. What makes you different from the others?
We are not the only ones with such a strategy. That's true. The question is whether it is well implemented and whether you have the necessary skills. Marvel is a great proof that we are strong in innovating. In addition, we are the hearing aid manufacturer who is most consistent in strengthening the retail business. This is a decisive advantage for the differentiation of our brand. I think the figures for the last two years show that we are pursuing the right strategy. Our size, which gives us a certain advantage in terms of scale, is certainly helpful in this regard. It is particularly important in the transformation of our retail business in the direction of the omni-channel.