COGS. Cost of Goods Sold.
When I first heard Emmitt Nantz talk about Inventory Ally at a reception last year, I have to admit that I was not very enthusiastic about the topic. He said, “With a small investment from the clinic and some tracking of their purchase history, we can reduce their costs of goods sold by 2.3% of revenue, or thousands of dollars per month.”
To provide some context, earlier that year I had attended the Consumer Electronics Show and was excited by the potential of AI. Walking the floors of VMX and WVC, I was looking for a similar trend. When I was talking with Emmitt that night, I was still reeling about the potential of AI. I asked Emmitt how he was incorporating AI into his work, and he responded that it was part of the longer-term roadmap, but that it wasn’t currently in the software. I was disappointed.
On the walk back to my hotel room after the reception, and for the following two months, I couldn’t stop thinking about what Emmitt was trying to achieve. Let me explain what I mean.
Taking it back to basics, a business can become more profitable by either increasing revenue or reducing costs. Over the past 12 to 18 months, I’ve heard about service and product price increases of, on average, 12 to 15% year over year. At the same time, the number of new clients and visits has either remained stagnant or declined. That means that clinics are extracting more money from fewer people (talk about an access to care problem!). Some would argue that the year-over-year price increases are just the clinics’ way of keeping up with inflation, and to some extent, I agree. But there is something else happening. I think that something else involves decreased investment, rising interest rates, and a very competitive labor market.
Ten years ago practices were, on average selling for 5-6x EBITDA. That number ramped up to 20-30x EBITDA in some rare cases for specialty clinics, but on average clinics were selling for approximately 8-13 times EBITDA in 2023. What drove up the valuation? A main driver was venture capital and private equity firms buying up smaller practices, bundling them, and then selling them for a higher multiple. Investment firms were buying clinics at 18x EBITDA and selling at 20x EBITDA shortly thereafter – a nice little profit margin. Those investment firms who entered the market later (2021 to 2023) ended up buying at a higher multiple than what they could sell for, partly because of raising interest rates that caused the cost of borrowing to exceed the profits realized from buying and selling practices. As a result, investment firms were left holding the clinics and looking for other ways to demonstrate profitability. The search for greater clinic profitability has led to the need to increase prices (see above) and greater clinic efficiency in the form of veterinary team production.
We might not have hit the price ceiling yet, but those 12-15% YOY price increases can’t go on forever. So practices are not going to achieve the returns that they need by pricing alone. At the same time, veterinary production is challenged in many ways because younger veterinarians are not yet efficient enough to produce the $750K-1 million in revenue that seasoned veterinarians are able to produce. So increasing profitability through increased revenue is stalling out. What’s left is decreasing costs. In a tight labor market, it’s very difficult to reduce labor costs – so there’s only really one area to focus on: cost of goods sold (COGS).
Now we return back to Emmitt, his co-founder, and Inventory Ally. Inventory Ally is focusing on the one area that is going to help these practices the most: increasing profitability through reducing COGS. It does this by tracking inventory, anticipating sales, and only suggesting the products that need to be on your shelf. The inner workings of this would require a demo of the product, which you can schedule at inventoryally.com.
Alright, you’ve made it this far in the article, and at this point, it basically sounds like an advertisement for Inventory Ally. To a certain degree, that’s true because they’re solving a problem that everyone is facing and I think more people should know about it. In addition to being an important solution, it has excellent timing because of all of the different drivers that are impacting clinics today. It’s not enough that startups have product-market fit; they also need the right timing that makes their product invaluable today. Inventory Ally is not alone in trying to reduce COGS, but it is one of the more promising startups that are doing it right.