Market

Analysis Report
Funeral Services Industry

Tiffany Hollins, Michele Nava, Saket Nishant, Raphael Fanti,

and Emrah Sat




October 27 2014




Word count: 1,473

Market definition
The funeral services industry comprises the companies and organizations that
provide funeral, cremation, burial and memorial services.

In this report, we cover mainly the American funeral services industry,
complementing it with worldwide analysis where relevant.
Products and services
The industry portfolio can be segmented in three categories:
Funeral ceremony: maneuvering and preparation of the body, religious
and other (e.g. mourning) ceremonies, and body logistics
Internment: two services, burial and cremation, are the main substitutes
in the market. Each of them is composed of specific products and services
Memorialization: products that come into play after the internment (e.g.
headstones for burials, ashes pot for cremations)
Consumers
Despite being the deceased the ultimate receiver of the services, the ultimate
decision maker is his or her close family. Decisions on funeral services vary
drastically amongst cultures (e.g. religious beliefs), and income level.
Final customer suppliers
For most of the American and developed international markets, funeral homes
interact with final consumers, bundling together the various products and
services provided.

In developing markets many families organize services for their deceased on
their own for economic reasons. In some cultures (e.g. Hinduism, tribal African
societies), it is expected that families take care of their relatives funeral services.
Intermediate products and services suppliers
Funeral services, independent of internment method, demand a set of associated
products and services:
Funeral ceremony: body preparation material and supplies, mourning
and ceremony facilities renting, caterers, religious events
Internment: A casket and associated Real Estate are need for burials. For
cremations, a casket might also be purchased for the ceremony, and a
specific pot is usually purchased for the ashes
Memorialization: comprises inscriptions, headstones, monuments,
Regulation
Given the sensibility of final consumers when purchasing, one can imagine the
incentives and bargaining power that suppliers posses.

The FTC in United States have realized this and enacted the Funeral Rule, under
which funeral homes activities have to, amongst other requirements:
Separate products (product bundles are legally prohibited)
Be transparency in prices, providing an itemized list
Provide quotes by telephone, allowing for quick prices comparisons


Final(consumers(
Deceased(family(
Regula1on(

FTCs(Funeral(Rule(

Funeral(Homes(
Burrial(
Cerimony(

Memoraliza1on(
Crema1on(

In(house(/(
Outsourcing(

Suppliers(
Casket,(ashes(pot,((

Services(providers(
Logis1cs,(catering,((

Cost structure analysis

The diagram below summarizes a general cost structure for Funeral Services.

COST!!
STRUCTURE!
!

!
!

Fixed!Costs!

1 Facili5es!&!
Equipemnt!
1 Personnel!
1 SG&A!
1 Adver5sing!

Variable!Costs!
!

Funeral!ceremony!
!

1
1
1
1
1
1

Internment!

Memorializa5on!

Loca5on!rent!
Con!
Priest!/!Ocer!
Dead!body!care!
Logis5c!/!Custody!
Beaurocracy!&!Legal!

1 Inscrip5on!
1 Headstones!
1 Monument!

Burial!

Crema5on!

1
1
1
1
1
1

Casket!
Cemetery!fees!
Cemetery!personnel!
Lots!Rent!
Logis5c!
Beaurocracy!&!Legal!

1
1
1
1

Crematorium!fees!
Lots!rental!!
Logis5c!!
Beaurocracy!&!Legal!

The fixed costs in the industry relate mainly to overhead: facilities, assets,
personnel and other SG&A costs that the various funeral services companies
shall bare in order to run the business. Other investments, such as acquisition of
Real Estate for burials for subsequent sub-renting, could be considered fixed, but
from our research, that is not the current practice even in developed markets.
This trend could however change with the consolidation in the sector, due to
increased power of bargain of funeral houses vis--vis cemeteries. Significant
arbitrage profits opportunities arise for funeral houses given the long term
nature of contracts (usually 100 years).

Variable costs can be segmented in the categories outlined and can vary
significantly given the industrys large portfolio. The graph below1 shows a
breakdown of variable costs for a median burial in the US.

1 Source: NFDA National Funeral Directors Association website: Statistics in Funeral Costs

Variable costs for burial service in the United States in 2012

2395

1975
1298
695

495

400

295

285

225

150

130

Geographical considerations
Given the heavy dependence on human labor, one can assume that related costs
should be significant lower in developing economies.

The industry significantly fragmented worldwide, with consolidation trends on
developed markets. For these, scale effects should bring down supplies costs

Real Estate for burials should follow general RE prices, which can vary
substantially in countries.
Time evolution
Analyzing the American market2, we identified a substantial increase in burial
costs, attributable to
Willingness to trade-up from the consumer end, spending even more
than income increase (indicated by real GDP per capita)
Increased high-end portfolio, given costs increase more than CPI
These trends should be observable elsewhere, which is an insightful indication of
opportunity in this market in developing economics.

2 Sources: NFDA National Funeral Directors Association website: Statistics in Funeral Costs;

U.S. Department of Labor Bureau of Labor Statistic CPI; US Bureau of Economic Analysis & US
Census Bureau Real GDP per Capita


Indexed Funeral Costs, Real GDP per Capita and CPI index
1200
1000
800
600
400
200
0
1960 1965 1971 1975 1980 1985 1991 1995 2000 2006 2009 2012
Funeral Costs

Real GDP per capita

CPI

Demand drivers
Volume drivers
The main volume driver for the market is death rates. The aging of populations
observed worldwide therefore is an indication of increased demand in the
future, as per data shown for the US3, where the high fertility rate of the baby
boomers will have significant impact on the market.

To a degree, this phenomena is global, an opportunity indicator for developing
markets.

Deaths / '000 population

Death rates in the US

12
10
8
6

7.9

8.1

8.3

8.4

8.6

8.9

9.3

9.6

9.7

4
2
0

Price drivers
As stated before, portfolio is rapidly increasing in the industry, given consumers
willingness to trade-up and shifting habits:
Increased options of products in all ends, from caskets to catering

3 Source: U.S. National Center for Health Statists-Vital Statistics of the United States; National

Vital Statistics Reports; U.S. Census Bureau

Introduction of Luxury (e.g. Luxury jewelry with deceased ashes)

Personalization of services
Introduction of of complementary products (Memorial videos, Online
broadcast, )
Product bundling, despite regulation against, allows to sell non essential
items
Incentivation of advance planning, removing the time urgency of the
process allows the purchase of more, non essential, bundled products

Substitution: the shift towards cremation

The American market, along with many developed markets, is experiencing an
accentuated shift towards cremation, as per shown below4.

4 Source: CANA Cremation Association of North America website: technical papers

Cremation Percentage

60

1800
1600
1400
1200
1000
800
600
400
200
0

50
40
30
20
10
0

Cremations ('000)

US cremation statistics and forecasts

1985 1995 2000 2003 2004 2005 2006 2007 2015* 2025*
Cremations

Cremation % (cremation + burrial)

Many important factors contribute to this shift, namely:

1. Cost effectiveness
Cremation is in average cheaper than burial because it eliminates substantial
material needs, and is also accompanied by more simple ceremonies. Scarcity of
Real Estate in developed economies also contributes.

2. Decrease in religious beliefs
The decrease of religious partisans is a trend in most religions and geographies.
Since burial funeral services are associated with most traditional religions
(hindu religion is the exception), this pushes for fewer burials.

3. Increase of religious acceptance of cremation
Realizing this trend, some religions have changed their view on cremation and
now accept, sometimes even suggesting, cremation. As an example, many
churches are now building columbariums on church property to offer a final
resting place for members of the congregation.

4. Higher inter-country mobility
Cremation comes as an attractive alternative for a family member deceased
abroad for its simpler process and easiness to transport remains.

5. Environmental mentality
The environment is a current trend, and it would not be different in this industry.
Despite most current cremation methods being highly polluting, cremation is
still seen as more sustainable than burial by final users. Moreover, recent
development of Bio Cremation methods indicates a competitive advantage of
the method over burials to be explored in the future.

Competitive landscape
The Death Care industry is historically fragmented, having for millennia been a
family business. Funeral Houses have kept local because of cultural customs: one
prefers a known, usually indicated, firm to treat a deceased family member.

However, the accelerated evolution of expenditure in funeral services, coupled
with larger portfolios (and margin enhancing opportunities), relative inelasticity
of demand, low sensibility to prices and longer term overseas opportunities,
have led the American industry to heavily consolidate on the last few years.

Its largest player, SCI, publicly traded, currently controls 15% of the market, has
20K employees and a market cap of $4 bi. It has recently made an offer to
acquire its largest rival, STEI. If approved, the deal will generate a company with
over 2,000 locations5.

From a strategic point of view, consolidation is likely to continue in the future,
since several opportunities arose from the market structure:
Extremely high fragmentation
Material suppliers are consolidated: need to create bargaining power
Push for higher end products, thus higher investments and higher
margins
Opportunities in marketing, especially targeted, with the arise of social
media and personal information available online (Facebook itself offers a
Memorialized account
Opportunity to lock down contracts with hospitals, or to command
competitive advantage by being close to them (geographical competition)

If from one side the investment in consolidation in the sector is an indication
of its long-term profitability prospects, one is to also expect higher bargaining
power from suppliers to command higher prices: SCI already manages to charge
a 30% premium over competitors.

Conclusion
From our considerations, we have come to the conclusion that the market
Volumes will increase with aging population effects
Prices (and margins) are increasing due to shifts towards more
expenditure in products, concomitantly with shift towards cremation
Costs in the market are susceptible to scale effects and are likely to
increase due to trade-up effects. Investments in sophisticated product
lines will also increase

These are indicators of higher profitability, and with opportunities in
investments in geographical competition and marketing, one may assume the
industry will be more consolidated. This trend is already accentuated in the
American market, substantiating our findings.


5 Bloomberg BusinessWeek: Is Funeral Home Chain SCI's Growth Coming at the Expense of

Mourners? (October 24, 2013)

References

NFDA National Funeral Directors Association website: Statistics in

Funeral Costs

http://nfda.org/about-funeral-service-/trends-and-statistics.html#cfacts

U.S. Department of Labor Bureau of Labor Statistic website: CPI

http://www.usinflationcalculator.com/inflation/consumer-price-index-
and-annual-percent-changes-from-1913-to-2008/

US Bureau of Economic Analysis & US Census Bureau Real GDP per

Capita

http://www.multpl.com/us-real-gdp-per-capita/table/by-year

U.S. National Center for Health Statists-Vital Statistics of the United States;
National Vital Statistics Report

http://www.cdc.gov/nchs/deaths.htm

Source: CANA Cremation Association of North America website:

technical papers

http://www.cremationassociation.org/?page=CANATechPapers

Bloomberg BusinessWeek: Is Funeral Home Chain SCI's Growth Coming at

the Expense of Mourners? (October 24, 2013)

http://www.businessweek.com/articles/2013-10-24/is-funeral-home-
chain-scis-growth-coming-at-the-expense-of-mourners

Kathleen Obrien. Suicide rates higher among Baby Boomer men, study
finds (August 20, 2014)

http://www.washingtonpost.com/national/religion/suicide-rates-
higher-among-baby-boomer-men-study-finds/2014/08/20/ddfcaad4-
287e-11e4-8b10-7db129976abb_story.html

Larry Copeland. Life expectancy in the USA hits a record high (October
9, 2014)

http://www.usatoday.com/story/news/nation/2014/10/08/us-life-
expectancy-hits-record-high/16874039/

McDonaldization of Death Funeral Services, Life Insurance, Etc.
(November 14, 2012)

http://fundamentalsofsoc.edublogs.org/2012/11/14/mcdonaldization-
of-death-funeral-services-life-insurance-etc/