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Market Analysis Report Funeral Services Industry Tiffany Hollins, Michele Nava, Saket Nishant, Raphael Fanti, and
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, f uneral homes interact with final consumers, bundling toget her the various p roducts and services provided.

I n 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 t ransparency in prices, providing an itemized list

Provide quotes by telephone, allowing for quick prices comparisons

Final(consumers( Deceased(family( Regula1on( FTC’s(“Funeral(Rule”( Funeral(Homes( Burrial ( Cerimony (
Final(consumers(
Deceased(family(
Regula1on(
FTC’s(“Funeral(Rule”(
Funeral(Homes(
Burrial (
Cerimony (
Memoraliza1on (
Crema1on(
In(house(/(
Outsourcing(
Suppliers(
Services(providers(
Casket,(ashes(pot,(…(
Logis1cs,(catering,(…(

Cost structure analysis

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

! COST!! STRUCTURE! ! ! ! Fixed!Costs! Variable!Costs! ! ! 1   Facili5es!&! Equipemnt !
!
COST!!
STRUCTURE!
!
!
!
Fixed!Costs!
Variable!Costs!
!
!
1   Facili5es!&!
Equipemnt !
1   Personnel!
1   SG&A!
1   Adver5sing!
!
!
!
Funeral!ceremony!
Internment!
Memorializa5on!
!
!
!
1   Loca5on!rent!
1   Coffin!
1   Priest!/!Officer!
1   Dead! body!care!
1   Logis5c!/!Custody!
1   Beaurocracy!&!Legal!
1   Inscrip5on!
1   Headstones!
1   Monument!
!
!
Burial!
Crema5on!
!
!
1   Casket !
1   Cemetery!fees!
1   Cemetery!personnel!
1   Lots!Rent!
1   Logis5c!
1   Beaurocracy!&!Legal!
1   Crematorium!fees!
1   Lots!rental!!
1   Logis5c!!
1   Beaurocracy!&!Legal!

The f ixed 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 - à - 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 industry’s large portfolio. The graph below 1 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
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 develop ed 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.

T ime evolution Analyzing the American market 2 , 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
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 US 3 , 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.

Death rates in the US

12 10 9.7 8 9.6 9.3 8.9 8.1 8.3 8.4 8.6 7.9 6 4 2
12
10
9.7
8
9.6
9.3
8.9
8.1
8.3
8.4
8.6
7.9
6
4
2
0
Deaths / '000 population

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)

Personaliza tion 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

the purchase of more, non essential, bundled products Substitution: the shift towards cremation The American

Substitution: the shift towards cremation The American market, along with many developed markets, is experiencing an accentuated shift towards cre mation, as per shown below 4 .

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

US cremation statistics and forecasts

60 1800 1600 50 1400 40 1200 1000 30 800 20 600 400 10 200
60
1800
1600
50
1400
40
1200
1000
30
800
20
600
400
10
200
0
0
1985
1995 2000
2003
2004
2005 2006
2007 2015* 2025*
Cremations
Cremation % (cremation + burrial)
Cremation Percentage
Cremations ('000)

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, somet imes even suggesting, cremation. As an example, m any 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 e volution of expenditure in funeral services, coupled with larger portfolios (and margin enhancing opportuni ties), 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 locations 5 .

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 Ca pita

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 O’brien. “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/