Funeral Industry Case Studies

Getting rid of a delusion makes us wiser than getting hold of a truth. –Ludwig Borne

Funeral Industry

We can always learn in any situation like a family death about an industry such as funeral homes or the death-care industry.  Interestingly, bankruptcy statistics show the lowest failure rates for small businesses in the funeral industry. Funeral homes typically have high fixed costs like 24-hour call service and staff, hearses, showrooms, vaults, and embalming rooms yet low failure rates. Perhaps funeral homes act as local monopolies–they have local economies of scale. Many funeral homes are family-owned and passed from generation to generation. One of the firms I spoke to as been in business at that location for 80 years.

What should strike you as an investor is that there is strong stability in the asset and earnings power value of funeral homes–hence the business longevity and low failure rates.  I quickly found out the power of their local monopoly through my battle to obtain the lowest prices for a funeral service. After all, I am a bargain hunter to the core. What was so bad about going “Dutch” on my honeymoon?

I asked why the prices were so high to move the deceased. The funeral director asked where the deceased was currently located. In my car trunk right here in your parking lot, I replied.  I was quickly informed that one needed a license and death certificate to transport a body. Beyond fifty miles, I needed a refrigerated container. There went my chance to shop around.

The Loewen Group, Inc. and Service Corporation International Case Studies

I placed two case studies on the funeral industry:

The Loewen Group Inc. (Dec. 2000): An industry roll-up and the perils of debt to finance growth.

Service Corporation International (July 1996): How to manage a high growth company in a low-growth industry.

Though we will soon go over Chapter 6: The Dilemma of Growth in Competition Demystified by Bruce Greenwald, these cases can act as a supplement to studying economies of scale and corporate finance. I will send the key to the folder to anyone who has already asked for a key to strategic logic case studies. If you do not have a key by this evening or you are new to this blog, you can email me at aldridge56@aol.com with just FUNERAL HOMES in the subject heading, and you will receive a key.

Death is part of life. The goal is to live and learn fully. See the advice my Papa gave me:http://www.youtube.com/watch?v=AloNERbBXcc&feature=related

Thanks Papa!

14 responses to “Funeral Industry Case Studies

  1. Dignity – a UK-based funeral company – is also a long term holding of a well known European small cap fund called Montanaro (http://www.montanaro.co.uk/uploads/MUSCITAnnualReport2011.pdf)

  2. Sorry for your loss, John.

    You know what other segment has amongst the very lowest of business failures? Apparently, it’s the Amish. Strange, but true. I saw a documentary about it once. They trade with the “English” – apparently their term for outsiders – and do so successfully. Success is attributed to strong work ethic, fair business practises, and community participation. The businesses themselves are, as you might expect, fairly mundane; bakeries and suchlike.

  3. Sorry to hear about your loss.

  4. John, so sorry about your your loss. You have my deepest sympathy.

  5. Thank you for all the condolences. Death is an inevitable, final fact, so if a life is lived well, then death can also be a celebration. Death is not mentioned often in American society, especially end of life issues.

    I hope we all do our best to live well however you determine that term. Good luck to all.

  6. Too bad the funeral director probably lied to you, or was misinformed and poorly trained. Reference “Final Rights” by Slocum and Carlson for the latest state laws concerning deathcare. In Texas, you can do any funeral type activity yourself as long as it is not for money, and you do not pose as a licensed professional. (You are not required to use a ASTME certified mechanic to work on your car, so it’s the same with funeral work.) The reason funeral businesses are so expensive and monopolizing is due to the very thing you experienced. Calling their bluff with just a little bit of knowledge will usually work. Go to funerals.org for more information.

  7. How should one decide whether to have a concentrated portfolio or a diversified one? Recently read an interview by an investor Ori eyal and he says
    “As long as we can stay in the game, the long-term power of compounding will work in our favor. A 10% real annual return will multiply our money over 117 times in 50 years. But having even one single year with catastrophic losses undoes years of great performance. Simply put, the key to amassing wealth over time is avoiding catastrophic losses and never having to start over from scratch. When things go wrong, we can avoid catastrophic losses only by investing conservatively and without leverage. Conservative investing is like insurance—it seems like a waste of money until something bad happens and then you are glad to have it.
    I see funds that use leverage (either at the portfolio level or by investing in highly levered companies), and I see funds that are too concentrated. Over the long run, leverage and excessive concentration usually end badly.”
    Would like to share any views?

  8. Sorry for your loss, John!

  9. Hi John, I can’t imagine how difficult it must have been for you (about the trunk and the entire situation beforehand). I’m sorry for your loss.

    My father died recently also, and I lhad to arrange the service. You are right about the local monopoly, even here in Singapore (more like oligopoly). Two companies operate in the central part of Singapore, the major “brand” and the “budget” version. Some previous feedback about the larger company made me check out the budget companies. Turns out that all the smaller companies on the list the hospital gives you actually funnel business to one major budget operation (the smaller companies advertise different types of services (eg religious ceremonies, rites etc) so this makes it easier for people when they are extremely stressed). I found this out after I phone spammed the numbers at 3am and ended up talking to the same guy (he was really pro and patient – must be hard doing this every day). They all have different telephone numbers and addresses located in the same area, but it’s all one company. Nonetheless, the budget “monopoly” company did an excellent job, so it’s no wonder they have either consolidated the small entities in the central area business or have structured themselves that way from the start.

    Take care.

  10. FYI – burial plots can make great long term investments if bought at the right price. Their pricing set by the cemetery, which experience a persistent increase in maintenance costs (think about cost of cutting grass, maintaining paths, etc). My local cemetery increases prices by ~10% per year. Unfortunately not many people know that plots can often be had for a fraction of the price that the cemetery guy is quoting you – check local classifieds. Some can be bought for 25-30% of the retail price. There are no recurring cost to owning these – the original purchaser “paid” for lifetime of maintenance costs – the cemetery is obligated to put that money in the trust, which is used to maintain the property (heavily regulated here in canada). I think of it as buying land at 30% of book value, where the book value increases by 10% per year. Some plots have intangible benefits that impact their value positively in the long run – features such as location (near running water, under a tree) or proximity to famous people are examples of this. These opportunities exist because there is no market for pre-bought plots – regulations prohibit the cemeteries from buying plots back from consumers. No one thinks of buying plots in advance of a “need” unless they have been subject to a thorough sales pitch by the cemetery guy… And looking up plots in classifieds when you have a need, is the last thing anyone thinks of. A definition of an inefficient market… Value investing at its best – buy at 0.3x book – book grows by 10% per year without fail (price increases are persistent and a necessary part of maintaining operations), and the end market will never go away… I believe people in some parts of Asia have been investing in plots for a long time for these reasons – i think its still seen as taboo in north america

    • Dear Frank:

      I am sorry for the delay but I emailed you the two case studies: The Loewen Group and Service Corporation International. Thanks for your patience.
      Great post! You gave away a secret. Years ago when I was in high school I asked my dad why he was buying burial plots. His reply, “They ain’t making any more of these.” In other words, supply constrained.
      You are right, he bought a plot for $100 in 1987 which now costs almost $2,000! or a 12.73 CAGR.

      How big is the secondary market for burial plots. And how do you find buyers discretely?

      I love these hidden, secret niches. Sort of like tax liens in the old days.

      There is a company called Mathews International MATW(?) that makes brass urns for cremation. The company’s price at one time was an attractive investment.

      I bargained hard over funeral services, but in the end you are facing one or two choices within your area. My wife became hysterical (not the laughter kind of hysterical) when I suggested we shop around.
      The funeral director told me that the cheapest method of rememberance would be cremation, but that would go against the wishes of the deceased. I believe profit margins are higher in cremation because of lower capital costs of holding bulky inventory, need for hearses, etc. but revenues are lower.

      I told the funeral director I did want someone cremated. He said he was sorry for my OTHER loss. I said, “What loss. My EX is still alive, I just want her cremated NOW.

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