There is only one thing certain in life: death (and taxes but that’s not the point of this article). With baby boomers projected to start kicking the dust in the next few decades, at first glance the deathcare industry seems like a great place to invest. However, once I started digging deeper things did not look quite so rosy. In this article I will give an overview of the deathcare industry, who the major players are around the world, the economics of the industry, how deathcare companies make money, the trends in the industry and whether the industry is a good place to find good value investments.
Overview of the Deathcare Industry
The deathcare industry can be divided into the following types of companies:
- Funeral home/Funeral hall operators
- Cemetery operators
- Crematorium operators
- Manufacturers of Supplies/Equipment used by the deathcare industry (caskets, cremation equipment etc.)
- Companies who provided ancillary services to the deathcare industry (flowers, information to the public regarding funerals etc.)
The deathcare industry has been summarised thusly:
“Death‐care involves at least four distinct aspects or services. First, is disposal of the body,
most commonly through burial or cremation. This aspect is the only mandatory requirement for dealing with the deceased. Second, is the ceremonial aspect ‐ the funeral
service or the ‘send‐off’. Third, the memorialisation aspect including new age ‘virtual’
memorials or a headstone or plaque providing a sense of ‘place’ for the deceased. Finally,
planning for funeral needs through various means including bonds, insurance and pre‐need
Funeral home/hall operators are the most prolific type of deathcare company. This type of company owns a funeral home or funeral hall where they arrange the funeral and often also hold a ceremony at the same location. Cemetery and crematorium operators own a cemetery and/or crematorium and charge customers for their services. Manufacturers of equipment used by funeral home, cemetery and crematorium operators manufacture caskets, urns, incineration devices and other equipment needed by these companies. Companies who provide ancillary services to the deathcare industry typically provide flowers and other gifts used in ceremonies or provide the public with information regarding funerals. These companies are not technically part of the deathcare industry and in some cases revenue generated from the deathcare industry is a small part of their overall business. The lines between the different types of deathcare company are blurred, with many companies operating funeral homes and cemeteries and crematoriums.
Economics of the Deathcare Industry
There are no repeat customers in the deathcare industry. Deathcare companies are at the mercy of the death rate – after all the only way a deathcare company could increase the death rate would be to kill people!! There are only four ways a deathcare company can increase profits: raise prices, make acquisitions, increase the number of pre-need sales and/or improve operating margins.
A good example of this is Park Lawn Corporation. Park Lawn Corporation – the only funeral company listed on the Toronto Stock Exchange – states that their growth will come from three places: acquisitions, organic growth and margin expansion. In other words, they will be raising prices and buying more independent funeral companies. These are the main two ways a company in the deathcare industry could possibly improve profitability – they have no control over the death rate.
In recent years the importance of pre-need sales to the funeral industry has increased. Pre-need sales occur when someone pre-pays for a funeral, usually to ensure that their funeral costs are not a burden on their family. Most people who pre-purchase a funeral are elderly. When a person pre-pays for a funeral this money is placed into a trust and invested. The income from these investments is becoming a major source of profits for many mature funeral home operators. There are usually restrictions on when a company can withdraw funds from these trusts and where and what they can invest in. This is similar to insurance companies. Additionally, a potential investor must scrutinise a company’s revenue recognition accounting policies. Is revenue booked straight away or is it booked when the services paid for are actually carried out?
The most important factors to consider when assessing a deathcare company are:
- The death rate in their target markets
- Organic growth rates (i.e. are more people choosing one company’s services over another)
- Debt levels and acquisition prospects for the company
- Pre-need sales and trust investment performance
- Competitive landscape
- Regulatory landscape
- Margins and financial ratios (Gross margin, ROIC, Operating Margin, Debt/Equity etc.)
Major Publicly Listed Deathcare Companies
There are 24 publicly listed deathcare companies listed on stock exchanges throughout the world. Japan has by far the largest number of publicly listed deathcare companies whereas most other country’s deathcare industry’s are majority privately owned and operated. This list does not include companies whose exposure to the deathcare company is minimal such as Walmart and Costco (they sell caskets) or Aeon, a giant of the Japanese retail industry who also provides funeral services. In recent years some publicly listed deathcare companies where privatised, such as Spanish listed funeral company Funespana which was acquired by Mapfre in 2018. Funespana was the first funeral sector company to list on the Spanish Stock Market in 1998. This has reduced the number of funeral companies we can invest in. The full list of publicly listed funeral companies is below. There may be more publicly listed deathcare companies throughout the world, if you know of more please comment below! I will then give an overview of the Japanese, Asian (ex-Japan), American, British, and Australian deathcare markets.
Source: Author Research
Japanese Deathcare Market: One of the few growth industries in Japan
Analysing the Japanese deathcare market is difficult for me, mainly because most funeral hall operator’s financial statements are entirely in Japanese! Unsurprisingly, translating financial statements to English is not mandatory in Japan so English speakers are at a disadvantage when trying to invest in them – not to mention the cultural and accounting differences between my home country of Australia and Japan. This is both a blessing and a curse. On one hand it makes analysing these company’s much more difficult, on the other it means that there is a greater chance of finding bargains. Most foreign managers don’t invest in companies whose financial statements they can’t read! Japanese fund managers often have different investment strategies to foreign managers, therefore there can sometimes be some major valuation discrepancies. As with all Japanese companies, corporate governance is something to analyse closely since many Japanese companies are as much run for its employees and broader community as it is for its shareholders.
This analysis would not have been possible without the wonderful analysis of Japanese funeral hall operator Heian Ceremony conducted by Kenkyo Investing, which can be read here. In addition to analysing Heian Ceremony, it also gives an overview of the Japanese funeral hall industry. Much appreciated!
Japanese funeral hall operators (equivalent to funeral home operators in the west) typically fly under the radar and as a result they can trade at single digit EV/EBIT ratios or in some cases at negative EV/EBIT ratios! Tear Corp is by far the most richly valued listed funeral hall operator but San Holdings is the largest by market share. The key here is to either find a catalyst which will make the market give these companies a more reasonable valuation ratio or one which pays lots of dividends to give us a return regardless of what the market thinks the company is worth.
There are nine publicly listed deathcare companies on the Tokyo Stock Exchange:
- San Holdings Inc.
- TEAR Corporation
- Heian Ceremony Service
- Nichiryoku Co Ltd
- Cocolonet Co Ltd
- Sun Life Holdings Co Ltd
- IKK Inc.
- Beauty Kadan Co Ltd
- Kamakura Shinsho Ltd
The first seven companies are funeral hall operators. Funeral hall operators typically provide a hall where a funeral ceremony is held and provide the services associated with the ceremony such as decorations, food etc.. Over the past few decades there has been a shift towards using funeral halls due to people’s homes being too small to hold a large ceremony. Over 80% of funerals are held in funeral halls rather than at home. It is extremely common for funeral service companies to also offer wedding services and some also operate nursing homes. The eighth company in the above list provides flowers to funeral hall companies so its exposure to the deathcare industry is indirect. The ninth company in the above list, Kamakura Shinsho, is a uniquely Japanese company who provides information about end-of-life services (such as funerals, Buddhist altars, graves, and inheritance) to Japanese seniors.
In Japan, the funeral hall industry has low barriers to entry. There are few special requirements that funeral directors are required to meet. Thus any old Joe can start a funeral hall if they wish. The low barriers to entry are epitomised by the entrance of large companies from other industries opening up budget conscious funeral halls around Japan. Aeon, a major company in the Japanese retail landscape; Family Mart, the second largest company in the Japanese convenience store industry; and Nankai Railway, a railway company which operates railways in Southern Osaka, have all entered the industry in recent years. These companies typically target budget conscious consumers and are therefore a major threat to the traditional funeral hall companies.
Like most funeral companies around the world, funeral companies are an inherently localised business. People rarely travel far from where the deceased passed away thus it is important to analyse the local competition of any funeral hall company being analysed.
In Japan, the price of a funeral is divided into three components: funeral ceremony fees, facility fees and food/drinks fees. The funeral ceremony fee is the most significant. This is why the trend of traditional full-service Japanese funerals becoming increasingly uncommon is important to watch. These traditional funerals typically involve an all night wake, a funeral service over a number of days and cremation. In recent years, ‘lonely deaths’ have become a national concern in light of Japan’s rapidly aging population. Like much of Asia the Japanese are slowly changing how they honour the deceased in a shrinking society. One manifestation of this change is direct cremation becoming increasingly popular. This involves the deceased’s body being sent directly to be to cremated shortly after death with little or no ceremony. The person’s ashes can then be scattered in a place chosen by the deceased or by their relatives, such as in the sea. This spares the deceased person’s relatives the time consuming work of maintaining a cemetery plot and saves on cost. This is a key risk for all funeral hall operators in Japan.
Mainland China, Hong Kong and Taiwan
Mainland China is the world’s largest deathcare market driven by China’s large population and strong traditions surrounding death. Despite this there are only a handful of publicly listed companies in the deathcare industry. Like the most of the world, most companies in in the Chinese, Taiwanese and Honk Hong deathcare industries are privately owned. There are just six publicly listed deathcare companies which operate in Mainland China, Hong Kong and/or Taiwan:
- Anxian Yuan China Holdings Ltd
- Sage International Group
- Fu Shou Yuan International Group Ltd
- Sino-Life Group
- Grand Peace Group
- Lungyen Life Service Corporation
According to United Nations data, more than a tenth of the population of Japan, Hong Kong, South Korea, Singapore and Thailand will be 80 or older by 2050. As a result of this massive demographic change, ancient funeral traditions have had to change due to lack of cemetery space, budget concerns and smaller family sizes. Mainland China and Taiwan are facing a similar fate. These Asian companies often only derive a portion of their revenue from the deathcare industry.
United States Deathcare Market
In the US there are approximately 19,136 funeral homes, 1155 crematories and 115,000 cemeteries. 89.2% of funeral homes in the US are privately owned, mainly by families. Since the late 1960s consolidation has occurred in the industry. Large publicly listed companies (the main company being Service Corporation International) acquired small family owned funerals across the country in a debt fueled acquisition binge. The rationale for this consolidation was that through centralising back-office operations, costs could be reduced through economies of scale.
The benefits of economies of scale for these large public companies are debatable, with some people arguing that the benefits of centralised back office activities are more than offset by the increased administrative expenses required to run a large company. This is emphasised by the bankruptcy of Loewen Group International, a large multinational funeral services company (see In re Loewn Group International, Incorporated, 99-1244 (Bankr. Del. Filed June 1, 1999)).
To retain customer loyalty the acquired companies continued operating under their previous brand names developed by the previous family owners. The previous family owners often stay on as managers of the home. The large publicly listed funeral companies only own approximately 1000 cemeteries across the U.S.
There are only three publicly listed funeral service companies: Service Corporation International, Stonemor Partners L.P. and Carriage Services Inc.. Service Corporation is by far the largest funeral company in the United States with an estimated 15-16% market share by revenue and 10.8% market share by number of funeral homes. This indicates that Service Corporation charges more per funeral home than the wider industry.
The two smaller publicly listed funeral service companies are Stonemor Partners L.P. and Carriage Services Inc.. Both companies each have an estimated 1-2% market share by revenue and 1% market share by number of funeral homes. Stonemor focuses on cremation whereas Carriage Services focuses on burial. Park Lawn Corporation, listed on the Toronto Stock Exchange also has a substantial presence in the United States. Most of Park Lawn’s funeral homes are located in locales with limited presence from any of the three publicly listed U.S companies. The top six operators (public and private) control 25-30% of the funeral services market.
At the same time as when funeral homes ownership was consolidating, casket manufacturing was undergoing its own consolidation phase. In the first half of the 20th century most caskets were made of cardboard or wood. Consumer tastes changed in the latter half of the century resulting in metal caskets becoming the casket of choice. The majority of caskets manufactured in the United States are now metal. Due to the capital intensive nature of metal casket manufacturing relative to wood or cardboard manufacturing smaller firms exited the industry. 60% of all caskets manufactured in the United States are made by just two companies.
Hillenbrand Inc. and Matthews International Corporation, both publicly listed, manufacture and sell caskets, urns and other items to funeral homes. Over the years both companies have diversified their product offerings away from the deathcare industry. Matthews International also provides cremation systems, flush bronze and granite memorials, upright granite memorials and monuments, cremation memorialisation products, granite benches, flower vases, crypt plates and letters, cremation urns, niche units, cemetery features and statues, and other related products and services in addition to metal caskets. Providers of memorialisation products (including caskets) compete on the basis of reputation, price, delivery, design availability and product quality.
Hillenbrand’s 2018 Annual Report explains the competitive dynamics of the casket manufacturing sector nicely:
[Casket manufacturers compete] with several national and regional casket manufacturers, as well as more than 100 independent casket distributors, most of whom serve fairly narrow geographic segments. Some non-traditional death care providers, such as large discount retail stores, casket stores, and internet casket retailers also sell caskets directly to consumers. The industry has seen foreign manufacturers, mostly from China, import caskets into the U.S. and Canada. Sales from these non-traditional and foreign providers collectively currently represent less than 10% of total casket sales in North America. We expect declining casket demand and existing domestic over-capacity to continue to put added economic pressures on casket manufacturers and distributors (p. 8).
The major trend in the US deathcare market is a shift away from burial to cremation. According to the National Funeral Directors Association, the average cost of cremation is just $6260 compared to $8755 for a burial and vault. Price is not the only factor, in some cities such as New York burial plots are limited in supply. This also raises the cost of burial considerably.
As you can see above, the casket is a major component of the total cost of a burial with the (optional) vault coming in at second if we exclude the basic services fee. The casket is sold by funeral homes at a substantial mark up from the price they purchased it for and is a major source of profits.
If a funeral home has 100 customers per year (the average for National Funeral Directors Association members is 113) and they charged the average burial price, they would have revenues of $877,500. If 50% of those customers switched to cremation those revenues would decrease to $751,750. If 85% of customers switched to cremation, revenues would decreased to $663,425. Cremation is a substantial threat to the profitability of all major funeral companies, except for Stonemor who is the only publicly listed player with a focus on cremation.
Additionally, due to ambiguous billing practices all funeral homes must now give to any customer an itemised price list (both in person and over the phone) for any services provided or planned to be provided. This rule – called the Funeral Rule – was enacted in 1984 to provide consumers with greater transparency regarding costs. In practice these itemised price lists are often hung up in a funeral directors’ office where consumers rarely read it. Any new laws forcing funeral companies to improve pricing transparency would have substantial impacts on profits. Many of the larger funeral services companies rely on customers not knowing what they are being charged to get away with charging very high prices. State Government’s have also introduced their own laws regarding disclosure.
Another very important trend to keep an eye on is the growing prevalence of no-frills funeral services, burials and cremation, as well as the growing prevalence of direct cremation. If these practices become common place in the industry the profitability of Service Corporation, StoneMor and Carriage Services will be severely hit. Benen Ling has already given a concise analysis of Service Corporation, StoneMor and Carriage Services which can be viewed here. Casket manufacturers will also face some headwinds although this will be minimised due to the diversification programs Hillenbrand and Matthews International Corporation have embarked on. Even within their deathcare focused segments, they manufacture more than just caskets for burial and could diversify their offerings if they wish, so in my opinion they are a little more resilient than the funeral home operators.
United Kingdom Deathcare Market
Like the rest of the world, the UK funeral market is dominated by small localised funeral directors. There are around 5000 funeral director branches throughout the UK. 3000 of these are operated by small businesses with the remaining 2000 operated by large companies. The largest of these companies is Cooperative Funeralcare, part of Co-operative Group Limited, which is the UK’s largest consumer cooperative with interests in businesses ranging from retail to insurance. Dignity plc, the only publicly listed UK funeral company, is the second largest funeral company in the UK. Between them, Cooperative Group and Dignity control approximately 28 percent of the UK funeral market. Funeral Partners Limited (owned by Montagu Private Equity) is a distant third with market share of under 2%.
In the crematoria market, 106 of the UK’s 290 crematoria are privately owned. The 184 crematoriums which are not privately owned are typically owned by local authorities. Dignity plc is the largest private crematorium owner with 45 crematoriums while the number two player, Westerligh WGH Limited owns 29
Like the rest of the world, there is a growing trend towards cremation in the UK. This is driven in large part by the reduced cost of cremation relative to burial. In the UK, the average costs of funeral using a funeral director is £3,757. The cost for a cremation is £3,247 compared to the cost of a burial being £4,267. Cremation accounts for 75% of all funerals in the UK.
Funeral costs are typically divided into funeral director fees and third party fees (called ‘disbursements’). Funeral director fees cover things such as collection and care of the deceased and the cost of the coffin and hearse. Third party fees cover costs such as cremation and burial fees as well as doctor’s and minister’s fees. Extra services, such as catering, a funeral notice and venue hire are added to the funeral director and third party fees, if they are used.
Due to the dominance of not-for-profit operator, the Co-operative Group, the market dynamics of the UK funeral services market is quite different to other countries. In 2016 the Co-operative Group significantly cut their fees by more than 25 percent for basic funerals. This forced Dignity to respond by also reducing their prices with dramatic effects on Dignity’s profit margins. When this eventually played out in Dignity’s financial results it had a drastic effect on their share price. The presence of a substantial not-for-profit operator in the industry is a very important factor to consider when analysing Dignity.
Australia Deathcare Market
The Australian deathcare market is consists of a large number of small localised family businesses. This academic research article gives a great overview of the Australian deathcare market, I highly recommend you give it a read if you intend to invest in the industry. ASX listed company Invocare has a 26% share of the deathcare market with fellow ASX listed company Propel Funeral Partners having a 5.1% market share, according to IBISWorld. The rest of the industry consists of small, typically family-owned and run, businesses.
In Australia, funeral directors are largely self regulating with 60% of funerals in Australia being undertaken by a funeral director who is a member of the Australian Funeral Directors Association. Despite this largely self-regulating nature, the industry is subject to a high degree of regulation as one would expect for an industry which deals with such sensitive matters. This high level of regulation, in addition to the intense competition in the industry, are the main barriers to entering the industry.
Again, like the rest of the world cremation is becoming an increasingly popular choice primarily due to cheaper costs and the reducing prevalence of Christian burials. I won’t write too much about the Australian deathcare industry, it is very similar to the American and British industries.
Globally there is a shift towards cheaper funeral services, with cremation being the most prevalent trend across all countries. This means lower margins and less profits for many of the incumbent companies in the industry. With many of these companies encumbered by massive debt loads used to fund their acquisitions spree necessary to fuel growth (especially in the US), this is a potentially deadly (excuse the pun!) combination for these companies. Manufacturers of caskets and other equipment used by the industry do not appear as exposed to these risks, but even they are now facing challenges from budget conscious consumers. Is the deathcare industry somewhere to invest or is this an industry we would rather not have exposure to until we die? Comment below!
- AARP Public Policy Institute, The Deathcare Industry, https://assets.aarp.org/rgcenter/consume/ib44_deathcare.pdf
- Benen Ling (Seeking Alpha), These Death Stocks Are Barely Clinging To Life, https://seekingalpha.com/article/4271028-death-stocks-barely-clinging-life
- Carriage Services 10K 2018
- Competition & Markets Authority, https://assets.publishing.service.gov.uk/media/5c9ba9bf40f0b633f6c52a7e/funerals_market_study_-_final_report.pdf
- Funeral Wise, How the Funeral Industry has Evolved, https://www.funeralwise.com/learn/industry/
- Funeral Wise, How Much a Funeral Costs and Average Funeral Costs: Your Complete Guide, https://www.funeralwise.com/plan/costs/
- Hillenbrand Inc 10K 2018
- Invocare, Propel safe for now from UK funerals shock, https://www.afr.com/companies/healthcare-and-fitness/invocare-propel-safe-for-now-from-uk-funerals-shock-20180123-h0mwzu
- Matthews International Corporation 10K 2018
- Money Advice Services UK, https://www.moneyadviceservice.org.uk/en/articles/how-much-does-a-funeral-cost
- National Funeral Directors Association (2019), Statistics, http://www.nfda.org/news/statistics
- Park Lawn Corporation Investor Presentation July 2 2019
- Service Corporation International 10K 2018
- StoneMor Partners 10K 2018
- Value Line, Industry Overview: Funeral Services, http://www.valueline.com/Stocks/Industries/Industry_Overview__Funeral_Services.aspx
- Walbrock Research, https://walbrockresearch.com/10-important-things-understand-dignity-plc/
- Wikipedia, Deathcare Industry in the United States, https://en.wikipedia.org/wiki/Death_care_industry_in_the_United_States