Making a killing.
When Hawaii Funeral Director Association president Kenneth Ordenstein presses a button, the altar at his Kaneohe mortuary revolves from Buddhist to Catholic - in four seconds. It is a perfect metaphor for Hawaii's multicultural burial business. And lately it has been a perfect metaphor for an industry in the midst of dizzying changes.
Last January, Ordenstein's family sold its century-old mortuary business to the Loewen Group, one of two big mainland companies that have been buying up Hawaii funeral homes and cemeteries at a rapid clip. Loewen and its competitor Service Corporation International control close to 50 percent of the mortuary market statewide. And chances are, they will control even more in the near future. At stake is a booming industry with profit margins well over 20 percent and fabulous future prospects as aging Hawaii residents head to their final resting place in rapidly increasing numbers.
Once upon a time, America was the land of the corner grocery store, the local diner, and the more and pop funeral parlor. But beginning with the end of World War II, big conglomerates preaching economies of scale wiped out these small businesses. Supermarket chains have decimated the small groceries. The local diners have fallen by the wayside in the face of competition from fast food franchises. Only funeral homes have resisted that trend. In 1996, according to the National Funeral Directors Association about 85 percent of the country's 22,000 funeral homes were family-owned businesses that have been in operation for an average of 63 years.
What that statistic doesn't tell, however, is that the other 15 percent of funeral homes are owned by a handful of rapidly growing "death care" companies. The two biggest of these "consolidators" are Houston-based Service Corporation International and a Canadian company, the Loewen Group, Inc. (see accompanying charts).
By virtue of their size - SCI buries about one out of every 10 Americans and Loewen has 1,000 funeral homes and 400 cemeteries around the United States - the consolidators are able to negotiate deep volume discounts of up to 50 percent off wholesale prices from casket companies, urn makers and other funeral industry suppliers. By buying several funeral homes in close proximity, consolidators are also able to share use and costs of expensive hearses (the vehicles cost upwards of $50,000), embalming and cremation facilities, as well as purchasing and administrative costs. According to Ordenstein, Loewen's Hawaii funeral homes save on mundane items like office supplies and telephone listings. "It all goes straight to our bottom line," he says.
The ongoing consolidation and its accompanying vertical integration - often a consolidator owns the casket company, the mortuary and the funeral plot - allows these companies greater control of their prices and greater profits. Add to this standard merchandise markups of 200 percent to 500 percent, more than double the markup for most retail industries, and you have a business that Wall Street loves. In fact, one Houston broker was so bullish on death care that he put together a mutual fund composed solely of death care stocks (see accompanying story). Besides charming the Street, SCI and the Loewen Group have also managed to take home an increasing share of a national death care market estimated at about $15 billion a year.
Both SCI and Loewen landed in Hawaii's $60 million-plus annual death care market with a bang. In August 1992, SCI bought the Borthwick Group of Hawaii from local politician and businessman John Henry Felix and his partner, state-insider and entrepreneur John Farias. The purchase price was never disclosed. With this purchase, SCI acquired the largest funeral services operation in Hawaii with eight mortuaries on four islands and two cemeteries. All told, it was a business with 170 employees and annual sales of more than $10 million.
Around the same time, Loewen Group also began searching for purchases in the islands. In 1996, it bought Valley of the Temples Memorial Park & Mortuary in Kaneohe, one of Oahu's largest death care operations, from the Truesdale Corporation. Also included in the purchase were Windward Mortuary, Kukui Mortuary, Diamond Head Mortuary and Nuuanu Memorial Park Mortuary. In January 1997 Loewen bought Ordenstein's Mortuary at Hawaiian Memorial Park and Williams Funeral Services from the Ordenstein family. (Kenneth Ordenstein retained a minority stake and stayed on to become Loewen's regional manager for Hawaii). The buying spree gave Loewen a strong position on Oahu.
Both Loewen and SCI have since purchased other properties including Greenhaven Memorial Park in Kaneohe (bought by SCI) and Homelani Memorial Park on the Big Island (bought by Loewen). Currently, SCI does about $18 million a year in gross sales statewide, according to Hawaii area vice president Scott Sells. SCI performs about 2,000 funerals and burial services each year. Ordenstein would not disclose Loewen's sales figures in Hawaii but did estimate that the company, like SCI, performs about 2,000 funeral or burial services each year.
Despite the consolidators' cost savings, industry critics allege that SCI and Loewen use their market dominance to gouge the bereaved rather than offer them a better deal. (Numerous surveys on the mainland have concluded that in regions where consolidators have a large presence their prices are significantly higher than those of their independent competitors). "As soon as they move in prices go up. It happened here, too" says John White, director of the non-profit Memorial Society of Hawaii, which monitors the funeral industry.
Often price increases are hidden in dizzying lists of services amidst dozens of caskets, urns and funeral options. "Some mortuaries will put the English on the merchandise, where others put it on the use of facilities," explains Clifford Dodo, president of Dodo Mortuary on the Big Island. For example, one of the consolidators' cemeteries in Hawaii charges an "inspection fee" of $100 or more for someone to put a grave marker up that was not purchased through the cemetery or its affiliated mortuary - a thinly veiled move to discourage bargain hunting. "They charge you $100 just to look at the thing," says Bert Freeland, the vice president of independent Ballard Family Mortuary on Maui. "You own that piece of land, but you still don't have the right to shop and buy something cheaper for your own land."
Consolidators have also raised the ire of both state governments and consumer groups around the country with their strategy of hiding the change in ownership in funeral homes they have purchased and attempting to maintain the appearance that the old town mortician is still running the show. With shareholder expectations of revenue growth driving company behavior, consolidators have also gained an unsavory reputation for the hard sell - a tactic that is particularly effective on people in their time of need who have no basis for price comparison and are unwilling to shop for a better deal.
To be sure, few complaints against consolidators - or other death care companies - have been lodged with the state's Department of Commerce and Consumer Affairs. Furthermore, Hawaii's consolidator's contend their prices are fair. "Our company is market sensitive and tries to adjust its prices for the market area it serves," says SCI's Sells. "The prices we have to charge are the prices we have to charge so we can maintain overhead." Loewen officials also rejected accusations of predatory pricing. "Our last price change was in August 1997. Our cremation prices went down," says Ordenstein, who notes his company's low-ball rate of $695 for a no-frills cremation is a good price.
Still, the proof is in the profits. Securities Exchange Commission filings in 1995 reported SCI's gross profit margin at 25 percent and Loewen's at 41 percent. Recent press releases from Loewen crow about 20 percent pius increases in quarterly net revenues. Locally, funeral executives peg profit margins for the Hawaii consolidators at 20 percent or more - a healthy return that few big publicly traded companies can match. And even Hawaii's independents are probably making a sound profit of between 6 percent and 15 percent.
What's more, the business will likely get better. The number of deaths in Hawaii as well as the death rate per 1,000 population have been climbing steadily for 20 years. The current death rate is about 6.3 per 1,000, up from 5.8 per 1,000 a decade ago. And that is projected to skyrocket, possibly into double digits, as the Baby Boomers start to die. Multiply that times Hawaii's average death service cost of between $3,000 and $5,000 and tack on cemetery costs that can range from several thousand dollars to well over $10,000 and you have an annual market of $100 million or more statewide.
The biggest threat to this sales growth is cremation. According to the Cremation Association of North America, Hawaii has a 58.25 percent cremation rate - the highest in the United States. Cremation is usually thousands of dollars cheaper than funerals, but the gap is closing as the funeral industry continues to market new goods and services - such as combustible cremation caskets - in order to make burning corpses more profitable.
Burned or buried, funeral services are not just for dead people anymore. The biggest growth area for the death care industry is "pre-need services" where a customer pays for a funeral in advance. "How many people die each year in Hawaii? But when you get into the prearranged side, the question is how many households are there in Hawaii? We all have to die. That's a much bigger market," says Ordenstein. In pre-needs, the Mililani Group is the clear leader with $42 million of assets currently in its trust. But SCI may have almost as much in the four pre-need plans it sells, including a joint venture with Hosoi Garden Mortuary. Loewen likewise has a large pre-need business in Hawaii called the 50th State Funeral Plan. Overall, Hawaii residents are putting tens of millions of dollars a year into pre-need trusts. And as more people reach their 60s and 70s - the time when most people buy pre-need funeral plans - the dollars flowing into pre-need trusts could skyrocket.
Currently, the consolidators say they are not looking at more purchases and want to expand their existing operations. And they may be running out of fish to swallow. The remaining independent mortuaries are generally larger operations that can compete with the big guys. Dodo Mortuary is the dominant death care provider on the Big Island and Hosoi Garden Mortuary is the preeminent provider of services to Japanese Americans on Oahu. The Mililani Group is solidly profitable and has no plans to sell. The few smaller independents are in less profitable regions such as West Hawaii or are smaller and therefore have less potential for growth.
But with Wall Street expectations of revenue growth to live up to, the consolidators may have no choice but to buy more homes and cemeteries. At least one Hawaii death care business - Maui Memorial Park Cemetery - is up for sale. Both SCI and Loewen are moving forward with multi-million dollar renovation and expansion plans on their existing properties. And it appears the days of the mom and pop funeral home in Hawaii are now giving way to the days of the mom and pop funeral franchise. Says Loewen's Ordenstein, "We are sort of at the end of the line here and we are going to be changed just like all the other institutions before us have been changed. The profession is mature. I guess consolidation is part of that process."
SERVICE CORPORATION INTERNATIONAL Houston, Texas
Holdings: 2,800 funeral homes, cemeteries and crematoria in North America, Europe, Australia and the Pacific Rim
1996 Total Revenues: $2.3 billion 1996 Net Income: $265 million Stock Performance 1997: +20%
Borthwick Bulgo's-Norman's Mortuary Borthwick Hawaii Funeral Home Borthwick Kauai Mortuary Borthwick Mortuary Greenhaven Cemetery Hawaiian Memorial Park Hawaiian Memorial Life Plan Ohana Family Life Plan Valley Isle Memorial Park Valley Isle Memorial Life Plan
LOEWEN GROUP, INC. Vancouver, British Columbia, Canada
Holdings: Owns or operates some 1,000 funeral homes and over 420 cemeteries across the United States and Canada. Over 90 percent of the company's revenue is derived from the United States.
1996 Total Revenue: $908 million 1996 Net Income: $63.9 million Stock Performance 1997: - 40%
Diamond Head Mortuary 50th State Funeral Plan Homelani Memorial Park Kukui Mortuary Nuuanu Mem. Park Mortuary Ordenstein's Funeral Home at Hawaiian Memorial Park Ordenstein's Center for Preneed Funeral Planning Valley of the Temples Memorial Park & Mortuary Williams Funeral Services Windward Mortuary
RELATED ARTICLE: BUYING INTO DEATH
Hoping to cash in on the demographics of an aging America, a Houston stockbroker has devised a new sort of mutual fund. Philip Pauze is pushing shares in his Pauze Tombstone Index - an indexed mutual fund that deals exclusively in "death care" stocks. The fund debuted last May and has so far garnered over $3 million from investors hoping for the worst.
Pauze got the idea for the fund while watching the phenomenal rise of Service Corporation International right in his backyard. The Houston-based company's stock has shot up 300 percent over the last five years. After looking at some more numbers - statisticians with the National Funeral Directors Association estimate deaths in America will increase from the current annual toll of just over 2 million to over 4 million in 2040 - Pauze figured other death care companies besides SCI would be equally good bets.
The nine stocks included in Pauze's fund are mainly owners of funeral homes but also deal in casket sales and manufacturing, funeral insurance and other businesses tangential to the last days of man. The fund is a straight index of companies that derive 15 percent or more of their revenues from death care business. Each of the nine stocks is held in proportion to it's market capitalization.
To back up his claims that death care is the wave of the future, Pauze created a Pauze Tombstone Common Stock Index - a faux index that tracked the market performance of his fund as if it had initiated in 1985. According to figures Pauze got from Bloomberg L.P., his Tombstone Index outperformed all major indexes since 1985 with annual returns averaging 16.59 percent over that period. A similarly indexed investment in the Dow Jones Industrial Average would have yielded annual returns of 13.73 percent; the S&P 500 would have only returned 12.01 percent on average.
However, the vast majority of Pauze's fund is composed of two stocks: SCI and Loewen Group. The two firms represent a whopping 73 percent of the fund. And for much of the index's pseudo history, these two stocks were the entire index - no other funeral care stock had a market cap big enough qualify. (Needless to say, this fact is not mentioned anywhere on Pauze's prospectus). Of course, there is the hefty, 3.75 percent upfront sales charge for Class A shares pius yearly maintenance charges. Perhaps it would be easier to buy a few shares of SCI and Loewen yourself.
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|Title Annotation:||includes related article on mutual funds for 'death care'; mortuary businesses in Hawaii|
|Date:||Mar 1, 1998|
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