Only two things in life are supposed to be certain: death and taxes. Such certainty has seen Australia’s largest funeral services providers making a killing for investors by delivering high growth annual returns for the last decade.
With more than 160,000 Australians dying this year, most of these deaths bring not just grief to many, but also profit to others. In many ways, the death care industry has been regarded as being an investors dream: there is unending demand, the customers are often too emotionally stressed to shop around and there is a cultural taboo against spending too little on a loved one.
The fact that most people are only ever likely to organise one or two funerals in their lifetime also means that there’s a huge power imbalance in favour of the big funeral chains, who are selling to unsophisticated customers.
Baby boomers are moving against the traditional business model
The current situation in the funeral industry can only be understood by first looking at the historical context in Australia.
Up until the mid-1990s, most funeral homes in Australia were independently owned. Then two US multinational firms, Service Corporation International (SCI) and Stewart Enterprises Inc. entered the Australian market. By 1998, the largest of these firms, SCI had acquired 123 funeral homes, 11 crematoria and 7 cemeteries in three eastern states in Australia. Then in 2001, SCI sold 80% of its ownership in the Australian funeral industry to a consortium led by the Macquarie Bank. This entity listed on the ASX in 2003 as InvoCare Limited, which is now Australia’s largest publicly listed funeral company.
InvoCare currently controls more than 34% overall share of the Australian funeral market and continues to acquire small and medium size funeral homes. So, if you’ve ever searched for a funeral director, you’ve probably come across one of their funeral brands. Although the names on signs outside InvoCare’s funeral homes are well known, the revenues and profits from them flow to corporate shareholders, not the community.
The logic behind the InvoCare’s business model is simple: funeral homes and cemeteries are an inherently local business, so combining hundreds of sites from multiple cities will result in a more diversified location base, increased funeral volumes, stable revenue and higher profits. With fat profit margins, steep mark-ups and funeral cost increases (above inflation), it is only a matter of time before consumers switch en masse back to family owned and independent funeral homes, with a more compelling value proposition.
And that’s what appears to be happening. The largest threat to profits for the big funeral chains is the rise of direct cremation. Currently, about 70 per cent of people, responsible for organising the funeral, will choose a cremation. The figure is about 56 per cent in non-urban areas. This number will continue to rise as Baby boomers, who are now less religious compared to previous generations, choose alternative ways of saying goodbye.
The rise of direct cremation and resulting loss of revenue is a serious threat to the big end of town. Let’s work through the numbers. If a funeral home has a hundred customers per year and it charges an average funeral cost $7,449 per customer (finder.com.au), it would have annual revenues of $700,449. But if 40% of customers switch to direct cremation at $3,000 each, then annual revenue drops to $522,489, a 26% decrease in revenue. If direct cremations get even more popular, those numbers look even worse. Given that funeral homes’ costs are mostly fixed, that is of serious concern for the big funeral chains.
Which funeral companies are most at risk
The funeral industry in Australia is dominated by two listed funeral stocks, InvoCare Limited and Propel Funeral Partners. Between them they currently control over 40% market share nationally (…and growing). These big chains are reporting higher and higher profits as they continue to increase their footprint and buy out small operators to increase their market share.
InvoCare, which is listed on the Australian Securities Exchange (IVC:ASX), is Australia’s largest provider of funeral, cemetery, crematoria and related services. It now operate over 290 funeral locations and 16 cemeteries and crematoria, across Australia, New Zealand and Singapore.
InvoCare, owns well known funeral home brands such as White Lady Funerals, Guardian Funerals and Simplicity Funerals. It also owns related services and products HeavenAddress; LifeArt coffins; Guardian Funeral Plans, MyGriefAssist, MyMemorial and Funeral Planner.
InvoCare’s business model has traditionally been based upon acquisitions of existing funeral businesses in the major cities of Australia and above average sales to drive high single digit Earnings per share (EPS) growth. This strategy has delivered InvoCare investors an average return of 16% since listing in 2003.
InvoCare profits also rely on charging customers much higher prices than independent funeral homes. In a recent story by the ABC 7.30 Report (10/6/2019), it was reported that on average, InvoCare funeral brands are up to 22 per cent more expensive, than at independent rivals.
This strategy appears to have been working out well so far, but there are very subtle signs of trouble looming on the horizon. The company appears healthy for now, but with a large decline in funeral home revenue looming due to a more informed consumer and direct cremation trends, that may not be the case forever.
Propel Funeral Partners (PFP:ASX)
Propel Funeral Partners was established in FY12 and is now the second largest private provider of death care services in Australia and New Zealand. Propel was founded and is managed by Propel Investments Pty Ltd.
The company listed on the Australian Stock Exchange in late November 2017 as it sought to emulate InvoCare by buying up smaller family owned funeral homes. They own funeral homes, cemeteries, crematoria and related assets in Queensland, New South Wales, Victoria, Tasmania, South Australia, Western Australia and New Zealand.
Propel performed over 10,000 funeral services in FY18 and the Company’s portfolio currently comprises 108 locations (54 freehold and 54 leasehold) in Australia and New Zealand, including 24 cremation facilities and 7 cemeteries. It’s recent acquisitions include Seasons Funerals in Western Australia and Norwood Park in New South Wales, Newhaven Funerals in Queensland.
Although they may not be listed on the ASX, Tobin Brothers Funerals are one of the largest funeral brands in Victoria with over 24 locations across Melbourne. They currently operate in Ashburton (Herbert King Funerals), Berwick, Brighton, Cheltenham, Cranbourne, Diamond Creek, Doncaster, East Burwood, Echuca, Frances Tobin (Funerals by Women), Frankston, Glenroy, Malvern, Moonee Ponds, Mount Martha, Noble Park, North Melbourne, Ringwood, Rosebud, South Morang, St Albans, Sunbury, Sunshine, Thomastown (Abbey Funerals), Werribee.
In summary, InvoCare’s sheer size and higher price positioning leaves it more exposed to Propel and Tobin Brothers, when it comes to the threat of direct cremation. Just like other industries in the past, the funeral industry will affected by the evolution in consumer preferences. Add to this, the debt-fueled acquisition binge that InvoCare and Propel Funeral Partners love to partake in, it is likely this will be their undoing when the hard times come.
Learn more about the funeral industry in Australia
eziFunerals supports individuals and families cope with end of life decisions, death and funerals. We are an independent, Australian-owned and operated company, and are not a subsidiary of any other corporation. We do not conduct funerals and we are not part of any other funeral company.