By Craig Malisow
By Jeff Balke
By Angelica Leicht
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By Sean Pendergast
By Sean Pendergast
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By Ben DuBose
Robert L. Waltrip, founder and chief executive officer of Service Corporation International, recently told The New York Times that people who don't buy his company's stock "just don't like money." He's right: Waltrip's company is not a cash cow. It's a cash herd. And it looks to remain perpetually profitable. In an industry report, stock analyst Steven Saltzman of The Chicago Corporation summed up SCI's market niche thusly: "Demographic trends are favorable, and the business is one of the most stable that we have encountered. The business is highly profitable and there is room for improvement. The largest players in particular -- including Service Corp. -- are insulated from competition..."
Read that again. Insulation from competition; high profits; favorable demographics; stable business environment: all the characteristics of a capitalist's dream business. But it gets better. For SCI, "highly profitable" means profit margins as high as 80 percent. The dominant player in a highly fragmented business, SCI controls 10 percent of the market; moreover, many of its customers pay in advance, and over the next five decades, its services will be increasingly in demand.
In case you're wondering, the "service" provided by Service Corporation International is funeral and burial service, known more formally as "undertaking": embalming the dead, digging the graves and selling the caskets and cemetery space. It's not the most glamorous line of work, but heck, somebody has to do it, and it has definite advantages over businesses with less grim reputations. Most important -- it pays extremely well.
Based in a nondescript office tower on the Allen Parkway, SCI has grown from a single Heights Boulevard funeral home originally owned by Waltrip's father to the world's largest provider of "death care" services, with 13,000 employees. SCI operates 791 funeral homes and 192 cemeteries in 610 cities in the U.S., Canada and Australia, and company revenues are growing by some 14 percent a year -- in 1994, gross revenues will approach $1 billion. This year alone, the company acquired more than 100 new funeral homes.
And, unlike other businesses, SCI is subject to virtually no downward price pressure. In other words, funeral homes dont compete on price, they compete on image. Most of SCI's customers don't even know that they're dealing with an international conglomerate traded on the New York Stock Exchange. They write their checks to the historic name on the door. In Manhattan, it's Frank E. Campbell; in Denver, it's the Olinger Mortuary. Here in Houston, it's George H. Lewis, Settegast-Kopf or Forest Park. But all are part and parcel of SCI.
While SCI was the first company to pursue aggressive consolidation in the $8 billion-a-year death-care industry, other publicly traded companies are expanding rapidly and have begun competing with SCI for acquisitions. New Orleans-based Stewart Enterprises, traded on the American Stock Exchange, owns more than 60 funeral homes and 50 cemeteries. The Loewen Group, traded on the NASDAQ, owns more than 470 funeral homes, 38 cemeteries and 18 crematoria. (Loewen just bought the Earthman funeral-home chain here in Houston.) But SCI has a commanding presence. Last year, there were about 2 million deaths in this country. SCI did 200,000 funerals. The company's sales are twice Loewen's and about four times Stewart's.
Even so, the corporate consolidators have so far captured only a fraction of the country's funeral business. Although they handle more than 10 percent of the nation's funerals, they own less than 10 percent of domestic funeral homes. The vast majority of funeral homes -- 80 percent of the country's 22,000 -- continues to be run by small family-owned firms, which means that plenty of acquisition opportunities remain for the big players.
Funeral corporations, no different from other businesses, want to capture market share. Thus, SCI and the other consolidators are aggressively marketing "pre-need" funeral contracts and cemetery property. The pre-need contracts provide lucrative financing charges and ensure a future client base. The companies are also capturing market share through acquisitions here and abroad. Last fall SCI bought Pine Grove, an Australian company with 58 funeral homes and eight cemeteries/crematoria. SCI and others are also snapping up properties in lucrative urban markets like Houston, New York City, Miami and Los Angeles, where they can create the best economy of scale and handle the most deaths. Because in the death-care business, more death means more money.
According to the National Funeral Direc- tors Association, the average funeral home has been operating for more than 60 years. With the lowest failure rate and the lowest startup rate of any business in the U.S., the funeral industry enjoys certain benefits that other industries don't. Very few consumers shop for funeral services. They tend to return to the same funeral home they have dealt with in the past, regardless of price. Funerals also tend to be big-ticket items: for the average American, the third-largest purchase he or she will make -- after a house and a car -- is a funeral. (Kind of makes you want to go out and buy a bass boat, doesn't it?)
Yet despite its inherent stability, the independent funeral business has many drawbacks, including long hours, high overhead and decreasing profit margins. Increasing federal regulation and lack of interest from the younger generation has also forced older owners to look for ways out of the business. That's where SCI and the other consolidators have been able to move into the market. Perhaps it was only a matter of time before the funeral industry began to consolidate. But it took Robert Waltrip to make it happen.