Dying for Dollars

As the death-care industry booms and consolidates, Houston's Service Corporation International is leading the way

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.

Like many others in the industry, Waltrip grew up in the funeral business. His father, Robert E. Waltrip, and his aunt, Mrs. S.P. Waltrip, founded Heights Funeral Home in 1926. When Robert L. was still in college, his father died, and he was called on to take over the business. He decided to expand shortly after assuming control at Heights, and he mortgaged his assets to build Waltrip Funeral Directors on Campbell Road. Waltrip found that he was able to operate several funeral homes at greater profit by sharing personnel, vehicles and infrastructure. By 1957 he owned three funeral homes, and the acquisition strategy had been born.

In 1969 Waltrip obtained long-term financing and began selling stock to the public. SCI was listed on the American Stock Exchange the following year, and in 1974, with some 300 funeral homes in the fold, SCI switched to the Big Board. The company grew sporadically in the 1980s while trying to define its niche in the market. It flirted with the casket business, the flower business and other sidelines before returning to its basic line of funeral homes and cemeteries.

Today, flush with cash, SCI has begun buying back some of its stock, and the company recently announced a dividend hike. SCI has sold $1.2 billion in pre-need contracts. Wall Street likes the company, and so do shareholders. The stock price rose by more than 40 percent last year, prompting one death-care analyst to call the increase a "spectacular outperformance" of the Standard & Poor's 500. The largest owner of SCI stock is J.P. Morgan & Co., with 7.4 percent of the company's common stock. Eagle Asset Management, a St. Petersburg, Florida investment company, is the second-largest holder, with 5 percent. (Racer A.J. Foyt, a board member since 1974, holds 11,000 shares.)

Brokerage houses and investment advisors are bullish. Analysts cite the rising death rate as well as demographic trends: some 35 million Americans are now over 65, and the fastest-growing segment of the population is that portion approaching 85 years of age. Says Dean Witter analyst Scott Mackesy, who has a "buy" recommendation on SCI: "The demographics are great for them. The 65 and over, the Medicare market, that's growing like crazy over the next 20 years. I don't know of anyone on Wall Street who is bearish or has a sell on SCI."

There's an old political saw that says, "Where you stand depends on where you sit." In the case of SCI, that could be modified to say, "When you die, what you pay depends on where you live." With 14 SCI funeral homes in the Houston area (among the 125 such firms listed in the Greater Houston yellow pages), one might expect that SCI's prices would be fairly uniform. Not so. In fact, depending on the service or product sold, the company may charge twice as much in one area as in another. After a visit to SCI-owned Houston Embalming Service at 34th and Ella, the variations in price seem particularly odd.

The "prep center," as it is known to SCI personnel, has no unusual external features, save for a long lattice fence that obscures the loading door from the street. A couple of black Chevy Suburbans with the familiar chrome emblems on the rear panel are parked nearby. Located about 50 yards away from the front door of Pat H. Foley & Co.

-- another SCI funeral home -- the low-slung tin warehouse is busy embalming SCI's clients 24 hours a day, seven days a week. All of SCI's Houston-area funeral homes have their embalming done at the prep center.

On a recent day Wallace McConahey, the manager at the facility, regretted that he couldn't take visitors through the embalming room. "We have four people being embalmed right now," he explained. McConahey and his staff do most of the heavy lifting for SCI in Houston. They are the ones who go out on the "first call" -- funeral parlance for "go pick up a corpse."

While independent funeral homes do their embalming on-site, SCI has reduced costs through "clustering." By sending all their bodies to the embalming center, SCI reduces the amount of manpower needed at each funeral home. Lower manpower costs mean higher profits. When a client dies, the call to pick up the body is transferred to the embalming center, where workers are ready to retrieve customers 24 hours a day. Once the client is brought back to the embalming center, the staff puts the body in a refrigeration unit until they receive permission to embalm. After permission is granted, the four licensed embalmers drain the blood from the body, pump in a mixture of preservatives and drive the body to the funeral home that will handle the service.

However, even though all of SCI's non-breathing customers pass through the prep center, the prices paid by living consumers vary widely. For instance, a funeral director at SCI's brand-new $2 million George H. Lewis at Champions Funeral Home on F.M. 1960 gave a price of $275 for embalming. The price list from SCI's Pat H. Foley facility shows that embalming costs $385. SCI charges customers at Pat H. Foley $110 more for embalming, even though that facility is about 20 miles closer to the embalming center than the new facility at Champions is.

Transportation charges also vary. As it does the prep center, SCI operates one centralized livery, thereby increasing overall efficiency. Although SCI operates 14 funeral homes in the region, it has just 13 hearses. "We try to schedule funerals at 10, 11:30, 1:30 and 3," said fleet manager Tommy Tyson. By staggering the times, Tyson explained, he can use one hearse or limo in two different services on the same day. Tyson, who is in charge of scheduling the motor fleet and personnel for all of SCI's Houston funerals (they conducted 5,200 in the area last year), makes sure that limousines and hearses show up when and where they are supposed to. On a recent morning, Tyson's dark-suited drivers milled around a small television, drinking coffee and talking quietly as they waited for their next assignment.

But even though the hearses and limos come out of the same garage, are serviced by the same mechanic and may be driven by the same driver, consumers in different parts of town pay different prices. The charge for a hearse at SCI's Howard-Glendale Funeral Directors in east Houston is $250. At Memorial Oaks, it costs $285.

When prices are compared between SCI funeral homes in Austin and Houston or Dallas and Houston, the differences are even more striking. A hearse at Cook-Walden Funeral Home in Austin costs just $126. At SCI's Forest Park Westheimer Funeral Home in west Houston, it costs $275. The same service at SCI's Lamar & Smith Funeral Directors, a low-cost provider in central Dallas, costs just $135. (A recent advertisement in The Dallas Morning News for Lamar & Smith advised consumers, "It;s not a sin to price-shop funeral services." The company offers funeral arrangements, casket included, from $1,700.)

The pricing of caskets, too, makes little sense. At SCI's Austin operation, a solid mahogany casket described as "natural finish, urn-shaped, champagne-velvet interior, non-protective" costs $4,387. At SCI's Forest Park Lawndale on Lawndale Avenue, a casket described as "non-protective, mahogany wood, exterior finish natural mahogany, velvet interior" costs $7,854. At SCI's Forest Park Westheimer, it costs $6,997.

SCI communications director William Barrett defended the pricing policy simply by saying, "It would be foolish to say we're not out to make a profit."

Nothing in his plush 12th-floor office would indicate that Blair Waltrip's business involves funerals. Western paintings, waterfowl and wildlife scenes cover the walls. Books on executive management and training perch on the shelves. Aside from a large ashtray with the SCI logo, and the SCI lapel pin on his suit, you'd be hard-pressed to figure out what company he works for.

The son of SCI founder Robert L., Blair Waltrip said he always wanted to be in his father's business. "At six years old, I knew that's what I wanted to do," he said. "I never had any doubts." As a youngster, Waltrip played in the parking lot of Heights Funeral Home. Today, at age 39, he's the youngest member of SCI's board of directors and is the company's largest individual shareholder. At last week's price of $26 per share, his 860,000 shares were worth more than $22 million. The executive vice president in charge of operations, the young funeral baron wouldn't predict how big SCI could become.

"Rather than look at how big we can get, we try to manage our business," he said. "Rather than focus on big numbers, we focus on managing the business to the best of our ability in growing the company for the best interest of the shareholders. I never thought about how big SCI can get."

He paused and then continued. "Let's put it this way: Right now, we see a heck of a lot of opportunity. And really, we don't see any restrictions on the horizon."

But Waltrip grew testy when asked about the disparity in prices among SCI funeral homes. Asked why a mahogany casket in Austin costs $3,467 less than one in Houston, he replied: "Number one, I didn't see the unit you are referring to. We operate in a very decentralized manner. We don't dictate what prices should be in particular markets for particular services or merchandise. We leave it up to people in the cities to arrange their own pricing structure. And Houston and Austin are two different communities. And just because one of them charges more or less for a particular unit, it's probably based on local market conditions."

Waltrip said pricing decisions are made by the manager of each facility and then reviewed by regional managers. He also pointed out that SCI has huge overhead costs, including personnel and buildings: "We have the finest vehicles, the highest-caliber vehicles, that are available 24 hours a day, seven days a week. But we are not busy 24 hours a day, seven days a week. We provide a service to the consumer, and we believe we are competitive in the market we serve."

Citing surveys that SCI sends out to recent customers, Waltrip said: "We have an acceptance rate of 97 percent. So if the customers' communication to us is any barometer, which I think it is, we have an acceptance rate of over 97 percent."

There is no question that SCI has a well-trained staff. With a few exceptions (the funeral home in Austin wouldn't tell me the make and model number of the mahogany casket mentioned above), SCI staffers were highly professional and very willing to talk about procedures, prices and options.

"We feel we provide exemplary service," said Waltrip. "And we feel we charge a fair price for the exemplary service we provide."

"You always try to show the customer the most expensive casket first," explained Vachael Starks, as she showed me around the casket showroom at the Commonwealth Institute of Funeral Service. A recent graduate of the mortuary school, Starks now works behind the reception desk at the American Funeral Services Museum, which adjoins the school [see "The Mausoleum Museum," page 13]. She explained that students at the school receive full instruction in the pricing and location of caskets. "By showing them the most expensive one first, that's the one they remember."

The most visible part of the funeral business, and usually the most profitable, the casket industry is highly competitive, with 300 U.S. companies producing caskets made of everything from plywood to copper. Local funeral homes quoted prices ranging from $997 to $89,500. "Yes sir, and what is that made out of?" I inquired about the top-end model. "Solid copper with sterling-silver overlay," he replied. (If you're interested, call Settegast-Kopf.)

Call it a casket, coffin, whatever you like, it is no more than a box. Yet the choices available are bewildering: full couch, half couch, fully sprung mattresses, polished, protective, non-protective... And the prices on the caskets don't offer a reliable gauge of their relative value. Even more disconcerting is the realization that funeral homes usually mark up the cost of a casket by 200 to 400 percent.

When I asked members of the funeral industry about the high cost of caskets, I got almost identical responses from two different people: "Merchandising is merchandising," both replied, and: "A Yugo is cheaper than a Rolls-Royce. So why doesn't everybody buy a Yugo?"

But comparing caskets to cars is something of a reach. After all, you use a car every day. You use a casket only once. As for "merchandising" -- buying toothpaste and buying a casket are simply not the same sort of transaction. Certainly, people will shop based on their perceptions -- but they can also seek the lowest price on toothpaste. Once a customer is in a funeral home, though, he will very rarely shop elsewhere. Thus, the pricing of merchandise in a funeral home has very little resemblance to the real world, where Americans have made price comparison a favorite indoor sport.

But there may be relief on the horizon.
Russell Moore, who operates Casket Gallery International -- a retail casket business in the Dallas suburb of Mesquite -- thinks funeral homes charge too much. "Our $895 non-protective casket would compare to an $1,895 or $2,495 casket you'll find in a funeral home," he said. Moore argued that funeral homes try to make their cheapest casket look bad, encouraging customers to buy a more expensive product. Speaking of a Dallas-area funeral home that offers low-cost services, he said, "They have a casket in there that is the ugliest thing in the world. By the time you buy a casket that's attractive, you will have to spend $3,000 to $4,000."

Moore's business prospects are good. Several billion dollars' worth of caskets are sold every year in the U.S. And, by law, funeral homes cannot refuse to use a casket from a third-party supplier such as Casket Gallery. (Last month, the Federal Trade Commission adopted a regulation prohibiting funeral homes from charging a handling fee on caskets purchased elsewhere. The National Funeral Directors Association has notified the FTC that it will appeal the ruling.)

Moore frankly equates the funeral home's control of the casket business with racketeering. Because they control the supply of caskets, he said, funeral homes effectively control the price. "In any area that you have a high percentage of corporate-owned funeral homes, you are going to have higher prices," he said. "And, frankly, that is one of the areas we are targeting." Moore said his company wants to expand into other cities, including Houston, but he would not say when it might happen.

Cemeteries were once the domain of the church. Gradually, the operation of the graveyard passed to the town or city, which operated the cemetery as a public service. Today the cemetery has become yet another area in which crafty entrepreneurs can make handsome profits. SCI owns four cemeteries in Houston. The company's officials say they are the four largest.

"It's hard to get people to buy anything before they need it," explained an SCI saleswoman at Memorial Oaks Cemetery, as she tried to talk a customer into a mausoleum space. Buying a crypt in the mausoleum could be cheaper than a regular grave, she explained, once you include the cost of a vault, grave-liner and headstone.

At Forest Park Westheimer -- another SCI operation -- the cheapest price quoted over the phone for a regular grave was $1,200. Then, surprise! -- the salesman suggested that the mausoleum might be a better deal. "You can save up to 10 percent if you buy a pre-construction mausoleum," he said. He explained that the mausoleum wasn't built yet, but buyers could reserve a new coffin condo for just $3,495. Once the building is completed later this year, the crypts will be selling for $6,995. "We discount when we sell pre-need," he explained.

The salesman then continued to expound on the virtues of a mausoleum over a regular grave. In addition to the $1,200 for the grave, it costs $575 to dig the hole (industry professionals prefer to call it "opening and closing" the grave). Add another $1,100 for a vault and $1,000 for a marker, and a regular plot will run $3,875. Thus, he explained, buying a space in the yet-to-be-built mausoleum was a better deal.

It's easy to see why SCI wants consumers to be shelved in a mausoleum. The company makes more money. Why sell a three-foot-by-nine-foot plot that can handle only one person, when you can build a high-rise mausoleum and stack customers four or six high? Plus, you can charge customers more for what the saleswoman called "premium burial."

George Kriegshauser, who manages SCI's Houston-area operations, explained that about 1,000 graves can be put on a single acre of cemetery space. Selling spaces for a minimum of $1,000 each, cemetery companies easily make more than $1 million per acre of cemetery space. If they build mausoleums, they can sell up to 10,000 spaces per acre. Thus, per-acre profits increase not by a factor of ten, but by a factor of 20, 30 or 40, since a premium burial commands a premium price. During a visit to SCI's Memorial Oaks Cemetery on the Katy Freeway near Dairy Ashford, Kreigshauser explained that the company has about 50 acres of undeveloped cemetery land containing enough grave space for the next 75 years.

At Memorial Oaks, the company is prepared for the next millennium. SCI just completed construction on a snazzy $2 million funeral parlor, where everything is solidly upper-middle-class. Located a scant 20 paces from the white lines of the Katy Freeway, the building is an ornate palace for the dead. Very much a funeral parlor rather than a funeral home, filled with expensive chairs, carpet and decor, the new facility is almost identical to the new George H. Lewis facility at Champions, 20 miles to the north.

The Memorial Oaks facility represents the latest trend in the industry. One-stop shopping has come to death care. Companies like SCI save money by putting funeral homes right at the cemetery. Combination facilities reduce overhead and transportation costs, and they save time for company employees. The new combination funeral homes "are very popular with consumers," said SCI communications boss William Barrett. SCI, Loewen and Stewart have all begun stepping up their plans for combination facilities. SCI now has more than 60 combination facilities.

Independent funeral-home owners are mixed in their assessments of SCI. In Cincinnati, Bernie Naegele and a couple dozen other funeral-home owners banded together in the late 1980s to form a cooperative venture known as Care Givers -- with the express purpose of keeping the big firms out of their city. "I think I can better serve families than they can," Naegele said.

In Wisconsin, funeral-home owners united to pass a bill in the state Senate prohibiting funeral homes from owning cemeteries, a move which effectively limited the ability of the big firms to move in.

Here in Houston, Christina Morales, owner of the Morales Funeral Home, said of SCI: "They are good in that they make it as professional as possible. But they also raise the cost of funeral prices because they have such a monopoly on the funeral-home business." Morales said her business focuses on the Hispanic community, where SCI hasn't shown much interest. "Their franchising hasn't resulted in any breaks for the consumer," she said. "They have these head honchos and they have to pay their salaries, too."

Reggie James, project director for Consumers Union in Austin, had little good to say about SCI and the death-care industry. "The funeral industry is ripping off the consumer," he said. Wary of the corporate move into the industry, he said: "I think it needs to be regulated like a utility. They are a monopoly. Market pressures don't apply, so you can't control the price. People can't use demand to adjust the price, and consumers can't shop to get a better price because of the time limitation."

James's favorite target is the pre-need aspect, which SCI and other funeral companies are promoting very heavily. Referring to the businesses' dubious practice of withdrawing the accumulating interest from pre-need trust accounts (a practice recently outlawed in Texas), James commented: "We have had horrible problems with long-term care policies. We have always said [the pre-need contract] is not a good deal. In the alternative, we said customers should put money away." James said that other investment options, including life insurance, provide better value to the customer.

The merits and the drawbacks of the corporatization of the funeral business could be argued for days. SCI and the other big companies have brought computers and efficiency to a business formerly dominated by cabinetmakers, who built coffins in their spare time. Just like other businesses, they have a right to expect a decent return on their investment. But how much of a return should they get? Is 30 percent enough? Is 80 percent too much?

Chris Layton teaches the history of American funeral services at the Commonwealth Institute of Funeral Service. He believes that the role of SCI and other large funeral companies will increase because of what he calls "neo-localism." He said that the transitory nature of the American population will lead to an increased reliance on funeral homes to care for the dead. And he sees little opportunity for change. "At funerals, people become very traditional," he said. "Funerals are like weddings. People are concerned with the social aspects. It's the social value in what they are doing that is most important."

Maybe that's why SCI and the other consolidators are so profitable: they have tapped into a social tradition that requires a certain image. Just as at weddings, where families want to project an image of prosperity, no one wants to hold a cheap-looking funeral. Mix that desire with inevitable feelings of guilt that prompt the bereaved consumers to spend freely, and you have a business recipe for assured profitability.

Thus, as the local bank, grocery, hotel and bookstore have been taken over by out-of-town chains with little or no connection to the local community, the locally owned funeral home may, in the long run, become another anachronism. Just as birth has been moved out of the familiar confines of the home into the sterile (in both senses of the term) hospital environment, death may also be falling into the hands of the corporations.

The shareholders of SCI couldn't be happier.

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