Grim Time for Funeral Firms

The funeral industry’s continued good health once seemed as inevitable as, well, death itself.

The $14-billion industry’s three biggest chains racked up market-beating profits in the 1990s, acquiring almost 50% of Southland funeral homes and about 13% of U.S. mortuaries overall. Investors sent their stock prices soaring, enticed by predictions of a so-called death boom in about a decade when baby boomers start passing away.

But this year, the funeral business has caught a glimpse of its own mortality.

The industry’s second-largest operator, Loewen Group Inc. of Burnaby, Canada, filed for Chapter 11 bankruptcy protection in June. Shares of the industry’s two other giants--Service Corp. International, or SCI, and Stewart Enterprises Inc.--lost more than three-quarters of their value during the last year as earnings sank far below expectations.

A combination of factors, but primarily unbridled spending, brought on the crisis, analysts say.

“They paid too much for acquisitions,” said Fran Blechman Bernstein, an analyst with Merrill Lynch Global Securities.

Both chain and independent funeral homes saw profit margins shrink as consumers increasingly chose minimalist cremations over more elaborate--and expensive--burials.

To top it off, people are simply living longer. The U.S. death rate has crept fractionally lower in the last five years. Houston-based SCI, the industry’s largest chain, blamed its sagging fortunes in part on potential clients not dying as soon as projected.

Analysts say the industry will rebound once the giants rein in expenses, but they expect the pall to remain over it for at least another six months.

Meanwhile, consumers willing to confront the notion of “cashing out” may be able to cash in on the chains’ distress. As industry giants shift away from aggressive expansion toward increasing volume at properties they already own, they may lower prices, analysts say.

“This is one industry where, up until now, consolidation only benefited the shareholders,” said Joshua Rosen, an analyst with Credit Suisse First Boston. “Prices went up; profit margins went up. Now the consumer is finally going to benefit.”

Richard Godinez describes the funeral home merger scene between 1996 and 1998 as something out of “Jaws.”

“It was a feeding frenzy,” said Godinez, funeral director at Saddleback Chapel in Tustin and president of the Orange County Funeral Directors Assn.

In 1996, SCI attempted a hostile takeover of Loewen. In response, Loewen’s founder went on a buying spree partly intended to run up enough debt to make his company less appetizing. He succeeded a bit too well.

“Ray Loewen bought up every cemetery, funeral home and crematory he could,” said Jon Kyle Cartwright, an analyst with Raymond James & Associates. “All too often, they paid more than they were worth.”

Loewen acquired more than 350 properties, including a stake in Southland institution Rose Hills Co. of Whittier. Analysts say it paid 20% to 100% more for properties than they were worth.

“We acknowledge that, clearly,” said Loewen spokeswoman Jennifer Mercer. “It didn’t work.”

Chief rivals SCI and Louisiana-based Stewart Enterprises too often were lured into bidding wars, unwilling to cede the most lucrative properties, analyst Cartwright said. SCI added 375 mortuaries and cemeteries last year alone. Stewart Enterprises more than doubled its holdings since 1996, shelling out $266 million in 1998.

In markets such as Southern California, the acquisition binge remade the funeral industry.

Outwardly, acquired homes remained unchanged, the names on their signs comfortingly constant. Inside, however, old-fashioned family-run shops became corporate units.

To save money, clusters of mortuaries were served by central body-preparation rooms, phone banks, communal motor pools and shared personnel. To squeeze out more revenue, chains hired battalions of salespeople and marketed prepaid funerals with unprecedented aggression, including direct mail and telemarketing campaigns.

Still, to recoup acquisition costs and to keep investors salivating at their profit margins, the big chains often raised prices soon after purchasing funeral homes.

Higher Prices Noticed

Chain prices at Los Angeles and Orange County mortuaries are, on average, 10% to 40% higher than independents for funerals, cremations and other services, a Times survey of 180 funeral homes in Los Angeles and Orange counties found.

Consumers eventually figured that out, even though industry surveys show people typically do not comparison-shop for funerals and are concerned less about price than about location and reputation.

Loewen said it conducted 5% fewer funeral services in 1998 than in 1997. Stewart Enterprises in part blamed high prices for its sluggish third- and fourth-quarter sales, saying they had resulted in customers choosing more economical cremations or other funeral providers.

“They charged too much and pushed to the point where the public wouldn’t take it anymore,” said Ron Hast, publisher of Funeral Monitor and Mortuary Management magazines.

Early this year, Loewen ousted its founder and namesake, then desperately tried to raise cash by selling off 124 cemeteries and three funeral homes. But cash flow couldn’t support the $2.3 billion in debt, analysts said.

As Loewen went into a tailspin toward bankruptcy, SCI--itself saddled with more than $4 billion in debt--issued a warning in January that earnings would be lower than expected.

“That was the bellwether,” Rosen said. “If you were looking closely, and not a lot of people were, it was becoming clear that growth was a lot slower than expected.”

SCI’s Jan. 26 announcement got Wall Street’s attention. The company’s shares, which hit a high of $44 in July 1998, plunged 44% that day, to about $19. It has fallen 58% more since. On Friday, it closed at $8.50, up 19 cents, on the New York Stock Exchange.

SCI executives declined to comment about the company’s struggles or retrenchment strategy. But a burgeoning anxiety continues to grip the funeral business overall, including companies reporting solid results.

“Public markets began re-pricing our entire industry,” said Stewart Enterprises Chief Executive Joseph Henican, who has seen his company’s stock drop from a mid-1998 high of $27 to a 52-week low of $3.97 on Friday, when it closed down 78 cents in Nasdaq trading.

Rick Gutierrez, an attorney and a partner in three Guerra-Gutierrez mortuaries in Los Angeles and Whittier, helped negotiate the sale of several local funeral homes to chains in the go-go years.

“The numbers looked good, but their debt was going up as fast as their income,” he said. “It had to collapse.”

The chains’ falloff has ended the funeral industry era of fat buyouts and ceaseless growth through acquisition, analysts say.

They depict the coming year as a Lent-like period of abstinence in which chains will build up existing assets rather than vacuuming up more. Rosen expects acquisitions to drop off by at least $1 billion.

Loewen’s reorganization plan is due in the next few months. Earlier company reports suggest that managers plan to sell off at least two more sizable chunks of properties.

Buying Spree Ends

Virtually no mortuaries in Los Angeles and Orange counties have been sold to the Big Three in 1999, after years in which dozens routinely changed hands, local funeral directors said.

“The chains are becoming more selective buyers,” Rosen said. “SCI’s focus is on being more competitive on price, on customer service and on its internal operations.”

Stewart Enterprises has tried to renegotiate dozens of acquisition deals struck before the investor backlash and has even canceled some, Henican said. After years of earnings-per-share growth of 20% or more, Stewart Enterprises expects growth of about 5% this year and about 10% to 12% in the next several years, he said.

Some independent funeral home directors say the chains’ weakness will help them compete more effectively after years of feeling overwhelmed by the giants’ marketing machinery and ability to grab volume discounts on products.

Godinez said Saddleback had lost sales not only to chains, but to casket retailers and other discounters who emerged as mortuary prices rose.

“We’ve felt the pinch,” Godinez said. “But the window’s available for us now.”

By contrast, hundreds of mortuary owners who sold to Loewen during its heyday are suffering.

When Loewen purchased Palm Springs Mortuary from Honorine Flanagan and her husband in 1996, the couple received about $2 million in cash and $8 million in Loewen stock, company documents show. At the time, the stock was trading at about $36. Now it’s at 47 cents. It closed up 3 cents Friday on the NYSE.

“She thought she’d be coasting in her golden years, and now she’s got worthless stock and lots of uncertainty,” said Ed Green, Flanagan’s attorney. Flanagan, now a widow, has sued Loewen, claiming the company knew the stock was vulnerable. The case has been stayed pending the bankruptcy’s resolution.

A. Alan Alameda sold Mission Chapel in San Jose, owned by his family since 1933, to Loewen in 1995 for cash and a 10-year unsecured note to be paid off in quarterly installments. The payments stopped coming this spring, and the company has warned creditors to expect back 15 cents or less on the dollar.

“They owe me hundreds of thousands of dollars,” Alameda said. “I can live without it, but I’d sure like to have it.”

Consumers’ changing tastes and price concerns play a central role in the chains’ plans for revival, analysts say.

Cremations have become more common, especially in Western states and Florida, in part because they offer a less expensive alternative to burial. In 1997, the cremation rate was 24% nationally and 45% in California. The Cremation Assn. of North America projects that by 2010, two of every five Americans and more than half of Californians will choose cremation.

Stewart Enterprises and SCI have responded by investing heavily in cremation societies, specialty firms that offer discount cremation packages.

Stewart Enterprises executives, who snapped up Neptune societies in Northern California and Telophase societies in Southern California, say they are finding ways to sell cremations more profitably, expanding them to include elements of traditional memorial services.

The most basic cremations can cost as little as $500 and yield paper-thin margins. But some cremation customers--who tend to be more affluent--want to honor loved ones with the formal ceremonies and impressive caskets that can add thousands to the bill.

Beyond offering more cremation options, analysts say chains are developing an array of prepaid funeral products, some linked to employers’ benefits packages.

Industry experts differ over whether chains will reduce prices to woo customers and to boost volume.

Rosen predicted that prices would come down--SCI has instructed its sales staff to negotiate prices to keep customers from taking their business elsewhere, he said. Stewart Enterprises announced in August that it would cut rates to compete more successfully for customers, even if it meant a short-term profit hit.

But Cartwright said chains will only lower prices if cost becomes the leading factor in consumers’ decision-making.

“As soon as you can win customers that way, prices will drop,” he said, adding that he thinks prices will go up in the short term as chains try to maximize revenue.

Consumer Wishes

Among Southland funeral homes, rates can vary by 200% or more for similar goods and services. Local funeral directors say consumers discuss price more than they did before and routinely call around for quotes.

But consumer activists say buyers still avoid making funeral decisions before they have to and, when grief-stricken, often spend more than they can afford. Enrollment in the Los Angeles Funeral Society, which negotiates less expensive

funerals for members, has dropped from 27,000 families to about 17,000 in the last 15 years.

“I thought we had created a revolution,” said Ruth Harmer-Carew, the society’s president, “but we’ve been talking into the wind all these years.”

As the funeral giants struggle to adapt to evolving consumer demands, simple demographics may prove their greatest ally.

After declining for more than a century, the national death rate is projected to rise once the first baby boomers turn 65 in 2011. Deaths are expected to increase from 2.3 million in 1990 to about 4 million in 2050.

“You’re never not going to need this industry,” Loewen spokeswoman Mercer said.

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The Industry and Its Leading Players

High spending on acquisitions, changing consumer preferences and longer life spans have hurt profits and stock prices at major funeral home chains. Here’s a look the industry in the Southland and how the top three chains compare with independents:

Southland Market**

Chains: 90 funeral homes

Independents: 101 funeral homes

*Figures include full-service funeral homes in Los Angeles and Orange counties only and do not include cremation societies or homes that offer limited discount packages.

The Chains

Service Corp International

Headquarters: Houston

Employees: 27,618

Worlwide holdings: 3,812 funeral homes, 515 cemeteries

Southland mortuaries: 64

1998 revenue: $2.9 billion

1998 profit and annual change: $342.1 million, +2.5%

1998 funerals: 259,071**

1999 stock performance to date: -78%

Loewen Group

Headquarters: Burnaby, Canada

Employees: 16,700

Worlwide holdings: 1,151 funeral homes, 427 cemeteries

Southland mortuaries: 13

1998 revenue: $1.1 billion

1998 profit and annual change: -$598.9 million

1998 funerals: 163,000

1999 stock performance to date: -94%

Stewart Enterprises

Headquarters: Metarie, La.

Employees: 10,600

Worlwide holdings: 575 funeral homes, 143 cemeteries

Southland mortuaries: 13

1998 revenue: $648 million

1998 profit and annual change: $41.9 million, -38%

1998 funerals: 111,216

1999 stock performance to date: -82%

** North America only

The Prices

Average prices* of various services at 180 Southland mortuaries surveyed by The Times.

*--*

Chains Independents General service fee $1,192 $879 Immediate burial $1,129 $1,030 Direct cremation $976 $814 Forwarding a body $1,234 $1,060 Receiving a body $992 $870 Embalming $255 $218 Casket price range $394- $423- $8,724 $11,081

*--*