Business, Cremation

$5 footlongs . . . . and $695 cremations

Foundation Partners why I partnered

Last week we commented on an article from funeral industry veteran Doug Gober.  That article encapsulated where Mr. Gober saw the investment money going in the death care industry.  We think Gober was right on in his assessment, but one of his insights . . . . .that of “the best way to add value to an existing funeral home is to add a crematory” brought a question from one of our readers that we think is interesting.

That reader had these comments and wondered how adding more crematories would help death care services in the United States:

  • Cremation capacity is generally sufficient nation-wide, with certain newsworthy exceptions
  • Public opposition to new crematories is only growing and making it difficult to build a new crematory in even rural areas
  • Trade services offering removal, embalming and cremation services are growing. Also, alkaline hydrolysis and natural organic reduction are largely being offered by trade establishments initially.
  • The “race to the bottom” is on two tracks – online cremation providers and trade services. Both depend on high volume and large market share. Well established businesses make it difficult for newcomers.

We think the reader has really good and correct points.  However, business in America – and the death care business is no exception – lives and thrives on Darwinian principles.  . . .that is the survival of the fittest.  And, if your establishment does not have a crematory and you are losing business to a competitor that does, you will add that crematory to your business even though the “cremation capacity” for the country is already sufficient.  Your funeral home’s addition of that crematory simply adds to the extra capacity available in the country.

The downstroke of that extra capacity brings us to the reader’s 4th point. . . .that of a “race to the bottom” on pricing.  In almost all businesses, those that have excess capacity generally resort to pricing to fill that capacity.  And, we believe, that will become a real issue as more and more crematories are built and go online for use.

Funeral Director Daily recently wrote an article entitled, “Learning from the secular “non-death care” world“.  In it, we diagnosed the QSR (Quick Service Restaurant) world and how some of the things that those franchise companies did might be comparable to the cremation/burial markets.  If you read that article, one of the things you would have learned is that Chick-fil-a franchises are very expensive and hard to get the rights to. But when you do acquire one, on average they bring in over $4 million in revenue per location.  A McDonald’s, also an expensive franchise, was a distant 2nd in revenue per location with about $2.76 million in revenue per location.

Today, we will compare that. . . and excess cremation capacity with the franchisor of sub sandwiches, Subway.  Subway’s modus operandi has been much different from Chick-fil-a or McDonalds.  Quite frankly, their apparent philosophy has been to have low cost franchise and launch costs – estimated at $140,000 – $342,000 per store compared to a McDonald’s estimated cost of $1.3 – $2.2 million per store.  The thought process has been to saturate the country with stores (much like funeral homes are doing with crematories) and then reap in sales from the apparent location convenience.

Compared to Chick-fil-a and McDonalds, a Subway does much less in sales per store.  As a matter of fact, the number that we found was about $417,000 per location in 2020.  That’s about 1/10 of the annual revenue of a Chick-fil-a and about 1/7 the annual revenue of a McDonald’s franchise.

Here is where I see a correlation between the idea of too many Subways with the idea of too many crematories.  In 2008 Subway launched its “$5 Footlong” promotion.  It was wildly successful and brought in $3.8 billion in revenue to Subway franchisees in 2008 . . . that is more than the annual sales of Arby’s or Dominos at that time.

While the promotion brought in great amounts of revenue it also had the effect of lowering margins on individual franchisees as more expensive sandwiches, with greater margins were not sold.  By 2016 Subway had seen a net decline in franchisees for the first time in their history.  According to an article from “The Hustle” that I read, here’s what Subway then did:

“In 2017, the $5 footlong made an unexpected comeback in the form of a $4.99 deal. 

This decision was met with uproar from franchise owners, who claimed the promo made it impossible to make a profit. The unit economics proved their case: Even the cheapest option, the turkey sub, barely broke even.”

That “low-price” also led to what the same article says is a decline of revenue per store from $488,000 to the current $417,000.  And, in 2020, the company saw a loss of about 10% of its franchise owners.

It almost sounds like the company forced a “Race to the Bottom” with its pricing policies which is what the reader that contacted me noted in their 4th bullet point from above.  So, the question must be asked, “As we continue to build out cremation capacity in death care establishments in North America, will we also see a “Race to the Bottom” in pricing as too many providers chase too few consumers in the low-cost cremation business.

I don’t have the answer, but I think that is a great question to contemplate.

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One Comment

  1. Dear FDD, Not since the advent of the first commercial crematory was established in Pennsylvania in the 1876 by Dr. Francis Julius LeMoyne have we had sufficient crematories. On average, dividing the total number of annual cremations by the total number of retorts, we have seen in recent years the math show us the average retort cremates more than 300 bodies a year, and this is increasing in spite of an increasing number of retorts.

    An argument could be made that any funeral home can build a crematory and get its ROI back in 10 to 15 years, once they hit 90 to 100 cremations. However, owning a crematory and “the race to the bottom” are not aligned thoughts! The proper pricing of cremation services by established funeral homes has to be consistent with the proper pricing of services culminating in a burial. The fear has always been that when a funeral home owns its own crematory, “it will promote cremation”. False! Consumer’s have been choosing cremation at an increasing rate each year since the FTC instituted The Funeral Rule, 110 years after LeMoyne. That rate of increase is now more than 50%. If you want to deal with general statements, that means that today, a cremation, is “a traditional funeral” in the US.
    I urge your readers to not dismiss Doug’s thesis out of fear. Embrace it and build your business plan within its message.

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