Minefields up ahead??

December 9, 2021/Business, Preneed/

Just yesterday Funeral Director Daily brought you an article that showed, through the reports of public companies, that consumer based funeral homes and cemeteries seem to be doing really well financially over the past two years of the Covid-19 pandemic. For the most part, and their are exceptions, the 12-15% increase in American deaths has seemed to trickle down to better bottom lines of funeral homes and cemeteries.

I also want to point out that has not been done without incredible efforts on the part of our profession. Early on, before vaccines, funeral directors were putting themselves on the line to make sure they could do what they could to help the families who experienced loss.

Yesterday’s article pointed out that the funeral profession has done so well. . . and they have adjusted using remote arrangements, webcast services, and more technology to the point that the “outside world” of investors has seemingly lost their reluctance to invest in Death Care moving forward.

So, as a cautionary businessperson, one who knows that what goes up may come down, what pitfalls do I think you should look for ahead and maybe try to ameliorate before they hit you head on? I’ll give you my point of view. . . .

The Consumer Price Index (CPI) — The CPI is a calculated number that tries to give an accurate picture of what the price of purchased items for the consumer has gone up (or down) in a year. Recently, that number was 1.8% in 2019, 1.2% in 2020, but has skyrocketed to 6.2% in 2021. That is the highest number since 1982 when the CPI was at that same 6.2%. So, for the last 40 years, we have had a much slower rate of inflation or annual cost growth than we did in 2021.

How will that affect your business? The obvious is that prices that your business pays to provide the services for the families that you serve will increase more than you maybe think. I think of things such as utility costs, custodial services costs, prep room supply costs, waste costs, lawn care costs, advertising costs, and the list is endless. I don’t think that there is any doubt that these costs will increase. . . . .and then there is wage costs — if the cost for groceries, youth sports, college, automobiles and the like is going up an average of 6.2%, you can bet your employees want to get caught up to that number also.

Tom Anderson
Funeral Director Daily

I’ve seen an indication that the CPI going up is permanent and not, transitory (temporary) as the Biden administration has claimed. I’ve always watched public utility companies (PUC) that are regulated by the government. They rely on making profits in order to pay all of the costs and reward their investors. Historically, they ask government regulators for 7-10% annual increases and are granted rate increases of about 2-5% by the regulators. So far for 2022, I have seen one PUC ask for a rate increase of 20% because of added costs and actually be granted a 7% increase (what they historically ask for). To me, that more than anything recognizes the fact that those PUC’s can prove that costs are going up for good. . at least in my opinion, inflation is not transitory.

You need to look at your business and recognize that costs are going up and calculate your budget with that as a fact.

Preneed — This is pretty specific to the funeral home industry and depending on how you service preneed accounts may or may not affect you much. From my point of view I have always looked at funeral homes having a choice on how they handle preneed funding. On one hand they can make the decision to contract with the preneed client in that once the funds are put into a preneed insurance account and services are selected the consumer’s costs are paid in full — I call this a “Guaranteed” contract.

The other way I look at insurance funded preneed is that a consumer selects, in general, the type of funeral arrangements that they prefer with desired merchandise. Their is no contract to guarantee those specific selections and the consumer has a policy which gives them “a bag of money to spend” at the time of the funeral.

If a funeral home has offered the “Guaranteed” preneed contract, that funeral home is set to do very well in terms of profitability during “low-inflation” times. Let’s say the policy has guaranteed growth of 3% from the insurance company. If inflation, the CPI is 1.2%, then the funeral home has gained an additional 1.8% margin for the year because the growth from the policy outpaces the growth from business expense inflation.

On the other hand, in times of high inflation, such as 2021, your costs are going up 6.2% and you are only gaining 3% additional death benefit from the policy, so you are losing ground to margins as your expenses outpace your death benefit growth.

Those are two of the main minefields that I can see up ahead for some funeral homes. There are other ones — such as supply chain issues. . . will you be able to get caskets and other memorial products when you need them? What about pricing and the consumer? If you have to raise your prices to cover inflation. . . will that increase in the cost of a traditional funeral cause some consumers to look for a less expensive option. . .or less expensive provider?

American business history is full of stories of operators who overcome the challenges. . and sometimes find innovative new ways to do things that overcome minefields and prosper. There is no reason to believe that with the proper planning you cannot be one of them.

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