Rising interest rates, rising costs, rising inflation. . . . what does it mean for funeral homes

April 20, 2022/Business/

Here’s an interesting fact as reported in this article from CNN, “The 30-year fixed-rate mortgage averaged 5% in the week ending April 14, up from 4.72% the week before, according to Freddie Mac. That’s the highest since 2010″.

Here’s a couple of other quotes concerning our economy from this recent article in Yahoo Finance, “Generally speaking, profit margins for S&P 500 companies are expected to shrink in the first quarter, compared to the previous quarter and 2021. . . . some firms are able to continue passing on costs, companies across the board are expected to endure rising expenses in the first quarter, as the cost of everything from labor to energy and raw materials rise.”

The Yahoo Finance article takes an interesting point of view and argues that companies that have historically had high margins, especially tech companies, can change the equation between margins and revenue growth and do just fine in keeping investors happy. By this they mean that for the short term that they can cut down general and administrative costs and lower marketing spends, but still deliver enough revenue at high margins. . . .they just won’t have the growth that they are used to until pricing stabilizes. In contrast, a company with lower margins may not be able to lower marketing spends and other costs, for instance, without losing sales and, with those sales, profitability.

The article talks about companies such as Coca Cola (61% margins), Adobe (85% margins) and Oracle (76% margins) as examples of these companies that they believe can weather rising interest rates, rising costs, and rising inflation.

On the other side of the spectrum, according to the article are companies with lower margins such as Live Nation (17% margins), Hormel Foods (20% margins), and Lockheed (13% margins). Because of their lower historical margins these companies have much more difficult choices in how they can stay profitable in an environment of rising costs.

So, what are the margins in your funeral home and how can you weather this triple threat of rising variables while keeping your business in the best possible situation? Using the thought processes on margins from the Yahoo Finance article here are a couple possible scenarios.

If you have harvested high margin services in the past you may be able to continue at a status quo level continuing to bring in high enough margins while keeping your prices stable for a period of time. Your margins should allow you to keep your full services intact and still be profitable even if you are paying higher costs for financing, supplies, and wages. In essence, being a high margin operator has set you up to weather this storm for a period of time.

The one place that you would have to watch your flank is if you have low-priced competitors. It could very well be that your client families may be suffering at home from rising costs and with a death in the family may look for a low-cost operator to save some money. You’ll need to watch your death call volume to see if this potential trend becomes a reality in a period of sustained rising costs.

If you are an operator who lives with low margins and operates an efficient, low cost operation and deals in volume for profitability you will be on the other end of the spectrum. Your margins would, more than likely, be on the low end of the spectrum and any rising variable costs may erode your margins past a safe point of profitability. You may need to really watch those costs and, more than likely, reset prices to a higher level to maintain profitability.

On the flip side of the high margin business, you may however, be on the receiving end of higher call volume as more consumer clients look for a low-cost alternative. One of the keys to profitability, as variable costs rise, may be to hold your fixed costs as low as possible for the time being. Delaying capital expenditures may be a worthwhile cause, if it does not translate into lost sales. And, if you are the low-cost alternative in your market, don’t be afraid to raise your price point somewhat.

Funeral Director Daily take: These are just a couple of thoughts. I’ve always believed that funeral service is a truly local market with different brand leaders and different price point leaders in every market. There is no “exact” plan that will work for every funeral business. The variety of the funeral businesses around the country also allows independent operators a variety of ways to weather low volume months, quarters, and years.

Tom Anderson
Funeral Director Daily

During my days I operated a funeral home that when I retired operated at a 55% earth burial / 45% cremation rate. When you look at margins in the death care business, I would argue that the funeral home operated in the top 5% of all funeral homes for margins. The business operation was predicated on what I would call Balanced Pricing which stressed Service pricing over Merchandise, Moderate but nice facilities, and Efficient operations.

I started in the business in 1980. . which was in the middle of the same type of increases America is seeing today re inflation, interest rates, and cost increases. When we came out of that, the high margins proved very effective in that in down years our downside was smaller profits and not losses.

I think of “pull-back” consumer spending years during my time . . . maybe 1999 – 2002 and again in 2007 – 2009 . . and believe that by being a “Service First” pricing company our profits stayed fairly stable. I think in those years, clientele families maybe spent less on merchandise, but because we had little or no mark-up on merchandise, it did not affect our financial operation very much.

Part of today’s article should prompt you to look at how you price your goods and services. . . and figure a way to do so in a way that a “price-conscious” consumer can continue to allow for profitability when you serve them.

# # # #

Additional information and thought for its cause in the funeral industry:

I saw the following article last week and, while this reflects business at large, I wondered if it will have an effect on pricing of funeral businesses that are on the verge of, or in contemplation of being sold.

From Seeking Alpha last week: “The good old days of serious deal-making are no longer, with banks blaming Russia’s invasion of Ukraine and related instability dampening appetite for transactions. A steep drop in investment banking fees will likely be seen due to the pace of new deals slowing significantly, bringing an end to the pandemic boom seen on Wall Street. In fact, the number of M&A deals in North America fell 16.7% Y/Y in February and the value of those deals fell 30% in the same month, according to S&P Global Market Intelligence data.”

# # # #

And, here’s how a couple of other company’s are dealing with inflation. I found these items of interest about Amazon and AriZona iced tea in the newsletter The Hustle earlier this week.

Amazon announced a 5% surcharge for fulfillment services to account for inflation and rising fuel costs. One expert says the charge could lead to increased prices on Amazon.

And, here’s something about AriZona iced tea. . . . they have not raised prices in 30 years! According to this note that has led to great gains of volume which have increased profitability. . . . . . . .do you think a low-cost cremation provider could use the same formula???

“A 23-ounce can of AriZona iced tea has been the same price for 30 years — 99 cents. Adjusted for inflation, it costs less than ½ as much as it did in 1992.

How does AriZona manage this?

Don Vultaggio, the 6-foot-8 co-founder and chairman of the private company, is reportedly a stubborn man, according to the LA Times. He’s a wealthy man, too, with a net worth of $4B+.

Vultaggio’s take is that raising prices to meet inflation will net a short-term profit but push away customers. AriZona commands a 16% market share in the ready-to-drink space and sells ~1B cans annually.

Plus, whereas AriZona loses money on things like aluminum — at $3,250 per ton from $1,750 just 18 months ago — it saves money in areas like marketing. (The company has 506.3k TikTok followers vs. Coke’s 208.4k.)

The brand even pokes fun at its inflation defiance, recently tweeting that it should “run the economy for one day” and posting a meme about itself as an inflation-defending knight.”

More news from the world of Death Care: