Will “deflation” improve your margins?

 

 

“Deflationary forces will be the story of the season.”  That’s a headline I recently saw.

 

I receive three general business newsletters in my inbox every morning.  I woke up on Monday of this week with two of those newsletters headlining their newsletters with talk of inflation. . . more specifically, that talk was of inflation “receding” or at least the rate of inflation slowing down to a more normal situation.  According to one of those newsletters using this article as a reference, the Core Consumer Price Index (CPI) has cooled more than expected.  Evidently falling to about 3% for June 2023 from a high of 9% year over year last summer.

 

The article from Yahoo Finance had the sub-title of my first sentence and said that lower commodity costs are on their way after three-plus years of hyperinflation.  The article makes the point, at least as of Monday, that oil prices have plunged 20% in the past year (Editor’s note: They have started moving up again in the past 30 days) which should make the supply chain that relies on transportation less expensive.  The article also intimates that lumber has dropped 25% and the electricity prices have dropped “considerably”.

 

The Yahoo Finance article concludes by saying this, “For the fourth quarter, analysts are projecting 7.5% year-over-year earnings growth”.  And from reading the article, I get the take that it is from commodity costs, of all types, dropping.

 

What should that mean for your funeral home?  —  If costs drop and every thing else stays the same, it should result in a larger margin between revenues and expenses which would be very positive for your funeral home.

 

Will that happen?  That’s my question. —  Commodities may very well drop in price.  But, is that a main driver of your costs of doing business?  I don’t have a crystal ball, but here is what I see for funeral homes.

 

Tom Anderson
Funeral Director Daily

First of all, astute funeral home operators have more than likely raised prices to combat some of these recent commodity price and inflation increases already.  If you have not, it is probably because you are keeping lower prices to either win market share or to show integrity with non-guaranteed preneed funeral policies.  Both are good reasons and over time may win market share for your firm.

 

So, if your revenue is raised already. . . will your costs drop as the experts seem to think commodity prices will drop and lead to greater margins?  I’m not so sure that you can count on it.  My reasoning is that commodity pricing is not the major driver of funeral home costs  — yes, casket prices may go down if gasoline, steel, lumber, and the cost of delivery goes down. . .and your electricity may go down if that commodity price also decreases.

 

However, your major drivers of expense in the funeral home business are facilities and personnel.  And, over 40 plus years in various businesses has taught me that almost never do personnel costs go down once increases have taken place.  I just have found that once somebody is increased in wages, as many funeral homes have done with personnel over the past couple of years, that cost never comes down. . . it is there to stay. . .and eventually to continue to rise.

 

Not to mention the benefits that go with those personnel costs. . . benefits such as health care, child care, and now, mandatory in Minnesota, a tax to allow for paid family leave for all employees.  I don’t think those costs are going down anytime soon.

 

And, your facility costs such as upkeep and taxes have probably risen during these past two years of high inflation also.  I don’t see your yard man taking a decrease for his work nor do I see real estate taxes coming down.

 

So, I think it is good that inflation is lessening as stability is not only good for consumers, it is good for business.  However, in the funeral home business, I’m not so sure that the lessening of inflation will be a big boon for funeral homes as to their margins improving.  If your business has an adjustable rate loan and rates start coming down that would be a help, but I don’t see interest rates starting a downward trend for at least six months.

 

As always, my advice is to continue to watch your costs.  My dad used to say “I don’t make my money selling funerals, I make it containing my costs”.    If we do get into a deflationary trend make sure you are always looking to suppliers and vendors to take advantage if and when prices do drop. . . . .don’t forget, they are in competitive environments, too. . . and may drop prices to build market share.

 

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