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Article Excerpt
ABSTRACT
Cemeteries and mortuaries are unique properties, but they can be segmented, quantified, and appraised on the basis of traditional valuation approaches. Cemeteries and mortuaries are the key components of the deathcare industry, which involve a wide range of assets. They are typically owner-operated and purchased and sold on the basis of their current income-producing potential. There is limited market data, requiring the analyst to research competitive facilities. interview market participants, and create a financial capitalization model that can provide a valuation of the real property and business, if necessary.
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Even though many cemeteries and mortuaries are operated on an integrated basis, they are still vastly different enterprises that deal with the same product. Cemeteries (1) require large tracts and specialized improvements that are prepared for occupancy in advance of need. They are one of few businesses that require investment in their inventory of product, which may take decades to market and absorb. Mortuaries, (2) on the other hand, are service businesses that can operate in leased premises, although most do not, and, in their typical configuration, can be subject to a significant degree of obsolescence. These factors, and others, will be examined in this article.
The term deathcare industry refers to the array of providers of funeral and burial goods and services, such as funeral directors, cemeterians, and third-party sellers. Historically, the industry has been fragmented, with limited overlap among various segments of the funeral and burial industries. Funeral homes (mortuaries) and funeral directors sold funeral merchandise and services. Cemeterians and monument/memorial dealers sold monuments and memorials. A funeral home or cemetery generally arranged cremation services, and independent florists sold flowers.
Today, cemeteries and mortuaries are complex enterprises that combine a variety of physical assets, including land; land improvements; buildings; furniture, fixtures, and equipment; and inventory. The intangible aspect of the business or goodwill includes the name, reputation, continuing ability to attract patronage, and quality of management.
The Industry Today
Currently in the United States, there are about 15,000 mortuaries, over 5,000 operating cemeteries, over 1,200 crematories, and an estimated 300 casket stores, which are neither mortuaries nor cemeteries.
As an alternative to traditional interment by burial, cremation is provided at a much lower cost. Cremation caskets can vary greatly in price (from $300 to $2,000), but they can be substantially less than burial caskets, which can exceed $20,000 for one made of bronze, with double-wall construction and velvet interior.
As the public has become more accustomed to cremation, mortuary revenues have declined. For example, a standard $5,000 burial package can be reduced to $2,500 if the customer decides on cremation instead of burial. Table 1 shows the differences between burial and cremation services.
Increase in Cremation Rates
The number of cremations has increased over the past decade, while the number of traditional funeral and burial arrangements has remained relatively constant. According to an industry source, (3) consumers mainly choose cremation because it saves money (25%); saves land (17%); is simpler (13%); and prevents the body from being in the earth (11%). Increased awareness of the fragility of the environment has promoted the popularity of cremation.
Nationally, cremations are involved in over 25% of total deaths. Cremation rates vary significantly by state (see Figure 1), ranging from 61% (Hawaii) to 7% (Mississippi and West Virginia). Regionally, western states have the highest cremation rates and southeastern states (the exception being Florida) have the lowest.
As the number of cremations has increased, there has been greater competition for cremation services among the segments of the deathcare industry. Also, the number of crematories has grown. Many crematories have begun to market their services independent of cemeteries and mortuaries. The cemetery segment has responded to the increase in the number of cremations with the creation of scattering gardens.
Increase in Preneed Arrangements
The preneed concept was originated by burial organizations that sold burial certificate plans in the 1930s. (4) During the 1950s, funeral directors began selling prearrangements. Selling cemetery lots ahead of time is a long-standing tradition, but the preneed funeral market has increased significantly in the last 15 years due to the consolidation of businesses with greater financial resources and the ability to market on a large-scale basis.
The increase in sales of preneed goods and services has been influenced by the active promotion of preneed arrangements by chains, overcapacity of funeral homes, and concern for Medicaid eligibility (5) (sheltering appropriate assets for funeral expenses). Billions of dollars are involved in trust funds held pursuant to preneed agreements, and other funding mechanisms, such as warehousing, surety bonds, and insurance policies.
Consolidation of Deathcare Industry and Increase in Large Chains
Like many other industries, the deathcare industry has experienced attempts to increase the profitability of corporate ownership of properties through the use of economies of scale, such as sharing personnel and equipment among properties, and reducing the cost of goods sold through negotiated discounts for large purchasers. Corporate chains have attempted to dominate the deathcare market.
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The 2002 Economic Census shows that the largest firms also have the highest amount of revenue on a unit basis. Also, this report revealed that the four largest operators of cemeteries and crematories account for 18.3% of all establishments and the eight largest operators account for 36.5%. The corresponding figures for revenue are 36.8% and 42.8%, respectively. The four largest funeral home chains account for 14.4% of all establishments in the United States and the eight largest account for 15.4%. The corresponding figures for revenue are 19.4% and 21.4%, respectively.
Diminishing Distinction between For-Profit and Nonprofit
Most funeral homes are for-profit businesses. Most cemeteries are nonprofit, including military, religious, municipal, and fraternal cemeteries. Many nonprofit cemeteries are small or inactive.
The distinction between for-profit and nonprofit is increasingly blurred. Many for-profit businesses have arrangements or affiliations with nonprofit cemeteries. Some chains have established a nonprofit corporation as the titular owner of the cemetery to meet statutory requirements. (6) For example, in Oklahoma, all cemeteries are required to be nonprofit, but many are owned by a for-profit chain. (7)
Federal and State Oversight
Federal Oversight. The Federal Trade Commission's (FTC) Funeral Industry Practices Trade Regulation Rule (funeral rule) requires disclosure of price information by businesses that provide both funeral goods and services. If a business sells only services (cremations, for example) or only goods (such as caskets or grave markers), it is not covered by the FTC funeral rule. There are no federal minimum standards for preneed funeral and burial contracts, nor is there a federal requirement for full disclosure of preneed contract terms and conditions.
The FTC has been reviewing the funeral rule. In light of the diminishing distinctions between the funeral and burial industries, as well as the increase in third-party sellers, the FTC has been considering the application of the funeral rule to cemeteries and third-party sellers.
State Oversight. Because of the traditional industry segmentation, state regulation of the deathcare industry is a patchwork of various laws with responsibility for enforcement spread across multiple state agencies, commissions, and boards. As the distinctions among industry segments have eroded and concerns about regulatory gaps have increased, some states have attempted to coordinate or merge the regulations of various departments that regulate funeral homes, cemeteries, third-party sellers, and preneed goods.
Eighteen states (Arizona, Florida, Georgia, Maine, Minnesota, Nevada, New Jersey, North Dakota, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, and Wisconsin) have adopted the federal funeral rule in whole or in part, either by reference or verbatim. (8)
In addition to adopting the funeral rule, states have addressed issues including the disclosure of the ownership on advertisements for funeral and burial services; assurance of income for perpetual care of cemeteries; provision of adequate authority and funds for state enforcement agencies to...
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