Funerals R Us

By Harvey D. Shapiro

Chain-store economics has finally hit the funeral industry, forcing family owned mortuaries to sell, go co-op, or raise the flag of independence.

There are no sample products in the lobby of Service Corporation International's highrise headquarters on the fringe of Houston's downtown. Nor are there pictures of SCI facilities, or testimonials from satisfied customers. It's just as well, because SCI — the name itself reveals even less about the company's product — is the nation's largest operator of funeral homes and cemeteries.

By applying the principles of McDonald's to the business of dying, Robert Waltrip, SCFs CEO, has in 27 years built the mortuary founded by his father and grandmother into a national Funerals R Us, a New York Stock Exchange company with revenues of $519 million. While SCI has less than a 5 percent market share in the $4.5 billion funeral industry, it towers over its competitors: Most of North America's 22,000 funeral homes are small, family owned businesses. The few other chains are all local or regional, the largest having only 60 homes or so. The Waltrips — Robert's son, Blair, is executive vice-president, his son-in-law is also an executive, and his mother is an honorary director — have built their chain of 551 funeral homes by buying out scores of morticians in the United States and Canada.

Conducting funerals is a highly personalized business in which emotions play as big a part as economics. Most ethnic and religious groups in America were once accustomed to burying their own dead. Though they have long since relinquished the task to commercial mortuaries, people care a great deal about who is ministering to their loved ones in their final encounter with this world. More so than most service businesses, it is risky for some remote bureaucracy to impose policy, cookie cutter style, on funeral homes, many of which have been around for decades or more and are familiar names in their communities.

While introducing economies of scale, the Waltrips have worked hard to see that their local homes retain the family aura and management. The size of the headquarters staff — slashed from 29 to 11 in March — would seem to preclude too much heavy-handed direction from the top. As small businesses find it more difficult to maintain their independence in the current economy, this large company, at least, is trying to succeed with an image not of a predatory ogre, but of unthreatening paternalism.

Like other postwar industries, local funeral homes have found the march toward consolidation increasingly difficult to resist. Those that remain independent are struggling with the same economic realities faced by other family businesses.

Waltrip Pere explains the realities that cause many operators to sell. "Historically," says Robert, a burly Texan with closely cropped hair and a ruddy complexion, "funeral operators across the U.S. and Canada have been mom-and-pop companies that have gone into their third and fourth generations of operation. But at a certain point in his life the funeral operator found himself in a difficult position: There were no children to come into the business, or his children had gone on to be doctors and lawyers. So whom did he sell to? He wasn't really sure his employees had the financial strength to make a go of it, so he was in a bind. When we came along, he had a place to go."

Like the children of many funeral home operators, Robert had grown up, literally, in a mortuary. Most of the kids eventually join the family business and prosper modestly, taking their turn as president of the local Rotary or Lions, doing charitable works and, not incidentally, drumming up some business. But Robert had bigger ambitions and a much larger vision.

He was a student at Rice University in the fifties when his father died and he was forced to quit school to help operate the family business, Heights Funeral Home. From the beginning, Waltrip saw the potential for expanding and diversifying the business beyond Houston. After expanding to three homes, he raised $3 million to finance his expansion plans. "I just felt you could build a national company in the field of funeral home services as easily as you could build a Holiday Inn or McDonald's or Midas Mufflers," he recalls.

SCI began buying funeral homes one at a time. Then, in 1971, it acquired a network of 26 homes when it bought Kinney Systems, another family mortuary business. In 1981, SCI made its largest single acquisition when it bought IFS Industries, then its only major competitor. For $48 million, SCI got 91 funeral homes and 22 cemeteries.

Two key principles guide SCI acquisitions. First, as Robert puts it, "We go where the action is, so to speak." As growing numbers of the aging U.S. population migrated to the Sunbelt, SCI followed, making acquisitions in Arizona, Florida, and California. Second, within these, well, growth markets, he says, SCI tries to buy the most prestigious, and usually the largest, firms.

Although funeral homes acquired by SCI retain their distinctive public identity, they achieve less visible but important financial benefits. "The overall theory behind our expansion program," Robert says, "is to try to build a cluster within a given area where we can conserve on personnel and equipment. Economies of scale come with volume in a concentrated area, just as they would in any other type of business."

John Morrow Jr., president of SCI's funeral services division, describes how it works: "We have to be ready to answer a call 24 hours a day, like a firehouse, but there is a lot of downtime in a funeral home. When you put several of them together, however, this home is busy today and that one's busy tomorrow and you can have a central pool of labor that's going all the time — making the original calls to hospitals or nursing homes, embalming, making and filing death certificates — all the administrative details. Then when it comes time to conduct the funerals, the vehicles can be dispatched from a central location with the necessary manpower."

There are, after all, no names on the hearses that pick up bodies, or on the limousines that lead funeral processions.

"There is still a nucleus of people at each location who personalize the business with their clientele, and those people don't move around," Morrow adds. "But the behind-the-scenes functions can be performed centrally."

 

The company has recruited several of its top executives from the local homes it has bought, among them Morrow. SCI bought the Morrow family's funeral home in Houston in 1970, and now he and his two brothers are SCI employees, as is their 86-year-old father.

At SCI's regional office in New York City, Eugene R. Schultz, assistant regional manager, explains that many of the background functions for the company's assortment of area funeral homes are all administered through his office. "There's centralized billing and bookkeeping, which sends invoices to all of our customers, and a centralized personnel office that keeps records for all the employees," he says. "Plus, we've got an in-house training program here."

In some markets, SCI has done for the customer precisely what Alfred P. Sloan enabled General Motors to do for drivers: offer a product for every pocketbook and taste. This is most notable in New York City, where SCI has nine funeral homes or chains. It owns Walter B. Cooke, which buries notable Christians, and also owns Riverside Memorial Chapel, Schwartz Brothers, and Jeffer Funeral Homes, which have been burying New York's large Jewish population for generations. SCI owns the Frank E. Campbell Funeral Home on Manhattan's fashionable Upper East Side, but last year acquired a major interest in Thomas M. Quinn & Sons, founded in Astoria, Queens — Archie Bunker territory. (SCI is working with the Quinn family to extend the business throughout other New York City boroughs.)

In contrast to supermarkets or franchise operations, which generally put their own names on the stores they buy, SCI leaves the names that are already on the doors. "You have to understand that some of these firms were founded back in the 1800s or the early 1900s," Blair Waltrip notes.

When SCI makes an acquisition, it also sticks to whatever religious or ethnic leanings the local home has. "That's one of the strengths of SCI — they keep the identity of the organization," says Ysidro E. Reyes, a counselor at Gates, Kingsley, Gates funeral home in Santa Monica, California. Reyes, for 23 years the director of the Wilshire Funeral Home, which sold out to SCI in 1978, has a total of 53 years of experience. SCI also benefits from his active involvement in fraternal organizations and Catholic charities.

SCI sets financial goals for each local funeral home, and passes along information about funeral trends and techniques as well as advice on the narrow range of marketing strategies open to funeral homes. They send along tasteful examples of ads from other SCI funeral parlors, for example. Beyond that, Reyes says, "SCI pretty much lets us make our own decisions, within their guidelines."

While Robert Waltrip understood that the economics of chain stores could be applied to funeral homes, he also knew that the homes' success turned on their highly personal and traditional relationships. That's why SCI has usually acquired existing funeral homes rather than trying to start up new franchises. And that is also why it has sought to keep its major assets — its managers — by locking them in with service contracts and stroking them with regular communications.

The Transition from being an owner to being an employee is not always easy. A consultant in Arizona says, "I had a client in Connecticut who sold out to SCL. He got more money for his business than be thought he would ever see in his lifetime, and he wanted to stay on as manager. But he immediately got this three-ring binder full of directives, and the guy was seeing a psychiatrist in 90 days. He could not mentally let go of his company."

But while some chafe under the burden of following directives from Houston, others say the constraints are limited and are applied with a light touch. Older funeral directors, particularly, are often quite pleased to turn their equity into cash and still be able to remain in charge of the business, keeping most of their managerial prerogatives. And younger directors know that joining forces with SCI enables them to build the business, and a career, beyond the often limited horizons of their older relatives.

"Our family feels we have bought into the future of funeral service by merging with SCI," says Rosemarie Lamb, president and chief operating officer of Blake-Lamb Funeral Homes in the Chicago suburbs. Rosemarie, whose grandfather originally purchased the firm, wants to expand Blake-Lamb beyond its present 14 homes. SCI's knowledge and deep pockets, she says, "give us a lot in the way of support."

The Lamb family sat down a few years ago for a discussion of the future and concluded that the business had to grow because of changes in their communities. Owners of funeral homes built in the center of town 50 years ago have watched as their original clientele has gradually migrated to the suburbs and grated to the suburbs and beyond. Ethnic communities once centered downtown have been replaced by other groups-blacks, Hispanics, and, most recently, Orientals — who have their own traditions and their own funeral homes.

People are prepared to stick with a familiar name in the funeral business, Lamb says, but convenience of location is another major factor. So the homes have to go where their clientele goes, and that often means opening up places in new communities. "We asked ourselves whether we would be able to finance this growth within the family, and we decided we couldn't," Lamb says.

 

Some funeral homes even follow their market far beyond the city where they are based. SCI's Riverside Memorial Chapel, a major Jewish institution in New York City, has opened homes in Florida's Dade and Broward counties, following the substantial numbers of Jewish New Yorkers who have moved to these warmer climes, a move they say they couldn't have managed without capital and oversight help from SCI.

Robert Waltrip can't get over what a perfect business proposition funerals represent. "It's a cash business," he says. "You don't have a lot of inventory, and there's little or no downside." Well, there is one downside: A lot of people can't treat funerals as just another business. Ever since he took the company public, Waltrip has had to deal with analysts and investors who either find the undertaking grim or make dumb jokes about it.

"We've been in this all of our lives, so we're used to it," Blair Waltrip says. Indeed the fact that the Waltrips, John Morrow, and other SCI executives grew up in funeral homes gives them an important bond with local managements. Funeral directors, after all, have chosen a line of work that most Americans wouldn't go near.

Morrow's father has been in the business since 1925. "He's well respected in the industry, and that's helped me when I'm negotiating an acquisition," his son says. Similarly, Rosemarie Lamb is comfortable with the Waltrips or Morrow because of their shared mortuary memories. "We lived above the funeral home from the time I was four years old," she says. "At age 14 1 was a runner — I went out to get death certificates and certified copies. I became part of the office staff. I did clerical things until I was 18, and then went to mortuary school." Lamb, whose brother and two sisters are also in the family funeral business, knew what it was like to get teased about what went on in the downstairs of her home. So did Morrow, who says his high school nickname was "Digger."

The Waltrips took SCI public in 1969, and though their ownership has been reduced to less than 10 percent of shares, family values still pervade the company. In fact, SCI's annual gathering of mortuary managers resembles a big family reunion. Funeral directors who may lack for shop talk in their communities can find it at gatherings of their fellow SCI managers. Thanks to SCI's "summit" conferences, Lamb says, she and other funeral home executives "have become very good friends. There is a camaraderie. We talk to each other about common goals and problems."

But how long can a giant company like SCI look like a family firm? In addition to Blair, Robert has two other children; neither is in the business, but the husband of one of them is.The oldest of Robert's six grandchildren is only 13, so it's not clear if there will be another generation in the company. With the shares so widely held, SCI could be easy pickings for a takeover, but Robert doesn't seem worried. "We feel that the unusual character of this business means not everyone is going to want to play in it."

They'd be foolish to try to do it without maintaining local presence, too. A lot of the families that sold out to SCI are staying put because they don't feel their chain is being yanked in Houston, or that the franchise they built with a religious or ethnic group or a neighborhood has been undermined by inappropriate standards imposed from afar. When SCI acquires a funeral home, its neighborhood competitors may start emphasizing in their advertising that they are "locally owned," but this approach is hinted by the continuing presence of founding families in firms owned by SCI. That's a winning formula SCI doesn't intend to tamper with.

Sell to SCI? Consider the alternatives

Funeral Homes are one of the last service businesses in the, country to come face to face with a nasty reality: the trend toward bigness and mass merchandising that has shaken many other industries in recent years.

Because they provide a very personal kind of service, local family owned homes have been able to tend off consolidation longer than most. SCI, by far the largest and most active of the corporate buyers, still owns only about 5 percent of the market. But the industry may now have reached the point where the forces of consolidation — and the pressures to sell — have become difficult to ignore.

It started with postwar shifts in population to the suburbs, and the migrations of older people to the South, which tended to weaken one of the local homes' biggest selling points: their ties to the community for generations. Customers who once turned to the home that had buried their grandparents may now live a thousand miles away. They have to look in the Yellow Pages to find a mortuary.

This increases the importance of advertising and marketing, which add to the expenses of the independent operator. Prepaid funerals have been more aggressively promoted in recent years as the responsible way to take care of burials in advance, so the burden does not fall on loved ones. For the homes, it's a way to lock in customers. Some homes have even hired sales staffs.

In addition to increased marketing costs, the independents must deal with suppliers that are growing ever more powerful as they, too, consolidate. Casket manufacturing, once a highly fragmented industry, is now dominated by one major player, Hillenbrand Industries, itself a family business.

As the new economic realities work their way through the industry, SCI and a handful of (much smaller) takeover companies gobble up more and more of the little guys. When the wave of consolidation begins to roll, local homes see opportunities to make a killing. The most desirable properties go for a premium. But the buyers won't continue to overpay for long. Prices will settle down to a more reasonable level, and holdouts will realize that if they delay any longer, they may lose out.

The business that wants to remain free has to raise the flag of independence and trumpet its virtues to customers and suppliers: "We are independent and family owned and when you deal with us you will be treated with the care and respect a member of this community deserves."

But there is another alternative. The independents can try to develop local franchises and cooperatives. To combat powerful suppliers, for example, they can pool their buying power and bargain. Local grocers are among the groups that have done this. Seed-growing cooperatives compete with larger corporate competitors. In the building supply industry, co-op buying groups each year purchase billions of dollars worth of goods for their several hundred members.

The co-op movement has begun growing rapidly in the funeral business. Independent homes in 22 states are affiliated with Trust 100 in Cincinnati, which develops standard pre-need insurance plans and designs advertising for them. In Michigan, for example, 45 homes have formed a co-op that one member says "helps independents offer a package that is better than what is being offered from out-of- state competition that has saturated the state with salespeople." In the Louisville, Kentucky, area two co-ops, Funeral Auto Co. and Greater Louisville Limousine Service, provide hearses and limousines to groups of local homes. When one of the two local vault manufacturers wanted to sell, local funeral operators, fearing that the other would acquire it and close it down, bought the company and organized Funeral Directors Vault Ltd.

But forming co-ops isn't easy, for the very reason that prospective members tend to be fiercely independent and wary of giving up business decisions to a group. Most often, efforts to cooperate collapse because of lack of leadership in the industry, lack of experience in organizing co-ops, and lack of trust. Charles Pearson of L. D. Pearson & Son in Louisville says that several livery co-ops in other communities have failed because the members "can't agree on whether the cars should be dark green, dark blue, silver, or maroon." Each home feels its customers know it by the color of its cars. 'They are too bullheaded to realize the cost savings that would come from agreeing on one color," Pearson says.

As consolidation goes forward in various industries, some family businesses will die, but others will remain independent by finding new and better ways to compete. Still others will be born as entrepreneurs seek to fill new niches and needs in our economy. Birth, death, and renewal is a constant in family businesses. It's a metaphor that funeral home owners can appreciate.

— Peter Davis, The Wharton School

Sidelines and profit margins

Though remarkably successful in applying chain-store economics to the funeral business, SCI has had to cut back some of Robert Waltrip's ventures into related businesses. The company announced in March that it was selling its funeral supply division for $62.5 million. L. William Heiligbrodt, president and chief operating officer, also said SCI would sell its insurance business, which has specialized in prepaid funeral policies.

Since funeral flowers were by far the biggest income producer for florists, SCI opened flower shops in a number of large cities. But although the stores were profitable, Robert says, SCI later sold them because the margins were small and "they just took time away from our base business."

SCI also got into caskets, embalming fluids, and other supplies. That business, it turned out, was not as profitable as Robert had hoped.

A lot of funeral homes around the country felt SCI was a competitor, whether the company operated a home in their community or not, and were unwilling to buy supplies from "the competition."

The company played a major role in boosting sales of "pre-need" funeral insurance. Its Memorial Guardian plan let customers pick out the kind of funeral they wanted and pay for it in advance on an installment plan. The idea was appealing because it locked the customer into funeral and burial by SCI. And SCI got to invest the money until the time came.

SCI created its own insurance company, and piled up nearly a billion dollars in pre-need funds. But a big insurance concern is very capital intensive, explains William Mercer, the company's former chief financial officer. "We think our money is much better spent in the funeral service industry, and we have more opportunities there," he says. SCI funeral homes will continue to offer pre-need plans, but they won't be involved on the financial end.

Nonetheless, SCI does not mind being a financier. The company owns Provident Services, which lends to the funeral and cemetery industry. When funeral companies approach a bank for financing, they're perfectly happy to offer collateral. But, Robert Waltrip notes, the average banker's response is, "What am I going to do with a cemetery if I have to go in and foreclose?"

SCI loves cemeteries. It owns 122 of them across the country and two in Canada. Says Robert: "It's a great investment as far as we're concerned."

—H.D.S.

 

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June 1990

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