SCI 70% Acquisition of Neptune Society a ‘Power Play’

June 10, 2011
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Houston — Service Corporation International’s acquisition of 70 percent of the Neptune Society last week is being viewed by funeral service watchers as a very savvy move, giving the largest funeral home company strategic strength across the funeral service spectrum.

“SCI can work its mainstream funeral locations and enhance its cremation society network into more areas,” commented David Nixon, Nixon Consulting. “The move to dominate the other side of the spectrum by capturing low-end, discount operators [is quite] a power play. It’s a pretty sweet deal for them, it seems.”

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Tom Johnson, chairman of Johnson Consulting Group, agreed. “If you look at how the overall market is shifting, it certainly makes sense for SCI to make this move. Cremation is not going away, and Neptune Society has carved out a very nice niche in that market. It is a bold move by SCI that addresses the market shift and positions [the company] very well for the future.”

For Dan Isard, president of The Foresight Companies, the transaction is a remarkable evolution for the Houston-based consolidator. “SCI is starting to see the strength it has as a company,” he said. “Its advertising is emphasizing that no matter where a death takes place, [SCI] is the one call you need to make. Its Web presence for preneed is the best in the profession. Now it has completed its trifecta of management.”

The question, said Isard, is: “Are they going to be a boutique operator, middle-of-the-road operator or value-oriented operator? You cannot run Nordstrom-like service with Walmart prices,” he said. “Every good company needs to decide where it’s going to be in the marketplace. Target is a middle-of-the-road

operator, and its staffing is that middle market.

“So, in the funeral business, a company such as SCI has many boutique locations and many middle-of-the-road locations,” Isard added. “Now, with Neptune Society, it has created its own national brand of value-oriented business locations. Brilliant.”

Isard cited the FAMIC Report that shows that only about 11 percent of consumers want a direct disposal. “But if you accept that there are 2.3 million deaths and about 35 percent of those employ cremation as opposed to burial, that is about 800,000 [deaths], and 11 percent of those want a direct disposal — that shows you that on a national basis, there is a large quantity of consumers,” he said. “While Neptune does provide direct disposal, it uses various methods to get consumers to purchase additional services and merchandise.

The Neptune Society is the largest direct cremation organization in the United States, with annual revenues of more than $55 million and a network of locations in nine states. The majority of Neptune Society locations (seven) are in Florida, four in both California and Texas, three in Washington state, two in both Arizona and Nevada and one each in Colorado, Illinois and Oregon.

A press release announcing the transaction stated that Neptune has built a backlog of future revenues of more than $125 million. Neptune operates under the brand names Neptune Society, Neptune Cremation Service and Trident Society. Neptune’s owner, BG Capital Management Corp., a diversified private equity company, will continue to hold 30 percent of the outstanding shares and continue to be managed by Marco Markin, the company’s current CEO.

According to Isard, the irony is that SCI can be a greater Neptune Society than Neptune Society can on its own. “SCI can have a location in a small market and offer Neptune as a marketing brand, yet its service is handled by the local funeral home,” he said. “So Neptune can now market everywhere there is an SCI location. Neptune sales should increase dramatically.”

Isard remarked that the burden for SCI could be keeping Neptune from being too successful. “If Neptune converts too many SCI calls that were cremation dispositions and therefore changes the same-store sales for that market to a lower revenue amount, then SCI has introduced price into markets that heretofore were too small to have low-price alternatives,” he said. “While every market has price shoppers, taking a revenue per call from $3,000 to $2,700 is not dramatic, but with the strength of a Neptune at about $1,200, plus or minus, suddenly you could introduce your own price shopping alternative and hurt the revenue per location, which is a big problem.”

According to Isard, the Neptune business model in the markets in which it operates is akin to Walmart’s — “low price, low service, low staffing costs,” he said. “To have $50,000-per-year staff performing $1,200 direct cremation cases could weaken the profit structure of the company. I am sure SCI has addressed this concern.”

So what will this mean for independent funeral homes operating in Neptune markets? Nixon noted that in markets where Neptune already has a presence, it could be interesting to see if SCI ramps up the exposure and marketing levels, especially where there is no SCI traditional funeral home. “If SCI wants to start quick out of the gate, I suspect those Neptune markets [with no SCI location] could see a quick spike,” he said. “The combo markets [with Neptune and SCI locations] could be a little longer to see some changes, if [there are] any.”

Isard believes there are two groups to consider – those operating in areas that are existing Neptune-marketed areas and those operating in areas that do not have current Neptune competitors but will because of existing SCI operations within the service area.

“As to the first,” said Isard, “it will be much ado about nothing. Since I perceive that the Neptune ownership group is retaining a [30 percent] ownership and since Neptune management will stay in place, this will continue to be Neptune competitors to the same degree – no change in marketing or operations. SCI will operate via the Neptune system and manage very well.”

As to the second group, Isard predicted that SCI will introduce its Neptune brand into the market since its existing locations and retorts can serve these families. “So, Neptune as a brand will increase its revenue, I predict, as SCI incorporates this brand into the non-Neptune markets within which it exists.”

The press statement offered quotes from both Markin and Thomas L. Ryan, SCI president and CEO. “In our stage of rapid growth and development, it is the perfect time to partner with a company having SCI’s scale, resources and capital,” Markin said. “Neptune is a great organization with fabulous employees, and we are all excited to pursue the tremendous growth prospects ahead of us.”

Said Ryan: “We look forward to welcoming Neptune’s associates into the SCI family of businesses. This partnership is a wonderful opportunity for us to join forces with the largest and fastest growing direct cremation company in North America. Neptune serves a segment of the market that will continue to grow and that we do not currently target through our traditional funeral service and cemetery network. In addition to building on Neptune’s successful growth and customer service, we will be able to yield immediate synergies by providing back office and fulfillment support through SCI’s infrastructure.

This article was originally published in the Memorial Business Journal and republished on ConnectingDirectors.com with permission. For more information on the Memorial Business Journal, an NFDA Publication, please visit: http://www.memorialbusinessjournal.com or www.nfda.org

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