FFDA Reports Funeral Profits Rebound
Springfield, Ill. — A year ago, Federated Funeral Directors of America (FFDA) reported that funeral homes typically experienced a 10 percent to 15 percent decrease in profitability during 2009. The news this year, however, is slightly better as FFDA reports that even with the sluggish economy, the average funeral selection (services plus casket) rose by 1.9 percent. While this increase, which, believe it or not, was the fourth in five years, was less than usual, it still outstripped the rise in casket and overhead costs.
Together, merchandise and operating expenses were up by 1.7 percent over 2009. Operating costs were up 2.0 percent. According to FFDA, funeral directors exercised strict control over their spending, and the average cost of a casket declined for the first time in nearly 50 years, albeit just $1. Consequently, as a percentage of sales, funeral profits improved to 5.5 percent from 5.3 percent a year ago.
Given the mixed messages on the economy, the figures represent some good news. Over the last several years, the death rate has been flat, and when coupled with cremation continuing to rise a point or so every year, the impact on a funeral home’s sales and profitability is understandable. There are still plenty of news stories reporting how families were cutting back to cope with the economy, and these cutbacks included family funerals. Most of the consumer stories reported that cremation received a bigger spike over and above its expected annual increase.
David Nixon, president of Nixon Consulting, Chatham, Ill., noted that although the average cost of a regular adult funeral increased $119 in 2010 vs. 2009 ($6,457 vs. $6,338), it is the smallest dollar increase in the last 10 years. “The average is about $157,” Nixon said. “It’s nice that profit went up to 5.5 percent, but the gain on the sale was miniscule ($20).”
Laying Out the Numbers
In 2010, the average gross sale for an adult funeral was $8,704.63, which is 2.1 percent more than the $8,527.75 reported in 2009 and 4.4 percent more than the $8,338 in 2008. The average total of cash advance items in 2010 was $996.05, 2.8 percent higher than the $968.97 in 2009 and 4.2 percent more than 2008’s total of $955.92. Also, the average sale of vaults, clothing (and additional service requirements) last year was $1,251.39, which was 2.5 percent higher than the $1,220.28 reported in 2009 and 5.7 percent higher than the $1,183.94 in 2008. Subtracting the cash advance expenses from the average gross sale left an average selling price of a regular adult funeral at $6,457.19, 1.9 percent more than the $6,338.50 in 2009 and 4.2 percent higher than the $6,199.01
|The Adult Funeral Selection|
|Adult Funeral (avg. gross sales)||$7,812.35||$8,080.72||$8,338.87||$8,527.75||$8,704.63|
|Avg Cash Advance Items||-$861.71||-$907.64||-$955.92||-$968.97||-$996.05|
|Average sale of vault, clothing||-$1,102.84||-$1,139.22||-$1,183.94||-$5,675.49||-$1,251.39|
|and additional service requirements||———-||———-||———-||———-||———-|
|Average Selling Price||$5,847.80||$6,033.86||$6,199.01||$5,675.49||$6,457.19|
|(Regular Adult Funeral)||———-||———-||———-||———-||———-|
|Profit to Average Funeral Sale||5.63%||6.12%||6.17%||5.31%||5.52%|
Source: Management Analysis Department, Federated Funeral Directors of America
reported in 2008, according to FFDA.
According to Ken Rodenburg, FFDA vice president, the increase in the average sale was down for what it normally is, but on the flip side, costs did not increase as quickly as they usually do, which is why profit margin was up a little bit.
“Revenue was up 1.9 percent; that was a smaller increase than normal,” Rodenburg said. Among the factors contributing to the smaller-than-normal increase were, not surprisingly, the increase in cremation and the economy.
“There are some families that still don’t have the purchasing power they used to: They either have no job or they have lost a job and found a new one or they are not making as much – even the fear of losing a job affects your buying decisions,” he added. “Families have less purchasing power, they are buying a lesser casket and opting for abbreviated services or they are switching to cremation – I think that did contribute to a smaller increase. One other factor involved is that when times are tough, funeral directors are reluctant to raise prices.”
Furthermore, the typical firm’s operation costs increased by 2.0 percent in 2010, from 2009’s $4,933.92, and 5.4 percent from 2008’s $4,774.49. Also, the percentage of a funeral home’s operation cost to selling cost rose 15 percentage points in 2010 to 77.96 percent from 77.84 percent in 2009 and 77.02 percent in 2008.
“What I found particularly interesting is in the average overhead,” Nixon observed. “It still is coming in about 77 percent to 78 percent over the past 10 years; only a couple times has it been lower. This is remarkably consistent considering the volatility of the profits. The casket costs over the past 10-year period seem almost locked in.”
Rodenburg believes the economy had an impact in the operations cost because it provided the impetus for funeral directors to look much more closely at their operations, such as spending. “In doing so, they are looking for ways to cut costs and retain the service level they are used to providing,” he said. “They are doing things that, without the effects of the way the economy was, or is, to a great extent, they probably would have let slide or overlooked.”
The biggest statistical curiosity was found in casket costs, which fell for the first time in 50 years; the decrease was exactly $1 (.09 percent), to $1,067.07 from $1,068.07 in 2009. This is still 2.5 percent more than the $1,041.07 reported in 2008. Last year, the percentage of casket cost to selling price was 16.5 percent, a slight decrease (.3 percentage points) below the 2009 and 2008 figures of 16.85 percent and 16.81 percent.
Nixon added that the consistency over the past few years of overhead and casket costs are noteworthy. “I am looking at both of these [overhead and casket costs], and it tells me that although there has been a slight change in the overhead as a percentage of a sale, it has been very stable, and caskets have been rather stable as well; there have been variations but nothing tremendous,” Nixon said. This means to the average funeral home owner that the cost of caskets has basically kept pace with the sale.
|Operation Trends (2006-2010)|
|(Regular Adult Funeral, Service & Casket)||———-||———-||———-||———-||———-|
|(Cost per Adult Funeral)||———-||———-||———-||———-||———-|
|of Operation Cost to Selling Price||———-||———-||———-||———-||———-|
|AVERAGE CASKET COST||$1,010.15||$1,024.29||$1,041.86||$1,068.07||$1,067.07|
|of Casket Cost to Selling Price||———-||———-||———-||———-||———-|
|Before Income Tax||———-||———-||———-||———-||———-|
|of Profit to Average Sale||———-||———-||———-||———-||———-|
Source: Management Analysis Department, Federated Funeral Directors of America
Rodenburg pointed out that FFDA’s numbers refer to what it calls a regular adult funeral, which includes both burial and cremation services. Services such as direct cremation, immediate burial, welfare services, and infant and children services are not included. “There are a lot of cremations that are included in the regular adult funeral [category] because there are a number of cremations that are more than an immediate disposition – some type of service is included, others have a complete traditional service with it. Don’t confuse this to mean just burials because it doesn’t. It is a composite of
both burial and cremation services.”
Mark Allen, executive director of the Casket & Funeral Supply Association, said that FFDA’s conclusion that the average cost of caskets to funeral directors decreased is good, albeit surprising, news. “I suspect it has something to do with product mix,” Allen said.
He added, “Many suppliers raised prices at the end of 2009, so I was surprised to see that casket costs decreased, according to FFDA. At the same time, their inclusion of cremation merchandise may have an influence. Our reports don’t itemize cremation caskets and containers in a separate category. Cremation caskets may have had an exaggerated impact
on FFDA’s figures, while our reports may have underestimated the effect.”
Rodenburg said the slight dip in casket costs helped the bottom line for funeral homes for a variety of reasons. “Individually, those reasons probably don’t amount to much, but collectively, they do have an impact,” he said.
For instance, if families were purchasing less expensive caskets because of the economy, that would translate into lower casket costs. “More funeral homes might be getting better discounts than they have in the past or [are] changing to lowercost regional suppliers, maybe Chinese caskets – those are the kinds of things that have held casket costs down,” Rodenburg said.
He attributed part of the reason Chinese caskets don’t have as much of a pushback from when they were first introduced
|Trends in the Last 20 Year|
|AVERAGE SALE Regular Adult Funeral (Services & Casket)||$3,247.46||$4,889.43||$6,457.19|
|AVERAGE OPERATION Cost per Adult Funeral||$2,402.24||$3,658.44||$5,033.84|
|PERCENTAGE of Operation Cost to Selling Price||73.97%||74.82%||77.96%|
|AVERAGE CASKET Cost||$562.95||$808.71||$1,067.07|
|PERCENTAGE of Casket Cost to Selling Price||17.34%||16.54%||16.53%|
|AVERAGE PROFIT Before Income Tax||$282.27||$422.28||$356.28|
|PERCENTAGE of Profit to Average Sale||8.69%||8.64%||5.52%|
Source: Management Analysis Department, Federated Funeral Directors of America
Recent Statistical Perspective
Looking back at the last 10 years, the typical firm’s operation cost increased by an annualized average of slightly more than 3.7 percent. During that same time, the selling price of a regular adult funeral rose at an average annualized rate of just over 3.2 percent. Overall in the last two decades, the typical firm’s operation costs rose more rapidly than its average sale. Consequently, even with lower casket values, the average profit ratio on adult sales was cut by a third – falling from
8.7 percent in 1990 to just 5.5 percent this past year.
In the 20-year analysis, the $6,457.19 average sale of a regular adult funeral in 2010 was 32.1 percent higher than the
$4,889.43 reported in 2000 and 98.8 percent higher than the $3,247.46 in 1990. During the same period, the average operation cost per adult funeral of $5,033.84 in 2010 was 37.6 percent higher than the $3,658.44 reported in 2000 and 109.5
percent higher than the $2,402.24 reported in 1990.
Looking at the last 20 years, the pressure of operation expenses was greater in the last 10 years than in the previous 10
years. The percentage of operation costs to selling price increased from the 73.97 percent reported in 1990 to 74.82 percent in 2000 and 77.96 percent in 2010, according to FFDA.
“[Funeral directors] are working on getting those costs down,” Rodenburg said. “There are a number of areas where the economy has hurt, such as an increasing number of bad debts and discounts climbing at an alarming rate.”
Looking at the average casket cost, FFDA put the figure at $1,067.07 in 2010, which was 31.9 percent higher than the $808.71 reported in 2000 and 89.5 percent higher than the $562.95 reported in 1990. The percentage of casket cost to selling price during the period fluctuated from 17.34 percent in 1990 to 16.54 percent in 2000 to 16.53 percent in 2010. In dollars, the typical funeral home’s average profit (before income tax) was $356.28 in 2010, which was 15.6 percent less than the $422.28 in 2000 and 26.21 percent higher than the $282.27 reported in 1990 by FFDA.
As for gauging the financial impact cremation has had on the totals, Rodenburg said there is no comprehensive way to quantify that. “We know what the cremation rate was for our clients,” he said. “We know what it was the year before, but how much the economy played into that, we have no way to gather that type of information.”
Rodenburg said he believes that eventually the economy will have a positive effect in funeral service in the lessons learned now in difficult times that will serve funeral homes well when circumstances improve. “[Funeral directors] are looking at their expenses and fixed costs, cutting discretionary spending, looking for ways to run a leaner ship, using parttime help rather than full-time help to save on benefits, demand more from suppliers,” he said.
Overall, Rodenburg was encouraged that profits improved, even though it was a very modest gain. “I hope that it bodes well for the future,” he said, although today’s rising energy costs will have a negative impact on any definition of economic recovery.
“If funeral directors continue to watch their expenses and if volume holds up, those three factors together will make the future look pretty good,” Rodenburg said.
Nixon has maintained that funeral homes need to take a more proactive approach with pricing their services.”What is happening with the economic pressure has directly impacted the cremation selection,” Nixon said. “We are encouraging [consumers] to spend less. Funeral directors are going to have to right-size their business to their market whether it is because of a changing death rate or lower volume at their locations coupled with reduced income per call because of the increase in cheaper cremations.”
In looking at profits in other industries, Nixon recalled an article in the December 2009 Inc. magazine about a pizza place in the Chicago area that has an extensive training program for its staff. “They are hiring high school and college students, and they are taking weeks to train them,” he said. “But the interesting thing about the article beyond that was that the average profit for a pizza parlor was 6.6 percent, compared to the 5.5 percent reported for funeral homes by FFDA.”
Nixon said that if this figure is true, or if this is in the ballpark, it doesn’t bode well for funeral service. Combining the escalating cremation rate with declining profitability, Nixon asked, “Do you think 5.5 percent is a good profit?”
Nixon has long advocated for funeral homes to price their cremation services the same as burial. In a recent survey he discussed at the New Jersey State Funeral Directors Association Convention, last year, Nixon polled 10 funeral homes, five of them with roughly high volume and five at lower volume, to see what they are doing with their cremation and burial. Last year, the survey found that the average casket and service sale was $6,700 and the average cremation service and container was $2,917 (no urns or vaults).
“We can see that cremation is generating only 43 percent of the revenue that a burial is generating. Looking at this, it has been consistent over the years,” he said. “What this is telling us is that for every dollar of income from burial, we are getting only 43 cents per cremation.”
Looking at the dollar gap from 1994, when Nixon started his survey, the gross gap between a burial and cremation service is almost $3,800, which is the highest he has recorded. “Percentage-wise, we’re keeping up, but in terms of dollars, the gap gets wider,” he said.
Nixon presented two pricing scenarios: a burial-based firm that does 70 percent burials and 30 percent cremations, and a cremation-based firm, which is 60 percent cremation and 40 percent burial. “If we look at the income per call with an average burial of $6,700 and an average cremation at $4,000, what I am suggesting to you is that this is not what I anticipate the future will be, but this is an actual scenario based on two firms today.”
The bottom line? The cremation-heavy firm is generating $270,000 less revenue than the burial-based firm. “How many firms can operate with $270,000 less income based on 100 calls?” he asked. “This is what firms in high-cremation areas are facing in terms of lost revenue,” he said. “That is today. There are firms dealing with this right now.”
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