Dying for better growth

Advances in medicine, deadly competition and a slowing economy has made life tough for the funeral industry. IBISWorld general manager ROBERT BRYANT reports.

By Robert Bryant

Advances in medicine, deadly competition and a slowing economy has made life tough for the funeral industry.

A few weeks ago, one of Australia’s biggest funeral companies Tobin Brothers launched a service that allows Australians to plan their funerals online. As well as being a quirky story, it was rare example of innovation in an industry that is usually very stagnant.

IBISWorld estimates that this industry grew at an average annual rate of just 2.3% over the five year period to 2007-08. Industry revenue has remained moderate throughout the performance period, growing at a similar rate each year.

The economic situation has some bearing on industry revenue growth, with relatives choosing fewer services or expensive items when the economic situation is uncertain. For example, revenue growth was slowest in 2005 and 2006 as economic growth and household disposable income slowed. Increased interest rates and high fuel prices also had an impact, leading to a growing preference towards cremations, which are less expensive than burials.

Products and service segmentation

During 2008, the industry is expected to maintain a slow growth rate in the short term – unless of course a deadly outbreak such as the global Bird Flu pandemic occurs.

The financial performance of this industry is related to changes in the number of deaths and changes in the mix between funerals and the cheaper cremation services.

The number of deaths is increasing at a slow rate due to a decreasing infant mortality rate, fewer road deaths and reduced deaths from heart disease. This trend has been aided by improved diets, exercise and reduced smoking. Less intrusive medical procedures, population screening and improved diagnosis, medications and treatments have also assisted.

Cause of death

Industry outlook

The outlook for the industry is hardly healthy: IBISWorld forecasts that this industry will grow at an average annual rate of 2.6% during the five year period to 2012-13. Revenue is expected to continue experiencing only moderate growth throughout the outlook period, due to the number of deaths increasing at a slow rate.

Growth will also be affected by an expected rise in the proportion of lower-cost cremations, relative to burials.

Significant price competition will continue and profit margins will remain low, particularly given the industry’s high labour and overhead costs and the expected increases in costs above what can be charged to clients.

Industry consolidation is expected to continue, mainly through mergers and acquisitions between existing small and medium sized companies in search of cost advantages.

The number of deaths is expected to increase from 2012 onwards, as the population age structure changes, with more older people. However, the life expectancy at birth will continue to increase, due to improved health and medical services.

Crematoria are expected to benefit from the constraints on burial space now evident in many of the long established cemeteries as well as from relative price considerations and an increasing share of cremations. The profitability of crematoria operators should improve. However, changes in state government legislation in areas such as limited tenure of grave sites are required to allow the crematoria industry to grow.

Key sensitivities

The key sensitivities affecting the performance of the funeral directors, crematoria and cemeteries industry include:

• Age Group (70+). The proportion of the population aged 70 years and over, and particularly in the 85 years and over age group, is significant in terms of the number of deaths annually. It is affected by the increasing life span of individuals, largely caused by more healthy living and improved medical diagnosis, procedures and medications.
• Deaths. The industry is affected by the number of deaths. This is related to a number of factors including the age structure of the population and advancements in health and medicine. More sophisticated medical diagnosis and less invasive treatments have significantly improved the life span of the population, reducing the annual number of deaths.
• Real household disposable income. Changes in industry revenue are related to changes in household disposable income, which is affected by factors such as changes in interest and tax rates and labour market growth. It can also be affected by factors such as high and increasing fuel prices. Changes in household disposable income directly affects the budget and expenditure of people paying for funerals, and can also lead to opting to use cheaper cremation, rather than burial.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au