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  • Writer's pictureJSO Valuation, Ltd.,

The Death Industry

March 5, 2020

Throughout most of the major population centers in the country, local funeral home owners decry the significant decrease in the number of Throughout most of the major population centers in the country, local funeral home owners decry the significant decrease in the number of family-owned operations that has occurred in the last two-decades. Officially the Death Care Industry refers to companies and organizations that provide services related to death: funerals, cremation and/or burial, plus memorials. This includes for example the use of a funeral home, purchase of a coffin, crematoria, cemeteries, and headstones. The death care industry within the U.S. consists mainly of small, family-owned businesses[i]. This article is mainly concerned with the funeral home sector; other areas of the industry are incorporated where necessary.

When Jessica Mitford published American Way of Death in 1963[ii], independent entrepreneurs owned almost every single funeral home in the United States. The process that started in the early 1970s saw the sector started to organize itself into the $16.5-billion industry that it is today. Whereas family-run funeral homes where once ubiquitous throughout most metropolitan areas, today in most communities, there are so many less independent owners left and many of these have carved out a niche within their communities that sustains them.

Another issue is that this industry isn’t particularly nimble. The process to moving to where demand is higher isn’t really an option, especially when significant investment goes into opening a new funeral home location. Opening a second location as you follow your potential users base is possible but there is a high-cost barrier to entry. Pre-need financial plans are popular in the “traditional” sense, as a typical funeral can cost as much as $8,000. (This is against the average cost of $2,500 for cremation.) But for non-religious, non-traditional and potentially non-boring (as a third category) the traditional funeral is now not the only way to commemorate a life. This is further discussed later on in this paper but it is another erosion of users in 2020 and beyond.

Corporations have been involved in significant consolidation and are at pains to point out, that it is just as easy to run 18 funeral homes by sharing car service costs, embalming, management, pre-burial services, transportation, etc. But what is lost to the

community is the feeling of security and stability, which the family-owned funeral homes create. Nevertheless slightly over 89% of all funeral homes our other independent for part of a small corporate group that still has some ties to the local neighborhood.

A funeral home “is an establishment where the dead are prepared for burial or cremation.[iii]” A funeral home is also described as a funeral parlor or mortuary, and is a business that provides interment and funeral services for the dead and their families. These services may include a prepared wake and funeral, and the provision of a chapel for the funeral.[iv]Over the past five-years, improving disposable income, coupled with a higher death rate (baby boomers) has temporarily boosted industry growth. However, industry growth has been constrained by the rising popularity of cremations, which as we saw cost considerably less than traditional burials. As a result, industry revenue is

anticipated to grow an annualized 0.9%, including anticipated decline in revenue of -0.1%% between 2019 through to 2024. Over a prior five-year period the industry has reached $16.5 billion[v] annually. This is up from $15.1 billion in 2015. Some of the key statistics in a snapshot are in the table adjoining provided by IBISWorld.

In the five-years to 2024, industry conditions are projected to stagnant in many areas but not all. As the population continues to age, the number of deaths in the United States is anticipated to increase especially as baby boomers succumb to their age. However, in some areas gentrification has moved many lower income or ethnic residents out of their neighborhoods. For example in Chicago, there is definitely a Greek neighborhood, a Polish neighborhood, Ukrainian, etc. As their children move toward the suburbs, their parents follow. These also just happen to be the older population, who now will not be there available to avail of the services of the local family funeral home. The other major negative force that has emerged in the last five-years includes the rise and acceptance of cremation, non-tradition funerals to green funerals. It does not mean the funeral home is not involved, but it does mean the profit margins are significantly less. However their fixed costs remain the same.

The rise in competition for the funeral home industry products has exasperated revenue streams within the traditional funeral homes. With the emergence of e-commerce as at alternative sales channel, caskets, urns, etc., a mainstay of the funeral home revenue stream has been curtailed and this trend is likely to continue.

It should be noted that the lack of transparency on pricing within the industry itself has been a major negative factor that has allowed the emergence of e-commerce into this industry. The funeral home provider is required by law to give you a General Price List (GPL) itemizing the cost of the items and services the home offers. If the GPL does not include specific prices of caskets or outer burial containers, the law requires the funeral director to show you the price lists for those items before showing you the items themselves. Factor in a bereaved family in distress and these details such as a GPL seen a distant need in that moment. NPR’s article Despite Decades-Old Law, Funeral Prices

Are Still Unclear, (February 8, 2017, Morning Edition), found that rules go only so far in protecting consumers, and that the industries promise of transparency often goes unfulfilled. The problem in uncovering pricing is frustrating, but it isn't new. The funeral industry has been consciously non-transparent since at least the 19th century and again as recently as 1960, when the National Funeral Directors Association prohibited its members from advertising in the newspaper. This ban was not ended until 1968 until after U.S. Department of Justice got involved. But this culture of secrecy persists today. According to Funeral Wise[vi], “the funeral home industry is regulated on a state-by-state basis. Rules can vary widely by state and are subject to frequent changes making state regulations one of the greatest complexities of the funeral business. The vast majority of the jurisdictions require individuals to be licensed to provide funeral related services.”

At the Federal level, funeral home operations are subject to substantial regulations by the Federal Trade Commission (the “FTC”). The FTC’s Funeral Rule, enacted in 1984 and amended in 1994, was designed to protect consumers by requiring that they receive adequate information (the GPL) concerning the goods and services they may purchase from a funeral provider. On the surface this is excellent, but in reality there is still very little information available. Early in 2020, we observed that Mitzval Memorial Funerals[vii] has a comparative price list, as does Colonial Wojciechowsk Funeral Homes[viii]. However, it has to be said that these are very complicated, but nevertheless in our search for pricing data there was almost no direct pricing available. However we did find that the Cremation Association of North America (CANA) noted that the average cost of a funeral was $8,350, and the National Funeral Directors Association (NFDA) was slightly lower at $7,045[ix]. This cost does not include any cemetery fees, so the full cost for a funeral is likely to be nearer $10,000. This however is empirical data, which is distributed by the trade associations. Buying a car maybe slightly less complicated but one is definitely not under significant duress at that time. With all of this confusion, it is easy to understand how e-commerce became an alternative sales channel within this industry. It’s less clear how this is affecting the individual family-owners. The empirical data again suggests where there might have been three funeral homes, there is no one. In the more rural communities, the effect may not be as profound, but opportunities for growth are limited there too.

We have briefly delved into the pricing situation as in our opinion it is a significant factor in the loss of the neighborhood funeral home. As we have already pointed out, price is a factor, but so too is cremation and other types of non-traditional funerals. This is in addition to the consolidation of the market in general. This is an industry under siege.

With the projected annual growth to 2025 of less than 1%, the future is certainly somewhat cloudy at this time. For example, IBISWorld has projected that 54.5% of deaths were cremated in 2018 (latest data available) up from 46.1% in 2014. There are several reasons for this including a more transient population, the loosing of religious preferences for burial, the outright barring of new cemeteries in major cities such as Seattle Washington, all adding to the pressure to the traditional industry. There has also been a major push to be more environmentally conscious when it comes to the traditional burial. It is more likely than not that the amount of cremations will only continue to rise over the next five-years. CANA has projected that by 2022 the rate of cremations will increase to 57.8%. While the funeral homes are a part of this process the revenue generated is significantly less.

Higher disposable income levels will allow Americans to choose between cremation and traditional burial regardless of price. Still, revenue gains are forecast to be less than moderate for funeral homes as inexpensive cremations continue increasing in popularity and undermine the traditional service. According to CANA (Cremation Association of North America), they had estimate that the cremation rate outpaced the burial rate in 2017. Consequently, industry revenue is anticipated to expand at an average annual rate of 0.9% despite the 0.2% decline in 2019. As we have already alluded to, the popularity by many residents is also driven by the need to conserve the earth’s resources, and cemeteries are looked-upon as a drain on the urban land bank that as everyone knows is a fixed finite resource. (This is not occurring in rural communities which do not have the same land pressure at this time.) Hence, while we are moving into an era of where the baby boomers are aging rapidly many families will choose cremation over the traditional burial service.

The number of deaths is generically related to (1) age, (2) structure of the population, (3) infant mortality rates, (4) disease prevalence, (5) natural disasters and (6) deaths from accident, suicide and other causes. Of these, the structure of the population accounts for social variables as well as local income levels, employment, crime rate, access to medical facilities, 911 services and the general standard of available housing. The graph above[x]clearly alludes to some of the issues facing black man.

Goes without saying that average life expectancy grows in line with advances in medical treatments, interventions and procedures and the general health of the population. It now stands at 76.1 years for man and 81.1 years for women. However, this is down significantly from three-years ago. The accelerating homicide rate, obesity and the potential reduction in healthcare especially among the poor population is expected to decrease the overall life expectancy rate for both men and women further. Still, due to the aging baby-boomers in the US, the number of deaths is expected to increase in 2020 and for several years to come.

70.0% of all deaths occur in the population aged over 65-years old therefore this tends to be a good indicator of demand for future funeral home services. Consequently while this group is a key demand indicator, it is not as we have seen, a service solely directed anymore toward funeral homes.

As written in IBISWorld, “according to data from the Cremation Association of North America (CANA), 51.6% of all deceased humans in 2017 (latest data available) were cremated. This is up from 34.4% in 2007 and 28.2% in 2002. The growing popularity of cremations versus traditional burials is due to a number of factors, including cost, environmental considerations and religious acceptance. On average, cremations come out to nearly a fifth of the cost of traditional burials. According to data from CANA, the national average cost of a cremation in 2012 was $1,650, compared with $7,300 for a traditional burial. The table below highlights the rapid rise in cremation in the US[xi]

Consequently, the economic landscape, which determines disposable income levels, affects demand for industry services. IBISWorld stated that if disposable income was to become less available families might look for low-cost ways to memorialize their next of kin, thereby assuming an increase in the demand for cremations or negatively impacting funeral homes.[xii]” But even in a strong economic cycle as we are currently in, consumers appear to be still opting for a combination of ‘home funerals’ and cremations, because of their increased simplicity and decreased cost. However we expect in many instances cost is not the dominant factor.

Once again, it is important to note that profit margins for cremations are smaller for funeral homes, as users also eschew high-margin caskets and other burial merchandise. In the diagrams above from IBISWorld cremations have doubled since 2015. For the funeral home in general it highlights the different profit centers within the typical business model. The five main categories of “traditional” pre-burial or funeral planning services, resale of merchandise, body preparation (embalming) services, direct cremation and transportation, provide the bulk of their gross revenue on an annual basis. However, the continued and expanding competition from discount retailers (such as Costco) and the ease of online ordering from casket manufacturers are expected to curtail prices for funeral merchandise through 2020. This is along with burial are very significant portions of the industries gross revenues.

The table to the left was produced by the National Funeral Directors Association (latest available as of 2/2020), as to the cost of the typical funeral with all its components in 2017[xiii]. Since 2015 this cost has risen by approximately $315. If a vault is included, something that is typically required by a cemetery, the median cost is $8,755 or $412 more expensive than 2015.

Returning to the table of Products and Service Segmentation (above), one can see that pre-burial services make up the largest service segment of the revenue stream (c. 30%). In the traditional funeral, the funeral home arranges and plans the services such as the 1) the retrieval of the body, 2) visitation, 3) the memorial and 4) the burial service. In the typical funeral home building, there will be a room dedicated to such things as flowers, a family waiting room where the bereaved relatives can rest with some type of privacy. As we have concentrated on two areas of the services provided by a funeral home, one can see that there are other significant areas of value in their service. In the typical funeral home they will also they will have the ability to embalm, have a conference room or meeting room to help with the funeral arrangements for the family, and finally a garage for their rolling-stock. All of these generate revenue in one source or another.

Between the fixed plant and the staff needed to be present as part of the actual service, one can see how the actual cost of an individual funeral can be significant. One can also see that there is the ability to control costs significantly, reciprocal being less profit for the funeral home.

The visitation that takes place in one of the “chapels” in the building is also at times commonly referred to as a wake or the viewing. This may last for one to two evenings prior to the actual funeral, with the body of the deceased on display (in a closed or open casket). The memorial, which may also be part if the pre-burial services, May or may not be at the funeral home. Finally there is the transportation to the decease final resting place.

As we already alluded to, cremation has typically faced opposition from many religious groups. Jewish law does mandate that the dead must be buried. The older population tends to follow this doctrine. In the Islamic faith, cremation is strictly forbidden. Christianity also recommends burial. But in recent times however, many religious organizations have begun shifting their stance on cremation. Much of this may be due the declining influence of the church and the move to a more secular society. Today, many religions have had to embrace cremation as an acceptable method of treating the dead. This has further encouraged consumers toward cremations rather than the traditional burial, constraining industry growth.

According to CANA, the three top states for cremation in 2012 were Nevada (74.2%), Oregon (73.2%) and Washington (73.2%) and the other end of the scale are the States of Kentucky (22.4%), Alabama (20.2%) and finally Mississippi, or the more traditional bible belt. This will have an affect on the family funeral home and indeed this will spill over the larger corporate operators through out the United States.

There is no doubt that this is already having a significant effect on current market valuations of the existing funeral homes. The writing is on the wall for everyone to see. Funeral homes have specific designs an interior build-outs that cater directly to the business. Older funeral homes in the city centers tend have less land than their more suburban counterparts. Funeral homes within the city centers will see a changing of there highest and best use of their underlying land over the next five-years if the statistics on cremation become more of a reality. This translates into less funeral homes within the neighborhood or funeral homes got for one reason or another still maintain a presence even though the profit margin has drizzled toward zero.

For the past 100 years, the small, family-owned operations largely characterize the industry. Nevertheless as demand for the traditional funeral services continues to decline and competition alters the industries landscape there have been significant ownership changes.

Since 2010, several mergers and acquisitions have occurred.

  • In 2010, Service Corporation International (SCI) purchased Keystone North America, the fifth-largest operator in the industry. In the FTC approval, the final order settled charges that SCI’s acquisition of Keystone would reduced competition in 16 funeral service and three cemetery markets in the United States, and required that SCI divest properties in each of those markets.

  • In 2014, SCI acquired all of the outstanding stakes in The Neptune Society, the nation’s largest direct cremation organization, with annual revenue of more than $55.0 million.

  • Other prominent players, such as Carriage Services Inc. and StoneMor Partners LP, have been steadily acquiring smaller operators over the past five years.

None of these are insignificant players and over the past decade they have started to

erode the revenue of the family service. This industry has mainly medium to high barriers to entry, and according to IBISWorld, it is an industry primarily given government regulations, licensing requirements and more typical initial capital costs required to start a business. A new business requires a site that is large enough to accommodate the building, the associated components within the building, potentially a large portico as part of the entryway, significant parking and the ability to stack cars (like in a bank drive-through) prior to leaving for cemetery.

Competition continues to remain high, and as seen from the accompanying graph, the major players have a smaller market share than one would expect given that there are 25,317 potential companies currently operating in the US. However, there is a continued decrease in the number of independent owners year-over-year. From a national economic point of view the following table illustrates where this industry lies within the overall US national economy.

As an industry, the revenue for the most part has overall experienced a low level of volatility over the five-years since 2015. This however potentially should be look at unfavorably. One can say that there is a certain amount of predictability in revenue trends for the industry but none of these trends are predicting significant growth between 2020 and 2024. These are of course largely based on the number of past and predicted deaths in the United States. The age structure of the baby boomer population indicates temporary growth in the near future for the industry. One has to assume as the boomers age the number of deaths is set to increase. Offsets to this are the continuing improvements in health care and prescription drugs, which do serve to extended the average lifespan. This however can be a mixed bag of goods, as many elderly will move slightly further away from their homes to enter an assisted living facility, to be closer to their family, etc. This has to be balanced with the changing consumer preferences over the last twenty-years for cremations. This will continue to develop into a greater challenge to the funeral homes overall revenue stability (given that they typically bring in less than one- third the revenue of traditional funerals). This is clearly evident in the image above where funeral homes are on the stagnant side of the revenue line.

Finally, consider Chicago's Lakeview neighborhood, where the Herdegen-Brieske Funeral Home closed September 15, 2013, partly because older people had moved away. But there was more then one reason why the over 65 population declined so drastically. In 1980, the Lakeview neighborhood had the highest concentration in the city of adults 65-years and older, with 14,402 people, according to census data. By 2010, that number had slipped by more than half to 6,849. Some of those older people, typically on fixed incomes, were forced out when rental housing prices or property taxes rose as more affluent young people moved-in[xiv]. But one can’t fault gentrification alone. It is true that not only in Chicago but also in many cities across the nation, neighborhoods have changed. The number of people per household has declined, income levels have grown, and the cost of accommodation has doubled and in some cases tripled. The standard population health curve in these gentrified neighborhoods has been skewed toward the 20- and 30-somethings.

This change eroded the demand for the neighborhood family-owned funeral home. But, family members who moved to the suburbs took their elderly parents with them. These where are the very people who for decades had use the same funeral home for their relatives since deceased. Many times they cater to separate or ethnic classes and knew all of their traditions and funeral rites. The clergy from the local church interacted seamlessly with these funeral directors. But as the neighborhood change so did the funeral needs. Lastly, in these tight knit communities where the operation of the funeral home was passed down between generations, there was at times an inability or even a lack of desire of younger generation-owners to see that the business remains within the family. This generation is college-educated career bound in a completely different direction.

In conclusion, some of the reasons for the decline in this industry are varied, but revenue declines from the uptick in cremations and it’s continued rising demand is not a good future indicator for this industry. The lack of transparency in the past, and one could even say today also does not bode well. Consumers have gotten used to the idea price shopping online, and e-commerce has a firm footing within the industry. While we highlighted some funeral homes that were in compliance with the FDAs current laws and regulations, it was still terribly difficult to actually sort through the data to establish an actual funeral cost. We believe this is pushing potential users further away from this industry.

There’s the obvious trend toward corporate-owned facilities. There economies of scale will continue to maintain their profit margin, but again as baby boomers die they like everyone else will be subjected to declining use. There is also the increasing difficulty for smaller funeral homes to acquire ongoing financing. Therefore, many operations remain under-capitalized. In some States, laws covering embalming have changed making this portion of the business less profitable or taking it away all together as a profit center. Some family-owned funeral homes share rolling stock, but in the long-term this too is not a solution. We can expect significant changes between 2020 and 2030. In this decade there will be a significant demise of the baby boomers after which the population structure of the country will change again. Millennia’s well most likely do things differently and with a nod to the environment, cremation will continue to rise especially within this population sector. Other issues potentially affecting independent funeral homes in the Midwest, the East and the West are real estate taxes. In Cook County, Illinois, and in particular the city of Chicago, taxes are now such a significant issue that they alone will close many doors forever.

About the author

John O'Dwyer is the president of JSO Valuation Group, Limited. This is a national appraisal firm located in Evanston Illinois. JSO specializes in valuations of low-income limited-equity cooperative housing, self storage warehouses, community or club swimming pools, convenience stores along with the traditional commercial buildings such as offices, retail and industrial properties. The firm has an emphasis on property taxes appraisals, estate valuation and insurance valuations. In addition to position papers on the death industry, Mr. O'Dwyer has also written on the automobile industry, convenience stores with gas stations, commercial swimming pools, automobile dealerships, to mention a few.

  1. [i] Wikipedia, Death Care Industry on the United States [ii] The American Way of Death Revisited, Jessica Mitford, 1963. [iii] 2015 Oxford University Press [iv] [v] IBISWorld Inc., Funeral Homes in the US, Report Number 81221, 2019. [vi] [vii] [viii] [ix] [x] National Vital Statistics Reports, November 6, 2014, by Elizabeth Arias, Ph.D., Division of Vital Statistics [xi] [xii] IBISWorld, Inc., Industry Performance, Funeral Homes in the US, April 2015, Lucas Isakowitz [xiii], [xiv] Chicago Tribune, June 22, 2014, Ellen Jean Hirst

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