Alderwoods Company Analysis

Company Report - Alderwoods Group, Inc.

Introduction

The funeral industry is comprised of thousands of independent operators and a few large corporations that each own and manage hundreds of funeral homes, cemeteries and crematoriums. Alderwoods Group, Inc. is a company that came into the funeral service industry in 2002 after the restructuring of the now bankrupt Loewen Group, Inc. (Financial Post). The price earnings ratio as of October, 2005 is seventeen times its earnings per share (Yahoo! Finance). In the next ten years both revenues and market cap is expected to increase at Alderwoods due to the aging baby boom generation and the fact that Alderwoods has aggressively been disposing of its debt by selling off many of its assets (which include cemeteries and funeral homes).

Funeral homes, cemeteries and crematories are businesses that service the post-life activities for families. The industry covers everything from casket manufacturers and lab equipment makers (suppliers), funeral homes (providers) to the ultimate final resting place in a cemetery (plots, vaults, headstones, internment vaults, mausoleums) or in the case of cremation, ovens, loaders and ultimately, urns. Within the industry there are four major competitors on a national scale: Service Corporation International (SCI), Alderwoods Group, Inc., Carriage Services, Inc. and, Stewart Enterprises, Inc. They are all public companies that manage funeral homes, cemeteries and crematoriums throughout North America.

As of January 1, 2005, the Alderwoods Group "employs approximately 8,500 people at 648 funeral homes, 79 cemeteries and 63 combinations funeral home and cemeteries throughout North America (Alderwoods 2004 Annual Report)." These totals are significantly down from the 1990's when Loewen's tried to capture market share and aggressively bought up hundreds of independent funeral homes and cemeteries. By overextending itself, and having to settle a $500 million breach of contract lawsuit, the Loewen Group filed for bankruptcy and sold many of its assets before reorganizing as Alderwoods (Financial Post). The Alderwoods Group had to continue to take drastic action to insure its survival and its return on investment. Consequently, management continued to sell off its assets and reduced its debt from $2,342,916,000 at the end of 2002 to $1,307,043,000 (Alderwoods Annual Reports, 2002 & 2004). As of January of 2003, Alderwoods downsized from 802 funeral homes and 185 cemeteries to where they are today (Alderwoods 2002 Annual Report). Adlerwoods stock performance has outpaced the S & P 500 over the previous two years (Yahoo! Finance). In fact, since 2003 Alderwoods has had 13 consecutive quarters of growth in its average revenue per funeral (Crotty) and its stock price has risen from $3.00 to over $15 per share (Yahoo! Finance).

Strengths

Besides being able to reduce its debt, Alderwoods is transitioning from a more traditional management method where casket sales dictate the profitability to a service-oriented model that focuses on the actual service itself, dictating profitability. One of the advantages of having corporate run facilities is the economies of scale when working with vendors that supply caskets, urns, etc. In addition, many of the funeral homes that are near each other have the opportunity to reduce overhead by sharing their resources such as hearses and embalmers. In addition, Alderwoods prefers to keep the name of the original family names on the funeral homes it acquires in order to maintain ties to the generations that have been served by their local home (Meyer). One such facility is Rose Hills Mortuary in Whittier. According to Nick Clark, their Marketing Director, Alderwoods doesn't have much direct involvement with Rose Hills other than being the parent company. The fact that Rose Hills is essentially allowed to run autonomously is due to their success over the years. Clark says, "It's all branding. Alderwoods doesn't want to fiddle with the brand (Clark)." In cases like Rose Hills, "branding" to the local community is one strength that Alderwoods recognizes as a key selling point.

Weaknesses

As mentioned earlier, the debt structure that Alderwoods is continuing to work out will take years to alleviate. This situation will continue to drive the company to analyze their weaker acquisitions and make decisions to sell additional assets. In order to stay competitive, Alderwoods will have to look at other revenue generating opportunities. To date, the company still relies upon the markups of caskets and other hard goods as their main source of income. Based upon the current trends towards various tastes and preferences, the company will have to respond and offer other services that independent funeral homes are now beginning to profit from such as internet obituaries and video tributes.

Threats

The typical American full service funeral costs $6,500 (NFDA.com). With competition from outside countries like China entering the casket market, Costco selling caskets, and the rising popularity of cremations, prices are being pushed down for caskets and services (Hopkins, 1). "The average cost for all types of cremations is about $1,800", according to Jack Springer, executive director of the Cremation Association of North America (Scherr). These threats to the company's bottom line has lowered the margins Alderwoods traditionally relied upon. Therefore, in order to compete in the future, Alderwoods will have to find alternate methods to profit such as offering more services or options for the funeral service. As a result, the trends show that many families are interested in cutting costs and instead of lots of mourning, celebrating a life. At Rose Hills, people are looking for expertise and prestige in planning their funerals. Costco caskets haven't made too much of a dent in sales yet, but still pose a threat. According to Clark, "After paying for a wedding, house and car, a funeral is probably one of the most expensive purchases and people don't want to be buried in a bargain Costco casket" However, many articles have brought to light the high costs of dying, so many families have been researching ways to reduce these costs.

Opportunities

The target market for Alderwoods is the aging population. As mentioned above, the baby boom population is just now reaching their 60's and will be beginning their planning for their own funeral. Pre-arrangements for this generation will become the primary focus of this industry for many years to come (Barnard, 6-9). For those customers that choose