Today, Daniel M. Isard, president of The Foresight Companies, LLC, a Phoenix based management and financial consulting firm that specializes in providing services to the funeral and cemetery profession, announced the updated figures for the rate of indigenous inflation within the funeral profession for 2009.  “This past year saw a perfect storm causing the inflation rate to increase to the one year highest rate since 1991,” Isard said.  “The perfect storm was low yields on preneed accounts which account for payment on about 30% of all funerals, a high rate of increase on caskets which are used in about 70% of all funerals, an increase in the number of funeral cases that resulted in disposition by cremation which generate about 40% less revenue per funeral and a fear of Consumer Confidence which caused individuals to be cautious with their spending on optional goods and services,” he added.

The inflation rate as computed by Foresight in 2009 was 6.08%.  Foresight has been actively watching Funeral Service Inflation (“FSI”) for more than 20 years and pioneered the very concept of a specific inflation rate for this industry. “We have studied the effect of inflation and the operation of a funeral home going back to 1940.  We do this to help the funeral home managers make decisions about preneed in a proactive fashion and, therefore, operate as prosperously as possible,” Isard said.

In the past few years Foresight has computed inflation on the operation of a funeral home and has pioneered a method that will allow them to track the inflation rate on funerals that result in burials only.  “When you contrast the general industry inflation rate in 2009 at 6.08% and the rate for those cases that are buried at 7.07%, this is more than 223% of the CPI for the same period.  Some of the key points which have driven up FSI this year include

►   The costs of caskets increased by about 4.27%.  The average wholesale cost of a casket in a tracked funeral was about $1,068 up from $1,042 last year.  “On a cumulative basis we perceive the average consumer was buying a cheaper retail casket than they were just three years ago,” Isard said.  Our analysis on FSI, solely on burial cases, resulted in an inflation rate of 7.07% in 2009 down from meteorically high 12.14% in 2008.  The very high 2008 rate was caused, in part, by an average increase in the cost of comparable caskets from 8% to 13%.

►   The cost of health insurance and other benefits increased about 4.4% in 2009 from 2008.  “While this cost does not appear to be significant in its nature, most funeral homes provide health insurance to five or more people, usually at a fully paid premium basis!” Isard remarked.

►   The cost of automobile expenses did not increase dramatically in 2009 due to lower fuel costs and the fact that most funeral home businesses repaired rather than replaced many of their specialty or work related vehicles.  “The number of new hearses and new limousines bought by the more than 22,000 funeral homes in the US was at an all time low, driving many manufacturers to the brink of extinction,” Isard added.

►   A continued decreasing yield on preneed trust and preneed insurance death benefits also lead to an increase in inflation.  “Approximately one out of every three funerals nationwide is prefunded and about two thirds of these are price guaranteed by the funeral home.  The average death benefit crediting rate was between 1.5% and 4.0% over the past year, so the cumulative effect of this price guarantee and the compounded value of these accounts causes funeral homes to recognize a loss when servicing these prefunded accounts compared to the price of these accounts using their current General Price Lists,” Isard explained.

Ironically, the increasing choice of cremation rather than burial may actually be a blessing in disguise for the well run funeral home.  Today, cremation is the choice of about one out of every three families.  “While more than 80% of the funeral homes we studied are not yet pricing their cremation services equal to those of burial for identical services rendered, the elimination of the increasing cost of the casket in about 25% of all cremations actually allows funeral homes to better manage their costs to provide for these services on an at need and preneed basis,” Isard hypothesizes.

The computation of Foresight begins with an analysis of the national average figures compiled from Federated Funeral Directors Of America, Inc., the Springfield, IL accounting firm which serves more than 10% of all funeral homes in the United States.  Federated and Foresight are not related in any way.  They provide their summary data to Foresight and others as a courtesy. “I must thank John and Ken Rodenburg, the Executive Officers of FFDA for some of their guidance and support through the years,” Isard was quick to point out. “Without the data of Federated the computation would be much more cumbersome to produce and possibly less accurate, as the Federated data is consistently applied which we do not see in other public computations,” Dan said.

“Inflation in this profession is as important to compute as it is in any industry, since business owners need to assess the effect of their pricing increases and management of their overhead to produce a profit which is fair and reasonable,” Isard stated.  “This industry also has the burden of having made commitments to serve families in the future via prearranged and pre-funded funerals, the bulk of which are guaranteed for the future.  Therefore, the growth of this money versus the amount of inflation could represent a problem for the industry as a whole and each individual funeral home,” Isard advised.

The concept of the computation assumes a level profit margin and a level merchandise commitment, coupled by consumer spending and the overhead of the industry as a whole.  While the death rate might increase or decrease on a national or regional basis; funeral homes mainly have a fixed cost of operation.  Some of the key indicators observed by the data for 2009 versus 2008 include:

• Consumer spending on the average funeral in 2009 was $6,338.50.  This was an increase of $139.49 on average over the previous year, or about 2.25%.  Over the past 10 years the average increase was 2.92%.
• Profit on the average funeral in 2009 was $336.51 which was a 12% decrease from the previous year’s profit amount of $382.66.  In 2009 the average profit margin on the average funeral was down from $382.66 in 2008 to $336.51.  This is a decrease in profit of 9% while families are spending 2.25% more.
• Profit Margins, as measured by Federated, have decreased to 5.31% in 2009; the lowest the profit margin has been since 1984 when the Federal Trade Commission changed the way funeral prices and merchandise needed to be presented to families.
• Overhead, as measured from Federated’s survey, showed increases in operations on a per funeral basis in 2009 to have been $4,933.92; a 3% increase versus the 2008 overhead computation of $4,774.49.

“That demonstrates that consumer spending went up 2.25% but profits went down 9%; therefore, most funeral homes did not properly adjust their prices and allocate them effectively to consumer choices,” Isard concluded.

The last 10 years have seen the following FSI versus CPI:

The ten year average of FSI was 3.92% versus the average CPI rate for the same period of 2.67%.  Therefore, it appears that FSI has been 46% higher than CPI for the past 10 years; which is significant when it comes to the analysis of the preneed guarantee offered by many funeral homes.  Many insurance companies and trust companies compare their account crediting rates to CPI.  “The comparison of preneed death benefit increases or trust account yields to CPI is wholly fictitious and distorts the safety of providing a guarantee on preneed accounts,” Isard affirmed.  He added, “The components of CPI are market basket components that are not components of the operation of a funeral home so why would anyone want to compare their own operational needs to that of a consumer’s household operations?” Isard queried.

Funeral home and cemetery owners and managers can learn more about FSI via the web sites of The Foresight Companies, LLC (www.f4sight.com) and the free informational and educational site Foresight sponsors (www.thefuneralcoach.com) as well as by subscribing to Preneed Perspective the long running newsletter with information on preneed related topics.

For comments from The Foresight Companies, LLC, or to interview Dan Isard, please contact Susan Dragoo at 800-426-0165 or susanralston@f4sight.com.  For questions about the data supplied by Federated, please contact Ken Rodenburg at his office in Springfield, IL at 217-525-1712.  While Federated provided Foresight with a copy of their statistical supplement for 2009, the conclusions reached are those of Foresight and Dan Isard.