My wife just returned from a two-week trip to Japan. She was visiting our 23-year-old son, who is currently teaching English in Fukuoka, Japan.
They spent a week in Tokyo, absorbing the sights and sounds of a modern city of 14 million people. Then they spent a week in Kyoto, a much smaller city filled with ancient shrines that date as far back as 711 AD.
The two cities were completely different. But my wife noticed one similarity.
In both cities, there were very few children.
There were plenty of Silent Generation – aged 75+
Plenty of Baby Boomers – aged 58 to 85
Fewer Gen X and Millennials.
But hardly any children.
Japan has the highest percentage of older people in the world. In 2020, people over 75 represented 15% of Japan’s population, while in the USA, the same group is only 7% of the population.
Japan has the world’s fastest-growing aging population.
Japan also has the fastest-growing number of incidents of people dying on their own. This has spawned a whole industry of home cleaning services that empty an apartment or home after their isolated elderly occupant passes away.
The demographics of Japan have changed dramatically over the past few decades, which has profoundly impacted the Japanese funeral industry.
Just five years ago, the average funeral in Japan was 3 million yen or roughly $22,337 US dollars.
Today, the average funeral cost has dropped to 1 million yen or $7,446 US dollars.
Do you think this might impact a funeral home’s bottom line? Absolutely!
The Japanese funeral industry is still a huge market. But it’s also a changing market, and funeral home owners are struggling to adapt.
Sound familiar?
The North American funeral home market is going through its own changes. The rising cremation rate combined with smaller (or non-existent) funeral services has hurt the bottom line of many independent funeral homes.
As a result, small, independent funeral homes are struggling to survive all over the USA and Canada, and business brokers have more listings than they can handle.
Today, large funeral industry corporations looking to expand can choose from a long list of available funeral homes and cemeteries. It’s turned into a buyer’s market.
Many of my clients have acquired other funeral homes in recent years, and others have sold their businesses. It feels like we’re in a time where you either acquire or someone will acquire you.
A funeral home business acquiring another funeral home is an example of a horizontal acquisition. You’re acquiring a similar company in the same industry at the same point in the supply chain.
Another form of acquisition is referred to as vertical. In this case, you are acquiring a company in the same or a related industry but at a different point in the supply chain. Acquiring your local florist would be an example of a vertical acquisition.
If SCI buys another funeral home, that’s a horizontal acquisition. If they buy Batesville Casket Company, that’s a vertical acquisition.
So if you are a funeral home owner who has played their cards right and is interested in acquiring another business which type of acquisition is better? Horizontal (i.e., another funeral home) or vertical (i.e., another point in the supply chain)?
Here’s a rule of thumb…
Use horizontal when you want to own a market, and use vertical when you are interested in maximizing your profit from that market.
For example, let’s say you have the opportunity to buy two different funeral homes. One is the largest competitor in your local market, and the other is #2 in a neighboring community.
They are both horizontal acquisitions, but which one is the better opportunity?
In this case, I would acquire your local competitor because there’s no strategic advantage to being #2 in two different markets.
If you buy your local competitor you now control an entire market. At that point, you could make some vertical moves like acquiring a local florist or an event center to maximize your profits.
The funeral industry is going through some significant changes, and there will be a lot of funeral homes up for sale in the next few years. It’s tempting to acquire as many as you can as fast as you can, but I would recommend being very selective in your acquisitions.
Acquire horizontally until you own the market. Then acquire vertically to maximize your profits.
Once you’ve maximized your profits and have a high EBIDTA, your business will be worth a lot more should SCI come knocking on your door.
Until next time
John
PS: The businesses in Japan that clean and empty a house after someone dies are often owned by the local funeral home. If you recognize that as a vertical move, you’re right!
