Over the last century traditional funeral homes have been known to have a “moat” around them in relation to potential competitors.  Those moats have brought about many barriers to entry to the profession and helped many family funeral homes thrive.  However, as we move forward some of those advantages for existing funeral homes are going by the wayside and funeral home owners have to continually “up their services” to keep their moats full.

I was reminded of that situation when I read this recent article from Seeking Alpha concerning coffee chain Starbucks titled, “Starbucks lost its moat, now comes the re-pricing”. 

From my point of view, just as in funeral service, there are items that society changes to “lower the water” in a business’ moat, but I think Starbucks is a great example of instituting self-imposed methods that can hurt one’s business.  I think that is a lesson for all businesses, including traditional funeral homes, to be aware of.

I discovered Starbucks at about the same time the internet was coming into vogue — the late 1990’s.  Our young family would vacation in Vail, Colorado, and I located a Starbucks about a block from our vacation lodging.  It was awesome – big comfortable leather chairs, a fireplace, quick service, and fairly priced coffee. I would take an hour each day, purchase the Denver Post, and sit comfortably in a great atmosphere — it was a place I was totally content.

That modus operandi seemed to work for Starbucks as for the next two decades the company grew and grew. . . .and as an owner of their stock I saw my investment grow and grow also.  If you followed the company you would have also seen that explosive growth with the stock going from about $3 per share in 2000 to about $120 per share in 2021. . . . .Their number of stores and revenues went in the same direction.

However, somewhere along the way in the late second decade of the 21st century the business started to change.  They added all kinds of options to their coffee drinks which for me slowed down the process of getting my coffee —  sometimes waiting five minutes or more in line and another 10 minutes for them to fulfill a simple cup of coffee order.  The price went up to about $5 for a simple cup of coffee.  Many of their buildings added more and more seats to accomodate larger crowds replacing the very comfortable large leather chairs.  . . . and other changes were added to increase profitability . . . and in my opinion, decrease the customer experience.

The politics of Starbucks seemed to either change or be more overt also. The company embraced Diversity, Equity, and Inclusion formats and seemed to be in a media-followed constant struggle with their workers over pay, benefits, and hours worked.

Finally, competitors popped up in the market that used the old Starbucks method —  quick coffee, reasonably priced, comfortable seating, and seemed to stay out of the political arena. . . . Today, as the linked article states, Starbucks is trying to get their mojo back.

It’s a Lesson —  I write this today as the author of the linked article notes that Starbucks is pursuing a “Back to Starbucks” strategy.  The author also doesn’t believe that strategy will work because of the damage done by the above-mentioned strategies over the years.

I can tell you that I’ve changed my allegiance to a northern U.S. based chain, Caribou Coffee, which seems to operate on the old Starbucks modus operandi —  although I see them making some of the same mistakes such as “too many” options which can cause delays in getting orders.  In my Minnesota community we have two Starbucks now and I don’t believe that I have ever bought a cup of coffee in either of them. . . . That shows that when allegiances change, many times they change for good.

Funeral homes have big moats — such as licensure to operate, licenses for employees, a high cost of buildings and fixtures, and satisfied customer families going back sometimes generations — that are difficult for new competitors to penetrate.  However, just as Starbucks is being accused of in the Seeking Alpha article, sometimes decisions by management make those moats easier to pentrate.

Funeral homes are probably going to have to move forward and offer some of the new products in Death Care in the future without alienating their existing supporters.  My take from this Starbucks article is to be cautious how you do such so you don’t alienate your current customers.

A Lesson I Learned from my Dad —   I mention the very pro-active movement of Starbucks in the Diversity, Equity, and Inclusion issues of the recent past.  I take no side with the issue other than to say getting “political” on either side of an issue may not be good for business – in general political decisions can alienate 50% of potential customers.  Here’s an article that Funeral Director Daily published a year ago about that dilemma.  It’s going on 60 years since my father gave me a lesson on that issue and I think it is still great advice for funeral home owners today.

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Funny how 28 hours alone in a car gives you plenty of time to think about things you probably would not think about otherwise. . . . I arrived home in Minnesota on Monday after spending Saturday, Sunday, and part of Monday returning from our winter rental home in Southwest Florida.

You might find this odd, but I actually enjoy the three days — I drop Angie off at the Fort Myers airport on Friday and she flies home. . . I then leave our rental unit bright and early on Saturday morning to drive our car back to Minnesota.  We’ve done this for five years now. . . and it works for us.

Luckily my car, actually an SUV has Sirius XM radio and I have the opportunity to listen to about 150 different stations over the 28-hour drive period.  This year I got tons of information on the NCAA basketball tournament, learned alot about NFL free agency and the upcoming draft, and enjoyed listening to experts on business and government/political related stations as well.

That leads me into a discussion of the title of today’s column.  The government/political stations talked a lot about potential tariffs.  It was interesting to hear some philosophical arguments about what happens to business if/when tariffs are implemented.  I would argue that the consensus of “experts” proclaimed that tariffs would hurt large companies that trade internationally and also small companies because increasing inflation may be a collateral side effect of tariffs and small companies are, according to the experts, hurt more by inflation.

What I came to understand is that the companies in the United States termed “Mid-Cap” companies would probably benefit the most or be hurt the least.  Reasoning being is that while large companies have an international headwind and small companies battle inflation, many investors will turn their attention to inside the United States and support these companies. . . . . Much of that support, it was purported, would come from Private Equity that would look to invest inside the United States rather than look internationally.

Here’s a couple of recent articles that I found about that theoretical situation:

What might this mean for Death Care? —  When I heard this concept, as I usually do I tried to understand how it will affect us in Death Care.  One thought that I have is that I know many “acquisition companies” use private equity to help them in the financial aspects of their acquisitions.

If private equity turns “inward” it may mean that there will be more resources available for the acquisition of funeral homes and/or cemeteries.  And, if there is more cash available, that may mean that for “desireable” funeral homes and cemeteries there could be a competition to purchase them which might, theoreticaly, raise the sale price.

I don’t know. . . just one thought.

Do funeral homes still have a “Wide Moat”?  —  Kind of going hand-in-hand with the thought of paying a high price to acquire a funeral home acquisition companies need to be sure that the acquired funeral home has a “Wide-Moat”.  In a business context here is how that term is defined:

“. . . . a “moat” refers to a sustainable competitive advantage that protects a company’s profits and market share from competitors and external threats.” 

Tom Anderson
Funeral Director Daily

Traditional funeral homes have historically had this “wide-moat” in their communities.  What widens that moat is that the existing business usually has a strong history, a building that would be expensive to duplicate, professional staff known in the community, and a book of pre-arrangments in its file for future business.

In addition, ownership and staffing professionals, in most states, need a license to be able to conduct much of the work that funeral homes take part in.  The time and expenses to obtain that license turns out to be a moat for others wanting to come into the business as well.

A new business to compete with that business would have to make an investment in a facility, find “licensed” staff more than likely who will not be well known in the community, and have no existing pre-arrangements to build off.   As you can probably understand, penetrating the “moat” of the established business may take years and result in financial losses before any gains.

My question here, is “With the changing face of funeral service, is the moat getting narrower“?  For instance, can cremation providers operate out of a leased strip-mall?  Can social media and online arrangements take the place of well-known staff?  Can renting event centers for celebrations or services compete with a well-appointed traditional funeral home? Is licensed staff necessary for all aspects of Death Care anymore?

I don’t have the answers to those questions, but I believe they are being asked by many in today’s Death Care world.  I would guess that there is no doubt that the “wider moat” that you have, the more your funeral home will be worth.

It is interesting to note that the S&P 500 has had an incredible run over the past 10 years gaining 235% in that time — an average of 23.5% increase per year.  However, an Exchange Traded Fund (ETF) that invests only in what it considers “Wide-Moat” companies has done even better in that time period gaining 240%.  That wide-moat fund trades under the stock symbol “MOAT”.

Successful funeral home/cemetery acquisition companies have known about the “Wide-moat” theory for a long time.  However, I’m wondering if those companies still see the local family funeral home as being “Wide-moat”. . . . . .

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