Death care industry, a special emphasis on China

• Booming death care industry in the nation
• Death care industry structure
• Growth drivers and potential threat

The death care industry which offers services such as funeral homes, cemeteries, crematoriums and memorials is highly fragmented and government controls are imposed in certain countries. The death care industry in the US is estimated to be $20 billion and in China it is projected to reach $33 billion by 2020. The industry provides services under various forms around the globe with major differences in the involvement from corporates and governments. The industry on an average involves numerous players with a distinct range of services.

The common forms under which the industry operates are of three main types, this is observed in the structures of the USA, China and India.

1. In the USA, the industry is highly fragmented on the basis of the region with few large corporate players controlling a sizeable share of the market.

2. In China, the industry has high entry barriers as local governments provide two to three licenses in a region giving participants concentration of the market share.

3. In India, the industry is again highly fragmented with very limited corporate involvement.

The characteristics of the industry

• No new entrants in the industry despite low barriers, this is due to the psychological reluctance of getting  involved with deaths
• Highly fragmented with multiple small players providing few basic services along with large players providing a whole range of services
• Strong pricing power as families of deceased people do not indulge in bargaining

Special case of China

The Chinese death care industry is among the largest in the world, but is structurally dissimilar from other economies due to a high level of consolidation and emerging population dynamics. The government controls a number of players through licenses with no more than two or three licenses issued per region. The country has the largest population in the world and a number of people in the age group of 60 or more years are ~222 million. Further, the number of deaths per 1,000 people is 7.1 and the total number of deaths in China is ~9.5 million per annum. There is an acute shortage of the burial space, which along with the emerging needs of a wealthy portion of population has led to a strong surge of demand from the death care industry. In urban areas like Shanghai, the total funeral cost has risen to more than 80,000 Yuan ($12,650) which is almost 1.2 times the average yearly pay in the nation. On the supply side, the unavailability of players providing services has led to a surge in the prices of death care services. This, in turn, has led to a boom for the industry which was seen by the performance of the largest player in China; Fu Shou Yuan International. The company posted a CAGR in revenue of 25% from 2010 to 2017. The operating margin of the company was the highest among large players in the industry across the world at ~40%. 

The combined effects of the concentrated market share due to the government policy and a strong growing demand for services by the ageing population has helped the Chinese death care industry to emerge as the fastest growing and most profitable in the world.

Industry growth drivers and threats in China

Growth drivers

• Growing share of population aged 60 and above will help drive a strong growth rate. The portion of the population aged 60 and above at present is ~17% and this is expected to shoot up to 30.9% by 2040. This has set the industry up for a strong growth trajectory over medium to long-term. 

   

  

   

• Introduction of pre-death contracts to increase cash flows. Large players in the industry such as Fu Shou Yuan International have introduced pre-death contracts, these are very popular in the US and Japan with penetration rates of more than 70% in both these countries. These contracts include services like hospice care, body transport, mourning hall construction, farewell ceremonies and legal advice. This is expected to help the industry develop a strong incremental cash flow generation as cash is received upfront before the actual services are rendered. This plan has been a strong growth driver for the industry after its introduction in the USA and Japan. The increased marketing efforts and penetration levels of these plans in China is expected to generate similar results. The impact of these contracts can be seen by a strong growth rate in the free cash flow of Fu Shou Yuan International since the company introduced the contracts in 2015.

• Shortage of burial space is causing a spike in the price of traditional burial services. An acute shortage has developed for burial space in the country. The cost of a burial plot in large cities like Shanghai has averaged around 80,211 yuan ($12,400) which is relatively more expensive than the average price of a house in China. Industry estimate suggests that all existing burial sites will exhaust in the next 10 years. A land crisis for burials is unfolding in the country and the price of burial space is set to rise continuously in the long run.

• Innovative plans to reduce space are required for traditional burials, this will help drive the population cultural preferences in the long-term. The shortage of space has prompted the industry to innovate newer ways to generate revenues such as space saving family plans where almost six remains can be buried in a small piece of land. This has partially helped to offset the deepening space shortage and made the burial services more economical, but in the long run the space crunch due to a growing demand of burials is expected to intensify, this can further boost the long-term service contract realizations for the industry.

Potential threats

• Government’s focus on promotion and support to alternative death care services like cremations and sea burials. A massive shortage of burial space in China prompted the Ministry of Civil Affairs to announce a drive in 2014 for achieving a national cremation rate of 100% by 2020. The government is also trying to boost the number of sea burials by providing a cost subsidy. The revenue generated from these type of services for the industry is roughly half of the revenue from traditional burial services. However, the local traditions are still prompting population to bury the ashes of the dead which can protect the industry to a certain extent from the potential impact on demand side changes.

Therefore, the death care industry in China hold a strong position as the population dynamic is highly supportive. A limited number of players exist due to license controls and this would help large players to grow their margins in the future. Televisory expect industry players to sustain strong CAGR of above 20% in the long-term as the demand for their services is projected to grow due to the rising share of the population in the above 60 age group. Overall, the large players in the industry are set for a high growth trajectory as the industry has an ideal mix of robust demand growth and a limited number of suppliers.