Statement of the problem
SCI has grown the top line of the company through acquisitions. This has also increased the market value of SCI. The value of SCI’s stock is implying that the market is expecting the company to keep a growth rate of 20 % a year, over the next five years. This growth can only be obtained by continuous consolidation.
- Can SCI keep on consolidating?
- If they stop acquiring competitors how will this affect their value?
- Has the consolidation strategy created actual value for SCI?
- If they keep acquiring new companies, how should they finance it?
- Is SCI’s strategy sustainable?
Facts and Assumptions
Industry
The death care industry is a considerably large and fragmented business. This industry includes two distinct segments – funeral homes and cemeteries, which most of them are family-owned and are inherited by generations. There were 22,500 funeral homes and 9,600 cemeteries in the United States, in 1995. There isn’t much differentiation in the industry and its dynamics is based on consolidation. The market concentration is very low based on the fact that there are about 20,000 funeral homes in America .
The death care industry also is a low-growth and mature industry. The market is largely divided into pre-need and at-need segments where the first is a way for the companies to lock in revenues and market shares long before the death actually happens. The latter is the traditional way of doing business when needed.
1. Threat of potential entrants was low because of high barrier to entry. The importance of personal relationship and reputation made it difficult to enter and to fail in this industry. Often a family would use the same death care provider generation after generation.
2. Buyer power was low because people usually prefer the same funeral home or cemetery to service the whole family.
3. Supplier power was high because the supplies such as caskets accounted for half of the expenditure for total funeral service....