The CMA considers that there are reasonable grounds for suspecting that there are various features or combination of features that prevent, restrict or distort competition in the supply of these services, including ·the customers' vulnerability and difficulty in engaging at the point of need and unresponsiveness to measures of price and quality. In relation to funeral directors' services, the CMA has also identified concerns about customers’ inability to assess certain aspects of quality and the value for money, a lack of transparency, the suppliers' ability to influence decisions and ineffective self-regulation. In relation to crematoria, there are also concerns about the limited number of providers in local areas and high barriers to entry.
Launch of market study
On 1 June 2018, the CMA has published a market study notice under section 130A of the Enterprise Act stating that it was proposing to carry out its functions under section 5 of the Enterprise Act in relation to the supply of funerals (and related goods and services) in the UK, to consider the extent to which a matter in relation to the supply of those services has or may have effects adverse to the interests of consumers, and to assess the extent to which steps can and should be taken to remedy, mitigate or prevent any such adverse effects.
The launch of the market study was prompted by concerns about, in particular, high funeral prices, significant price increases, price differentials, lack of transparency about pricing, difficulties in comparing funeral packages and consumer protection concerns in relation to pre-aid funeral plans.
The CMA stated that its market study will cover the whole of the UK and would focus primarily on the following parts of the funeral market:
- Funeral directors: The supply of funerals in the at-need market.
- Crematoria: The supply of cremation services by private firms and the supply of such services by, or on behalf of, local authorities.
- The CMA identified the following key issues to explore in its market study:
- The extent to which, and dimensions along which, funeral directors compete with each other and what factors may drive price rises and price differentials in the market.
- Whether the practices of funeral directors (such as around transparency of pricing information) further impede the ability of people (who are already facing challenging circumstances) to make informed choices.
- The extent to which crematoria have, and are able to exercise market power.
Having issued a market study notice, the CMA had to announce whether or not it intends to make a market reference by 30 November 2018.
Interim report and consultation on market investigation
The CMA notes that, despite certain comments received on the scope of the market study, it decided not to extend the market study to cover burial plots (the high cost of which has already been examined by government) or pre-paid plans.
The CMA states that it has received and reviewed evidence from a wide range of stakeholders. It has sent information requests to the nine largest funeral directors, the three main crematoria providers and comparison websites. It has also commissioned a consumer survey and consumer research.
The CMA notes the following about the funeral industry:
- Organising and carrying out a funeral broadly involves various administrative tasks (registering the death, booking facilities and necessary paperwork), handling the body and organising and carrying out a ceremony/service.
- There were 607,000 deaths in the UK in 2017, approximately 513,000 of which involved a funeral paid for at the time of bereavement, rather than through a pre-paid plan. The value of services provided by funeral directors for funerals purchased at the point of need and cremation fees, together amount to about £1.6 billion.
- The proportion of funerals involving a cremation has grown steadily in the past 60 years, from 35% in 1960 to 77% in 2017.
- The share of cremations carried out by private crematoria has increased from 23% in 2007 to 30% in 2017, while the absolute number of cremations carried out by local authorities has remained broadly constant over this period.
- Evidence indicates that the average cost of a "basic" funeral has increased by an annual rate of 6% in the 14 years to 2018, from £1,920 to £ 4,271. The average cost of a funeral involving a cremation was £3,744 in 2018. The two largest cost components are the funeral director's fee and the cremation fee.
- The industry is very fragmented, but there are three sizeable firms of funeral directors: Co-op (with 16% share of all funerals), Dignity (11%) and Funeral Partners (2%). Dignity also operates crematoria, alongside Westerleigh, Memoria Limited, smaller providers and local authorities. A number of companies specialise in the provision of cremations without ceremony. Dignity and Westerleigh together own around two-thirds of the private crematoria and one-quarter of all crematoria in the UK.
- Comparison websites specialising in funerals have emerged in recent years and a number focus on at-need funerals.
- The activities of funeral directors are not regulated in England, Wales and Northern Ireland, although there is a regulatory regime in Scotland. There are codes of practice developed by funeral director trade associations.
In this context, the CMA has examined the following:
How people choose a funeral
The CMA has reached the following provisional conclusions on customer behaviour when choosing a funeral:
- People are often poorly prepared, grieving, emotional and under time pressure to arrange a funeral quickly. Funerals are also purchased relatively infrequently, and therefore people have little knowledge of the options available.
- People typically choose to use a local funeral director and do not shop around for better prices and services (89% of people bought from the first funeral director they visit). Much reliance is placed on personal recommendations or past experience.
- There is an expectation that funerals are expensive so prices are not challenged. Only 6 % and 5% of people respectively consider that the prices or range of funeral options on offer were important factors in their choice of funeral director. Few knew that prices varied between different funeral directors and crematoria.
- Even if people wanted to compare funeral directors' prices and services, there is only limited information being provided online (which makes such comparison difficult).
- By the time met with the funeral director for the first time to discuss the funeral arrangements, they were already committed to using that funeral director (particularly where the body has already been moved to the premises of the funeral director). The negotiation of the funeral package is typically a discussion led by the funeral director. People are likely to accept the price and services offered. In particular, it is assumed that the funeral director's fee is fixed and non-negotiable.
Overall, the CMA has found that people who organise a funeral do not exercise some of the most basic commercial judgments that customers typically display in more normal circumstances. Key decisions affecting the final cost are made in an iterative discussion with the funeral director, which they largely control. This leaves customers in a position of extreme vulnerability.
Competition between funeral directors
The CMA has identified the following underlying characteristics of the funeral director services market:
- Lack of customer engagement (only 14% of those who organised a funeral in the last two years compared two or more funeral directors).
- Demand is relatively unresponsive to price and quality. The choice of funeral director is not driven by price. Factors such as localness and convenience are more important.
- Lack of transparency. There is limited visibility of pricing, particularly online. Even when price information is available online (or a customer obtains multiple quotes) it is not always easy to compare packages. In addition, there are many aspects of service quality that are difficult or impossible for consumers to observe. The CMA considers that lack of transparency limits the ability of customers to compare funeral director offerings in terms of price, quality and range.
- Sales practices of funeral directors can also limit a customer's knowledge of the range of funeral options available, so customers may end up not choosing the option they would prefer if they had information on all the available options (including their respective prices). Through iterative, face-to-face meetings, funeral directors are able to target different packages to customers based on their stated or assumed willingness to pay. There is evidence that a significant proportion of customers are not made aware of all the options available to them when choosing a funeral package.
In these circumstances, the CMA expects competition between funeral directors to attract customers to be weakened, with the result that prices will be higher and non-price factors (such as quality) will be worse than would otherwise be the case.
In this context, the CMA has assessed competition between funeral directors. It has found that:
- Competition for customers over price and non-price factors appears relatively muted. Funeral directors are able to set their offering without close regard to the prices and quality of their rivals. As a result, prices in this sector can be expected to be higher (and non-price factors, such as quality can be expected to be worse) than would otherwise be the case.
- In many local areas, people have a choice of several funeral directors and local concentration is not generally an issue in this sector.
- There is also evidence that the large funeral directors compete to attract customers by opening branches in new locations. The incumbent's typical response to entry appears to have been limited and generally centred on increased marketing activity.
- There is, however, some evidence that competition is relatively more intense with regard to simple funerals (both in terms of propensity to offer these as part of the funeral range and pice). In the past three years, and partly in response to new entry (including from low-cost operators), large funeral directors have embarked on new pricing strategies, such as launching new low-cost options, including lower priced simple funerals a (more limited, lower cost funeral that may: exclude provision of limousines; have no/limited choice of slot for the funeral service; have no viewing options and/or include a basic coffin with no/limited opportunity to upgrade) and direct cremations (a cremation without a ceremony).
- Simple funerals now account for an increased proportion of all funerals offered, although the CMA expects this level to drop back to historic levels. Although these recent strategies indicate that competitive pressures have increased in the supply of low-cost funerals, the CMA is not persuaded that this level of competition will be maintained over time.
- The CMA is not persuaded that competition in the supply of low-cost funerals is effective. It does not accept that customers generally have become more price sensitive (only a small number of customers are shopping around). Most customers still want a standard funeral and would not be willing to accept the limitations of a simple funeral. The prices of standard funerals and simple funerals appear to have diverged in the last two years, which is consistent with a lack of constraint.
- Direct cremations do not provide a constraint on traditional funerals, being a substantially different proposition, catering to a largely different customer group. They currently account for a very small proportion of funerals sold by the large funeral directors and this is not expected to increase substantially. They account for less than 10% of all funerals.
- The evidence indicates that the two industry trade associations have not been able to increase the level of transparency necessary to facilitate consumer choice. There is also evidence that the trade associations' focus on supporting the commercial interests of members may have been detrimental to competition (for example by hindering the development of effective online comparison tools).
Overall, the CMA expects that a large proportion of customers will continue to purchase standard funerals at the point of need. Such customers will be open to exploitation (including through high prices) due to their uniquely vulnerable circumstances and the nature of a purchasing process which the funeral director largely controls. In these circumstances, there is potential for prices to continue to rise (and non-price factors to worsen). In addition to the extent that there is competition for simple funerals, at least partly prompted by political and media pressure, when such pressures recede the competition currently seen in the supply of simple funerals could also reduce.
Competition between crematoria
The services offered by crematoria are relatively standard, although some do offer a range of additional services (such as longer services, bearers and hospitality services). Basic cremation fees make up over 90% of revenues of crematoria.
The CMA has identified the following underlying characteristics of the crematoria market:
- There is fixed overall demand for cremation services which is determined by the number of deaths and the proportion of funerals that are cremations (about 77%). Therefore, reductions in price or improvements in quality will not affect the overall level of demand that crematoria face. New entrants cannot materially increase the number of cremations required and will mainly gain volumes by taking from existing crematoria.
- Demand is relatively unresponsive to price and quality measures. Customers will tend to choose either the closest crematorium or one to which they have a family connection. Any shopping around is limited. 26% of respondents to the CMA's survey stated that they had a choice of crematoria but did not compare crematoria, and only 6% overall compared two or more crematoria.
- The evidence indicates that crematoria do not compete over price to any significant degree. Price is not a major consideration for families when choosing a crematorium, and in many circumstances the families will not know what the cremation fee is.
- There are few existing and potential suppliers there is a significant proportion of crematoria that have a limited number of alternative crematoria within a 30, 45-and 60-minute drive time. This small number of providers is due, in particular, to
- The nature of costs in the industry, and in particular the presence of economies of scale due to high fixed costs, implies that only a small number of suppliers may profitably operate given the overall fixed demand in any local market. Economies of scale mean that crematoria benefit from conducting a high number of cremations.
- The planning regime, which requires potential entrants to demonstrate a local "need ", implies that new crematoria are more likely to be approved in areas with sufficiently large demand, poorly served by existing crematoria.
- Crematoria play a role as a community facility that was traditionally and is still often provided by a local authority for a community.
- In many cases, whilst there will be some customers for whom there is a genuine choice between two crematoria as they are located between crematoria at similar distances from them, these customers are likely to be a small proportion of a crematorium's customers. Therefore, crematoria do not have strong incentives to reduce their prices or improve their offerings to attract new customers.
These factors imply that competitive constraints on crematoria will generally be very weak. The CMA, therefore, expects crematoria to have a high degree of market power and to be able to charge prices well above costs (or set quality absent strong competitive pressure). The CMA has found evidence consistent with the view that crematoria tend to charge relatively higher prices where they face fewer competitors and competitors are further away than where competitive constraints are stronger.
The CMA would expect crematoria to compete relatively more strongly on price and quality in areas where they are located close to one another. Therefore, the CMA has assessed competition between crematoria. It has provisionally found that:
- There is limited evidence of competition between crematoria over price and quality. There are only a small number of instances of lower prices where crematoria are located close to one another. It is not clear to what extent any lower prices are competitive as the CMA has found that private operators, in particular, and to a lesser extent local authorities are able to increase their prices by a set amount each year to meet income targets.
- Crematoria differ in the length of slots that they provide, the facilities that they provide and the age and standard of their buildings. However, the CMA has found limited evidence that these factors are important to customers.
- The CMA has found that there is limited scope for profitable entry by new crematoria in any given local area and, even when entry does occur it does not seem to lead to a significant competitive response from existing crematoria. Evidence from entrants suggests that, to achieve a high volume of cremations and cover their fixed costs, they choose to serve areas where demand is poorly served by incumbents so to avoid any head to head competition. This is exacerbated by the planning system.
Overall, therefore, the CMA considers crematoria have a high degree of market power. The extent to which crematoria may exercise this market power may differ. However, the incentives for crematoria to compete are muted, and crematoria are more likely to increase prices (or set quality independently of any significant competitive pressure) than compete for a small number of customers who have genuine choice between alternative crematoria.
The CMA has provisionally found that:
- The extreme vulnerability of customer has been a major factor in enabling suppliers to charge high prices in the sector for the past 15 years, rather than underlying cost pressures, It appears that Dignity's pricing policies have acted as the engine of these price rises, with others in the market appearing to follow its lead. This is the case in relation to funeral director services and, to a lesser extent, crematoria services.
- The CMA has seen compelling evidence that the above inflation price increases implemented by the large funeral directors have been driven by broader strategic aims (such as cross-subsidising various corporate activities), rather than factors directly related to providing services to the bereaved. It is not persuaded by arguments that higher prices are justified by better quality of service.
- The most expensive crematoria in the UK are run by private providers, in particular Dignity, but the CMA has also identified that some local authorities charge cremation fees comparable private providers (albeit not the highest). The CMA does not accept that industry cost pressures (including regulations relating to emissions) can fully explain price inflation of 6-8% every year for the past eight years.
- In addition to large annual price increases, the supply of funeral director services is characterised by large price differentials between suppliers, including within lo ca l areas. These are hard to explain on the basis of cost, range, quality and brand differences between suppliers.
- The yearly high price rises implemented by the major suppliers have directly boosted their profit margins for a persistent period of time. The EBIDTA margins of Dignity have been well above international benchmarks, while those of C o-op and Funeral Partners are at the higher end of them.
Overall, the CMA states that when considering suppliers profit margins alongside long-term policies of large price rises unrelated to underlying cost pressures, it seems clear that the market is not functioning well, to the detriment of vulnerable consumers.
The CMA considers that there are reasonable grounds for suspecting that the markets for funeral director services and crematoria services are not functioning as well as they should be, as illustrated by the long-term pricing policies of the larger suppliers and the associated high profit margins. The CMA anticipates continuing high price increases in relation to crematoria services. Even if the average cost of funeral director services remains at current levels in the short-term (as indicated by the evidence), the CMA considers that this level is well above what could be expected in a well-functioning market. It also expects that the majority of customers who are either unaware of low-cost options or do not consider them to be acceptable will experience further price rises in the medium term.
Case for a market investigation reference
The CMA notes that to make a market investigation reference (MIR) is not obliged to provide a precise definition of the markets to which the MIR relates but with regard to certain qualitative and quantitative factors it considers that:
- Funeral director services in relation to both funerals involving a burial and those involving a cremation are likely to form part of the same product market as the services provided by funeral directors are t o a large extent the same. The CMA considers it appropriate to define the product market for the purposes of this market study to be the supply of services by funeral directors to customers at the point of need. This includes all the services that form part of the funeral directors' offering, with respect to all their funeral opt ions, including alternatives such as direct cremation. It is appropriate to define geographic markets to be local.
- The appropriate market for crematoria services is the supply of crematoria services in local areas. It does not consider that burials are not a close substitute for cremations.
The CMA considers that there are reasonable grounds for suspecting that one or more of the following features or combination of prevents, restricts or distorts competition in the supply of services by funeral directors at the point of need in local areas:
- Customers' vulnerability and difficulty in engaging at the point of need.
- Customers' unresponsiveness to measures of price and quality.
- Customers' inability to assess certain aspects of quality and the value for money of all options offered given funerals are an infrequent purchase and customers are often inexperienced.
- Lack of transparency: reluctance of firms to publish/disclose clear prices (including online ), or to provide comprehensive information on quality and range.
- Point-of-sale advantage: ability of suppliers to largely control the decision-making process leading to the sale and its outcome.
- Ineffective self-regulation in respect of information transparency: no mandatory publication of online prices, absence of publication of inspection reports.
The CMA considers that there are reasonable grounds for suspecting that one or more of the following features or combination of prevents, restricts or distorts competition in the supply of crematoria services in local areas
- Customers' vulnerability and difficulty in engaging at the point of need
- Customers' unresponsiveness to measures of price and quality.
- Low numbers of crematoria providers in local areas.
- High barriers to entry arising from the planning regime and high fixed costs, which limit the number of crematoria in each local area.
In each case, the CMA considers that it has reasonable grounds to suspect that competition is prevented, restricted or distorted across the whole of the UK.
The CMA, therefore, provisionally considers that it is appropriate to refer both the supply of services by funeral directors at the point of need and the supply of crematoria services for a single in-depth market investigation to reflect certain similarities in the issues identified, including:
- Some of the features, particularly in relation to the demand side are common to both services,
- There is a degree of overlap in terms of the entities that are operating in both areas.
The CMA also provisionally considers that a reference is appropriate as:
- The markets are significant in size and usage.
- A significant proportion of the supply of relevant services are affected by the features identified, which appear to apply to most of the UK.
- The features identified have been a characteristic of the relevant sector for a substantial period of time, and there is no evidence to suggest that this is likely to change in the future.
- There is a reasonable chance of appropriate remedies being available through an MIR by virtue of the CMA ' s wide-ranging powers. Possible remedies could include transparency remedies, changes to the regulatory framework, establishment of a regulatory body for funeral directors and/or a sector regulator for crematoria, price regulation, guidance to local authorities, or changes to the planning system for crematoria.
- The CMA considers that there would be merit in a thorough, independent and expert analysis of the suspected problems, and their causes, and of the remedy options available to achieve better outcomes for people arranging funerals.
- The CMA cannot be confident that undertakings in lieu could provide as comprehensive a solution as is reasonable and practicable to the features that the CMA reasonably suspects may prevent, restrict or distort competition in these markets.
- It would not be more appropriate for the CMA or another regulator to address the identified features using alternative powers to an MIR
The CMA is, therefore, proposing to make an "ordinary" MIR within the meaning of section 131 (6) of the Enterprise Act 2002 in respect of the supply of services by funeral directors at the point of need and the supply of crematoria services in the UK.