Archived — Amalgamation of Alderwoods Group, Inc. with a Wholly-Owned Subsidiary of Service Corporation International

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Technical Backgrounder

November 10, 2006


This Technical Backgrounder summarizes the main findings of the Competition Bureau's (the Bureau) review of the amalgamation of Alderwoods Group, Inc. (Alderwoods) with a wholly-owned subsidiary of Service Corporation International (SCI).

Readers should exercise caution in interpreting the Bureau's assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act (the Act) and the Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose certain information obtained during the course of a merger review.

In April 2006, SCI contacted the Bureau regarding the proposed transaction. The Bureau classified the proposed transaction as complex under its service standards and began a formal inquiry pursuant to section 10(1)(b) of the Act. Documents and written returns of information were compelled from the parties, competitors and industry regulators through the use of formal powers under section 11 of the Act. In addition, for the purposes of conducting its examination, the Bureau solicited and received relevant information and perspectives from provincial regulatory authorities and industry participants.

In September 2006, after a thorough investigation, careful economic analysis and consideration of all the available evidence, submissions and representations, the Bureau concluded that the transaction would not likely result in a substantial lessening or prevention of competition in the relevant geographic markets for funeral products and services, cremation services and burial services.

The Parties

SCI, headquartered in Houston, Texas, is the largest provider of funeral, cemetery and cremation services, sometimes referred to as deathcare products and services, 1 in North America. SCI supplies deathcare products and related services in Canada, the United States and internationally on both an at-need and pre-need (by prearrangement) basis. In Canada, SCI operates its deathcare business primarily through its subsidiary, Service Corporation International (Canada) Limited (SCIC), which is headquartered in Vancouver, British Columbia.

Alderwoods, headquartered in Cincinnati, Ohio, is the second largest provider of deathcare products and services in North America. The company also provides deathcare products and related services on both an at-need and pre-need basis. Alderwoods acquired the business of the Loewen Group, Inc. (Loewen) following Loewen's bankruptcy and subsequent reorganization in 2002. In Canada, Alderwoods operates its deathcare business through its subsidiary, Alderwoods Group Canada Inc. (AGCI), which is headquartered in Toronto, Ontario.

Industry Overview

The deathcare industry in Canada is comprised primarily of funeral homes, crematoria and cemetery operators and other suppliers of funeral products and services. Each provides some or all of the products and services requested at the time of death (at-need services), although these products and services may be prearranged in advance.

Funeral homes provide services which may include embalming, registration of death, use of funeral home facilities for visitation, memorial services and funeral receptions, professional support services, retrieval of remains, transport of remains and, in some cases, transport of family members to a cemetery. The three basic categories of funeral services available at a funeral home are: immediate cremation or burial; immediate cremation or burial with a memorial service; and traditional funeral service (which includes embalming, visitation and memorial service) followed by a burial or cremation. Funeral homes also sell related products, including caskets, burial vaults, cremation receptacles, burial garments and other funeral-related merchandise as well as cremation niches.

The parties compete in Canada with family-owned local competitors, chains of funeral homes, as well as Arbor Memorial Services Inc., the other large, publicly held Canadian operator of funeral homes.

Cemeteries and crematoria provide disposition of remains through burial or cremation. As to cemeteries, they sell cemetery plots, mausoleum spaces, lawn crypts and related merchandise, including memorials and burial vaults. Cemetery operations in Canada are distributed among a large number of religious, ethnic and fraternal organizations, municipal governments, non-profit organizations and commercial owners.

Crematoria perform cremations; cremation is the process of reducing the body to ashes and bone fragments using intense heat. A crematorium is typically located within, or attached to, a funeral home or cemetery.

While legislation differs from province to province, prices in the deathcare industry in Canada are not directly regulated, other than to ensure adequate disclosure for consumer protection purposes. The industry is otherwise regulated to varying degrees including by municipal zoning and public health bylaws and provincial and federal environmental, trust and consumer protection laws.

Relevant Product Markets

The Bureau's examination focused on three specific product markets: (i) funeral products and services, (ii) cremation services and (iii) burial services.

Funeral Products and Services

The majority of competitors in the funeral products and services market, including corporate and independent funeral homes, offer a wide range of funeral products and services. The Bureau concluded that funeral products and services as a product market should not be further segmented, except as described below.

It is possible that, in certain circumstances, two funeral homes within a geographic market that provide comparable funeral products and services may not be in direct competition with each other. For example, this can occur when the majority of a funeral home's customer base within a geographic market belongs to a particular religious group. Where the Bureau found that to be the case, the funeral home servicing that particular group was not considered to be a direct competitor to other providers of funeral products and services in that geographic market.

Transfer service or removal service firms do not generally compete with funeral homes. In British Columbia, transfer service firms can only transport the deceased; they are not considered by the Bureau to be part of the relevant product market. In Ontario, these firms are permitted to specialize in immediate dispositions of the deceased, meaning they are a competitor only at the more basic end of the range of services offered by traditional funeral homes.

Cremation Services and Burial Services

In recent years, demand for cremation services has grown, particularly in British Columbia and, as a result, suppliers of funeral arrangements that involve direct cremation options increasingly represent an alternative to traditional burial. However, while burial and cremation are both available as methods of disposition of deceased individuals, there are certain ethnic or religious communities for whom the methods are not substitutable. Portability of remains and price may also be important considerations in choosing cremation services. Consequently, the Bureau found that there is likely a small but significant population who would not be able to, or would be unwilling to, use cremation services in place of burial. The Bureau found no evidence of a high degree of substitution between burial and cremation services, or that the price of cremation services provides a disciplinary influence on the price of burial services, or vice versa. Therefore, the Bureau considered burial services as a separate product market from the cremation services market.

Relevant Geographic Markets

Based on interviews with industry participants as well as documents and written returns of information supplied by the parties, competitors and industry regulators, the Bureau defined the geographic markets to be local in scope with respect to funeral products and services provided by funeral homes. Geographic market definitions were found to be broader in scope with respect to cremation services and burial services.

The Bureau focused its examination on the local geographic markets where there existed direct and significant overlap between SCIC and AGCI. All of these markets were located in Ontario or British Columbia. With respect to funeral products and services, the Bureau's examination focused on the following local geographic markets in Ontario, where market shares were high:

  • Kichener-Waterloo;
  • Cambridge;
  • Peterborough County;
  • Southeastern Toronto; and
  • Dundas and West Hamilton.

In British Columbia, the Bureau's examination of funeral products and services focused on Greater Vancouver and the Fraser River Valley, and the following specific local geographic markets, where market shares were also high:

  • Vancouver;
  • North and West Vancouver;
  • Surrey, North Delta and White Rock; and
  • Fraser River Valley (Mission, Hope, Chilliwack, Langley, Aldergrove and Abbotsford).

As indicated above, the geographic market definitions were found to be broader in scope with respect to cremation services and burial services. In Greater Vancouver and the Fraser River Valley, where it was necessary to examine the competitive effects of the amalgamation, the evidence obtained revealed that the relevant geographic markets were at least as large in scope as the following:

  • North and West Vancouver;
  • North of the Fraser River; and
  • South of the Fraser River.

It may be that the relevant geographic markets could be more broadly defined than this. However, it was unnecessary to make a final determination.

Summary of Competitive Situation

In Ontario, there is product overlap in local markets where each of the parties owns funeral homes, but none with respect to cemeteries or crematoria as the parties do not own any cemeteries or crematoria in Ontario. In British Columbia, there is product overlap with respect to all three relevant product markets, although it was concluded that the merger is not likely to result in a substantial lessening or prevention of competition in the cremation or burial services industry in British Columbia. With respect to cremation services in British Columbia, the Bureau found that the relevant geographic markets were very large in scope and that there would be enough available capacity from competing crematoria for competition to remain effective post-merger. In the case of burial services, while available cemetery capacity is a general concern in Greater Vancouver and the Fraser River Valley, it is believed that competing cemeteries will offer effective competition post-merger.

With respect to funeral products and services, an important starting point in the Bureau's examination of the likely impact of the proposed merger was the Bureau's estimate of post-merger market shares. The Bureau used death statistics and the estimated number of calls by provider, to calculate market shares. A call occurs when a funeral products and services provider is contracted to provide services in the event of a death. The information accessed by the Bureau revealed that, in the above local geographic markets in Ontario and British Columbia, estimated post-merger market shares of the merged entity would exceed the 35 percent threshold specified in the Bureau's Merger Enforcement Guidelines (Guidelines). 2 In some of these markets, the shares were quite high. For example, the market shares of the merged entity exceed 60 percent in four local geographic markets: Peterborough County; North and West Vancouver; Vancouver; and the Fraser River Valley.

Despite these estimated post-merger market shares, recent and significant developments affecting the industry in British Columbia and Ontario had an impact on the Bureau's analysis. These developments are somewhat prospective in nature, but they are expected to reduce the likelihood of a substantial lessening or prevention of competition resulting from the merger.

In Ontario, new legislation, the Funeral, Burial and Cremation Services Act, received Royal Assent in 2002 and is anticipated to be fully implemented by, at the latest, Spring 2008. The new legislation will replace the current Cemeteries Act and Funeral Directors and Establishments Act. Among other things, this legislation will permit cemeteries to offer funeral services from on-site funeral homes. Industry sources expect that this will have a significant and immediate impact on the competitive landscape in Ontario. The ability to arrange funeral and burial services at one location, sometimes referred to as one-stop shopping, is an advantage for certain consumers and is a factor that currently favours certain competitors of the merged entity, given that neither SCIC nor AGCI own cemeteries in Ontario. The Bureau found that a number of cemetery owners in Ontario, some of whom are located in local geographic markets that were the subject of the Bureau's examination, are poised to benefit almost immediately from this new legislation.

In British Columbia, there are two recent developments of significance. First, as of September 2006, SCIC's First Memorial chain of funeral homes in the Greater Vancouver Region has lost its status as a preferred service provider to the Memorial Society of British Columbia (MSBC). This followed the recent expiry of a 15-year exclusive agreement between SCIC and the MSBC entered into in 1992. The MSBC is the largest memorial society in Canada, with 240,000 members throughout British Columbia. It is anticipated that the loss of this contract will facilitate the entry and expansion of competitors for funeral products and services within the Greater Vancouver Region. For example, the Bureau learned that one of these entrants, already with an established base, has formulated plans to open store-front operations, from which customers can make funeral arrangements without going to a traditional funeral home, and to build a crematorium within the next two years to serve, among others, each local British Columbia market that was the subject of the Bureau's examination.

Second, and more generally, the store-front operations business model, which complements a limited physical presence with home visits to design funeral arrangements, has been successful in British Columbia. These operations offer the same range of funeral products and services, from immediate cremation or burial through to traditional funeral service, as an established traditional funeral home, but without that physical presence. These store-front operations can offer memorial or funeral services at third party locations when these services are requested. In British Columbia there appears to be an increasing propensity to source funeral services through these non-traditional vehicles. In British Columbia, this particular business model, the prospects for which are facilitated by the high cremation rate in the province (80%), appears likely to provide sufficient effective competition for the merged entity to reduce the likelihood of a substantial lessening of competition.

Conclusion

The full impact of the legislative changes in Ontario and the recent entry and evolving product offering in British Columbia are difficult to predict. However, these developments appear to mitigate the impact of the amalgamation between SCI and Alderwoods in Canada. Based on the information available, the Bureau determined that the proposed transaction would not likely result in a substantial lessening or prevention of competition in any of the relevant markets.

Pursuant to section 92 of the Act, the Commissioner has up to three years to file an application with the Tribunal with respect to a merger that has been substantially completed. Given the circumstances of this case, the Bureau advised the parties that it will revisit the case within two years to assess the competitive effects of the recent developments in British Columbia and Ontario described above. Should the Bureau's assessment reveal that the merger has resulted in a substantial lessening or prevention of competition in any of the relevant markets, the Bureau will consider appropriate remedial action at that time.


Footnotes

1 Deathcare is an industry term used to connote some or all funeral products and services.

2 Competition Bureau of Canada, Merger Enforcement Guidelines (September 2004 ), section 4.12.

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