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those firms still paying off the higher costs incurred during the pandemic. The number of deaths may well fall below existing averages in the years following the pandemic, as the pandemic would have claimed some lives now that would have ended in the following few years. This reduction in deaths may further impede firms’ ability to recover costs in the future. 1.2.4 Competition and regulatory arbitrage The move towards remote arrangement of funerals and greater online presence of funeral directors during the pandemic has been favourable to new entrants advertising and gaining customers online. Many of these focus on direct cremations – where the family cannot view the deceased or attend a service – and may have no or limited physical premises (such as capacity to store and prepare the deceased). The absence of overheads and the traditional services offered to families means that these firms can offer direct cremations at a very low price. Whilst this is a positive move for consumers who are happy with a remote service and the level of care offered, there is concern that some families are not aware of what is included – or not – in these offers. Anecdotal evidence suggests that some firms leave the deceased at hospital mortuaries until just Implications of the COVID-19 Pandemic for the Funeral Director Market and the CMA Investigation - 5 - before the cremation, do not prepare the body to a fit state to be viewed (e.g. dressed, tidied), and use a standard vehicle to transport the deceased to the crematorium, sometimes along with others. These lower cost operators may not even be more efficient from a societal perspective if they abdicate the costs of storing the deceased to the hospital mortuaries. The cost differences between such firms and funeral directors with proper facilities to store and prepare the deceased can be significant, even for the ‘same’ service such as a direct cremation, driven by overheads and staff time to prepare the deceased to a good standard (including staff training). This highlights a key feature of the sector, that it is difficult to specify a single ‘product’, as each funeral director can offer a different level of service for even the same type of funeral/cremation, in terms of what is included and also the quality of what is offered. It also highlights the potential value of quality regulation. A further issue highlighted by the pandemic is the scope for regulatory arbitrage. A number of funeral directors have reported to us that they have spent more time and money complying with the government’s guidance on social distancing than some competitors. Examples include not permitting viewings where it is not possible to adhere to social distancing guidelines, requiring staff to travel in separate vehicles, and abiding by the recommended numbers of mourners at a crematorium service. They report losing business to competitors who for example do allow viewings regardless of the risks to staff and the public, or permit larger crematorium services. This reinforces the risk of regulatory or quality arbitrage and an unlevel playing field, which could be exacerbated by the remedies currently proposed by the CMA. 1.3 Implications for price regulation The abovementioned impacts of the COVID-19 pandemic on the funeral director market, along with the market features highlighted by the pandemic, have a range of implications for the CMA’s investigation and proposed remedies. Understanding these impacts fully will be necessary for the CMA to assure itself that its remedies – in particular a benchmark cap on a standard funeral package or an average revenue cap – do not result in damaging unintended consequences. Cost recovery Cost increases resulting from the pandemic will place pressure on firms and, where these have been operating efficiently, will erode their ability to make normal profits and could lead to market exit if firms are unable to increase their prices across certain funeral types. The extent of cost recovery problems will depend on a range of factors, including the duration of such cost increases and future death rates (it is possible that death rates will fall below previous years’ averages following the pandemic if the pandemic pre-empted deaths that would have occurred in the next few years). A regulatory cap on prices could exacerbate market exit among certain firms if it is not calibrated with regard to cost changes across the industry. The evidence of Ramsey pricing in the sector further suggests that a rebalancing of prices between certain funeral types may be necessary to enable firms to recover all their common costs in the face of greater demand for simpler funerals. Price regulation that impedes this rebalancing – for example by overly restricting prices of a certain funeral types – may therefore drive firms out of the market if they are unable to pursue viable business models. The pandemic has highlighted that prices for individual services or types of funeral are not always directly linked to marginal cost, for example simpler funerals recovering a smaller share of common costs than more elaborate funerals, and funeral directors not charging directly for costs such as increased storage time, or for various extras during the pandemic. Price regulation that focuses on prices equalling marginal costs could have undesirable consequences, such as increases in the prices of basic funerals as
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