Lowen Group

How was the Loewen Group able to grow explosively for the first half of the 1990s?What were the advantages of debt financing enjoyed by the firm in this phase?

a)

The external growth strategy of Loewen Group: consolidation and pre-needs sales

Starting in 1969, Loewen Group followed a strategy of growth that surpassed the growthof the market for death care services by far. The market as such naturally only offers limitedgrowth opportunities with the number of deaths annually increasing by 0.8% since 1960. Onthe other hand the industry was and still is highly fragmented. There are many small players,who incur comparatively high fixed cost. These can be reduced, if several businesses areconsolidated, a strategy that first was implemented by Service Corporation, Loewen’s biggestcompetitor (they achieved an average reduction of fixed costs from 65% to 54% of revenues).The area of pre-need sales has been another growth opportunity in the past, as peopleincreasingly acquired death care services before their actual death (the shares in funeral andcemetery revenues grew from 22% to 41% and from 61% to 75% respectively between 1995and 1998). Generating cash flows before rendering the service was a beneficial side effect of this business model. Moreover, the market of death care services offers a high degree of stability. Revenues are very predictable due to constant death rates as well as a lack of pricecompetition and market shares are easy to keep because there are high barriers of entry(tradition and reputation play a big role).In general, Loewen Group operated in a not overly competitive market, which offered,however, only limited potential for growth. Their expansion was mainly based on acquisitionsof smaller competitors, a strategy that implied high needs of capital. Loewen therefore startedraising capital by issuing high amounts of debt and also equity. The funds from operationswere not enough to finance the acquisitions (internal funding would have only enabled...