Dignity Portfolio Item

The Basics

Established in 1812, Dignity is the only nationwide, vertically integrated end-of-life business. It currently has c.800 branches across the country, 500 trading names and 46 crematoria.

Since its formation, Castelnau Group had held a substantial minority position in Dignity. Subsequent to this, in May 2023, through a joint venture with SPWOne, which is the Family Office of Sir Peter Wood, Castelnau completed the acquisition of Dignity following which Dignity was delisted from the London Stock Exchange.

The Story

Dignity has been the victim of poor management and a short-term strategy that exploited customer goodwill by increasing prices faster than volume losses, without any discernible improvement in the quality of the offering. This led to a loss of competitiveness. Low industry barriers to entry meant that new competitors emerged, market share losses ensued and return on core capital declined.

A CMA investigation was also launched around the same time, (which ultimately concluded that price rises were egregious) and the share price collapsed. In early 2018 Phoenix saw an opportunity to invest in a great business at an attractive price.

The investment manager’s stake and involvement in the business grew over the forthcoming years. This culminated in Phoenix raising an EGM early 2021 due to serious concerns surrounding Dignity’s Funeral Plan division as well as the wider business strategy. The outcome of this was that Gary Channon became Executive Chairman of Dignity for a short period while the concerns were addressed, after which a new CEO was appointed.

The Vision

The investment manager’s vision is for Dignity to become the UK’s leading end-of-life business, renowned for its excellence, represented and embedded in the community with strong local brands, offering the best service for the best prices. The upside to getting this right is substantial value creation.

There are three core components to the Dignity business; Funeral Plans, Funerals and Cremations. Dignity has capacity for growth in all areas.

There is significant opportunity to grow Dignity Funeral Plans, by (1) expanding the market and (2) taking more share within that market. Only c.8% of over 50’s in the UK have a funeral plan (in the Netherlands c.60% of the adult population has a plan) and Dignity has just 21% of undrawn plans.

Not only do funeral plans lock in future business for Dignity, but that money goes into the Trust where there is an opportunity to build and grow the surplus. The value of this surplus is available to shareholders. Combining better management of the float with the fact that funeral prices are likely to trend down, means we expect the surplus to become a meaningful contributor to future value. 3% outperformance is a very achievable target and would generate an additional £30m each year (on a Trust of £1bn).

Within the At-Need Funerals segment, Dignity intends to use a combination of competitive pricing, mix, investment in the estate, cultural transformation and local branding to win back local market share. The aspiration is a 20% funerals market share in 10 years time (currently c.11%).

There is a fantastic, high return on capital assets within the crematoria division. Value can be created by building out the pipeline of crematoria and improving the yield on each crematorium. There are currently 46 crematoria, planning permission for another 6 and Dignity aims to build an additional crematorium each year for the next decade. Yeild can be improved by (1) increasing throughput, by embracing the lower priced Direct Cremations and increasing capacity at peak hours (through use of service chapels) and (2) by selling more ancillaries at each crematorium, through catering and memorial sales.

Underpinning all of this is a cultural transformation. Dignity intends to move from a command and control, hierarchical culture, to an inverted organisation (pioneered by the likes of Nordstrom and Timpson) that empowers front line colleagues and gives them far greater autonomy of decision making. Ultimately, colleagues should be empowered to do whatever it takes to best serve the customer; providing exceptional service will be fundamental to future success.

If all of the above is done well (and that is no easy feat), there is the potential for what Charlie Munger calls a lollapalooza effect, where several things come together to have a exaggerated impact on value. We have modelled a wide range of outcomes but think the intrinsic value of Dignity could be anywhere between £30 to £100.

Case Study: Revolutionary New Funeral Plan Product

Click here to view a case study on how Castelnau Group assisted Dignity to create a revolutionary new funeral plan product.