FIGHT TO THE DEATH

By ERIK LARSON

Death and taxes aside, two things were long a certainty on the gulf coast of Mississippi: if you died in Biloxi, you would be buried by Jeremiah O'Keefe; if you died in adjacent Gulfport, Bob Riemann would do the honors. A sometimes bitter rivalry existed between their families, but both names remained beacons in the fog of surprise and grief that overcame people upon the death of parents, spouses, siblings and children. Then something happened to Riemann's empire. His mortuaries still bore the name Riemann, and his sons Mike and David still managed the business. Hearses came and went trailing the usual plumes of sorrow. Outwardly, in fact, nothing seemed to have changed at all, except the Riemanns' announcement that they had taken on a new "partner," the Loewen Group, a "death-care" corporation based just outside Vancouver, Canada.

Not many lay people would have recognized the name, since relatively few ordinary citizens read the publications of the funeral industry--with their ads for Eterna-Cribs, Frigid Fluid body bags, Velvetone Arterial solution and Hydrol Tissue Builder--in which Loewen and its competitors had long been subjects of debate. O'Keefe, however, knew Loewen and knew full well it was no mere partner. "That was a lie and a subterfuge," he says. When Loewen went on to buy another nearby funeral home and in the process intruded on a long-standing contract between that home and O'Keefe, O'Keefe filed a lawsuit alleging breach of contract. It was the kind of innocuous business dispute that flares daily in thousands of courthouses throughout America. No one foresaw that this lawsuit would swell into a five-year battle and, as a by-product, bring to light a vast but quiet transformation in the way America buries its dead.

With little fanfare, the Loewen Group and a handful of other large death-care companies are racing to buy up as many independent funeral homes as possible--not out of any desire to share the resulting economies of scale and cut the cost of funerals but rather to boost prices still higher. The death-care companies seek to ready themselves for what stock-market analyst Steve Saltzman of the Chicago Corp. calls the "golden era" of death, the fast-approaching epoch when baby boomers begin dropping like flies. The Loewen Group is the second largest of the "consolidators," and over the past few years, the company has gained a reputation as one of the most aggressive. It bought its first U.S. funeral home in 1987 but as of mid-September owned 814 homes and 265 cemeteries, and has been driving hard to catch up to the industry leader, Service Corp. International of Houston (2,832 homes, 331 cemeteries). This year the Loewen Group has acquired almost $1 billion worth of additional funeral homes and cemeteries, including a stake in Rose Hills Memorial Park outside Los Angeles, the largest cemetery in North America, which Loewen acquired after outbidding SCI. The company's expansion may thrill investors but probably doesn't bode well for consumers, despite founder and ceo Raymond Loewen's penchant for describing the Loewen Group as the industry "leader in consumerism."

Now, it seems, the news for consumers could get worse. In September, SCI, dogged by Loewen at every turn, launched a hostile bid to seize control of its foremost rival and increase its dominance of the death business in key U.S. markets. Yet despite the likely repercussions, the threatened takeover has drawn scant popular attention--chiefly because the consolidation of the industry has so far occurred, by design, well out of public view. The Loewen-O'Keefe story, however, provides a look at just what an SCI-Loewen combination could hold in store for future next of kin.

THE SECRET REVOLUTION

In a corporate replay of INVASION OF THE BODY SNATCHERS, Loewen seeks to create the illusion that local funeral homes are still run exactly as they always have been, by native sons and daughters with a vested interest in the community. Although Loewen boasts of its acquisitions to shareholders, it otherwise keeps its ownership quiet. Anyone who calls David Riemann today, for example, gets an operator who says, "Riemann Service," just as operators have done since 1920. Says Ray Loewen: "Our objective is to honor the name and be a champion of tradition and history."

Outsiders, however, haven't seen it quite the same way. Jessica Mitford, author of The American Way of Death, the 1963 blockbuster that first disinterred the scandalous practices of the funeral industry, told TIME shortly before her death last summer that she planned to target the deceptive practices of consolidators in a revision of her book, which she jokingly titled Death Warmed Over (to be published by Knopf). "You think of dear old Mr. Johnson, an honest old chap that your family has dealt with over the years, and so you go to Johnson's, and it turns out to be this highly predatory different outfit where nothing's the same," she said. "I don't think people know anything about it. I think they're absolutely ignorant."

Which wouldn't matter if not for the tendency of Loewen and SCI to raise prices after taking control. The consolidators increase revenue through a combination of price hikes and a deft reconfiguring, or "remerchandising," of casket showrooms to ensure that customers buy caskets with far better profit margins. At the same time, they cut their costs by buying caskets and other materiel de mort at volume discounts and by linking funeral homes in clusters that share hearses, embalming rooms and other services. You may deposit your late Uncle Harry in that luxurious if slightly creepy Colonial house on the corner, but these days you have no guarantee he will stay there. This centralization can increase the risk of administrative errors like the one that occurred recently in Arizona when an SCI cluster facility mistakenly cremated a body that was supposed to be shipped intact to Utah. A spokesman for SCI, however, says such an error is no more likely to occur in a cluster than in any other operation. "We run very strict procedures for the identification and tracking of bodies," he says. "Even at that, we're not infallible."

None of the tactics employed by the consolidators is illegal, although Arizona, where SCI has a powerful presence, is contemplating a law that would require the companies to disclose their ownership to consumers. "I can't point to SCI and Loewen and say they're doing anything wrong," says David Walkinshaw, a third-generation funeral director who owns the Saville Funeral Home in Arlington, Massachusetts. "They're doing things the way major corporations do in every other area of our economy."

But such tactics did not sit well in Biloxi.

DEATH PAYS

Jeremiah O'Keefe is at his desk in the headquarters of Gulf National Insurance Co., a key part of the O'Keefe family's Biloxi empire. Gulf National sells "pre-need" funeral insurance, which lets forward-thinking souls pay in current dollars for funerals that are bound to be more costly down the road. Funerals have always been a family affair for the O'Keefes. As a teenager, O'Keefe helped out with embalmings done in the homes of the deceased, to which he and the embalmer brought large suitcases and big jugs for catching--well, for helping the newly departed complete their journeys in as fresh a state as possible.

What especially galled O'Keefe about Loewen's moving into the area was that after it acquired Riemann, it promptly bought the Wright & Ferguson Funeral Home in Jackson, Mississippi, which had previously sold only O'Keefe's brand of pre-need insurance. Suddenly, however, the Riemanns began selling their own brand through the new acquisition. O'Keefe took his protest directly to Ray Loewen.

Like O'Keefe, Loewen grew up in the funeral industry. He helped transport bodies to and from his father's Manitoba funeral home. "It was," he would later testify, "a great way to grow up in a small country town." He launched the Loewen Group in 1985. Last year, just a decade later, the company had nearly $600 million in revenue, more than 90% of it from its U.S. operations.

O'Keefe soon found himself on English Bay aboard Ray Loewen's yacht, the company's secret weapon in the subtle art of funeral-home acquisition. Traditionally, the funeral industry has been dominated by family-run operations. Even now consolidators own only about 10% of America's 23,000 funeral homes, although these tend to be prime properties in key markets and account for an estimated 20% of the country's funerals. Wooing the owners often involves a good deal of soft salesmanship--chats over coffee and impromptu visits to talk about "succession planning," the industry's euphemism for transferring ownership. Loewen then flies prospects up to Vancouver, where Ray Loewen dazzles them with evening cruises and salmon barbecues. Says a former executive: "Going salmon fishing south of Alaska is a wonderful experience. And all other things being the same, it makes a difference."

But not always. Ray Loewen once invited SCI's founder, Robert Waltrip, aboard, and the two men, both wearing yachtsman's caps, almost came to blows. O'Keefe likewise failed to appreciate the charm. Over a sumptuous dinner, O'Keefe told Loewen he did not want a fight and proposed a number of ways to resolve the dispute. But Loewen, he says, turned the evening into an effort to persuade him to sell his own best funeral homes. At one point, he says, Loewen boasted how he maneuvered John Wright to sell the Wright & Ferguson Funeral Home by threatening to build a brand-new home in his territory. Loewen demonstrated how Wright's hand shook so much the coffee sloshed from his cup. "To brag about being able to intimidate somebody is not evidence of a gentlemanly sensibility," O'Keefe says. "It told me he's an arrogant guy, that he's a hard pusher."

Angry now, O'Keefe filed his lawsuit. This time Loewen dispatched a top executive, John Turner, currently working for SCI, to settle the lawsuit. Turner, in an offer so appealing it just about stunned O'Keefe, proposed to sell O'Keefe the Riemann family's insurance company, which was like offering to sell the Hatfield homestead to a McCoy.

No one, however, bothered to mention the plan to the Riemanns. They too charged up to Vancouver. David Riemann presented Ray Loewen with a bitter five-page letter in which he questioned Loewen's commitment to "bottoms-up management," Loewen's stated philosophy of delegating authority to regional managers and local funeral directors. Riemann complained that his wife Tammy had been fired by Loewen without notice, then continued, "I have had all responsibility of operations taken from me. I have yet to figure out, or have I ever been told, why I was totally eliminated from any and all operations functions." In a postscript he noted, "I understand that I am no longer president of Riemann Funeral Homes Inc. on the Gulf Coast; I have been removed as an officer of most of the other affiliates. Why?"

In practice, new members of the Loewen family are likely to find they do not have quite as much leeway as bottoms-up management might suggest. The company immediately begins a process that Ray Loewen calls "normalization," or bringing newly acquired homes up to financial expectations. All the comfy perks of a family business--extra cars and dry cleaning--suddenly disappear. And prices rise. Loewen also institutes its "Third Unit Target Merchandising" system in the casket showroom, which capitalizes on the propensity of survivors to avoid the cheapest two caskets and choose the next one up in price. "It's no different from any other business operating a showroom," says Lawrence Miller, president of Loewen's cemetery division. But often, two former officials agree, this means banishing a newly acquired home's usual lowest-price offerings and replacing them with more expensive substitutes, so that when the customer picks that third-unit target, he ends up choosing a casket that yields a much better profit.

The Loewen Group and the other big consolidators know full well that family members make funeral arrangements in a daze, often picking a particular home because it happens to be close by or has a familiar name or once buried some other member of the family. Out of grief or a desire not to seem cheap at such a weighty juncture, survivors jettison the consumer instincts they would most certainly employ when shopping for a new car. As a result, funeral homes traditionally haven't had to worry much about price competition. In its annual 10K report to the Securities and Exchange Commission, the Loewen Group describes this lack of price sensitivity as one of the "attractive industry fundamentals" of the funeral business.

According to a survey by the Memorial Society of North Texas, which seeks to help members arrange economical funerals, homes owned by Loewen, SCI and Louisiana-based Stewart Enterprises (the third largest funeral company) were consistently more expensive than their independent competitors. In Amarillo, Texas, for example, a Loewen home charged $1,638 for the basic services of its funeral director and staff--the "nondeclinable" fee allowed by the Federal Trade Commission, known more casually in the industry as the "cover charge." The other three Amarillo funeral homes in the survey charged an average of $863. A TIME price survey found Amarillo's Boxwell Brothers funeral home, an independent, charged $185 for embalming, but Loewen's N.S. Griggs charged $425. "When the uninformed consumer walks through the door and it happens to be their misfortune to select a Loewen Group home, they're going to pay at least 15% more," says Don Flynn, a Canadian mortician and industry gadfly.

In fact, prices can rise so fast that the independent funeral-home operators targeted by Mitford's first book suddenly find themselves to be death-care heroes. Rising prices have begun to erode the industry's historic immunity from bargain hunting. Consider Cape Cod, Massachusetts, where Loewen controls all but three funeral homes from Hyannis to Provincetown. (It offered to buy two of those three as well, but their owners declined.) The Massachusetts attorney general became concerned enough about Loewen's near monopoly to require the company to divest itself of three homes, a move of questionable value given that Loewen had already shut one down and the other two were small operations. Owners of all three surviving independents say they don't mind Loewen's presence because Loewen boosts its prices so high that any customers with the emotional stomach to shop around will come to them. Faith Hallett, co-owner with her sister Fran of the Hallett Funeral Home in South Yarmouth, Massachusetts, estimates that her funeral prices run $600 to $1,200 lower than those of the surrounding Loewen homes and adds, "The Loewen Group hasn't hurt us in the least." Says a former Loewen executive, interviewed on condition of anonymity: "The best thing that can happen to a local funeral home is that Loewen buys the competition, because the prices will go through the roof."

In fact, the consolidators have driven prices so high in some markets that they have opened new opportunities for the growing alternative-funeral industry. Russell Moore, a cultural anthropologist, located his Casket Gallery International--which sells low-priced caskets--on the outskirts of Dallas. He based it there precisely because SCI, Loewen and Stewart had such a huge presence in the region. "Many families are literally being priced out of the funeral industry," he says. "They're choosing cremation, or they're trying to do it themselves."

Ray Loewen counters that the average Loewen funeral generates only about $300 profit--although this average includes everything from direct cremations to premium traditional services and excludes all cemetery costs. Revenue from existing homes increases only 3% to 5% a year, he says, and he notes that Loewen also spends "huge amounts" to upgrade new additions. "It used to be thought that funerals were a big-ticket item," he says, "but really the dollars aren't that big."

But in disclosures to the SEC, Loewen reported that last year, through a combination of price increases and cost cutting, the company managed to generate a gross profit margin from its funeral operations of 41.5%--the kind of spread that executives of the FORTUNE 500 almost never see. (By comparison, SCI's gross profit margin for funerals was 25.3%.)

From 1991 through 1995, Loewen more than tripled its revenue, to just shy of $600 million. But most of that growth was generated by a kind of fiscal illusion. The company boosted sales not by attracting more and more corpses to its existing mortuaries but rather by buying up funeral homes at an increasingly fast pace.

The company has had little choice but to keep raising its rate of acquisition lest it disappoint shareholders, whom Ray Loewen has promised annual earnings growth of 25% or more. Perversely, though, that promise prompted stock analyst Steve Saltzman to recommend last April that Loewen shareholders sell their stock. "My concern," he says, "is that at some point this company suddenly hits a wall because it simply can't manage the growth." Even under the best conditions, such rapid growth would be hard to sustain; Loewen's battle with Jerry O'Keefe has made it infinitely more difficult. THE COST OF DYING

Soon after the Loewen group made its offer to sell O'Keefe the Riemanns' insurance company, the deal began to erode. Or so it seemed to O'Keefe, who suspected the Riemann boys of using their insider status with Ray Loewen to undermine the sale. All at once the company seemed to drag its feet and impose new barriers. Even John Turner, then Ray Loewen's right-hand executive, later testified that he too became convinced that no matter how cooperative O'Keefe tried to be, the deal would not be completed.

Fed up, O'Keefe expanded his lawsuit to accuse Loewen of offering the settlement in bad faith and of engaging in predatory trade practices by seeking monopoly control of local markets. For his lead trial attorney, he hired Willie Gary, a personal-injury attorney from Stuart, Florida, with the persuasive powers of a Pentecostal preacher. Gary, who accepts only cases capable of boiling the conscience of a jury, knew the O'Keefe saga would play well in rural Mississippi. "This case," he says, "is about gouging moms and pops who saved their life savings just to be able to be put away nicely."

What Loewen's attorneys never seemed to grasp was that Gary had turned a bloodless contract dispute into an indictment of the new death-care industry, and that a Mississippi jury would view the industry's practices with less delight than would the company's stockholders. "It was bad," chuckles Glenn Millen, a retired Siemens electrical engineer who served as jury foreman. "If we'd had guns in there, we'd have probably been shooting."

Although ostensibly a defense witness, John Wright, whose sale of his Wright & Ferguson Funeral Home had triggered the legal dispute, confirmed that prices at the home climbed in the wake of Loewen's acquisition. Earle Banks, a state legislator and owner of the People's Funeral Home, a black funeral home in Jackson, described how Loewen had doubled and tripled prices on a common model of burial vault--the 4,200-lb. copper-lined Wilbert concrete "triune"--that wholesaled for $940. Loewen's Wright & Ferguson home charged $1,920. In Corinth, where Loewen owned three homes that once gave it a monopoly over the white funeral business, Loewen's homes charged $2,860.

Ray Loewen denied that his company automatically raised prices. Rather, he said, the company concentrated on raising overall revenue through cost cutting and remerchandising. But Lorraine Magrath, former regional comptroller for Loewen, testified that raising prices was company policy, a policy she claimed was part of the reason she resigned. The repeated increases were "a problem for me," she testified; she believed that the increases should stop, "that at some point we should say, 'The price is high enough.' "

JUST ANOTHER BODY

Eight of the 12 jurors wanted to destroy the company by levying a $1 billion judgment in compensatory and punitive damages. Other, more reasonable members finally talked the billion-dollar club down to a compromise--a mere $500 million. Loewen, unable to raise the $625 million bond required by the state before it could appeal, considered filing for bankruptcy but earlier this year negotiated a settlement with O'Keefe's lawyers totaling $175 million in cash, stock and a promissory note payable over 20 years.

This was a trying time for Ray Loewen. He did his best to diminish the importance of the verdict, racing around the country meeting with securities analysts, trying to restore confidence in the company and its stock. In a conference phone call this spring with leading analysts, he pledged to grow the company at an even more aggressive pace. He concluded the session, gushing, "It is just so refreshing to be able to have an open, forthcoming, positive call with you all. We will do our best to make you very happy throughout the year."

But the lawsuit had an unexpected aftershock. It depressed the value of Loewen's stock. It also forced the company to issue substantial amounts of new stock, thereby diluting Ray's holdings from 20% to 15%. Both developments made the company more vulnerable to attack. On Sept. 17, SCI announced it was offering to acquire Loewen. After Loewen's board rejected the bid, SCI recast it as a hostile takeover, this time for $45 in stock for each Loewen share, for a total value that Loewen and SCI estimate to be more than $4.2 billion.

The companies have been cutthroat competitors for years. Any merger is certain to prompt antitrust concerns. Together, for example, they control more than 23% of the funeral market in Florida, considered the El Dorado of the death business. In Seattle, Loewen owns a funeral home located on the grounds of an SCI-owned cemetery. The ftc has demanded company records to try to gauge the probable effect in states where both companies have a large, overlapping presence. Loewen says nine states, including Florida, have notified the company that they plan their own antitrust reviews. And Loewen itself has filed a defensive federal lawsuit against SCI, arguing that the merger would sharply reduce competition in dozens of cities and towns from Anchorage to Brooklyn, New York. Even SCI has announced that a successful combination would doubtless require the divestiture of some properties.

That Loewen's shareholders will benefit, merger or not, is certain. The offer has bid up the value of their stock and, incidentally, of O'Keefe's settlement, which included 1.5 million shares. If SCI prevails at $45 a share, that stock will be worth $22.5 million more than was guaranteed in the settlement.

Equally certain, however, is that future bereaved won't make out so well. No one expects that a successful takeover would lead to cheaper funerals. Indeed, even Ray Loewen thinks prices would probably rise as SCI sought to cover its costs of acquisition. "They would have to get earnings someplace to justify the purchase."

But critics and independent operators agree there is more at stake than just money. With consolidation has come a level of depersonalization that family-owned funeral homes, for all their other alleged sins, have managed to resist. "It really shows that nothing is sacred," says Karen Leonard, executive director of California's Redwood Funeral Society (her E-mail name is CheapExit), who was Mitford's research associate. "You are just part of the machine. This is just another body. This is just another family. Sell, sell, sell."