Child’s play

Despite the recent negative headlines surrounding ABC Learning Centres, IBISWorld’s ROBERT BRYANT says the sector is a strong performer

By Robert Bryant

It’s been a tough year for Australia’s childcare industry and its biggest player, ABC Learning Centres.

ABC shares plunged in February over investor concern about the company’s high debt level and its aggressive offshore expansion. The sharp fall in ABC shares forced chief executive Eddy Groves and his wife Le Neve to meet margin calls by selling huge stakes in the company, further damaging investor confidence. The company was eventually forced to sell part of its US childcare business and pay down debt.

Yet for all that, analysts and market watchers agreed on one thing – ABC’s Australian business was a strong performer and the jewel in the crown. IBISWorld’s data bears this out. We estimate that the industry grew at an average annual rate of 6.6% during the five year period to 2007-08.

Growth in the industry is driven by increases in household disposable income, the female participation rate in the workforce, the number of children of primary school age, and, most importantly, the level of government funding offered in the form of subsidies to users and providers of childcare services.

In 2006-07 and 2007-08, growth slowed as funding increases began to slow down, and the needs of working parents began to be met.

IBISWorld forecasts that the industry will grow at an average annual rate of 5.7% during the five year period to 2012-13. Over the outlook period, the average annualised rate of real growth in revenue will be comparable with the average annualised rate of real growth in industry employment and wages. However, profitability may be adversely affected in the event that increases in labour costs cannot be fully passed on in the form of higher childcare fees.

One of the big positives for the industry is an expected increase in the population of children aged less than 10 years – long day care and family day care, the most expensive types of care, are principally provided to the 0-4 year age group.

Economy-wide employment is forecast to grow over the outlook period at lower levels, increasing the likelihood that households with children will have at least one parent or relative staying at home to care for their children.

In addition, the Federal Government’s Family Tax Benefit initiatives can provide an incentive for many families to have one parent staying at home to care for young children.

Key success factors for operators in the industry

• Economies of scale. A childcare centre should have a minimum of 35 places to be economically viable, but preferably should have between 40 and 45 places. It appears that economies can be achieved in operating a number of childcare centres within relatively close proximity.
• Ability to alter mix of inputs in line with cost. An optimum number of places and age mix of children to ensure profitability.
• Ability to take advantage of government subsidies and other grants. Ensure eligibility of customers for government assistance; as well as demonstrate to customers an attainment quality.
• Ability to vary services to suit different needs. Flexibility of operating and session hours to cater for the varied needs of working parents.
• Recommendation/accreditation from authoritative source. For LDCCs (long day care centres), registration with the National Childcare Accreditation Council and completion of the accreditation program within 18 months, with ongoing compliance with accreditation rules and guidelines.
• Optimum capacity utilisation. Maintenance of high occupancy rates.
• Ability to attract local support/patronage. Marketing skills are important in filling places.
• Easy access for clients. Location is an important factor affecting the profitability of a childcare services. Supply-demand factors affect occupancy rates and the fees that can be charged.

Products and service segmentation

Major market segments

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au