What you probably didn’t know about the early childhood sector

These days my days are spent having lengthly discussions about the childcare industry (or more accurately, the childcare and early childhood education industry — ECEC). No I’m not a new mum (phew!), which then invites puzzled faces and a usually mixture of one of these three questions:

“Childcare? How did YOU get into that!”

“Ah that’s a big market!”

“Hmmm, yes there’s lot of problems to fix in childcare”

With a background in banking and logistics, I was not convinced there was much to be done within this archaic industry. I was wrong. If you were like me (or if you don’t know the difference between long day care and family day care) chances are these are a few things you did not know about this industry:

1. There are over 18,300 businesses registered, but it wont be enough — The ECEC industry in Australia includes long day care centres (39%), outside school-hours care (56%), family day care (5%) and occasional care (<1%). With about 55% of all children attending long day care, this service is the most popular form of childcare as there is a heavy reliance by parents particularly for children between 0–4 years. As long day care centres now start providing pre-school programs, there is a steady demand growth for this service. However if you were wondering which type is growing the fastest, it’s outside school-hours care.
2. Roughly 100 new centres need to be built per year — Currently only 12% of children aged 0–5 years attend child care. Over the next 15 years, children population is projected to grow by 833,000 (23%). Based on current utilisation rates, this increase will require around 113,000 additional full-time places in formal child care over the same period. This means we need roughly 100 medium sized centres being built each year (113,000/15 years/80 places per centre= 95).
3. …. But really there will be more — With continued trends towards higher female workforce participation and as the government implements its proposed child care reform package, we can anticipate much greater industry establishment rates in cities and regional areas.
4. Childcare carers are Australia’s largest growing occupation, but they might not take the job — In 2017 there were 84,000 individual enrolled in a certificate III or diploma for childcare training. This growth is partly a result of the demand side pull — rollout of new centres and the introduction of higher staff-to-child ratios in recent years. However, the flexibility that comes with working in child care is a major reason for many females to work in this profession. Child care work support the overall labour market trend that show an increase in part-time employment to account for nearly 1/3 of total employment. But wait there’s more! Many of these part-time workers want to work additional hours but cant find jobs when they want them. Underemployment is on the rise and considerably higher than the growth in full-time employment. This has resulted in excess capacity in the childcare industry. The desire for fractional employment needs to be better addressed to solve this mismatch between demand and supply. However due to low wages (almost 50% less than average national wages), childcare carers are under pressure to take on part-time positions in other industries that pay more.
5. Childcare centres have low debt risk — The average time spent in child care per week is 25 hours (but can go up to 37 hours in major cities). With an average childcare fee of $9.15 per hour, the average medium sized centres makes around $950,000 per year! The industry’s revenue growth rate could rise further if the government successfully implements its proposed child care reform package in July 2018. The proposed single Child Care Subsidy (CCS) would allow subsidies of up to 85% of total cost of childcare to be paid directly to child care operators.
6. … But stringent regulations are making them more costly to run — Under the Education and Care Services National Regulations, childcare centres must follow the educator to child ratio or they will be in breach of regulations. The current ratio is 1 educator to every 4 children of ages 0-3 years and 1 educator to every 11 children for children over 3 years of age. Childcare centre cannot continue operating compliantly if they do not have the required number of educators available to work on any given day. This could result in a $10,000 on the spot fine and license suspension. On top of that, childcare centres now face higher qualification requirements and have been under increasing pressure to offer commensurate pay to reflect the upskilling of child care workers. Payroll costs remains highest operating expense for childcare (anywhere between 50% — 70%).
7. So what is this hype about centres closing down? The industry was previously mainly made up of community-based organisations, however with increased costs many such centres are facing compressing margins. In contrast, franchises are able to cross- subsidies centres and are better able to adjust the staff mix and defray the costs of specialist staff (e.g. nutritionists and psychologists) and facilities. Although official reports would state industry profits average around 8%, some centres are able to take in around 30% — 40% EBIT 😲 !! We are likely to see some consolidation with the entry new industry players and existing franchises continue to acquire smaller groups. However with the 5 largest players holding less than 20% of total market share, the industry remains highly fragmented. There is opportunity to come in and offer a better proposition.

So, how might we re-imagine the business of childcare? I see the opportunity coming from addressing access capacity in the workforce and channelling those efficiencies into better quality and access of care.