The childcare industry’s growth spurt

The childcare services industry has been aided and encouraged by increasing Federal Government assistance for parents looking to put their children into day care.

Under the Howard Government, an effort to increase the nation’s birth rate resulted in initiatives such as the Baby Bonus. Meanwhile, several family payments to assist in affording childcare, principally the Child Care Benefit, were paid out to encourage parents back into the workforce. Commonwealth Government budget papers suggest that appropriations for childcare support were $1.8 billion in 2008-09, or about $2,250 per child enrolled in care.

Over 800,000 children are expected to use government subsidised childcare in 2010-11. As a result, the industry has gone from strength to strength. In 2010-11, the industry is set to be worth about $7.3 billion, having grown by 2.1% each year in real terms since 2005-06. The industry has exhibited strong growth over the past decade, even taking into account the recent shake-up of consumer confidence during the global financial crisis, which temporarily affected growth.

In 2008-09, the industry went backwards for the first time in over a decade, as consumers reduced the amount of time their children were in care, and relied on family and babysitters instead. As unemployment rose in 2009, families had less money to spend on care, and more time to provide care themselves. The increase in part-time work also gave parents greater freedom to care for their own children. In 2009-10, the industry made some headway, though revenue grew by just 0.7%.

A similar increase in industry revenue is expected for 2010-11 at 0.6%, as households find more room in their budgets for childcare, and confidence returns following the collapse of former player ABC Learning.

The future of childcare in Australia remains bright. Demand is strong and expected to grow over the coming five years. Continued government support and a mini baby boom will contribute to 4.7% average real growth in revenue over the five years through 2015-16 to reach a total of $9.2 billion.

However, this good news is conditional on shrinking margins for operators. Government regulation mandating higher staff-to-child ratios and higher levels of staff qualifications are likely to increase wage costs for operators. As wages make up the single largest cost for childcare providers, operators trying to make a profit in the industry will find themselves increasingly pressured. This is a key factor leading to the dominance of non-profit operators, which promises to be the defining story of the industry in the long-term.

Industry outlook

With a little help from the Government and the private sector, the industry has pulled through ABC’s collapse and the threat of an economic crisis, and is set for prolonged growth over the next five years. As the dust settles and the industry realigns itself after the lessons learned from ABC’s failure, all industry performance indicators are positive: government funding remains a priority, the unemployment rate is set to remain low by historical standards, the share of women in the workforce will grow, and incomes will continue to rise.

IBISWorld forecasts that industry revenue will increase at an average annualised real rate of 4.7% in the five years through 2015-16, despite sluggish growth of 0.6% in 2010-11. However, profitability is likely to suffer, as non-profit operators continue to proliferate and increases in labour costs resulting from more stringent regulation cannot be fully passed on in the form of higher childcare fees. Government handouts will seek to reduce the effect of rising childcare costs on households, but tightening profit margins will remain the major obstacle facing childcare operators in the next five years.

Demand trends

Over the next five years, there will be an increase in the population of children aged under 10 years, which will have a positive impact on demand for childcare services. This is a turnaround from the past five years, when young population growth was stagnant. The country has recently undergone a mini baby boom, which will help drive future demand, particularly as the job market continues to pick up over 2011-12. Changes in the population of children in the 0-4 years age group will vary significantly by region, which will provide varying growth profiles by region.

Low first-home affordability and rising residential rents will affect family decisions on the location of their home, and limit the room in household budgets for childcare. However, childcare is increasingly regarded as a necessary expense in households where both parents work, and households with a single parent. Long day care and family day care, the most expensive types of care, are principally provided for the 0-4 years age group.

Periods of higher unemployment and more part-time work will increase the likelihood that households with children will have at least one parent or relative staying at home to care for their children. The Commonwealth Government Family Tax Benefit initiatives may provide an incentive for many families to have one parent staying at home to care for young children. In areas where there is negative or very low employment growth, childcare services will experience lower demand.

IBISWorld expects unemployment levels to remain in the 4.0% to 5.0% band for the next five years, which is historically low. Demand for paid childcare services is likely to remain strong in these conditions. Relatively high rates of female workforce participation and growth in the number of single-parent families have combined to result in large levels of unaccounted demand for outside school-hours care.

Increased reliance on informal care from friends and family has created a climate whereby informal carers are less willing to continue providing help in the long-term, increasing demand for formal care. Continued government support for the industry and its customers will continue over the next five years. The Federal Government has a history of offering significant tax rebates to parents in order to aid childcare affordability. Funding childcare services is seen as popular politics and encourages greater participation in the workforce.

Sustainable childcare

The collapse of ABC has indicated the difficulty in maintaining profitable centres. IBISWorld estimates that an occupancy rate of between 70% and 80% is required for a centre to maintain profitability. One of the most drastic outcomes of the ABC collapse has been a marked increase in non-profit childcare providers. Indeed, the majority of former ABC centres are now run on a not-for-profit basis, often by charity or community groups. Private childcare providers in the industry are small, and often run for philanthropic or community purposes.

This means that the industry is unlikely to reach the profit levels prior to ABC’s collapse, and IBISWorld expects overall industry profit to remain below 1.0% to 2015-16. Individual operators hoping to earn a profit in the industry may find it possible by seeking out a niche, or by operating in locations where demographic and competitive factors are particularly favourable.

New regulations aimed at increasing staff-to-child ratios and mandating childcare workers’ levels of qualifications are expected to be introduced progressively over the next five years. These will tend to increase wage costs as operators will have to employ more staff, and pay higher rates for more highly qualified staff. This will be exacerbated by reported shortages of qualified staff in this industry, which may result in some providers facing difficulties complying with legislative requirements. As wages make up the bulk of operating costs in the industry, wage pressures are one of the key reasons operators rely on government assistance to stay in business.

Key success factors

• Ability to alter mix of inputs in line with cost: An optimum number of places and age mix of children will help ensure profitability for operators in this industry.
• Ability to take advantage of government subsidies: Government assistance is available to childcare operators and crucial to the viability of many childcare centres.
• Compliance with government regulations: Industry operators must apply with the National Childcare Accreditation Council and complete the accreditation program within 18 months. The level of regulation within the industry is increasing.
• Easy access for clients: Location is an important factor affecting the profitability of childcare services. Supply-demand factors affect occupancy rates and the fees that can be charged.
• Optimum capacity utilisation: The maintenance of high occupancy rates is crucial to success in this industry. In order to be profitable, a centre must have an occupancy rate of at least 70%.
• Ability to attract local support: Marketing skills are important in filling places at childcare centres operating in this industry. Having and maintaining a good public reputation will ensure repeat custom.

Robert Bryant is the general manager of business information firm IBISWorld.