The Economics of Building a Childcare Business

26:19And that means that you need certificates of occupancy and licensing, and there's this whole process. And in some places, we've got it down to a few weeks where we can do that, like a, you know, like a couple of months for construction and the licensing process and everything. And in other places like New York or San Francisco, you're looking at like a year, two years even, and you're carrying the costs of the space when possibly staff, depending on what you're doing with it for that time with no enrollment. How competitive are preschools on cost? And what I mean by that is how big a concern is it?

26:52Because on the one hand, I imagine that, you know, it is a sizable chunk of money for parents who are spending hundreds or possibly thousands of dollars a month on this expense. But at the same time, I also imagine that if you're a parent of a young child, you might be nervous about taking the cheapest option, right? And you might have a tendency or a willingness to take something that's more expensive. So do you find that you're competing on costs quite a lot or is there like a little bit of insulation there? We compete on costs for sure. I think at the ultra elite level, like Westside Montessori or the kind of storied New York preschools where people are like, this is a, you know, they think of it as like part of a path to Harvard or whatever.

27:36And they're charging$50 ,000 a year. There is some price insulation there. But even there, it's not, I mean, it's not totally inelastic. We raise prices and then we find that it's too much and you have to backtrack. Like we face price competition. Oh, so if you raise prices too much, you do see attrition of kids? Oh, yeah. Huh. Yeah, definitely. I find it interesting that you find that surprising. Were you kind of under the impression that that was? Well, I thought it was you used the word sticky before. And I kind of assumed like once kids were in a school that the parents liked more or less, barring some massive financial disaster, like if they lose their job or something like that, that they would be very motivated to stay in that school.

28:16Let's say that you're doing infant through preschool and a typical case. So we do for ages zero through six. but say you're doing like two to five, which is a more typical case. So a child is there for three or four years. You're losing a quarter of your class a year. So if you raise prices, I mean, let's just say that you don't even, none of your existing families disenroll, which isn't going to be the case necessarily. But if you raise prices and like you're the 25 % of your new families are new families and you have to compete for those families on the kind of new rates. We actually do this thing where we signal what our rate increases are going to be when you sign up.

28:53So there's no surprise rate increases. We do have rate increases, but we say like we have a rate sheet and you sign up for it and you know transparently what they're going to be. So you lock in those rates. If you lose half of those families, like your business is sunk. Like that, that's part of what it means to be in a business where like you make money on the last four families that enroll. I hadn't thought about that dynamic that just by definition, any like school basically is going to lose a lot of customers every single year automatically just because people graduate or matriculate. I don't know.

29:24Do you graduate? Yeah. And if your kind of mental model is K-12, you might think, oh, you're like losing 10 % or 8 % or whatever. But like really, you're losing like a fifth, a quarter, a third of your students every year. And that's if you've got a really healthy pipeline coming through. Like that's kind of what you're shooting for. That's a success case is that you're graduating students. So I know like every American considers themselves to have been raised middle class. But I was, and I definitely include myself in that category. And the years that I went to Montessori school, I was living in Joliet, Illinois.

29:58I had a lot of friends there whose families were unambiguously middle class. These days, when I think about like Montessori schools, I do not think that like, I think like, oh, you're like, oh, you have to be rich to go to a Montessori school or some sort of like, anything that sort of has the vibe of like, progressive education, I just assume is sort of this luxury consumption good. And B, like, why is that the case? And has it gotten worse? Because I don't know, the people that I went to school with strike me as, I don't know if in the year 2023, they could have sent their kids to a Montessori school.

30:34So cost of childcare has gone up, cost of education in general has gone up faster than in other areas. I can't remember what all the different buckets are. You guys would know better than I would. But whenever I look at the inflation curves and it's like education, healthcare, and then like, you know, food is flat and then something like electronics is like, you know, negative. Yeah. So yeah, I mean, it's gotten more expensive. I think in general, it keeps pace with or slightly outpaces wage growth. So given that most of the costs in education is labor. I mean, I think that that's part of what you're looking at there.

31:12I don't know if I have the full story as to, as to, I think it has gotten a little bit worse. I don't think it's as bad as it seems for a lot of different reasons. So there is a, there's more public funding now than there's ever been at the early childhood age. B, it just varies so much by location. Like, I mean, if you're kind of pegging on New York City. Yeah. I admit that like the economics of school, a Montessori school in New York City, where everyone is like crazy status obsessed and thinking that they need to get their kid in the right school so that they can one day go to Harvard and then one day go to a law firm is probably different than it was in Joliet, Illinois in the early 1980s.

31:48Yeah, I mean, New York is very bimodal. In New York, it's like Head Start programs or like, you know, $2 ,500 a month would be cheap, you know, for the kind of other end of the range. But in like Dallas, like you can get good daycare for$1 ,200 a month, thousand dollars a month and maybe some of that would be a little bit subsidized and you're looking eight hundred dollars a month and then all of a sudden it starts to look um a lot cheaper than like an any and like totally worth it to like get a job even a kind of middling pay job and send your kids to school if that's what it enables you to do so i think that the range is probably bigger than you're thinking but has it gotten worse um i think it's probably gotten a little bit worse yeah wait so setting new york aside um which is crazy crazy for a bunch of different markets this was a a wider point brought up by our previous guest on this topic, Nancy Fulbright, who argued that one of the reasons why child care costs are going up is like, yes, OK, labor costs have been going up.

32:46But there's also this selection bias at play, which is if you cannot afford child care, you opt out of the market entirely. Maybe you find a family member who can look after your kid or maybe, you know, you don't work anymore and just leave the labor market altogether. And so there's selection bias at play in that the people who can afford preschool are the ones paying for preschool. And there's a whole segment of society who are just not included in that data. Is that a valid criticism from your perspective? If I understand the point correctly, that there's a kind of step function where it's like you're either there's a threshold below which you're not considering paying for child care.

33:26Yeah. And there's a threshold and that threshold is probably gone up. Yeah, I think that that's that's true. There are kind of interesting little sub markets of the early childhood space, like at home care or in home care, where like a teacher runs a program out of their home and they might take like three students or five students or something like that. I think that if you wanted to kind of lower that threshold of and the kind of kind of cost threshold, I think you would have to think about how do we see a lot more of that kind of model where you've got a neighborhood like where a lot of neighborhoods have schools where like a mom whose kids have gone to college, like walks after three or four toddlers and and kind of what are the economics of that?

34:04So that is, I mean, that is not usually either illegal or not, or kind of highly regulated. And it's just, it's also, we just don't have a culture of that kind of thing. But yeah, I mean, in terms of the question, is there a step function? Is there a threshold effect? Does that drive up pricing? Yeah, I think almost certainly does. You know, it feels like there's this whole range. There's the heavily subsidized schools. There are the sort of mom and pop schools that were like, you know, maybe in the 1960s or 1970s and someone set up a school that's sort of like out of their house. And I think my sister went to one when I was growing up.

34:38It was literally in our neighborhood. It looked just like a house. And then there's all these private equity ones. What does the whole market look like? How much has it gone corporate versus, say, 20 years ago or so forth? It's mostly mom and pop. Still? Yeah. I think the official numbers are that it's like a$70 billion a year market, but it's higher than that. I think that that's an underestimate for various reasons. So if you, if you say it's like a hundred billion dollar total addressable market, early childhood centers in the U S and you could broaden that to be like 200 billion, if you included just nannies and other kinds of childhood, childcare expenses, kinder care is like a 7 billion revenue and it's the biggest by far.

35:18And then you have learning care group and bright horizons. That's another 7 billion spring. So probably like 10, maybe 15 % of it is PE or other kinds of big companies and the rest is really mom and pops i don't know exactly what percentage is subsidized because the way that the subsidies work is so varied and often subsidies go to private centers it's often it's unusual for there to be like a public preschool in the sense that there's a public school but um most i mean the kind of chains like i mean you know we're a drop in the bucket um you know higher ground schools um it's it's a huge market and it's very very fragmented the biggest players are like, you know, the biggest company takes up like less than 5 % of the market.

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37:23Need AI to turn 100 pages of market research into five insights with a click? Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. You said something earlier that many daycare jobs or childcare jobs as a society, we don't, they're not seen as high status jobs, high dignity jobs. And perhaps in some cases, the person in the position feels like, as you say, like they're sort of a babysitter waiting out the clock and waiting for the parents to like pick them up.

38:07And then the day's over. Can you like talk a little bit more about the structural challenges that pose? Because at the end of the day, like there just seems to be like this mismatch, like who is going into, you know, the supply of future teachers? Like who is going into this career? And like, are there policy levers that you think could be done to sort of increase the number of people that want to make this a career in some way? So the people that go into the early childhood education are people that love children, by and large. I mean, not always. You occasionally find somebody working in early childhood education who actually hates children, and that's tragic and awful.

38:45That seems like a bad combo. It's a bad combo. Yeah, yeah. I mean, one side, this is a little bit of an aside, but one side of this being a very labor intensive industry and a very human industry where, I mean, I agree that it would be, I don't think robots watching our children are in the cards anytime ever. One half of that, it's a management intensive industry, kind of like the culture of a school and the kind of happiness of your staff. And it matters a lot. And kind of interfacing with all these, you know, you've got 10, 20 personalities in a small center, all literally stepping on each other's toes, like keeping that a really positive place, which is really important for the children is really hard.

39:20that's an aside you can divide it into three issues that are all interrelated one is the money problem like what about people that want to make more money i think that there are possibly solutions to that where you tie early childhood education into other career paths the other is the kind of status problem that's in some ways the hardest problem just like how do you get people to see working with small children as like important i mean this is the problem that mothers it means tied into with all sorts of other social issues, gender issues and so on. And then the third problem is, and this is kind of why Higher Ground exists, and we haven't talked about it much, but it's how do you actually make early childhood education good?

39:59Like, how do you make it so that - I laughed there, not because like it's funny, but it is funny in the sense that is the education good? Often it feels like is the secondary or tertiary question, even though we are talking about schools here. And I think, I mean, most education isn't good, is my view. Certainly most early childhood education isn't good. And it's very far from great, even if it's like passable, you know, it's not great. And what everybody wants, I mean, people want money and people want status, but what everybody wants most out of their job is they want to do good work. and the thing that's going to change early childhood education is changing how we approach it at the level of the classroom and the programming and this is why this is why i'm such a such an evangelist about montessori and developmentally informed education and kind of um like thinking about alternative education and differences to the system is education needs to change and that that will change the teaching profession i mean that that change would i mean it goes a lot This is why part of what we do, we run a training center.

41:00We train a thousand teachers a year in our Montessori training center, our kind of accredited training center. And that is essential, like that you can kind of take somebody in and say there's a totally different way of thinking about it. We're going to kind of deprogram you from your traditional thinking about education and open your eyes to a new way of thinking about children, about learning, about curriculum, about development, about growth. Certain people love that. I mean, that is, that is, it's a calling for a certain kind of person. So just on that note, you know, Joe and I started this conversation talking about how, to some extent, expanding capacity in durable goods is simpler than expanding capacity in something like daycare or preschool education.

41:43And you talked a little bit about what it would take to get more people entering this profession. But are there other ways that you could expand capacity? Would it be, for instance, you know, maybe tweaking the type of education, making it more, for lack of a better word, efficient? That sounds terrible. Efficient education or government support of some form or another funding. What would it take to actually expand this sector significantly? OK, here's the standard narrative. I don't know how much I believe the standard narrative, but it's out there and there's probably something to it. There's been a kind of collapse that the pandemic accelerated of families that put down roots and they know one another and they get to know their neighborhood and they might have extended family in the area.

42:29And this is how they kind of raise children. The kind of critical narrative is like we've become more atomized as a society. So like we don't know our neighbors. And like if you've got two working families and you need help with child care, you've got to hire someone. And that didn't used to be the only or even the main solution to early childhood education or child care. To the extent that that's true, I think that's probably a half truth. I'm kind of skeptical of kind of atomization narratives and I'm generally skeptical of like there was a golden age where childcare was great. Right. Where you can take your kids, your neighbor.

43:00Yeah. But to the to the extent that that's true, I do think that there need to be kind of different operating modes for early childhood where I mean, we were doing things like we are running preschools in neighborhood houses. is we'll like rent a house like a five bedroom house we'll move a preschool teacher into that house and we'll say we'll pay your rent and like you know in three rooms on the first floor like you run an early childhood neighborhood center and like that that kind of thing is the kind of thing that we're experimenting with i mean if that was more common more standardized more culturally accepted and we got better at it not just we as in higher ground but just as a as a culture that was a kind of problem that we really were invested in solving i think that that kind of shift would be good.

43:45The early childhood center model, it's, I mean, the school model in general, even just like you go to school for eight hours a day until you're 18, like it's getting disrupted. And that goes all the way down to child, child care and early child care. And there's a question as to what it looks like. What do micro schools look like? What do homeschools look like? What are the whole range of homeschool options? How do you get expertise in this area? It's, it requires thought and innovation and it's, it's an exciting time. If you kind of look, if you squint and you look at the industry is like, this is where it's at right now.

44:13It looks very dark. I mean, it's like there's a labor crunch. Education is very bimodal. It's hard to expand capacity. But if you kind of step back and you say, parents are really skeptical of existing institutions and people are hungry for something different, I think you can be a lot more optimistic. And I think we will see changes in the next 10, 20, 30 years in this space. So I just have like one sort of last question, and maybe it's sort of very ties into this, what you were just talking about. But like, Like, you know, people have this idea, and I think for a good reason, that we should have publicly funded child care from day one.

44:46We have this sort of strange system where the public schools are, as everyone knows, in large part places where people, a big reason they exist is for working parents to drop off their kids. Hopefully it's a good education, but also a big part is just this sort of public, this free child care. But only once the kid turns like five or six or whatever the exact age is. So let's say like we wanted as a country like this is this doesn't make any sense. Like, why do we only start this at age five? We want to start it from like day one or, you know, month three or whatever it is. What would be the biggest constraints to being able to make that happen?

45:23So I'm very skeptical of that solution, both like philosophically and politically, but also operationally. I would say, and I should also say there are people, especially people in the Montessori world who think that is the solution. That is obviously the solution is to kind of integrate Montessori with the public space in multiple ways. There's a debate about that. I think what you would find really quickly is that making early childhood education good, like really good in a way that actually meets children's developmental needs is harder than getting elementary school right. That's harder. It sounds crazy to say.

45:53You're just like, wait, aren't you just watching the kids? Elementary school kids are actually as critical as I am of most school structures and traditional school structures. Six-year-olds are kind of ready for school. They're eager to learn. They're curious. They're thinking conceptually. they don't need a specific, they don't need to think about learning in terms of like a job or some vocation. This is just what that age is. The kind of six to 12 age, especially is, is the school age and always has been in history. Always. There's a reason why if you go back 2600 years, school starts at six or seven.

46:23And then there's this question as to what to do when children get to like middle school or high school age historically. But this, this kind of like six to 12 age is when schooling happens. And there are developmental reasons for that. If you want to push it down to three, much less two or one, and you want to think about making that a healthy environment where children are getting what they developmentally need, I think you have to do something like Montessori, if not exactly Montessori. And most preschools are really far from being that good. They're really, really far from being that good. And so I think what you would see is that the public preschools, it would be a developmental disaster.

46:57That's my thesis. Well, Matt Bateman, really appreciate your perspective. Obviously, sort of like extraordinary, complicated question just in terms of some of the dimensions that you brought up there, but even some of the sort of simpler regulatory questions about like, well, ratios and multiple points of egress in one state for another. Really appreciate you coming on the podcast and talking about the business. Thank you for having me. Thanks so much. That was really interesting. Yeah, thanks, Matt. That was great.

47:33Tracy, I thought that was really interesting. I mean, I think like simple, like, you know, the economics as he described it are like, yeah, you pay. And then it's like wages and rent, et cetera. But then like when you think about like management costs and I, you know, floaters, and I've certainly seen this and substitutes and churn, et cetera. You could see how it's just like they get incredibly like inefficient, complicated business. Yes, which is why I'm still kind of surprised that there seems to be so much private equity interest and like a belief in scaling it up. Although I do take the point about like, sure, you can have a sort of centralized administrator and things like that.

48:13I did think it was really interesting, his point about competing on costs and the idea that like, well, naturally, just by attrition, you're sort of losing students every year. That's something I hadn't considered before. Yeah. The fact that like so right, like, as you said, K through 12, hardly any graduate in a year. But if it's like a two or three or four year program, like you're always losing students and always having to pull in new ones. Also, you guys are so down on robots watching kids. But I have distinct memories of my parents leaving me alone with like a Teddy Ruxpin doll in 1985 for hours to entertain me.

48:52So it's already happened. The robots are already here. It's funny. They're called iPads. Yes. Oh, my God. Can I just say, as a parent, I love screens. I love iPads. I love Kindles. I love TV. I love Amazon Fire. I love all of these things. They make life so much easier. But actually, it is funny you say that because he's like, oh, there's never really a golden age. But maybe the golden age is when people are just more chill about this stuff. Okay. No, seriously. People are so neurotic. The parents are so neurotic. No, it's like the child has to be learning something like every minute of the day in preparation for, you know, their future success.

49:32Whereas you could just sit them down with like, I don't know, a light bright or something. I'm giving away my 1980s childhood. It's crazy that like if you have a two year old, you're like thinking about are they on the Harvard track? That's crazy. No, that is it. That's crazy. No, I agree completely. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Jill Weisenthal. You can follow me on Twitter at The Stalwart. You can follow our guest, Matt Bateman. He's at M Bateman. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashiell Bennett at Dashbot.

50:13And check out all of our podcasts under the handle at podcasts. And for more Odd Lots content, go to Bloomberg.com slash Odd Lots, where we have transcripts, newsletter, and a blog. And check out our Discord, discord.gg slash oddlots. Listeners like yourself chatting 24-7 about all of these topics. And if you enjoy Oddlots, please leave us a positive review on your favorite podcast platform. Thanks for listening.

50:51Thank you.

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