US Child Day Care Services, Nanny & Au Pair Agencies: An Industry Analysis

(July 2001)

©Copyright July, 2001 Marketdata Enterprises, Inc. Reproduction or distribution in whole or in part, by any means written or electronic, without prior written permission of the copyright owner is strictly prohibited. Violators will be fully prosecuted under US copyright laws

Executive Overview of Major Findings

(sample, selected sections of current July 2001 report)

Major Facts & Trends Characterizing The Industry…

Demand for child day care services is as strong as it has ever been. Indeed, at least 14.4 million children in the United States are in some form of day care arrangement, and fees for such services have been rising strongly over the past several years. “Day” care may no longer adequately describe the industry. With the entry of many former welfare recipients into the workforce, many parents find that entry level jobs available to them are often night shift positions (night shift nurses, security guards, cleaning staff, waitresses, factory workers, etc.). A whole sub-segment of “night care” services has sprung up to serve them.

Demographics are also fueling the strength in demand, as more women have babies before the end of their childbearing years of greatest fertility. As a result, top-line revenue gains for the industry have been in the 10% range since 1999, and the industry last year was valued at nearly $40 billion. It is expected to grow 9.2% annually, reaching $59 billion by 2005. This forecast represents an upward revision of a forecast Marketdata made three years ago, when we forecast 8.2% average annual increases.

There is probably no consumer service that’s more emotionally charged than child day care. Entrusting a child’s safety, nutrition and welfare to someone else, frequently strangers and not relatives, for five days a week, has to be one of a parent’s most difficult decision to make. Many simply don’t have a choice, as the household requires two full-time incomes to operate.

Possibly the most critical issue facing states and families is whether there is enough quality child care available for working mothers. Despite the increases in federal child care funding in recent years, most research indicates that the quality of child care continues to be sub-par. Although adequate funding is an important component toward improving the quality of child care, another key component revolves around adequate compensation for child care workers – to provide sufficient incentive to attract high quality employees and be able to retain them. This has been problematic because child care workers are very poorly compensated. Despite much outcry by various political and advocacy groups seeking to improve their lot, little has changed in recent years.

Does a parent use a group day care center, where one-on-one attention is impossible and the child is frequently exposed to colds and viruses of other children? Or, does one use a nanny and pay them top dollar (often $20,000+/year)? Using a higher-priced nanny is no guarantee of quality care, and many parents now “spy” on theirs just to make sure the child is not being abused or neglected. Or, does one use sometimes unreliable relatives, grandparents (who may be frail, elderly, or not in the mood to deal with diaper changes)?

Each option has advantages and disadvantages. The group day care center may provide better flexibility and back-up, and hours more attuned to a 9-5 work schedule, or even night shifts. And, their curriculum and learning environment is often superior to a family day care provider.

But, a loving/caring family day care provider that enjoys children and who has more time for personal attention because she’s only handling one or two, can provide better quality care. Affordability is a big factor as well. Surprisingly, group day care centers can cost less than a family day care provider that cares for a few kids at her home.

Therein lies the trade-off that most parents make—cost versus quality of care and convenience. One not familiar with the child day care services sector should know the following about the “industry”:

· Demand is strong for day care services, and is likely to remain strong over the next four years at least, due to: historically high birth rates just under 4 million/year, and the need for two full-time wage earners in many families (and more women in the workforce).

· After years of virtually no increase in fees, prices have begun to rise significantly (up 5-6% per year), resulting in improved profit margins for day care services.

· Parents are shifting toward using for-profit, group day care centers more often and family day care situations less frequently.

· History has proved that this industry is somewhat but not very sensitive to economic recessions and consumers’ disposable income. The current slowdown is NOT expected to have much of an effect.

· The top for-profit chains in the business have slowed their acquisition/expansion plans, and are growing moderately. However, the industry is huge and fragmented, providing plenty of room for competition and success by small and mid-sized operations as well.

· Franchising as a growth strategy has largely NOT worked in the child care business. Even the giants (KinderCare, La Petite Academy) have given up in this area. The business is just too complex and affected by local market conditions to lend itself to a cookie cutter approach.

· Child day care is a national and social issue, affected by politics. The Government is intimately involved, via subsidies of Head Start programs and tax credits for parents. Employers are also heavily involved, since the availability of day care facilities makes for happier employees and less absenteeism. The Church is also a provider of services, as are for-profit companies in the private sector and “entrepreneurs” that care for children in their homes. Licensing and regulation varies state by state. Consequently, the cost, type of facility or service, and training of caregivers varies widely throughout the country.

· Day care workers have one of the highest turnover rates of all workers in the United States—estimated at 40% or more. Most get paid little more than minimum wage, and many use the experience as a temporary stepping stone to the teaching profession. Services are caught in the middle. They can’t raise these workers’ pay because they can’t pass on the increase to customers in a very competitive market.

· Federal and state funding for child care has increased.

· There has been a sharp rise in the number of employer-based centers and capacity among the leading for-profit child care chains, especially KinderCare, Knowledge learning Corp., and Childtime Learning Centers.

Summary & Legislative Outlook…

Since this study was last conducted in 1998, many changes have occurred in the way government distributes child care funding, much of it driven by Welfare reform. Although some of these changes were already in place by 1998, their impact was not yet fully felt. Most noteworthy, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) consolidated several of the major funding sources for low-income child care into a single block grant to states.

Specifically, four of the chief programs for low-income children were combined to become the Child Care and Development Fund (CCDF). These programs are: Aid to Families with Dependent Children (AFDC); At-Risk Child Care Program; Child Care and Development Block Grant; and, Transitional Child Care Program.

Funding for child care was a top priority during the second term of the Clinton administration. As a result, spending for child care grew substantially during that period. Although George W. Bush also professes support of federal funding for child care, it is too early to tell what form that support will take and to what extent funding levels will be affected. If it is any indication, while he was governor of Texas, that state ranked among the worst in terms of child care standards.

In the 1999 federal budget, President Clinton proposed a major child care initiative, which would infuse $21.3 billion in new child care funds over a five-year period –from 1999 through 2003. The extent to which funding will go to the originally intended recipients and in the amounts originally proposed remains to be seen. However, for both 2000 and 2001, there were substantial increases in allocation for the CCDF and Head Start, respectively. In fiscal year 1998, the Dependent Care Tax Credit (DCTC) cost the federal government $2.8 billion.

Recently (2000), the Senate Finance Committee proposed expanding the DCTC by increasing the percentage of child care expenses credited. Under this proposal, families with incomes below $30,000 would be credited 50% of these expenses, with the percentage going down one percentage point for every $1,000 above $30,000, but not to be reduced below 20%. Families making more than $59,000 would be credited 20% of their child care expenses.

In 1998 about $14 billion was spent for overall credits, subsidies, and federal spending for child care and related services, up from roughly $9.5 billion in 1992 and approximately $12 billion in 1995. By far, the biggest chunk of federal spending in 1998 was represented by Head Start, with funding of $4.4 billion.

Day Care Quality Issues…

There is mixed bag of research from studies related to the quality of child day care programs. Child care quality is nearly impossible to measure. Researchers and professionals in the field agree that adequate pay, small group sizes, licensing and at least minimal training strongly increase the odds that a caregiver will do a good job.

The problem with day care in the United States today is not so much on the supply side, but the affordability of quality care. Most day care workers only make $5-9 an hour now, a major contributor to the dilemma of providing quality care at an affordable price.

The Families and Work Institute estimates that about one-third of child care is potentially damaging. For those children, child care may…

- Hurt intellectual and verbal skills.

- Increase their mothers’ negativity toward them.

- Put those with poor or depressed mothers at greater risk by further eroding the

mother-child bond.

- Deprive them of the stimulation needed to develop their brains to the fullest.

High staff-to-child ratios is the characteristic most closely linked to high quality care, followed by staff education, center administrator experience, and staff stability.

Classroom ratios of one adult for every three to four infants, 4-6 two-year-olds and 7-10 three-year-olds are recommended by the National Association for the Education of Young Children, a Washington, D.C. accreditation group. (Most states allow more children per adult, usually six.)

Based on a survey in the August 1998 issue of Working Mother magazine, it appears that although most states tend to cooperate with these standards, there are also many that do not adhere to them. For instance, the majority of states allow more than 4-6 two-year olds for every adult within child care settings.

Accreditation… “A parent going to an accredited day care center has a far greater chance of getting high quality care,” said Dr. Marcy Whitebook, an author of a study sponsored by the National Center for Early Childhood Work Force, a nonprofit research and educational organization. “But it doesn’t act as a guarantee.”

Based on the most recently available data, of the 106,000+ for-profit child care centers operating today in the United States, more than 6,000 have gained accreditation, and 12,000 more have applied (in the 1998 Marketdata study, the numbers reported were 5,000 and 10,000, respectively – also reflecting a sharp increase). Accredited centers must submit annual reports, and complaints prompt visits by the association. The group sets exacting goals for teachers and interactions with kids.

Day Care Fees and Costs…

According to the 1995 (most recent available) Census Bureau’s Survey of Income and Program Participation (SIPP), families paying for child care spent an average of $85 per week in 1995 (Sept-Dec. average). This was up 21% over 1993 levels. The Census reports that weekly fees rose 110% for 1984-1995, an average of 10% per year.

On a more current note, to underscore the substantial increases in child care costs which have occurred since 1995, one need only look at recent rates (2000-2001) charged by some of the leading child care providers. For instance, average weekly tuition at KinderCare was around $130 (vs. $100 in 1996--up 30% in four years). KinderCare management reports that tuition has been increasing 5-6% per year over the past several years, in line with its competition. At Bright Horizon’s Family Solutions, average weekly tuition was about $185 for preschoolers, and at Childtime Learning Centers, Inc., fees were in the $74 to $265 per week range for preschool care (vs. $79-145 in 1997). It should be noted that, when looking at the low end of child care rates, these are actually comparable to the average rate in 1995. Marketdata’s analysis of fees for four of the large day care chains shows that fees have been rising an average of 7% annually from 1997-2001.

In-home babysitters and organized child care facilities are the most expensive: Parents using in-home babysitters and organized child-care facilities paid the most per arrangement (about $65), followed by parents using family day care ($52). Families using relatives to care for their preschoolers paid the least ($42).

Child care costs are higher for infants and White children: Infants were less likely to be in paid child care than were older children; 54% of infants (under 1 year) were in paid child care compared with 59% of older children (1 to 4 years). Because babies often require more work, child care for infants is typically more expensive. In 1993, the average cost of child care per infant was $66 per week, while for older children it was $59 per week.

Of the 19.9 million employed women with children under 15 years of age in the fall of 1995, 41% (8.1 million) reported they made a cash payment for child care for at least one of their children. Relatively fewer poor than nonpoor families paid for child care (33% vs. 41%).

Demographics - The Nature of Demand…

Live births in the United States in 1998 (latest year available) reached 3.94 million. Births had exceeded 4 million for four years in a row up until 1993, but then fell slightly to 3.9 million in 1994, and have not reached the 4 million mark since then. Indeed, the number of births saw very little fluctuation between 1995 and 1998, ranging from 3.88 million to 3.94 million.

In the 1980s, demand for child care services soared as the number of children under age five with working mothers increased from 4 million in 1977 to 9 million in 1988. Two factors caused births to exceed expectations. First, more children were born to immigrant mothers than were anticipated. Second, fertility rates for women in their 30s were higher than anticipated.

The sharp decline in the numbers of women in their 20s, who typically produce the most children, has in recent years been offset by the increasing fertility rates of women in their 30s. Family patterns are also changing. About 50% of the children born today are the first or only child in their families, compared with 25% of the baby boomers, according to American Demographics magazine. This, combined with the shift to delayed child-bearing, results in many couples with two well-established incomes to spend on one or two children. As a result, the impact of 3.9 million babies born annually today is far greater than the economic impact of the same number born back in the 1960s.

The number of mothers in the labor force has risen, largely unabated, since the 1960s. In 1999, the labor force participation rate of mothers with children between the ages of 6 and 17 stood at 78%. Among those with children under the age of six, 65% were in the labor force.

According to the “Who’s Minding the Kids?” study, in 1995, 14.4 million (75%) of the 19.3 million children under 5 years of age were in some form of child care arrangement during a typical week. Ten million of these preschoolers lived with employed mothers, up from 8.2 million in 1985. Fewer than half (43%) of these preschool-age children were primarily cared for by either a parent (including the mother herself) or by some other relative – in 1995.

More than half of preschool-age children were cared for by someone other than relatives while their mothers were at work. In 1995, 28% of preschoolers were cared for by nonrelatives, including in-home babysitters and family day care providers; and, one-fourth (25%) of preschoolers were cared for by organized child care facilities.

Organized child care facilities were used more often for preschoolers residing in the South (35.7%) than in any other region of the U.S. Use of organized child care facilities in the South far surpassed their use in the West (26.2%), the Northeast (25.8%) or the Midwest (23.6%).

The use of organized child care facilities was also more prevalent for children of women working day shifts, accounting for 34% of all their child care arrangements. Because organized child care facilities often may not be available during evenings or on weekends, children of women working non-day shifts used these facilities far less often, amounting to 18% of all child care arrangements in 1995.

In 1995, 51% of the care received by Hispanic preschoolers of employed mothers was provided by their relatives compared to about 47% of the care received by White children and 44% among Black children. Black preschoolers (74%) were far more likely to be cared for by nonrelatives or in organized child care facilities than either White or Hispanic preschoolers (59% and 50%, respectively). Black children were much more likely to use organized child care facilities (about 41%), than were either White (28%) or Hispanic children (24%).

Industry Structure and Service Provider Segments…

Summary

Based on data compiled by The Children’s Foundation (2000 estimates), there are an estimated 106,246 "organized group day care "centers" in operation in the nation, as well as 304,958 licensed family day care providers/homes. By comparison, in 1991, there were an approximate 246,745 listed family day care providers/homes in the nation, and 86,212 group day care centers. In addition (based on latest estimates [1997]), there are an estimated 88,939 child care services operated by state and federal agencies, churches, hospitals, employers, the military, etc. (refer to table below). Therefore, there are now more than half a million day care provider sites in the nation.

Most commonly, child care arrangements fall into one of two classes: family day care (care provided informally in the parent's or caregiver's home) and formalized day care centers. The latter include for-profit and non-profit facilities.

Estimated Number of Day Care Provider Sites, By Type: 2000

Family day care providers/homes (2000)	304,958
Organized group day care facilities (2000)	106,246
State & Federal Government agencies (1997)	55,000
Churches (1997)	23,000
Hospitals (1997)	900
Employer programs (1997)	6,000
U.S. Military bases (worldwide) (1997)	639
Colleges & universities (1997)	1,400
Community service organizations, YMCAs, YWCAs (1997)	2,000
Total:	500,143