Macro environmental analysis:
PEST Analysis
Political:
The Commonwealth Government allocation for child care for the four year period 2003-04 to 2006-07 is $8.6 billion, which is a $2.6 billion increase from the previous four years. (Health and Aged Care report, 2003). This accounts for the Child Care Benefit (CCB), which is an income tested, sliding scale of financial support for families to reduce the cost of childcare. (Planning to succeed in child care, 2001). This benefit is the crux of the Governments support to families, helping to make child care more affordable. It is estimated that 501,100 families are assisted through this benefit. (Census of Child Care, 2002)
With the impending federal election, both parties are increasing their commitment to children’s issues with both Larry Anthony, and Mark Latham proposing multi-million dollar spending boosts for the sector to increase quality of care, reduce costs further and meet the 10,000-20,000 extra places needed. (The Age, March 14, 2004, p11)
Conclusion:
In an industry that derives 60% of its income from the government, (Alberici, 2004) the proposed spending boosts strengthens the market for child care. Demand for child care directly increases with cost decreases (Dorion and Kalb, 2002), so market demand is set to increase further. Also, with all State Governments being Labour governments, the stability of social services such as childcare are destined to be high priority.
Economic:
The childcare market has relatively inelastic demand, however with Australian interest rates on the rise, families with mortgages may experience a drop in disposable income. Dorion and Kalb (2002) show that a drop in disposable income could lead to decreases in child care. This however is likely to be offset by the rising trend of household income that rose 16% from 1996 – 2001 (ABS, 2002)
Socio-Cultural:
The OECD childhood education and care conference in 2001 emphasizing the importance the early years in humans development has boosted awareness of quality child care in Australia, both politically and socially. (McDonald, 2002). The balance of opinion according to Evans & Kelley (2002), is that half days in formal care are ok, but full days are not. This perception could lead to a decrease in child care demand.
Labour participation rate of Women is a large determinant of child care demand, and there has been a recent trend of growth, however there has been a decrease in participation rates of almost 15,000 women in the past year. See chart one
Chart 1. Source: ABS, Labour Force, Australia, 2004.
The rate of Lone parents has increased also over the last ten years, from 15.4% in 1992, to 23% in 2002. (See chart 2)
Chart 2. Source: ABS Australian Social Trends, 2003
Conclusion:
The labour participation rate of women, and the amount of lone parent families are direct demand determinants of the child care market, as 90% of children are in long day care due to parents working, (Census of child care services, 2002) and there is an increasing trend in both. It is noted by the Australian Institute of health and welfare (1999) that underlying demographic changes are not as important as mothers’ labour participation rates (IBISWorld 2003).
Demographics:
The trend of demographics impacting childcare have been:
- A decline in growth rates in the 0-4 age bracket of the Australian population, and it is expected to continue for the next 10 years.
- The proportion of children (0-14yrs) has decreased from 25% in 1982 to 20% in 2002.
- The growth rate for the same age bracket is a slow 6%.
-Fertility rates of women has dropped from 1.86 children per woman in 1993, to 1.75 in 2003.(ABS, Social Trends, 2004).
Chart 3. Source: ABS Australian Social Trends, 2004
Conclusion: Although the target market is decreasing in growth is still expanding in real terms and so the demand trend for childcare will continue, being offset by other social and political factors.
Technological:
This is a market that is not highly dependant on Technology. One way it may impact however is through information being readily available to buyers through the Internet.
Market analysis:
Market Size:
IBISWorld (2003) estimates industry revenue to be $3,622 million for 2002-03, with an estimated 760,000 children using approved formal care, 501,100 of which receiving Commonwealth Child Care Benefit as of June 2003.
Market Performance:
The Industry value added (IVA) increased annually by 7% from 2002-03, outperforming Australia’s GDP, which increased over the same period by 3.6% (IBISWorld, 2003). This is a positive indication.
Market segmentation:
Chart 4. Source: 2002 Census of Child Care services.
Long day care is the largest segment of the child care market in Australia (see above). This is then segmented into private and community based long day care with 63% and 37% respectively. (2002 Census of Child Care services).
Life cycle:
It is in the growth stage.
It is growing due to:
- Government objectives aimed at assisting mothers with young children to return to the work force (McDonald, 2002), leading to real increases in labour participation rates (see chart 1),
-The federal election, as both parties are promising large increases in spending for this sector.
-Recent growth in the rates of formal care used Australia wide. (ABS, 2002)
-The real growth rate in this sector outperforming the GDP over the five-year period to 2002-03. (IBISWorld, 2003).
The external factors are currently pushing a rise in demand for childcare in Australia, including Long day care, and this is continuing
Porters Five Forces:
Industry rivalry: Medium
According to IBISWorld (2003) the industry displays low concentration with the largest four operators accounting for less then 10 percent of revenues and so the industry is considered to be disciplined. Low levels of competition and low fixed costs also indicates low rivalry. The aggressive growth attempts by the listed companies however could lead to higher concentration rates, and therefore more rivalry.
Threat of potential entrants: Medium
Cost wise, barriers to entry are low for this industry, with low fixed overheads and regulatory costs. Licensing and accreditation is necessary to receive the Child Care benefit, however licensing costs for a center with over 121 places for three years is $595. (Doyle, 2002), and accreditation is granted once quality check list has been approved. There are however regulations in place about where to start a center.
Bargaining power of suppliers: Low
Labour is the biggest supplier in this industry. Recently, low wage rates has led to a flight of well trained people from the industry, (Beyond 2001, 2001) indicating that supplier demands haven’t been met.
Bargaining power of buyers: Low.
28% of private and 22% of community long day care centers had no vacancy in 2002 (up from 9% and 7% respectively in 1999) so the ability of buyers to easily switch centers is low.
Threat of substitutes: Medium
Substitutes to formal childcare are informal care, where a relative or friend takes care of the child.
-The trend of grandparents and relatives providing informal care of children is increasing (IBISWorld, 2003). This could decrease demand for formal care as it is perceived to be more beneficial to the child.
-Federal court ruling in 1999 set a precedent to allow companies to provide child care free from fringe benefit tax. (IBISWorld, 2003). This will provide a threat to normal formal day care centers, as this will be a convenient substitute for other community or private day care centers.
These however are only a choice if they are available. If so, the threat is high. For the majority though, the threat is very low.
Competitive Analysis:
As seen earlier the market share of private to community long day care centers is 63% and 37%. Both ABC Learning Centres and Peppercorn Management have seen their share prices rocket seven fold and nine fold respectively over the past two years. (Alberici, 2004), and the big three, including Hutchinson, account for just over 700 out of a total of over 4000. All three are embarking on aggressive growth strategies.
Estimated Market Share for Long Day Care Centres.
Source: The Australian, 1/4/04, and Alberici, 2004
Source: The Australian, 1/4/04.
In general, Child care centers compete at five levels, which have been rated on a scale of one to three (three being the most important) of what parents look for in choosing a day care center. (Wise 2003)
Table 2: Parents perceptions of childcare importance.
Source: Family Matters, 2002.
Competition strategies are different for all three. Competitive advantages different for listed companies. Hutchinson strives for service, not size. Peppercorn is simply a management service for current LDC’s, and ABC competes through increase efficiency and centralized management. All also compete by offering lower prices through their economies of scale. Community base LDC’s competitive advantage is due to a high level of public perception of care, with no incentives to cut costs in any way.
The nation level of listed company ownership is around 17.5% of the LDC market, (The Australian, 1/4/04) while at the Victorian level, it is about 20%. (Interview with Jane Bennett).
At the Stonnington level, out of 26 child care centers, only one is owned by ABC (Stonnington Facts and figures for business, 2004), the rest being community owned. (3% owned by a listed company, compared to Australia average of 17.5%). With Stonnington boasting a high level of income, the competitive advantage of private firms to offer cheaper prices has less of an impact, with perception of care being the most important factor. With high quality care being expensive, the ability for community LDC’s to allocate 80% of the budget to workers, compared to only 50% in private firms, reinforces Community LDC’s competitive advantage.
Critical success factors:
1)
Making use of financial government support through complying with the National Accreditation Council.
This is critical and not just important because the average weekly result for all centers in Australia is a loss of $247 8.04 before government support. Without the support there is no way a center can run. (IBISWorld, 2003)
2)
Good public perception of the level of care for the child.
Evans and Kelly (2002) show that the balance of opinion in Australia is that full days in child care is bad, and that the families perception of whether the center can provide sufficient individual attention is the critical factor. Therefore without this, a family will go out of their way to take their children to a different one. (Table two shows that this is more important then convenience of child care).
3)
Starting the center in an appropriate area
If the center is not in an area of high demand locally (in an area or oversupply), or one that can provide convenience for the working parent, then the center will struggle. The local market must be suitable.
Strengths and Weaknesses:
The ABS publication ‘Melbourne, A social atlas (2001) highlights social trends and demographics in Melbourne. Weaknesses of the Stonnington market are mainly due to:
-Low levels of Children aged 0-4
-High levels of Dual Income No Kids families,
-Lower levels of lone parent families
-Low levels of Mothers in the work force
-Low level of Non- English speaking families relative to Melbourne (see chart …)
These have been proved to be determinants of child care demand.
Stonnington has only 2.55 target children per LDC place, compared to the Melbourne average of 3.0. This reinforces the impact of the weakness of demand determinants in the area.
Property prices are in the highest 30% of Melbourne, (Stonnington facts and figures, 2004), and so this will reduce available profit margins and therefore the attractiveness of this market.
Source: Stonnington Facts and Figures for Business, 2004.
Recommendations and Conclusion.
The Macro-environmental analysis indicates a strong market to enter for possible investors. Trends, both social and political indicate future growth of the market. At an industry level, Porters Five forces analysis shows that it isn’t difficult to enter, however I forecast increasing difficulties due to increasing rivalry and trend towards informal care.
The Stonnington market is not a viable market to enter. The weaknesses are too great as shown above. If one was to be started however, its competitive advantage would have to be to offer the greatest care possible, regardless of the cost. There are however more suitable markets in outer suburbs in which the demand determinants for the child care market (as shown above) are conducive for a successful entrance, and government support is even greater (eg. Rural areas).
Bibliography:
Primary Research:
Correspondance with Jane Bennett, Executive Officer Victoria State Office of Family and Community Services, Received on March 29, 2004
Secondary Research:
Books
Kotler, P., 2003, Marketing Management, 11th Edition, Prentice Hall Pty Ltd. Sydney
Reed, P. 2003, Strategic Marketing Planning, Nelson Australia Pty. Ltd, Victoria
Secondary Research
-
ACTU Congress Melbourne (2003), “A Fair Australia: Child Care Policy”, , viewed on 18th April, 2004.
-
Allan, J. (2004), “Commonwealth Must Act to End Vic Child Care Crisis”, (2004), , viewed on 16th April, 2004.
-
Alberici, E. (2004), “Child care companies in the spotlight”, , viewed on 13th April, 2004.
-
Australian Bureau of Statistics, (2003), 4402.0 Child Care, Australia, Australian Bureau of Statistics, Australia.
-
Australian Bureau of Statistics, (2002), Year Book Australia 2002, Income and Welfare Trends in child care, Australian Bureau of Statistics, Australia.
-
Australian Bureau of Statistics, (2002), Household Income and Income Distribution, Australia: A Social Report, Cat. no. 6523.0, ABS, Canberra.
-
Australian Institute of Health and Welfare, (2001), Trends in the affordability of child care services, Working Paper no. 29, Australian Institute of Health and Welfare, Australia.
-
Child Care Centres Australia Limited, (2003), Stock Research Report, Child Care Centres Australia Limited, Australia.
-
Centre of Full Employment and Equity (2001), Child Care Report, Child Care Services for 3 and 4 year old children, Centre of Full Employment and Equity, Australia.
-
Chapman, B., Dunlop, Y., Gray, M., Liu, A., (2002) ‘The impact of Children on the Lifetime earnings of Australian Women: Evidence from the 1990s’, The Australian Economic Review, vol. 34, no. 4, pp. 373-89
-
City of Stonnington, Facts and figures for business, , viewed on 3 April, 2004.
-
Commonwealth Budget, 2003-2004 Budget at a Glance, ,
viewed 1th April 2004,
-
Commonwealth Child Care Advisory Council (Australia), 2001, Child Care: beyond 2001 /Commonwealth Child Care Advisory Council, The Council, Canberra.
-
Commonwealth Department of Family & Community Services, , viewed 28 March 2004,
-
Department of Family and Community Services. (2000), Child Care Benefit, Commonwealth of Australia, Australia.
-
Doiron, D., Kalb, G. (2002), “Demand for Childcare Services and Labour Supply in Australian families”, The Australian Economic Review, Vol. 35, No. 2, pp. 204-213.
-
Drago, R. (2002), “Childcare and the ‘Care Gap’ in the United States and Australia”, The Australian Economic Review, Vol. 35, No. 2, pp. 214-220.
-
Evans, M.D.R., Kelly, J., 2002, ‘Attitudes towards Childcare in Australia’, The Australian Economic Review, vol. 35, pp. 188-96
- “Govt to fund extra childcare places”, (2004),
, viewed on 13th April, 2004.
-
IBISWorld, (2003), 08710- Child Care Services in Australia, IBISWorld Pty Ltd, Australia.
-
Jackson, A. (2003), “ABC Learning on acquisition alert”, , Viewed on 18 April, 2004.
-
“Labor promises to clear child care backlog”, (2004), , Viewed on 12th April, 2004.
-
McDonald, Peter, 2002, ‘Issues in Childcare Policy in Australia’, The Australian Economic Review, vol. 35, no. 2, pp. 197 – 203
-
Planning to Succeed, 2001, Department of family and community services, Published 2001.
-
Wooden, M. (2002), “Childcare Policy: An Introduction and Overview”, The Australian Economic Review, Vol. 35, No. 2, pp. 173-179.
Appendix 1
Reply email from:
Jane Bennett
Executive Officer Victoria State Office
Phone: 03 8626 1202 Fax: 03 8626 1220
Hi David,
please find attached the comparative supply data for LDC and a cover letter that lists some other sources of useful information.
(See attached file: POPULATION & SUPPLY DATA @ 22032004.xls)(See attached file: coverletter.doc)(See attached file: CHILD CARE CENTRES X SUBURB&TOWNX APROVED PLACES @ 220304.xls)
In regard to corporate ownership of LDC centres in Victoria, I can tell you that approximately 120 services are owned by listed corporations. This represents about 20% of the total number of LDC services in Victoria.
The four biggest players in Victoria are ABC, Child Care Centres Australia, Peppercorn Management Group and Brighter Futures (which is also now owned by ABC). ABC owns by far the largest number of these services.
A point to keep in mind are that many parents will not use a child care centre near their home, but instead opting to use one near their place of work, or on the way to their work.
In regard to your query about Outside School Hours Care data, our listings of areas of need are not released to the public. They're only used internally to assist in the allocation of places during a funding round.
As I mentioned to you on the phone, the current funding round has just
closed. Whilst there is a need for additional OSHC places in Victoria,
most of this need will be met (if places are allocated in the Budget) by
services run by primary schools. There are relatively few After or Before school services that are not operated by schools. If you still have queries about establishing an OSHC service, you can contact Rachel Adams in our office on 8626 1181. She'll be back in the office after Easter.
Hope that this information is of assistance.
Regards, Jane.
From: Jane Bennett
Executive Officer Victoria State Office
Phone: 03 8626 1202 Fax: 03 8626 1220
The language spoken at home is a determinant of child care demand. (Wise, 2003). Over the period 1993-1999, the proportion of English speaking families using childcare increased from 20.0% to 24.3%, whereas non-English speaking families remained 14 %. (Centre of full employment and Equity, 2001). Since there is a higher rate of informal childcare in non-English speaking families, (Doiron & Kalb, 2002) Stonnington’s lower rate of Non English speaking families could contribute to lower child care demand.
