News

Nursery profits 'are hyped to investors'

The nursery sector is in danger of being over-hyped to potential investors in the City who may have unrealistic expectations of the profits they can make, according to an analysis of the sector by healthcare consultancy Laing and Buisson. The report, Children's Nurseries - UK Market Sector Report 2002, published last week, warns that the sector is still in its 'honeymoon phase' with investors, just as the care home sector was in the late 1980s. However, with care homes, there was a 'fundamental mismatch between reality and expectations' and it turned out that groups could only grow by going back to their investors for further injections of capital.
The nursery sector is in danger of being over-hyped to potential investors in the City who may have unrealistic expectations of the profits they can make, according to an analysis of the sector by healthcare consultancy Laing and Buisson.

The report, Children's Nurseries - UK Market Sector Report 2002, published last week, warns that the sector is still in its 'honeymoon phase' with investors, just as the care home sector was in the late 1980s. However, with care homes, there was a 'fundamental mismatch between reality and expectations' and it turned out that groups could only grow by going back to their investors for further injections of capital.

The report has found 'some remarkable parallels' to the care homes sector, even to the extent that several individual entrepreneurs have been active in both. Like the nursery sector now, some care homes groups claimed that economies of scale gave them an edge over independent operators. But this did not turn out to be the case, especially as any economies could easily be outweighed by burgeoning head office and management costs.

However, Laing and Buisson's analysis also noted a crucial difference. Day nurseries are predominantly funded by private customers - parents - whereas the main source of funding for care homes is public, making them particularly vulnerable to policy changes. Some care homes are still struggling to get local authorities to increase fees to take account of the last increase to the national minimum wage, whereas day nurseries have been able to pass this on to parents.

The Laing and Buisson report found that in 2001 the nursery market, including voluntary and local authority nurseries, was worth just over 2bn. Private sector nurseries generated 91 per cent of this, or 1,860m.

The report observed, 'Although on the surface the Government may appear to be a heavy subsidiser of daycare, offering a guaranteed nursery education place for all four-year-olds and the majority of three-year-olds, in reality it only funds a small proportion of the UK children's daycare nurseries sector.' This is because the vast majority of subsidised places are in nursery classes within primary schools or nursery schools, and also because the Government only subsidises part-time places in nurseries outside the public sector, equivalent to five two-and-a-half hour sessions per week.

Eighty per cent of the nursery market's value, 1,655m, is funded by parents, of which 110m, or seven per cent, comes indirectly from Government grants and benefits, including the childcare tax credit element of Working Families Tax Credit. Private companies' spending on nursery services for employees accounts for just under 10 per cent of the market at 190m, whether through vouchers or free nursery places on site. This is a more substantial contribution than direct Government funding, which accounts for 150m and includes the subsidy for places for three-and four-year-olds and schemes such as the Neighbourhood Nurseries initiative and Sure Start.

* The report, Children's Nurseries - UK Market Sector Report 2002, costs Pounds 375. For more information contact Laing and Buisson on 020 7841 0046 or see the website www.laingbuisson.co.uk.