Finding good, high quality childcare has been a growing challenge in the US for a long time. The pandemic only made the situation worse, with all kinds of negative knock-on effects for the economy. So what is actually involved in building out a childcare business? What are the costs? How much can it scale? Can it be made more efficient by changing regulations or subsidies? On this episode of the podcast, we speak with Matt Bateman, a member of the founding team at Higher Ground Education, which operates a chain of over 120 Montessori schools across several states. We discuss how the business works, what the opportunities are and the constraints on making childcare more abundant and affordable for everyone. This transcript has been lightly edited for clarity
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Key insights from the pod:
What is higher ground education? — 5:23
Where the money goes at a childcare center — 6:40
Can childcare businesses scale? — 10:57
Do the economics of childcare change with the type of school? — 17:10
Labor retention in the childcare business? — 18:44
The challenge of opening up a school in NYC — 22:48
Why costs keep going up — 27:41
How big is private equity in the space? — 32:03
The different types of childcare businesses — 38:36
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Joe Weisenthal (00:00):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:15):
And I'm Tracy Alloway.
Joe (00:17):
Tracy, the economics of care work, one of these topics that I think we're both interested in, but news developments keep derailing our pursuit of this area.
Tracy (00:26):
Things keep happening.
Joe (00:27):
Yeah, really.
Tracy (00:28):
So we can't talk about the economics of preschool.
Joe (00:30):
And I guess the one other time we sort of talked about it, so much of the conversation was about infrastructure or making this economy more productive, so much emphasis on the built economy.
Tracy (00:43):
The good side of the economy.
Joe (00:45):
The good side. Factories and “Can the factories make good batteries?” and stuff like that. But I do think that when you look at long-term challenges for the US, so many things relate to childcare, elder care is a really big one and the economics of these industries that aren't going to have some huge productivity breakthrough tomorrow where it takes a lot of labor and they seem to keep getting more challenging for people.
Tracy (01:12):
Right. In many respects they seem more troublesome than some of the good sides. I think we talked about this before, but certainly if you look at inflation numbers and if you divide them up by consumer goods versus services, the really long-term price pressures are mostly on the services side.
So again, things like healthcare and education. Then secondly, to your point, in some respects it feels like okay, if there's a bottleneck of a particular good, well we can build a new factory or increase capacity at the ports. I'm sort of simplifying it, but when it comes to care work, there's this massive labor issue, in which you can't just build 50 new preschools in a particular city because you would still need to man them and even if you could get the labor to keep them going, there is a fundamental issue with the business model itself.
Joe (02:07):
Totally and you mentioned the ports and you said you're oversimplifying, but I don't think so. I mean that is sort of what a lot of this conversation is about. You can expand them, you could repeal the Dredge Act and allow more boats into the port of Los Angeles. And then in theory, some ports are automated so that one person can do what 10 people did in terms of unloading containers and things like that. I mean, maybe at some point we'll have robots take care of all old people and children and something, but that does not seem imminent.
Tracy (02:37):
It seems rather dystopian though, not imminent, but very dystopian. So we have done an episode on this with Nancy Folbre where we talk sort of generally about the issues at play with preschool education, but I think we need to delve in a little bit more on some of the practical difficulties of running this type of business.
Joe (02:59):
And this is one of those things that's not like a post pandemic. I mean, it's worsened in this sort of current post March, 2020 era, the stress that families feel about childcare, but, at least in New York City, people were stressed about it in 2019 and 2018 and probably as long, for years and years. So there's something deeply structural going on. And you asked a really good question in the interview with Nancy Folbre and it's like, where does the money go?
Tracy (03:26):
Where does the money go?
Joe (03:27):
What is the cost?
Tracy (03:29):
I think I'm just going to be asking this question over and over again on this episode, but I do not understand how people can pay $2,000 a month for childcare and yet the childcare workers themselves seem to be not paid very well. So where is the money going?
Joe (03:46):
And I think there are many people listening who'd be like wait, Tracy knows of a place where you can get childcare for $2,000 a month.
Tracy (03:53)
Oh, really? Sorry. Is that cheap? I was trying to think of something reasonable.
Joe (03:56):
I think that there are many people who pay. I don’t know, I actually don't know, but you're right. It is an expensive cost for any family, particularly in cities. And also it seems to be the case that the workers generally are not paid all that well, in many locations at least. So your question of where's the money going? What's it cost, etc. We just need to dive more into that.
Tracy (04:21):
Yep. Let's do it.
Joe (04:22):
Well, I'm very excited to say we do have the perfect guest because he is in this business specifically, we're going to be speaking with Matt Bateman. He is a member of the founding team at Higher Ground Education, which is a startup that has a chain of over 120 Montessori schools around the country, mostly under the Guidepost Montessori brand. He's currently technically the VP of Pedagogy at Higher Ground Education, and he knows a lot about the actual business of childcare, where the costs go, etc. And so Matt, thank you so much for coming on the podcast.
Matt Bateman (04:59):
Oh, thanks for having me.
Joe (05:00):
Matt, just to establish why we're talking, what is Higher Ground Education? Why was it founded, I guess, in 2016? What is this business that you helped launch?
Matt (05:12):
It's a missionary company so we're out there trying to create more Montessori schools, create more Montessori education and the fundamental mission of the company is educational or pedagogical, which means kind of related to teaching methods. It's that the kind of support that children get in early childhood centers, or even from their parents can be greatly, greatly improved.
This is the Montessori thesis by approaching education very differently and so that's the premise. And there, I mean, there are a lot of Montessori schools, there are thousands of Montessori schools in the US, tens of thousands across the world. But we wanted to do something big in the space to grow bigger, to create something like, I don't know, the Whole Foods of Montessori, create a new kind of branding impact and a new reach for Montessori education, as we understood it.
Joe (06:00):
Tracy, by the way, I don't think this actually causes a disclaimer, I went to a Montessori school for a few years, I'm a big fan.
Tracy (06:08):
For some reason that doesn't surprise me, Joe.
Joe (06:10):
But yeah, for a few years and I had very positive memories of it.
Tracy (06:17):
I think I technically went to a government preschool. It was provided by the US Embassy.
Joe (06:24):
Which country were you in at that time?
Tracy (06:25):
In Japan.
Joe (06:26):
Oh, wow.
Tracy (06:26):
Well, Matt, can I just ask the obvious question. So a parent or a pair of parents, they're paying hundreds of dollars a month for childcare. Where is that money going?
Matt (06:40):
I'm going to answer the question as I understand it. I mean, the unit economics of an early childhood center are pretty simple, it's tuition minus labor minus rent. So is your question, just the numbers don't add up if you've got a hundred people in a center times the amount of tuition, that's the list price, it seems like it should either be making 90% margins or the teacher should be getting paid more. Is that the question?
Tracy (07:01):
I think it feels like the teacher should be getting paid more, and so labor shouldn't be as much of an issue as it seems to be currently.
Matt (07:09):
I mean, a few caveats, a lot of people don't pay list tuition. So I mean, even at very elite schools, at chain schools there's a kind of list price, and then there's graded discounting down to 50% or even lower. And so the average list price can be a lot lower than the list price. The average gross tuition can be a lot lower than the gross tuition that you would get just by multiplying the tuition numbers.
The second thing is there is overhead in this business. I think the overhead actually hits one-off centers, kind of mom and pop centers, which are most centers harder than it hits the chains because of there's regulatory overhead with licensing. There's kind of operational overhead. This is not an industry where there's a billing system in a box that any preschool center can use and it's really easy. It's actually pretty difficult to get it set up and chasing payments and chasing parents.
Usually the people that set up centers are like entrepreneurial moms that decided to start a preschool 20 years ago and they're learning the business side as they go. It's a very small business kind of vibe and in that setting, operational complexity and regulatory complexity, which I mean, it varies, but I mean, in New York City, there's a ton of regulatory complexity that eats up costs.
And then the last bit which is a kind of the intersection of regulatory and labor complexity is there are ratio requirements and there are ratio requirements, and there are also just requirements on who can work in a preschool at all. I mean, you see this a lot in places like New York, it's not that easy to find guides that are qualified to work in preschools, you need a certain kind of bachelor's or master's or credential.
I can't remember exactly what the details are in New York City but it's not just like you can tap into a wide hiring pool, a wide labor market. And so all these things kind of intersect to being like you need to have a certain ratio, you've got some overhead, there's a lot of operational complexity, so maybe you should add another person to your staff. And if you add another person to your staff, which is the easiest way to solve a lot of these problems, as you just kind of overstaff, you end up paying everybody less.
I mean, that is the endemic problem in the early childhood market. So that's a kind of shotgun blast overview. I mean, the reality is that most centers don't make much money. I mean, a lot of them lose money, a lot of them close and a lot of them have razor thin margins. And even the big centers, I haven't seen KinderCare's numbers post pandemic or the Morning Care Group. But if you look at, I mean, Bright Horizons is public, and so you can look at their numbers. Their early childhood care business, I mean, if it weren't for ARPA money, it would be cash flow negative.
Tracy (09:50):
Can I just ask, that was a great overview and I think we're going to drill into a bunch of the things that you just said, but what is insurance like for preschool? Because I can imagine that that must be, you talk about sort of regulation, I imagine that must be one big risk factor and potentially quite a large expense?
Matt (10:11):
We have liability insurance. I don't think it's that significant. I would have to ask somebody else on my team, but I don't think it's really that significant.
Joe (10:36):
Go on and talk about scaling, etc. And so you say that there's this endemic problem of over hiring, etc., Talk to us about this phenomenon of the choices that a school makes, how it sort of solves the hiring problem and then pushes wages down for everyone.
Matt (10:57):
I mean, that's one aspect of it, and I wouldn't say it's the main or the primary problem, but it’s one of the ways that the problem manifests. So let's say you've got a small center with five classrooms and you need to have two teachers in each classroom, let's just make it simple. Some of the classrooms are toddlers, some of the classrooms are preschool, but you need to give those teachers breaks or you're in a labor crunch and you're losing teachers more frequently, or teachers aren't showing up like a teacher calls in sick and that's happening more and more often.
This is the kind of post pandemic reality where callouts are just, in every industry, callouts are getting more common. Well, you need something that we call in this industry a floater or a kind of standing substitute teacher to be able to kind of go and fill in. And then, unless you're thinking very creatively about that role, the kind of standard way to think about that role is you just have another person who's available. It starts to get expensive pretty quickly.
Because you're looking at, okay, we had 10 people on staff who were teaching, and now we have 12 people on staff because we have two floaters, and then we have two admins, and it's 14 people on staff. And two admins is very small. Actually, for a school of this size, most schools would have three or four admins. And then you have to think about turnover and the teachers that you're training and so it's a labor intensive industry. Everybody knows that but it's even more labor intensive, I think, than people realize it is, at least on the standard models of it.
Joe (12:19):
I want to go back to something you said that a lot of the chain companies that own childcare centers would be cash flow negative without what money? Did you say ARPA money? And what is that money?
Matt (12:31):
I mean, that's Bright Horizons in particular. ARPA money is some sort of COVID grant system. I can't remember what it stands for. I mean, Bright Horizons does make money. They make money with backup care and in other ways but if you just kind of look at the unit economics of their centers, of their preschool centers it's not great, it's just a kind of low margin business.
I mean, this is something that we struggle with as well, and in good cases we can push the margins up but when you're starting a school, when you've got a new center, when you're looking at somewhere between one and three years of cash flow burn, no matter what as you're kind of ramping up, I think that sometimes you people have this impression because private equity is so interested.
Tracy (13:11):
This was going to be my next question: if the margins are so thin, why is private equity so interested in this business apparently?
Matt (13:18):
I think that they're interested in it because it's kind of sticky and has regulatory moats and I mean, what private equity does in this industry is that it's a roll up strategy. Basically, they come in and they buy centers from small businesses that are looking to sell, schools that started in the sixties, seventies, eighties, or small businesses that are now owned by other holding companies, by other private equity companies and they combine them and they try to get as many operational and administrative efficiencies as they can. And they close the ones that aren't profitable and they try to get to 15% margins or whatever. Then they either repackage it and sell it or they go public depending on the model and there's been a lot of passing back and forth between clusters of schools and private equity.
Tracy (14:00):
How do scaling efficiencies work in preschools? Because on the face of it, it wouldn't appear to me that running 10 schools versus running one school would be vastly more efficient.
Matt (14:15):
It's not vastly more efficient but if you're dealing with baseline thin margins, eliminating an admin person at a school because you can centralize that function or coming up with a standardized operational or onboarding system or a system for vetting hires. Hiring is a pain in education. Some of this is preschool and early childhood, but some of this is just like private schools or just the schooling system in general.
Some of these issues just kind of get inherited from the general complexity of education. But yeah, I mean, if you kind of can go down from four admins to two or you can have a scheduling system that lets you eliminate one floater or something like that, that's where the private equity kinds of efficiencies come in.
How we think about it is a little bit different. I mean, the big question is are there innovations that can help? Our thesis is there are, and that these kinds of standard models that take these half academic, half progressive play based preschools and just try to scale them out. Like the thing that's actually needed is programmatic innovation, including innovation on the staffing side in terms of how teachers are hired and trained and, and how the funnel works and can you do something like Montessori ran incredible schools in Rome where there were 150 students and five lead teachers and five assistant teachers for three to six years old. That's a much better ratio and those programs were amazing. They were kind of world changing good.
Joe (15:41):
You’re talking about the actual Maria Montessori when you say that, right?
Matt (15:44):
I'm talking about Montessori in 1913 or whatever. I mean, this is what she's famous for. She's famous for taking children who were living in slums, the likes of which the US has never ever seen, the kind of poorest of the poor, the least privileged possible. And she had them kind of happy and reading and academically advanced by the time there were three and four, and nobody understood how she did it because this was a time when nobody was teaching children how to read at three or four, even wealthy children weren't learning how to read. And she did it with relatively low ratios or high ratios, I guess depending on count
Joe (16:18):
Who's the denominator and what is the numerator?
Matt (16:20):
Exactly and once you get up to the three year old range and you have a program that's really based on setting up an environment in a certain way and giving children a lot of independence and setting a certain kind of culture in the school, you don't need to kind of staff for supervision or staff for tutoring in the same way. That's part of our hypothesis is that, in infant care and toddler care, you're always going to need, it's always going to be labor intensive in the sense of being a lot of teachers per student or a low amount of students per teacher.
I think people think in elementary school you can have a higher ratio and it can still be good. I think that that's also true in preschool and there are other things like that.
Tracy (17:03):
Actually that leads me to something else that I wanted to ask, which is, how much do the sort of economic aspects of running a preschool change along with the education style?
Matt (17:16):
They do change a bit. So I think that they're fairly different for us once you get to three years old because of how we do preschool classrooms, because we have a one to 12 ratio there. They're also different for us in that we consider the job of an early childhood educator to be a certain kind of expertise that we train on and pay for.
And so the economics of paying teachers is just a little bit different for us, paying and hiring teachers and supporting teachers. But in general, I don't think that it changes that much across most centers. Even the changes that I think are there for us, which are real and meaningful, they're not order of magnitude changes. They're small differences that do make a difference.
Joe (18:04):
I mean, every industry, especially these days, has had problems with labor retention. Probably it's worse for the education and service sector or childcare stuff. I know that the daycare center that my kids both went to, we get an email every few weeks or maybe every few months about oh this teacher is leaving and then someone else and so I'm pretty aware of that. Can you talk about your strategy? It sort of sounds like you're saying it, but are there things that companies can do or operators can do that would sort of train and invest in the teachers to reduce churn?
Matt (18:44):
So just the state of the problem is that total labor and early childhood is still less than it was in 2019. I can't remember how much less, I think it's like 5% less but there was a slowly steady increased curve as there often is, in any kind of labor market that's healthy. And then there was a huge drop, and it hasn't quite recovered yet. It's been going steadily up since then, but it hasn't quite recovered.
Pay has gone up 20, 25% I think in the last two or three years and that's one of the main things that companies are doing is they're trying to pay teachers more. We're certainly paying teachers more, I can't remember exactly how much more than 25%, but more than that is the amount that our wages have gone up. I don't know how much of it is just a wage issue. Wages aren't going to double, they're going to keep going up, but they're not going to go dramatically up just because of the unit economics of it.
I think that a lot of it has to do with kind of seeing the job as a meaningful career, as something with dignity. Early childhood work is also relatively low status and then the things that employers can do, or the things that centers can do is how do you kind of actually manifest that, both in terms of meaningful opportunities and in terms of the kind of dignity of the work itself. I mean, I've worked in preschools that aren't Montessori as well as Montessori preschools.
You feel like a babysitter, you feel like you're watching a bunch of kids and you're running out the clock and that's just it. I mean, even if you love children and I love children and I've done this kind of work. It doesn't feel like a kind of sustainable long-term thing. It feels like something you do for a while or is gig work and seeing it as this is a kind of expertise and a kind of wisdom and there's curriculum here and there are things that you can do and master, and there are growth paths. I think that that's the biggest thing and there aren't that many early childhood approaches. I mean, Montessori is one but there are others that kind of take it that seriously.
Tracy (20:36):
Have there been, throughout your career, any shifts in the demographics of people who work at preschools? Did it used to be an older cohort and now maybe it's younger or vice versa?
Matt (20:49):
That's a really good question. Anecdotally, I feel like it's gotten younger, but I mean, I've been in this industry for about 10 years, so not that long. But even though I feel that way, when I'm thinking about the teachers that we’re training and the teachers in our schools, it still really is the full range. So you did see a lot of retirements right around when Covid hit and that kind of knocks the older end of the distribution off. I don't know whether that's just going to heal over time naturally, or whether that's here to stay. Yeah, that's a good question.
Joe (21:21):
I want to go back to ratios and of course you talked about that in theory as Maria Montessori showed 110 years ago, maybe you don't need as many teachers once you get to the age of three or whatever. Ratios generally though regulated and probably for most schools the regulations are there for a pretty good reason and especially if you're going to have babies etc., you want a lot of eyes on them for pretty obvious reasons. But as a company with schools in multiple states, can you talk about like you have schools, I don't know for sure this is true, but in my mind I imagine that Texas laws are much more liberal about this stuff than New York City laws. Can you talk about what you see and the differences you see from state to state?
Matt (22:12):
I mean, some of them are in ratios, but some of it is just, I lived in New York for years with a small child and ran schools for small children. It is essentially illegal to open an infant program in New York City for children under 18 months. It needs to be on the ground floor and you need to have to egress. I mean, just the space requirements are so onerous and then the kind of licensing review process is so onerous that it's really, really hard. We have infant programs in New York.
Joe (22:38):
I'm pretty sure because I think at least one of my kids was in that program before 18 months.
Matt (22:44):
I'm overstating it. It's not illegal.
Joe (22:46):
No, I know it's not, they're just hard to find.
Matt (22:48):
It's legal, it's just hard, especially if you're kind of looking at entrepreneurial one-off, mom and pop operators then it's really, really hard and that's not true in Texas. But I mean, it's not that easy in Texas either. There's still a licensing process so there are big differences. There are some differences in ratio requirements. In Chicago and New York, the ratio requirements are a little bit stricter. It tends to be the licensing process for the space requirements.
This is another thing that you can get with economies of scale, if you're opening new centers, which we do, we don't just do acquisitions we open a lot of new centers. There's a construction process that has to happen with almost any space and 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 couple months for construction and the licensing process and everything. And in other places like New York or San Francisco, you're looking at 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.
Tracy (23:52):
How competitive are preschools on cost, and what I mean by that is how big a concern is it? Because on the one hand I imagine that 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. You might have a tendency or a willingness to take something that's more expensive. So do you find that you're competing on cost quite a lot? Or is there a little bit of insulation there?
Matt (24:29):
We compete on cost for sure. I think at the ultra elite level, like West Side Montessori or the kind of storied New York preschools where people think of it as part of a path to Harvard or whatever and 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 we have to backtrack. We face price competition.
Tracy (24:55):
If you raise prices too much, you do see the attrition of kids?
Matt (25:00):
Oh, yeah definitely. I find it interesting that you find that surprising. Were you kind of under the impression that...?
Tracy (25:06):
Well, I thought it was, you used the word ‘sticky’ before and I kind of assumed 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 — they would be very motivated to stay in that school?
Matt (25:23):
Let's say that you're doing infants through preschool, a typical case, so we do for ages zero through six, but take say you're doing 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 the 25% of your new families are new families, and you have to compete for those families on, 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. So there's no surprise rate increase. We do have rate increases, but we say 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, your business is sunk, that's part of what it means to be in a business where you make money on the last four families that enroll.
Joe (26:18):
I hadn't thought about that dynamic that just by definition any school basically is going to lose a lot of customers every single year automatically just because people graduate or matriculate. I don’t know, do you graduate?
Matt (26:31):
Yeah and if your mental model is K-12, you might think, ‘Oh, you're losing 10% or 8%’ or whatever, but really you're losing a fifth, a quarter, a third of your students every year. And that's if you've got a really healthy pipeline coming through, that's kind of what you're shooting for. That's a success case is that you're graduating students.
Joe (26:49):
So I know every American considers themselves to have been raised middle class, and I definitely include myself in that category. And the years that I went to Montessori school, I was living in Joliet, Illinois, or I had a lot of friends there whose families were unambiguously middle class. These days, when I think about Montessori schools, I do not think ‘Oh, you have to be rich to be, go to a Montessori school’ or anything that sort of has the vibe of progressive education, I just assume it is sort of this luxury consumption good and be 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.
Matt (27:41):
So the 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. 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. I don't know if I have the full story, 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 A, there is more public funding now than there's ever been at the early childhood age. B, it just varies so much by location like if you're kind of pegging on New York City prices, you guys are both from New York, right?
Joe (28:38):
Yeah I admit, the economics of school, a Montessori school in New York City where everyone is crazy status obsessed and thinking that they need to get their kids 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 Juliet, Illinois in the early 1980s.
Matt (28:54):
Yeah. I mean, New York is very bimodal. In New York head start programs or like $2,500 a month would be cheap for the kind of other end of the range.
But in Dallas, you can get good daycare for $1,200 a month, a thousand dollars a month, and maybe some of that would be a little bit subsidized and then you're looking $800 a month and then all of a sudden it starts to look a lot cheaper than a nanny and totally worth it to 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? I think it's probably gotten a little bit worse, yeah.
Tracy (29:34):
Wait, so setting New York aside, which is crazy for a bunch of different markets, this was a wider point brought up by our previous guest on this topic, Nancy Folbre, who argued that one of the reasons why childcare costs are going up is, yes, okay, labor costs have been going up, but there's also this selection bias at play, which is if you cannot afford childcare, you opt out of the market entirely.
Maybe you find a family member who can look after your kid or maybe 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?
Matt (30:24):
If I understand the point correctly, that there's a kind of step function where it's like there's a threshold below what you're not considering paying for childcare and that threshold is probably gone up, right? Yeah, I think that that's true. There are kind of interesting little submarkets of the early childhood space, like at home care or in home care where a teacher runs a program out of their home and they might take three students or five students or something like that. I think that if you wanted to kind of lower that threshold, the cost threshold, I think you would have to think about how do we see a lot more of that kind of model where a lot of neighborhoods have schools where a mom whose kids have gone to college looks after three or four toddlers, and kind of what are the economics of that? That is not usually either illegal or not kind of highly regulated and 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 it almost certainly does.
Joe (31:29):
You know, it feels like there's this whole range and there are the heavily subsidized schools, there are the sort of mom and pop schools that were maybe in the 1960s or 1970s and someone set up a school that's out of their house and I think my sister went to one when I was growing up. It 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.
Matt (32:00):
It's mostly mom and pop.
Joe (32:02):
Still?
Matt (32:03):
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 say it's like a hundred billion dollars total addressable market, early childhood centers in the US and you could broaden that to be like 200 billion if you included just nannies and other kinds of childcare expenses.
Kindercare is like a $7 billion revenue, and it's the biggest by far. Then you have Learning Care Group and Bright Horizons, that's another %7 billion. 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 unusual for there to be a public preschool in the sense that there's a public school. But most, I mean, the kind of chains, I mean, we're a drop in the bucket. Higher Ground schools are a huge market and it's very, very fragmented. The biggest players, like the biggest company, probably take up less than 5% of the market probably.
Joe (33:24):
You said something earlier that many daycare jobs or childcare jobs as a society, they're not seen as high status jobs, high dignity jobs and perhaps in some cases the person in the position feels, as you say, they're sort of a babysitter waiting out the clock and waiting for the parents to pick them up and then the day's over.
Can you talk a little bit more about the structural challenges that poses? Because at the end of the day, there just seems to be this mismatch and who is going into the supply of future teachers. Who is going into this career and 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?
Matt (34:11):
So the people that go into 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.
Tracy (34:21):
That seems like a bad combo. I’m just going to throw that out there.
Matt (34:24):
It is a bad combo. 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 is it’s a management intensive industry, kind of 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. Keeping that a really positive place, which is really important for the children, is really hard. That's an aside. You can divide it into three issues that are all interrelated. One is the money problem.
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 how do you get people to see working with small children as important? I mean, this is the problem that mothers and I mean this is tied into with all sorts of other, 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?
Joe (35:37):
I laugh there not because it's funny, but it is funny in the sense that ‘is the education is good’ often feels like it is the secondary or tertiary question even though we are talking about schools here.
Matt (35:50):
And I think most education isn't good, in my view. Certainly most early childhood education isn't good. And it's very far from great, even if it's passable, it's not great. 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 I'm such an evangelist about Montessori and developmentally informed education and kind of 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 change would, I mean, it goes along and this is why part of what we do, we run a training center.
We 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 a calling for a certain kind of person.
Tracy (37:03):
So just on that note, 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. And 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, 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?
Matt (37:50):
Okay, 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 with 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 and this is how they kind of raise children.
The kind of critical narrative is we've become more atomized as a society so we don't know our neighbors and if you're got two working families and you need help with childcare, 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 childcare to the extent that that's true.
I think that's probably a half-truth. I'm kind of skeptical of kind atomization narratives and I'm generally skeptical of a golden age where child care was great.
Tracy (38:33):
Right, where you can take your kid to your neighbor and they would watch them.
Matt (38:36):
To the extent that that's true, I do think that there need to be different operating modes for early childhood where I mean, we are doing things like running preschools in neighborhood houses. We’ll rent a house, a five bedroom house, we'll move a preschool teacher into that house and we'll say, we'll pay your rent and in three rooms on the first floor, you run an early childhood neighborhood center and 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 culture that was a kind of problem that we really were invested in solving. I think that that kind of shift would be good. The 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, it's getting disrupted and that goes all the way down to childcare and early childcare.
And there's a question as to what it looks like: What do micro schools look like? What does homeschool look like? What are the whole range of homeschool options? How do you get expertise in this area? It requires thought and innovation and it's an exciting time. If you kind of look, if you squint and you look at the industry as like this is where it's at right now, it looks very dark.
I mean 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.
Joe (40:10):
So I just have one last question, and maybe it sort of ties into what you were just talking about, but people have this idea and I think for good reason that we should have publicly funded childcare from day one. We 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 free childcare, but only once the kid turns five or six or whatever the exact age is. So let's say we wanted to as a country, this doesn't make any sense, why do we only start this at age five? We want to start it from day one or month three or whatever it is. What would be the biggest constraint to being able to make that happen?
Matt (41:00):
So I'm very skeptical of that solution, both 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 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. You'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 to think about learning in terms of a job or some vocation. This is just what that age is. The kind of six to 12 ages especially is, is the school agent always has been in history, always.
There's a reason why if you go back 2,600 years, school starts at six or seven. And then there's this question as to what to do when children get to middle school or high school age historically. But this kind of 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 kind of the public preschools would be a developmental disaster. That's my thesis.
Joe (42:36):
Well, Matt Bateman, really appreciate your perspective. Obviously sort of like an extraordinary, complicated question just in terms of some of the dimensions that you brought up there but even some of the sort of simple or regulatory questions about ratios and multiple points of egress in one state for another. Really appreciate you coming on the podcast and talking about the business.
Matt (42:57):
Thank you for having me.
Tracy (42:58):
Thanks so much, that was really interesting.
Joe (43:00):
Tracy, I thought that was really interesting. I mean, I think the economics as he described it are like you pay and then it's wages and rent, etc. but then when you think about management costs and floaters and I've certainly seen this and substitutes and churn, etc., you could see how they get incredibly inefficient, complicated business.
Tracy (43:35):
Yes, which is why I'm still kind of surprised that there seems to be so much private equity interest and a belief in scaling it up. Although I do take the point about, sure you can have a sort of centralized administrator and things like that. I did think it was really interesting his point about competing on cost and the idea that, well naturally just by attrition you're sort of losing students every year. That's something I hadn't considered before.
Joe (44:04):
As you said, K-12, hardly any graduate in a year, but if it's like a two or three or four year program, you're always losing students and always having to pull in new ones.
Tracy (44:15):
Also, you guys are so down on robots watching kids but I have distinct memories of my parents leaving me alone with a Teddy Ruxpin doll in 1985 for hours to entertain me. So it's already happened. The robots are already here. They’re called iPads.
Joe (44:32):
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 there’s never really a golden age, but maybe the golden age is when people were just more chill about this stuff. No, seriously, if parents are so neurotic about it...
Tracy (44:59):
No, the child has to be learning something like every minute of the day in preparation of their future success. Whereas you could just sit them down with, I don't know, a Lite Brite or something. I'm giving away my 1980s childhood.
Joe (45:17):
It's crazy that like if you have a two year old, you're thinking about if they are on the Harvard track. That's crazy.
Tracy (45:25):
No, I agree completely. Shall we leave it there?
Joe (45:28):
Let's leave it there.
You can follow Matt Bateman at
@mbateman
.