In the first of a two-part investigation into Early Childhood Education (ECE), BusinessDesk examines the sector’s winners and losers. The second part will examine potential solutions to level the playing field.
A record number of ECE services closed last year.
Rising costs, staffing shortages and inadequate government funding are plaguing the sector. Public health experts warn overcrowded centres will cause long-term harm to children’s health. Parent fees keep increasing.
The ECE sector is in crisis, but not all operators are affected similarly.
While small services struggle to stay afloat, a BusinessDesk analysis reveals large groups are expanding, and investment funds in the sector continue to generate a good return.
Government subsidies provide a stable income for ECE businesses. They are paid on a per-hour, per-child basis, with adjustments depending on teachers' qualifications, the child’s age and the type of service.
The more children there are for a longer time, the more money.
Multiple centres can achieve economies of scale on management and compliance costs. Savings can also be achieved on staffing, with qualified, experienced teachers costing more.
But it’s not as simple as going big or going home.
Aotearoa’s second-largest ECE provider, Evolve, has seen enrolments drop in recent years due to compliance and staffing issues. The Rainbow Corner Group, which had 16 centres and dozens of home-based services, went into liquidation last year following rapid growth, health and safety breaches, and high staff turnover.
So it’s more like going big but not too fast and not cutting too many corners.
Associate Education Minister David Seymour launched a review of the sector’s regulations in June and has promised a funding review would follow.
Sector concentration
Six private ECE providers received $591 million in government funding in 2023 – a quarter of the total funding of $2.3 billion.
The funding these six companies received grew by $131m, or 28%, between 2020 and 2023, meaning their share of the total funding grew from 20% to 25% in that period.
In some cases, providers acquired more centres during the period. But in others, centre numbers went down while licence numbers went up – suggesting centres are getting bigger and taking in more children.
Eleven companies run at least 10 childcare centres. Together, these companies hold 43,252 licensed childcare places in 595 centres – 20% of the 212,595 total licensed places as of April.
Seven companies hold more than 1,000 licensed childcare places, and 17 have more than 500 licensed places.
Click here to expand the above chart.
ECE power players
BusinessDesk has analysed licensed places and funding data to look at the growth of six ECE power players. It has also looked into the publicly available financial returns to see their profitability.
BestStart Educare, which was restructured from Kidicorp in 2015 into a tax-free charity, is the biggest provider of ECE in NZ.
The Wright family owns the charity.
BestStart received $293m in government funding in 2023, a 36% increase from the amount it received in 2019.
Over the same period, it dropped 10 centres, from 270 in 2019 to 260 as of April this year, while its total number of licensed places increased, suggesting the provider's centres are getting bigger.
Wright Family Foundation’s financial report shows it made a $23m profit in 2023, up from $20m the previous year.
BestStart paid about $40m in rental expenses, 37% of which went to Wayne Wright’s company.
BestStart CEO Tony Ryall said new developments were larger, purpose-built centres responding to population changes and parent demand.
He said the provider had sold some centres, closed some, and merged others into new centres over the past few years.
It closed some sites because they weren’t profitable and replaced others with a newly-built centre.
Ryall was optimistic about BestStart’s outlook.
“There are some parts of the country where it's difficult to operate because of staffing challenges and declining occupancy levels. But because we are a big network, we can weather some pluses and minuses."
Evolve Education Group, the country’s second-largest ECE provider, was listed on the NZ Exchange (NZX) until it was sold for $46m to Australian private equity firm Anchorage Capital Partners in 2022.
Its last available financial statements, from 2020 and 2021, show that it averaged $20m in net profits annually.
It received $86m in government subsidies in 2023, down 5% compared with 2019.
Its number of licensed places has since dropped by 18%, and it closed at least six centres.
Enrolment numbers across the business have also fallen, meaning it received less funding than the third-biggest provider in 2023 despite having more licensed places.
Evolve did not respond to a comment request.
Provincial Education Group (Peg), owned by Busy Bees Australasia, which is in turn owned by the Ontario Teachers’ Pension Plan, comes third in terms of the number of licensed places it holds.
However, its growth in recent years, combined with Evolve's decline, made it the second-biggest provider in terms of the government funding received last year.
Busy Bees took $100m in government funding in 2023, up 33% on 2019.
According to its 2022 return, Peg earned $70m in government funding and $53m in other income – presumably parent fees.
The results show the company turned an operational profit before financing costs of $10.4m in 2022 but recorded a loss of $6,059 because it was paying off loans.
The company has been growing in recent years, from 61 centres in 2019 to 84 this year, which could explain the borrowing.
In 2022, it paid $7.4m in interest expense on lease liabilities, according to the results. It spent $9.2m on interest expense, 10 times the amount it spent in the previous year.
Busy Bees NZ declined to comment.
Auckland’s Wendelborn family owns Kindercare, the fourth largest private provider. It received $67m in government funding in 2023, a 32% increase on the amount it received in 2019.
Its licensed places grew by 3% since 2021.
The fifth-largest private daycare provider is Educare Limited, which has 23 centres. It received $21m in government subsidies last year, 24% more than in 2019.
Government funding for New Shoots, the sixth-largest ECE business, has grown by 125% since 2019.
The group has grown from 12 centres in 2020 to 17 this year with the backing of Milford, which owns 48% of the company.
New Shoots Children’s Centre director Kelly Seaburg said Milford had made the expansion possible while providing guidance and support.
The company was now focusing on day-to-day operations and reinvesting in its services as taking on new developments had become riskier due to rising building and compliance costs.
“We want to focus on our teams rather than building newer ones. We are high quality; all the government funding we receive and more goes directly to our wages. Our largest expense is salaries."
Seaburg said she could not answer questions about the company’s profitability, and Milford did not respond to a request for comment.
Small centres struggling
While most big chains are growing, smaller services are closing at record rates.
In the year to June 2023, 237 services closed – the highest number on record – while 72 new ones opened.
Rainbow Corner's demise accounted for at least 52 of the closures.
Kathy Wolfe, Te Rito Maioha Early Childhood NZ CEO, said the rapid increase in services closing is “extremely concerning and a big risk for NZ”.
Closures impact families, with potentially severe impacts on the economy.
Underfunding is not a new problem, but it was exacerbated by the pandemic.
She said that’s when many services started dipping into their reserves or even remortgaging homes to remain open.
However, Sarah Alexander, chief adviser at the Office of Early Childhood Education, said not all closures represent a loss of service.
Three licences were cancelled for the purpose of a merger last year, for example.
She said ECE operators could run into problems that result in licence cancellation when they expand too rapidly.
Retirement, not wanting to run an early childhood service anymore, or buildings becoming dilapidated were all possible reasons for closure, she said.
Funding rewards large operators
Everything is pointing to the groups getting larger and small operators being pushed out, Early Childhood Council (ECC) CEO Simon Laube said.
He said a small centre with fewer than 80 kids on its roll is unlikely to be viable now.
Alexander said the funding system rewards large operators.
"It may be good for the business owners, but all the evidence shows it's not the best for children, and it's certainly not what parents want.
“Services know they can make money the bigger they are. From a consumer perspective, that is not quality. Parents want small group sizes and consistent care for their child.”
Black holes
Despite having one of the highest funding rates per capita in the OECD, NZ’s childcare has become the least affordable in the developed world, Stuff reported last year.
There are black holes in access, particularly for Māori, single parents, and those in poorer areas, while many community-run centres are being forced to close, Stuff found.
The previous Government sought to address these issues by introducing network management provisions in 2023.
The policy required the Ministry of Education to sign off on establishing a new centre to avoid over or undersupply in some parts of the country.
But Seymour scrapped the requirement in April, saying it made setting up new services complex and inhibited competition.
Seymour said providers and parents were best placed to decide where ECE services should be set up.
ECE business owners welcomed the move.
Disproportionate influence
NZEI Te Riu Roa Korimako Tangiata national secretary Stephanie Mills said corporatisation in the sector has led to a disproportionate influence on policy by a few large players.
It also meant a loss of diversity of services, which particularly impacts the most vulnerable or marginalised children.
For example, the number of Pasifika languages has declined in the past decade despite an increase in the number of Pasifika children.
All options on the table
Seymour said he recognises there is “great distress” in the sector.
"That’s why we’re starting from first principles with the funding formula. All options are on the table, and decisions will be driven by what’s ultimately best for the children, within the constraints set down by the taxpayer,” he said.
Additional data analysis by Murray Jones.
Read part two here.
Read more stories on the Business of Education here.