Bankwest Future of Business:Focus on Childcare

2018

Contents

Key insights

Industry overview

What’s driving industry growth? Spotlight on Australia

Spotlight on Western Australia

What does the future hold?

What challenges does the industry face?

Where do the opportunities lie?

Forecasted industry growth

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Key insightsForeword

Understanding factors impacting your industry, and how other businesses in your industry are performing, can be a great gauge for how your business is tracking.

The Bankwest Future of Business: Focus on Childcare Report is designed to give you a snapshot of the current and expected future state of your industry, which could help you plan and spark ideas. The report covers Australia’s childcare sector, summarising trends based on statistics from IBIS World, the Australian Bureau of Statistics and other reputable sources.

More than 1.2 million children are enrolled and attend a childcare centre across Australia, with the majority of those aged between 0 and 5. Record female participation in Australia’s labour market and the growing number of children aged between 0 and 12 saw revenue grow by 12.0% to $12.4 billion in the year to June 2017. This created an 8.1% surge in childcare employment in the year to August 2017.

The significant rise in industry revenue comes despite sluggish income growth and declining fertility rates across the nation. Western Australia continues to experience strong growth in the childcare sector, with the state recording the highest increase in number of childcare

centres in the three years to December 2016 of 29.4%. Additionally, WA has the highest fertility rate of all mainland states of 1.87, giving investors’ confidence that yields will outpace those on the east coast in the future.

Looking ahead, the number of children aged 12 and under will grow by 7.8% in the five years to June 2022, creating the need for 100,000 more childcare placements across the industry. However, growth will not simply come organically. Providers have the opportunity to diversify their service and activity offerings to drive revenue growth.

Additionally, increased demand for vacation care and family day care centres, as well as the new Family Assistance Bill will create greater need for childcare centres to understand their customers and whether they should position themselves as having a cost competitive or value add focus.

Foreword

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There are approximately 1.2 million children across Australia using government approved childcare services and this figure is growing. The rising number of parents using childcare services has underpinned revenue growth of 12.0% to $12.4 billion in the year to June 2017 and employment growth of 8.1% during the same period.

Industry overviewThis report covers the childcare industry, which includes long day care, family day care, vacation care, occasional care, in home care and out of school hours care (OSHC).

There is a growing appetite for parents enrolling their children in childcare outside of school hours. The number of children attending vacation care increased by 15.7% in the year to December 2016, while OSHC increased by 7.3% during the same period. New regulations affecting educator to child ratios in family day care centres in January 2016 saw the number of children attending family day care centres fall by 3.2%.

Breakdown

Revenue

Employment

Number of providers

Customers

2016: 141,100

2016: $11.1 billion

2016: 10,059

2015: 1,188,218

2017: 152,500

2017: $12.4 billion

2017: 10,400

2016: 1,220,549

8.1 %

12.0%

3.4 %

2.7%

2015 2016 % Increase

Number of children attending childcare by childcare type:

Long day care

Family day care

Vacation care

OSHC

Total

660,602

196,216

181,363

323,913

1,188,218

677,237

190,000

209,798

347,685

1,220,549

2.52%

-3.17%

15.68%

7.34%

2.72%

Source: Productivity Commission 2017

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Growth in the number of children aged under 12 is driving demand for childcare in Australia.

Total children under 12 = 3.7 million

1 Refers to growth in population in five years to June 2016

What’s driving industry growth?

Revenue growth in childcare has far outpaced the increase in Australia’s under 12 population. A notable driver of this has trend been an increase in Australia’s female participation rate to 59.9%, up 1.2 percentages points in the five years to October 2017.

The introduction of flexible working practices among Australian employers is allowing parents to stay in the workforce and use childcare when required. The number of Australians who cited workplace flexible working options as important in accepting a job increased by 21.0% in 2016.

Female participation rate (2012 - 2017)

60.0%

59.5%

59.0%

58.5%

58.0%

57.5%

57.0%2012 2013 2014 2015 2016 2017

Source: ABS 6202

More services offered by childcare services

How are childcare services driving revenue growth?

Longer opening hours

Greater flexibility in length of session times

Under 2 Under 12Under 6

7.5%

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Spotlight on AustraliaChildcare centres have had to deal with rising costs due to regulation requiring lower educator to child ratios and increased skill requirements for childcare facilities. Childcare services saw costs rise by 29.2% in the five years to September 2017, compared to an average of 18.9% across all industries.

Rising demand for childcare services saw costs for long day childcare rise by 3.7% in the year to December 2016 and 9.5% compared to 2014. Growing childcare use has also coincided with a decline in the use of informal care (i.e. babysitters) over the last 10 years.

Families are preferring more intimate care arrangements and longer operating hours, with some childcare centres mixing the ages of children within the rooms to simulate an ‘at-home’ environment.

*All industry is average of health care and social industries for which data is provided from the ABS

Family day care centres have seen the largest growth in approved services, growing by 77.6% in the three years to December 2016, likely driven the new National Quality Framework (NQF) standards.

Growth rate in services (2013 - 2016)

Producer Pride Index, Childcare & All Industry (2012 - 2017)

100%

80%

60%

40%

20%

0%

-20%Long day Family day Vacation day OSHC Occasional In-home Total

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Source: Productivity Commission 2017

140.0

135.0

130.0

125.0

120.0

115.0

110.0

105.0

100.02012 2013 2014 2015 2016 2017

Childcare services All Industry*

Source: ABS 6427

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NSW 15.3%

QLD 10.1%

NT 11.6%

WA 29.4%

SA 8.7%

TAS 1.1%

ACT 17.1%

VIC 15Australia 14.6%

Spotlight on Western AustraliaWestern Australia has seen the largest increase in new childcare centres in the three years to December 2016, rising by 29.4%, with the next largest increase of 17.1% in the ACT.

Western Australia’s strong growth in childcare has been underpinned by the highest growth rate of its population under the age of 12 nationwide. The number of kids under 12 in WA grew by 11.9%

in the five years to June 2016, compared to the national average of 9.7%. This trend is expected to continue, with WA’s under 12 population projected to grow by 14.8% in the next 5 years, compared to an increase of just 7.5% nationally.

Increase in childcare services 2013-2016 (%)

Source: Productivity Commission 2017

.7%

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Growth in Australia’s younger population will underpin strong growth in the industry in the next 20 years, providing opportunities for all childcare centres to grow.

The Family Assistance Bill

What does the future hold?

From 1 July 2018 the childcare subsidy will replace the existing childcare benefit and childcare rebate. The government’s childcare fee assistance is expected to rise by 38.8% in the four years to June 2021 to $10.0 billion, up from $7.2 billion in June 2017.

Government childcare fee assistance to increase

Activity test2 to assess maximum hours of subsidised childcare for studying, working or training parents

$1 billion safety netfor families earningless than $65,710per annum

Capping subsidies to limit price increases

5.0

4.8

4.6

4.4

4.2

4.02017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037

The introduction of the new Family Assistance Bill will drive industry revenue as well as establish a two-tiered system, creating a need for childcare centres to understand if their customers have the capacity to pay beyond the subsidised rate.

Australian population aged 12 or under (2017 - 2037)

2The new activity test will determine the maximum number of hours of subsidised care a family will receive. This is based on several activities including hours of paid work, training, studying, volunteering and paid parental leave.

Source: ABS 3222

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The success of Australian childcare providers will depend on their ability to overcome industry challenges and retain quality staff. Australia’s childcare industry experienced several strikes in 2017 due to:

3 Australian Children’s Education & Care Quality Authority 2017

What challenges does theindustry face?

Despite large adoption of increased requirements imposed under the NQF, as of November 2017 25.2%3 of childcare services were still working towards satisfying the new standards.

Adoption of NQF

Exceeding NQS

Meeting NQS

Working towards NQS

Significant improvement required

Stagnant wage growth

Smaller educatorto child ratios

Longer opening hours

Overall quality ratings

(Australia November 2017)

Source: Australian Children’s Education& Care Quality Authority 2017

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Where do the opportunities lie?Australia’s childcare industry is in a growth phase, however limited barriers to entry, regulatory change and low wage growth mean childcare centres must constantly look for opportunities to diversify, grow and add value.

Childcare providers should consider offering value-added services and activities to drive revenue growth and play a larger role in secondary education services. Activities that some providers are looking to introduce include:

Projected growth in Australia’s childcare population

Future growth in Australia’s younger population continues to create opportunities for childcare centres to cater to the care needs of parents of the under 12s.

Growing concern with nutrition and meal options at childcare centres is creating an opportunity for centres to promote and provide balanced eating options for children and differentiate through their menus. A recent study found that only 5.0% of childcare services were satisfying Australian government nutritional benchmarks4.

Secondary language classes

Sport classesCooking

activities

4 Healthy Australia 2017

A more subdued property market, the largest fertility rate of all mainland states of 1.87 and strong investor expectations are tipped to provide strong yields for WA childcare centres upwards of 6.0% in the short term.5

5 Ray White 2017

Nutrition

6.8%

10.5%

17.9%

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Continued growth in Australia’s younger population, rising female participation rates and increased service offerings will drive industry demand with revenue projected to reach $16.4billion by 2022, a 32.4% increase on the June 2017 revenue of $12.4 billion.

Forecasted industry growth

Growth in industry revenue will outpace growth in providers, leading to a 18.7% rise in the scale of providers in the five years to June 2022.

Childcare revenue in Australia (2007 - 2022)

Revenue per provider (2012 - 2022)

1816141210

86420

ProjectedActual

Source: IBIS 2017

$1,600,000

$1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0

ProjectedActual

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

Source: IBIS 2017

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SourcesAllday, A. Babysitting and Other Personal Services in Australia, IBISWorld, November 2017

Australian Government Productivity Commission, Volume B: Childcare, education and training, Canberra, 2017

Australian Bureau of Statistics 6291.0.55.003 (December 2017), Labour Force Australia Detailed Quarterly, Nov 2017, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6291.0.55.003Nov%202017

Australia Bureau of Statistics 3101.0 (September 2017), Australian Demographic Statistics, March 2017, Table 1, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/3101.0Mar%202017

Australian Bureau of Statistics 6202.0 (January 2018), Labour Force Australia, December 2017, Table 1, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Dec%202017

Australian Bureau of Statistics 3301.0 (December 2017), Births Australia, 2016, Table 1, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/3301.02016

Australian Bureau of Statistics 3222.0 (November 2013), Population Projections Australia 2012 (base) to 2101, Population Projections Fact Sheet, available at: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/3222.02012%20(base)%20to%202101

Australian Government Budget 2017-2018, Budget Paper No. 1, Canberra, 2017

Australian Government Department of Education and Training, The New Child Care Package, 2018-01-22

Australian Children’s Education & Care Quality Authority, NQF Snapshot Q3 2017, Sydney, November 2017

Harrison, S. Childcare centre asset class heats up in WA, new Ray White Commercial report shows, Ray White, November 2017

ManpowerGroup Solutions, Work for Me Understanding Candidate Demand for Flexibility. Sydney, 2017

Mullaly, J. Preschool Education in Australia, IBISWorld, February 2017

Richardson, A. Child Care Services in Australia, IBISWorld, March 2017

Wilkins, R. The Household, Income and Labour Dynamics in Australia Survey: Selected Findings from Waves 1 to 15, Melbourne Institute: Applied Economic & Social Research & The University of Melbourne, Melbourne, 2017

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At Bankwest, we knowthat Business Bankingis about more than justfinancial solutions.

Speak with one of our Business BankingSpecialists today. Call us on 13 7000.

We provide banking solutions to many of Australia’s leading businesses, including those in childcare. Whether you require straightforward banking or a more customised solution, our team of experienced banking specialists can help.

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The information contained in this report is of a general nature and is not intended to be nor should be considered as professional advice. You should not act on the basis of anything contained in this report without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report.

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