Odd Lots - The Economics of Building a Childcare Business

Episode Date: November 6, 2023

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 of early education works, what the opportunities are, and the constraints on making childcare more abundant and affordable for everyone.See omnystudio.com/listener for privacy information.

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And I'm Tracy Allo. Tracy, the economics of care work, one of these topics that I think we're both interested in, but like news developments keep derailing our pursuit of this area, right? Things keep happening. Yeah, really. And so we can't talk about the economics of preschool. And I guess the one other time we sort of talked about it, like so much of the conversation about like infrastructure or making this economy like more productive like so much emphasis on like

the built economy the good side of the economy the good side factories and can the factories make good batteries and stuff like that but i do think that like when you look at like long-term challenges for the u.s so many things related to like child care elder care is a really big one and the sort of like the economics of these industries that like aren't going to have like some huge productivity breakthrough tomorrow where like it takes a lot of labor and they seem to keep getting more challenging for people. Right. In many respects, they seem more troublesome than some of the good side. Yeah.

I think we talked about this before, but certainly if you look at inflation numbers and if you divide them up by, you know, consumer goods versus services, the really long-term price pressures are mostly on the services side. So again, things like health care and education. And then secondly, to your point, in summary. 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. Yeah. You know, I'm sort of simplifying it. But when it comes to care work, there's this massive labor issue, which you can't just build 50 new preschools in a particular city because you would still need to man them.

And even then, even if you could get the labor to keep them going, there is a fundamental issue. with the business model itself. Totally. You know, and you mentioned the ports and you said you're oversimplifying, but I don't think so. I mean, like, you know, that is sort of what a lot of this conversation is about. You can expand them. You could, you know, repeal the Dredge Act and allow more boats into the port of Los Angeles. And in theory, you know, 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 like all old people and children. and it's something like, but that does not seem imminent. Seems rather a dystopian, though. Not imminent, but very dystopian. But, okay, so we have done an episode on this with Nancy Fulbright, 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.

Right. 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, like the stress that families feel about child care. But like in least in New York City, people were stressed about it in 2019 and 2018 and probably as long, you know, for years and years. So there's like something like deeply structural going on. And you asked a really good question in the interview with Nancy Fulbright. It's like, where does the money go?

Where does the money go? Where is the money? What is the cost? 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 child care, and yet the child care workers themselves seem to be not paid very well. So where is the money going? And I think there are many people listening who would be like, wait, Tracy knows of a place

where you can get child care for $2,000. Oh, really? Sorry. No, no, no, I know. Is that cheap? I was trying to think of something reasonable. I think that there are many people who pay. I don't know.

I actually don't know. Okay, let's find out. 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 like, where's the money going? What's it cost, et cetera? Like we just need to dive more into that. Yeah, let's do it.

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 over 120 Montessori schools around the country, mostly under the guidepost Montessori brand. He is currently technically the VP of pedagogy at higher ground education. And he knows a lot about the actual business of childcare, where the Costco, et cetera. And so, Matt, thank you so much for coming on the podcast. Thanks for having me. Matt, just to establish why we're talking, what is higher ground education?

Why was it founded, I guess, in 2016, like, sort of like, what is this business that you helped launch? 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 are a lot of Montessori schools.

There are thousands of Montessori schools in the U.S., 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, like the Whole Foods of Montessori create a new. a new kind of branding impact and a new reach for Montessori education as we understood it. Tracy, by the way, I don't think this actually caused a disclaimer. I went to a Montessori school for a few years. I'm a big fan. I really, it's not like, well, those things are, oh, I have to disclose. For some reason that doesn't surprise me, yeah.

But when I, from like eight grade one through three, for a few years, and I have, I had very positive memories of it. I think I went to technically like government preschool. It was provided by the U.S. Embassy. Oh, really? In which country were you in at that time? Oh, wow. Yeah.

Okay. 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 child care. Where is that money going? 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 100 people in a center

times the amount of tuition, that's the list price. It seems like it should either be making like 90% margins or the teacher should be getting paid more. Is that the question? I think it's more. 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. I mean, a few caveats. A lot of people don't pay list tuition. So, I mean, that is, I mean, even at very elite schools, at chain schools, there's a, 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 can be a lot lower than the list price. The kind of 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, I mean, 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 like 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've learned 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 eats up costs. And then the last bit, which is a kind of like 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. And I mean, you see this a lot in places like New York.

Like 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, is you just kind of overstaff. You end up paying everybody less. And that is the endemic problem in the early market. So that's a kind of shotgun blast overview. I mean, I think the reality is most centers don't make much money. I mean, a lot of them lose money, a lot of them close. A lot of them have razor thin margins.

And even the big centers, I haven't seen Kindercares numbers post-pandemic or the learning 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. Hmm. Can I just ask, that was a great overview and I think we're going to drill into like 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 know, you talk about sort of regulation. I imagine that must be one big risk factor and potentially quite a large expense. 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. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation, and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defense, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global technology.

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I mean, that's one aspect of it. And I wouldn't say it's like the main or the primary problem, but it's like one of the ways that the problem manifests. So let's say you've got a small center with five classrooms. Sure. And you need to have two teachers in each classroom. Let's just make it simple. Sure.

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 is callouts are just like every industry call-outs, it's 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 we have two admins and it's 14 people on staff. And two admins is very small actually for a school of the 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 just, it's a labor-intensive industry. Everybody knows that. But it's just like it's even more labor-intensive, I think, than people realize it is, at least on the standard models of it. I want to go back to something you said that a lot of sort of the chain companies that own child care centers would be cash flow negative without what money.

Did you say ARPA money? And what is that money? I mean, that's bright horizons in particular. Yeah, okay. It's some sort of COVID grant system. Oh, I see. I can't remember what it stands for, but it's, I mean, Bright Huygens 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, we struggle with as well. And in good cases, we can push the margins up. But when you're starting at school, when you've got a new center, when you're looking at like, you know, somewhere between one and three years of cash flow burn, no matter what, as you're kind of ramping up. I think that sometimes people have this impression because private equity is so interested. This was going to be my next question. Like if the margins are so thin, why is private equity so interested in this business, apparently?

I think that they're interested in it because it's kind of sticky and has regulatory modes. And I mean, what private equity does in this industry is they, it's a roll up strategy, basically. They come in and they buy centers from small businesses that are looking to sell, like schools that started in the 60s, 70s, 80s, 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 percent margins or whatever. And then they either repacketed and sell or they go public

depending on the model. And there's been a lot of passing back and forth of clusters of schools and private equity. How do scaling efficiencies work in preschools? Because on On the face of it, it wouldn't appear to me that like running 10 schools versus running one school would be vastly more efficient. 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 or coming up with a standardized operational or onboarding system or a system for betting hires. Hiring is a pain in education. Just, I mean, and this is, some of this is preschool and early childhood, but some of it's 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 like half academic, half progressive play based preschools and just try to scale them out. 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 how the funnel works. And can you do something like, you know, Montessori ran incredible schools in Rome where there were 150 students and five lead teacher. and five assistant teachers for three to six years old, that's like much better ratios.

And those programs were amazing. They were kind of world-changingly good. You're talking about the actual Maria Montessori. Yeah. When you say that, okay. Yeah, I'm talking about Montessori in like, you know, 1913 or whatever. Wow. And 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 U.S. has never, ever seen, the kind of poorest of the poor, the least privilege possible. And, you know, she had them kind of like happy, and reading and academically advanced by the time they 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 so, and she did it with relatively low ratios and, or high ratios, I guess, depending on

who's the denominator and what is the numerator? Yeah, 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 yeah, like in infant care and toddler care, like you're always going to need, you know, it's always going to be labor intensive in the sense of being a lot of teachers per student or a little amount of students per teacher. But that gets, I think people think of like,

in elementary school, you can have like a higher ratio and it can still be good. And I think that that's also true in preschool. And there are other things like that. Actually, that leads me to something that 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? 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 like order of magnitude changes.

They're small differences that do make a difference. Can you talk about, I mean, you talk about, I mean, every industry, especially these days, has had a problem with labor retention. Probably it's worse for education and service sector, child care stuff. I know that the daycare center that my kids both went to, we get an email like every few weeks or maybe every few months about this teacher is leaving. and then someone else. And so I'm pretty like aware of that.

Can you talk about like 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 like training and investment in the teachers to reduce churn? So just the state of the problem is the total labor and early childhood is still less than it was in 2019. Wow. I can't remember how much less. I think it's like 5% less.

But it's, you know, there was a. slowly steadying increased curve as there often is, and 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 percent, 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 think more, I can't remember exactly how much more than 25 percent, 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. So, I mean, wages aren't going to double. Like 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 like, 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. Like you feel like you're watching a bunch of kids and you're running out the clock. And that's just, I mean, even if you love children and I love children, and I've done this kind of work, it's like 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 like 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. There are others that kind of take it that seriously. Have there been, you know, throughout your career, any shifts in the demographics of people who work at preschools? Like, did it used to be an older cohort and now maybe it's younger or vice versa? That's a really good question. anecdotally, I feel like it's gotten younger, but I also, I mean, I've been in this industry for about 10 years, so not that long. But even though I feel that way, like when I'm thinking about the teachers that we're training and the teachers in our schools, like it still really

is the full range. So you did see a lot of retirements right around when COVID hit. Right. 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, or whether that's here to stay. Yeah, that's a good question. I want to go back to ratios. And, of course, you talked about that, you know, in theory, as Maria Montessori showed, 110 years ago, maybe you don't need as many teachers, you know, 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 and et cetera, like you want, you know, 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, the differences you see from state to state? I mean, some of them are in ratios, but some of it is just like, I mean, 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. Huh. For children under 18 months. I mean, it needs to be on the ground floor and you need to have two 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. I'm pretty sure. I'm pretty sure my, I think at least one of my kids was in that program before 18. I'm overstating it. It's not illegal. No, I know.

It's not. Yeah. It's legal. It's just hard, especially if you're kind of, of looking at kind of entrepreneurial one-off, one-off operators. 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, the space requirements. We have, 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.

open a lot of new centers is there's a construction process that has to happen with almost any space and that means that you need certificates of agency 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 you know 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 like 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. 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, you know, 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, right? and 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 like a little bit of insulation there? We compete on costs for sure.

I think at the at the ultra elite level like West Side Montessori or the kind of storied New York preschools where people are like, this is a, you know, they think of it as like 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 that's, it's too much and you have to backtrack. Like, we face, we face price competition. Oh, so if you raise prices too much, you do see attrition of kids. Oh, yeah. Huh.

Yeah. Definitely. I find it interesting that you find that surprising, where you kind of under the impression that that was. Well, I thought it was, you used the word sticky before and I kind of assumed like 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, that they would be very motivated to stay in that school. Let's say that you're doing infant through preschool and a typical case. So we do for one age of zero through six, but say you're doing like 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 like you're the 25% of your new families are new families and you have to compete for those families 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 increases. We do have rate increases, but we say like we have a rate sheet and you sign up for it and you know transparently what they're going to be. So you walk in those rates. If you

lose half of those families, like your business is sunk. Like that that's part of what it means to be in a business where, like, you make money on the last four families that are enrolled. I hadn't thought about that dynamic that just by definition, any, like, 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? Yeah. And if you're kind of mental model is K-12, you might think, oh, you're, like, losing 10% or 8% or whatever.

But, like, really, you're losing, like, a fifth, a quarter, a third of your students every year. and that's if you've got a really healthy pipeline coming through. Like that's kind of what you're shooting for. That's a success case is that you're graduating students. So I know like every American considers themselves to have been raised middle class. But I was, so, but and I definitely include myself in that category and the years that I went to Montessori school, I was living in Juliet, Illinois. I had a lot of friends there whose families were unambiguously middle class. These days, when I think about like Montessori schools, I do not think that like, oh, you're like, oh, you have to be rich to go to a Montessori school or some sort of like anything that sort of has the vibe of like progressive education.

I just assume as 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 20, they could have sent their kids to a Montessori school. So cost of child care has gone up. Yeah.

Cause 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 and it's like education, healthcare, and then like, you know, food is flat. And then something like electronics is like, you know, deflation. Yeah. So, yeah, 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 as to as to, 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 there is, A, there's more public funding now than there's ever been at the early childhood age. B, it just varies so much by location.

I mean, if you're kind of pegging on New York City. Yeah, I admit that like the economics of school, a monastery school in New York City, where everyone is like crazy status obsessed and thinking that they need to get their kid 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. Yeah, I mean, New York is very bimodal. And New York is like head start programs or like, you know, $2,500 a month would be cheap, you know, for the kind of other end of. of the range. But in like Dallas, like you can get good daycare for $1,200 a month, $1,000 a month.

And maybe some of that would be a little bit subsidized. And then you're looking at $800 a month. And then all of a sudden it starts to look a lot cheaper than like an any and like totally worth it to like get a job, even a kind of middling pay job and send your kids to school. That's what it enables you to do. So I think that the range is probably bigger than your thinking, but has it gotten worse? I think it's probably gotten a little bit worse. Yeah. 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 Fulbright, who argued that one of the reasons why child care costs are going up is like, yes, okay, labor costs have been going up. But there's also this selection bias at play, which is if you cannot afford child care, you opt out of the market entirely. Maybe you find a family member who can look after.

after your kid or maybe, you know, you don't work anymore and just leave the labor market all together. 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? If I understand the point correctly that there's a kind of step function where it's like you're either, there's a threshold below which you're not considering paying for child care. Yeah. And there's a threshold. And that threshold has probably gone up, right? Yeah, I think that that's, that's true. There are kind of interesting little submarkets of the early childhood space, like at home care or in home care where like a teacher runs a program out of their home. And they might take like three students or five students or something like that. I think that if you wanted to kind of lower that threshold of and the kind of cost threshold, I think you would have to think about how do we see a lot more of that kind of model where you've got a neighbor, like, where you're a lot of neighborhoods have schools where like a mom whose kids have gone to college, like walks after

three or four toddlers and kind of what are the economics of that. That is, I mean, that is not usually either illegal or not or kind of highly regulated. And it's just, it's also 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 almost certainly does. You know, it feels like there's this whole range. There's the heavily subsidized schools. there are the sort of mom and pop schools that were like, you know, maybe in the 1960s or 1970s and someone set up a school that's sort of like out of their house. And I think my sister went to one when I was growing up. Like it was literally like in our neighborhood.

It looked just like a house. And then there's all these like private equity ones. Like do you have like this sort of like broader. What does the whole like market look like? How much has it gone corporate versus say 20 years ago or so forth? It's mostly mom and pop. Still. Yeah.

I think the official numbers are that it's like a $70 billion 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 dollar total addressable market, early childhood centers in the U.S., and you could broaden that to be like $200 billion if you included just nannies and other kinds of child care expenses, kindergarten is like a $7 billion revenue, and it's the biggest by far. Okay. And then you have learning care group and Bright Horizons. That's another $7 billion spring.

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 often, it's unusual for there to be like a public preschool in the sense that there's a public school. But most, I mean, the kind of chains, like, I mean, you know, we're a drop in the bucket. Right. You know, higher ground schools.

It's a huge market and it's very, very fragmented. The biggest players are like, you know, the biggest company takes up like less than 5% of the market probably. Hello, I'm Michelle Hussein and for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day. To spend more time with the people shaping our world. And that's what I'm doing here on this podcast. speaking to people from Nigel Farage. This is a love you trying ever so hard.

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to the Michelle Hussein show from Bloomberg Weekend. wherever you get your podcast. You certainly ask interesting questions. You said something earlier that many daycare jobs or child care 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 like, as you say, like they're sort of a babysitter waiting out the clock and waiting for the parents to like pick them up. And then the day's over.

Can you like talk a little bit more about the structural, challenges that pose because at the end of the day, like there just seems to be like this mismatch. Like, and who is going into, you know, the supply of future teachers? Like, who is going into this career and like, 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? So the people that go into the 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. That seems like a bad combo. It's a bad combo. Yeah. Yeah. 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 like 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, like 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. Like, 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 like how do you get people to see? see working with small children as like important. I mean, this is the problem that mothers and is tied into with all sorts of other social issues on 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? Like how do you make it so. I laugh there because like it's funny, but it is funny in the sense that is the education good often it feels like is the second. secondary or tertiary question, even though we are talking about schools here. And I think, I mean, most education isn't good, as my view. Certainly most early childhood education isn't good.

And it's very far from great, even if it's like passable. You know, it's not great. And 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. This is why I'm such an evangelist about Montessori and developmentally informed education and kind of like 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. I mean, 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 then. 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, that is a calling for a certain kind of person.

So just on that note, you know, 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, you know, 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? 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 of 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 like, we've become more atomized as a society. So like we don't know our neighbors. And like if you've got two working families, you need help with child care, 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 child care. To the extent that that's true, I think that's probably a half truth. I'm kind of skeptical of kind of atomization narratives. And I'm generally skeptical of like, there was a golden age where child care was great. Right, right. Where you could take your kid to your neighbor. Yeah. But to the extent that that's true, I do think that there need to be kind of different

operating modes for early children. childhood where I mean we were doing things like we are running preschools in neighborhood houses we'll rent a house like a five bedroom house we'll move a preschool teacher into that house and we'll say we'll pay your rent and like you know in three rooms on the first floor like you run an early childhood neighborhood center and like that 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 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, like it's getting disrupted. And that goes all the way down to child childcare and early child care. And there's a question as to what it looks like. What do microschools look like? What are the whole range of homeschool options? How do you at expertise in this area. It requires thought and innovation. And it's, 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, it's like 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. So I just have like one sort of last question. And maybe it's sort of very ties into this, what you were just talking about. But like, you know, people have this idea. And I think for like good reason that we should have publicly funded child care 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 to education, but also a big part is just this.

sort of public, this free child care, but only once the kid turns like five or six or whatever the exact age is. So let's say like we wanted as a country like this is, this doesn't make any sense. Like why do we only start this at age five? We want to start it from like day one or, you know, month three or whatever it is. What would be the biggest constraints to being able to make that happen? So I'm very skeptical of that solution both like philosophically and politically, but also operationally. I would say and I should also say there are people, especially people in the Montessori world to think that is the solution. That is obviously the solution is 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 a specific, but they don't need to think about learning in terms of like a job or some vocation. This is just what that age is.

The kind of six to 12 age especially is, is the school age and it 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 like middle school age historically. But this kind of like 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 is it would be a

developmental disaster. That's my thesis. Well, Med Bateman, really appreciate your perspective. Obviously, sort of like 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 like, well, ratios and multiple points of egress in one state or another. Really appreciate you coming on the podcast and talking about the business. Thank you for having me.

Thanks so much. That was really interesting. Yeah, thanks, Matt. That was great. Tracy, I thought that was really interesting. I mean, I think like simple, like, You know, the economics, as he described it, are like, yeah, you pay. And then it's like wages and rent, et cetera. But then like when you think about like management costs and I, you know, floaters and I've certainly seen this and substitutes and churn, et cetera, you could see how it's just like, like an incredibly like inefficient, complicated business.

Yes, which is why I'm still kind of surprised that there seems to be so much private equity. Yeah. interest and like a belief in scaling it up. Although I do take the point about like, 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 costs and the idea that like, well, naturally just by attrition, you're sort of losing students every year. That's something I hadn't considered before.

Yeah. The fact that like so, right, like as you said, K through 12, hardly any graduate in a year. But if it's like a two or three or four year program, like, you're always losing students and always having to pull in new ones. Also, you guys are so down on robots watching kids, but I have distinct memories of my parents leaving me alone with, like, a Teddy Ruxpin doll in 1985 for hours to entertain me. So it's already happened.

The robots are already here. It's funny to think. They're called iPads. 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 to say that because he's like, oh, there's never really a golden age. But maybe the golden age is when, like, people are just more chill about this stuff.

Okay. No, seriously. People are so neurotic, you know, the parents are, like, so neurotic. No, it's like the child has to be learning something all, like every minute of the day in preparation for, you know, their future success. Whereas you could just sit them down with, like,

I don't know, a light bright or something. I'm giving away my, my 1980s or childhood. It's crazy that like if you have a two-year-old, you're like thinking about it on the Harvard track. That's crazy. No, that is. That's crazy. No, I agree. Completely. Shall we leave it there?

Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. You can follow our guest Matt Bateman. He's at M. Bateman.

Follow our producers, Carmen Rodriguez, at Carmen Armin and Dashel Bennett at Dashbot. And check out all of our podcasts under the handle at Podcasts. And for more Odd Lots content, go to Bloomberg.com slash Oddlots, where we have transcripts, newsletter, and a blog. And check out our Discord. Discord.org.g. Slash OddLods. Listeners like yourself chatting 24-7 about all of these topics.

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