There is an undeniably strong demand for child care services in Cook County. The problem for day care center operators is affordability and profitability, particularly in low-income areas. Relatively few people qualify for government subsidies and there is increasing pressure for higher wages of day care staff. Compounding the problem for small operators is a trend to larger day care facilities due to economies of scale.
The Illinois Action for Children 2014 Report on Child Care indicated that there are approximately 142,823 slots available in formal Childcare Centers or Licensed homes in Cook County. The number of children from birth to twelve with both parents working is 647,779. The number of slots available as a percentage of children in need is only about 22%.
The problem is cost. An infant costs $247 per week (about $12,800 per year) and a five-year-old averages about $175 per week (or $9,100 per year) in Cook County. The U.S. Department of Health and Human Services considers child care affordable when costs do not exceed 10% of a family’s income. In Illinois it would take more than 50% of a full-time minimum wage worker’s income to support a four-year-old in child care.
Before the Illinois budget crisis Child Care Assistance Program (CCAP) for a family of two earning up to $2,456 per month could qualify. Starting July 1, 2016 the new emergency CCAP requirements were started meaning a two-person family can now only make up to $664 per month to qualify for aid. Currently 90% of new applicants for Illinois child care aid are now deemed ineligible. In order to manage the State’s finances during the budget impasse, the Rauner Administration wants to make the CCAM eligibility changes permanent.
Cost StructureAccording to Illinois Child Care: Developing Center-Based Programs, the following averages reflect typical operating expenses for a child care program after start-up.
Occupancy (building, utilities...)
Other services (accounting, legal, training, transportation)
Further Pressure - Industry Trends & Real Estate
Helburn and Howes in The Future of Children: Financing Child Care found that “…economies of scale exist in child care. Centers that had longer hours of operation, operated at closer to capacity, or served larger number of children had lower expended costs per child per hour with no apparent ill effects on quality of care”. IBISWorld reports that “…increasingly, larger operators are competing on the basis of square footage and are changing their location prototype to high-profile locations, with locations averaging between 18,000 and 30,000 square feet.”
Larger facilities can generally offer more services (early and late pickup, extra child development services) at a cheaper cost than smaller ones. Regulatory burdens can also be more efficiently managed with the advantage of scale. This will put small operators at a competitive disadvantage to larger operations, particularly in the face of very limited state funding.
An Industry in Crisis
The Illinois Action for Children estimates that approximately 5,000 child care providers comprise the formal child care sector in Cook County. The industry is highly fragmented and profit margins in poorer areas are low. Many owner operators in lower income areas simply do not have the resources to cope with the severe cutbacks in day care eligibility or compete against larger facilities that are more efficient. They do not have the luxury of waiting for what could be years for Illinois to put its economic house in order.From a more concrete valuation perspective, the analyst can also look at the rent and utilities as a percentage of total sales. If the rent and utilities are more than 15-20% of a small operator’s expenses (or 25% for large operators), it could be an indicator of trouble.