Some over-zealous property developers adopted a “build it and they will come” approach to new childcare centres in Melbourne in the past 18 months.
That resulted in some opening with only a handful of customers, contributing to an industry-wide oversupply that has cut profits across the sector.
But the oversupply hasn’t generally resulted in fees falling, although it has curtailed the extent of price rises which had been planned by operators. Instead, there have been extra promotional drives by many operators.
A new childcare subsidy system implemented by the federal government at the start of July has brought extra complexity to childcare fees, but this has largely only changed the amount of out-of-pocket fees paid by families.
Dean Clarke, the chief executive of ASX-listed Mayfield Childcare Ltd, is frustrated. He said on Tuesday there had been a record number of childcare centre openings in Victoria in the past 18 months, and some had been empty on opening.
Those competitors had then set about trying to recruit families to attend, in an industry already saturated with too many operators. He declined to single out who had been the culprits.
“That was at the extreme,” he said. But the lessons had now been learnt and proposed new centres which had town planning approval were now not proceeding to the building phase. “You are seeing developments that are not getting to construction any more,” he said.
He predicted it may be 2020 before supply and demand was in balance again in Melbourne. “I would think that by the time it gets into check again it might be 2020,” Mr Clarke said.
Fees at Mayfield centres had gone up by around 3.5 per cent at the start of July, compared with 5 per cent a year earlier.
Australia’s biggest listed childcare operator, G8 Education, which operates 512 childcare centres, revealed a 22 per cent slide in first-half profits on Monday as it battled against oversupply.
It has been busy opening new greenfields sites. G8 chief executive Gary Carroll said on Monday that occupancy rates at the company had fallen to 70.1 per cent from 72.6 per cent a year ago.
G8 has 41,000 licensed childcare places across its operations in Australia and Singapore, meaning that up to 10,000 places are vacant.
Another ASX-listed childcare group, Sydney’s Think Childcare Ltd, suffered a slide in profits when it announced its first half results on August 22.
Think chief executive Mathew Edwards was forced to cut profit guidance for calendar 2018 because of fierce competition and the oversupply.
He said in a presentation last week “with hindsight, we couldn’t have picked a worse time to increase our investment in corporate functions across marketing, operations, finance and human resources and education and invest in our operational platform”.
Think’s net profit after tax for the six months ended June 30 was $700,000, down from $2.7 million a year earlier. But average fees per child per day increased by $13 from January, 2017 to June, 2018 across its portfolio.
Mayfield listed on the ASX in late 2016 in a public float where the issue price was $1. The shares were trading at $1.16 in mid-February but have fallen back to 90¢.
Mayfield operates 19 childcare centres in Victoria. Mayfield on August 17 downgraded its own profit forecasts for calendar 2018 to an estimated $4.4 million, citing market oversupply, softer-than-expected occupancy in July and price increases being lower than anticipated.
Morgan Stanley analyst James Bales said the softness in G8’s profit results in a market where supply was outpacing demand again was cyclical and the company wasn’t in structural decline.
But the “cyclical headwinds” indicated that those who expected stabilisation in occupancy rates before the fourth quarter of 2018-19 were being too optimistic.
The oversupply is a headache for private equity group Anchorage as it attempts to sell Affinity Education, which operates more than 160 centres.