This blog concludes our series on the “3 Major Risks” in the industry school operators are now facing with their businesses. 

This business risk is, of course, unlike the first and second risks in that it is not new to the industry. However, this dramatic increase in new school locations is happening in a period when the birth rate in the U.S. is not nearly as strong as in past periods, and that is creating concern in the industry about the new supply of spaces far outnumbering demand.

The leading source of the new school locations and facilities has been generated by the huge expansion of franchisors in our industry (as has occurred in many personal service industry types). However, this is not the sole source of “new build” schools coming on-line as the industry’s largest operators — which are owned by Private Equity Groups (PEGs) — by their basic business model, must create rapidly growing revenue.

Some of this revenue growth demanded by shareholders of PEGs can be satisfied by the acquisition of other school operating companies, but all these companies must also create additional locations that can expand their revenue.

Lastly, almost daily, we see individual operators already in the business creating new facilities, many times to replace older facilities that have become seriously outdated. In sum, these different sources are combining to create a major increase in competition from their new facilities. These new facilities are very impressive outside and inside, and, obviously, offer advantages to these operators in attracting parent customers.

Again, new-coming competitors to an operator’s longtime trade area is a major business risk factor which existing operators have no control over. Unfortunately, Bailey Routzong sees this occur in community areas where there is not the population nor new rooftop growth to accommodate those added spaces in the trade area. In those scenarios, all operators in the trade area lose.

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