Sector snapshot: Nursery operators

CIL recently surveyed 100 nursery operators to understand the key market trends affecting the early years sector. Despite a challenging macro environment, overall sentiment remains broadly optimistic. This article explores the five core learnings from CIL’s Operator Survey.

Increased maternal employment and a growing number of nursery-age children has led to a growing need for childcare across the UK. The supply landscape has shifted towards group-based nurseries as the number of childminders has declined from 52,000 in 2018 to 40,000 in 2022, and nannies have become less accessible due to Brexit limitations and growing salary expectations.

The nursery landscape is highly fragmented – 56% of the 23,000 registered settings are run by single setting operators. These are gradually consolidating, however, driven by a growing number of nursery chains backed by external investment. This has resulted in a gradual shift to fewer, larger settings (average places per setting increased from 38 in 2008 to 47 in 2022, though volume of places remained stable at 1.1 million).

CIL’s Operator Survey found a sector under pressure, with nurseries facing recruitment difficulties and material uplifts in operating costs. In this article, we present our five key learnings:

1. Parental demand remains strong and has returned to pre-COVID levels.
2. There are increasing expectations on the quality of childcare offered by settings.
3. Most operators anticipate further fee rises.
4. Recruitment is challenging – though apprenticeships have eased some staffing challenges.
5. Despite sector challenges, operators report long-term optimism in the sector outlook

1. Parental demand has returned to pre-COVID levels, with many operators currently experiencing long waiting lists

During the nationwide COVID lockdowns, nurseries could only admit vulnerable children or the children of key workers, with demand supressed through 2020 and 2021. Operators suggest that occupancy levels have improved, with 75% of places filled in September 2022 compared to 56% the previous year, and over 40% of operators experiencing occupancy levels of 90% or above. 85% of settings report having a waiting list of a month or longer, with 52% of settings having a waiting list of at least three months.

Pressures on household finances are expected to have a mixed effect on the demand for nursery care. Recent research conducted by Business in the Community suggests that nursery care for a child under two years consumes 65% of one parent’s weekly median take-home pay.

CIL’s survey suggests 36% of operators expect demand to further increase (potentially as parents return to work earlier to support household finances), with a further 29% suggesting demand will remain unchanged. However, 35% of settings anticipate a reduction in demand as parents look to reduce household costs. Of this, only 7% anticipate a material reduction in demand. London and the South (wealthier areas of the UK with a higher density of nursery settings and places), and nurseries in single settings and smaller groups, are particularly optimistic on their outlook for parental demand.

2. Parents are increasing their expectations of childhood development within nursery settings, including greater childcare flexibility

As the cost of childcare rises, parental expectations of outcomes from early years provision have intensified. Operators suggest that parents are increasingly looking for greater communication on child progress, stronger educational input and more individual attention for their children. Similarly, parents are demonstrating increased expectations of flexibility of days or hours attended per week, reflecting changing hybrid working patterns. As a result of operational challenges, over 70% of operators now use third-party management information systems (such as Famly, Connect or Parenta) to support day-to-day nursery management and parent communication, with ~40% suggesting that they are using increasingly complex functionality within their software packages.

3. The sector remains conscious of increasing cost pressures, with an expectation that these will be passed on to parents

Managing costs is a challenge for operators. At the time CIL’s Operator Survey was launched, the government had capped energy prices for businesses for six months, though the Treasury has yet to announce any further support for the early years sector beyond April 2023. Three quarters of the operators surveyed suggested that the support package was insufficient given broader cost pressures, and two-thirds of operators suggested that managing energy costs was going to be ‘difficult’ or ‘very difficult’, compared to 57% for other costs (e.g. staff, property costs and consumables). Sector experts suggest that early years should be considered a ‘vulnerable’ industry, and therefore eligible for further support beyond the six-month support package. From April 2023, the national living wage will rise to £10.42, placing further cost pressures on settings.

In response to rising costs, most operators plan to increase fees in the next 12 months, and three quarters of settings anticipate that this will be at a higher rate than over the past year. Operators recognise that parents are increasingly cost conscious given broader pressures on household finances, with 61% indicating fee increases may be difficult to pass on, though operators broadly expect demand to remain stable.

4. Nurseries are experiencing a recruitment and retention crisis, and are increasingly looking to apprenticeships to grow the pool of qualified staff

The sector is experiencing pressure on recruiting and retaining staff, as labour competition is high, wages are low, and Brexit limits the ability to hire European staff. The Survey of Childcare and Early Years Providers found average staff turnover in private settings was 17% in 2021. In a study conducted by the Early Years Alliance in December 2021, 70% of respondents noted applicants lacked full and relevant qualifications, 52% couldn’t match salary expectations and 42% had applicants not show up for an interview. Research by Nuffield Foundation found that the average hourly wage in the early years sector in 2018 was £7.42 vs £11.37 across the female workforce and 45% of childcare workers claimed state benefits or tax credits in 2019.

To address staffing challenges, many settings are turning to apprenticeships. CIL’s Operator Survey suggests that in the past three years, 80% of settings had hired at least one apprentice, with the key reasons being to upskill existing staff (81%) and to support recruitment of new staff (65%). 95% of settings using apprenticeships anticipate continuing to do so, with half suggesting they will employ a higher number of apprentices than they do currently.

5. Current operating conditions are challenging – though operators demonstrate longer-term confidence in the sector outlook

Despite macro challenges, the early years sector has demonstrated historical resilience. The sector is critical in supporting UK employment and during the Global Financial Crisis nursery occupancy remained broadly flat. 86% of operators surveyed by CIL suggested they felt confident about the future of the sector. 98% anticipated continuing to operate in 12 months’ time, and 94% in three years’ time. A change in government may alter the landscape, as Labour has announced that childcare, including expanding breakfast club provision, will be a top priority.

The early years landscape presents ample opportunity for investors. Across the market, consolidation is anticipated to continue, with sales agents reporting buoyant market activity, and several private equity-backed groups demonstrating growth through M&A. Similarly, demand for technology and services into the sector is likely to remain high, as operational complexities drive adoption of nursery management information systems, and apprenticeships and training used to address staffing needs.

To find out more details on our latest research and sector credentials, please reach out to our Education and Training Practice.