Children’s nurseries has been, for some time now, quite low down in Aldwych Partners’ assessment of where CMA intervention risk lies in the health and care sector. The industry appears highly fragmented with more than 27,000 sites and, according to Nursery World, only 1,700 owned by the 25 largest operators.
Developments in recent months, however, are starting to change our view.
At a macro-level, the cost of living crisis has seen the Government searching for ways to ease the pressure, and childcare is an obvious sector to focus on. Recent reports show: (i) the high cost of childcare in the UK compared to other countries; (ii) the large share of household expenditure it accounts for; and (iii) the impact it is having on labour force participation, particularly for women. (A hat tip to Sarah Long at Euclid Law for her work highlighting these issues.)
That said, there is no easy way of bringing childcare costs down.
Supply-side reforms, such as easing staffing requirements children’s nurseries, or aiding the expansion of informal childcare in domestic settings, tend to trigger concerns about the quality of children’s care (as the government has seen in recent weeks). Easing immigration requirements for childcare workers, to reduce staffing shortages and increase placements, runs counter to broader policies on migration. Increasing childcare subsidies is expensive and, as the Financial Times has pointed out, successive increases in expenditure on subsidising childcare seems to have done little to reduce the actual cost for families.
In the presence of such a conundrum, a CMA market review is an easy tool for the Government to reach for. It is low cost (for the Government, if not for market participants), and can be used to complement other initiatives or feed into decision-making about measures to be adopted. A CMA review may also be attractive as an alternative to recent calls for an independent review into early years funding and affordability.
The Government may also like the potential for the CMA to tackle issues untouched by other reviews. For example, the Department for Education’s 2015 review of childcare costs identified significant efficiency opportunities in children’s nursery services without exploring why, if there is a competitive market in these services, these efficiencies are going unrealised.
At the same time as these macro-level drivers for a CMA review, the CMA’s own interest in reviewing the sector may well be sparked by the stories that are emerging at a local level about poor customer experiences. Just this week a children’s nursery in Bedfordshire was reported to have increased its fees by 200% and given customers 24 hours to decide whether to pay or take their children elsewhere. A month or so ago it was a 50% price hike by a nursery in Swindon. Moreover, the CMA has already fired a shot over the bows of the sector, with a reminder during the covid pandemic of the obligation to comply with consumer law.
A final straw in the wind is that national-level market shares, which appear to show a highly fragmented industry, may be masking some quite interesting developments, from a CMA perspective, in market concentration at a local level. In particular, the share of the national market supplied by nursery groups (i.e. children’s nursery operators with multiple locations) appears to have increased from a quarter of the market in 2015 to around half the market in 2021. As a result, the CMA may be concerned that market power is already accumulating in hyperlocal markets and, combined with high switching costs for parents, this is enabling higher prices.
Taking all these factors together, our view is that the likelihood of a CMA review of children’s nurseries in the short- to medium-term has increased significantly. Consistent with this, our view is that operators in the sector could usefully review their operations and M&A activity to mitigate the risk of CMA intervention.