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Monday, 13 October 2014

Marketing case study: The rise and fall of ABC Learning

The rise and fall of ABC Learning

Geoff Fripp, university of Sydney

ABC learning was publicly listed in 2001 with a portfolio of 43 childcare centers and market capitalization of $25 million. Over the next seven years, the company expanded to more than 2000 centres (making it the largest listed childcare centre in the world), across three continents, and peaked at a market value of over $4 billion.
Yet despite this spectacular growth, in November 2008, ABC entered voluntary administration, owing around $850 million in debt. Did ABC simply ride the share market rollercoaster, eventually becoming another victim of the financial crisis, or were there other factors influencing its rise and fall?

Company beginnings
Eddies Groves and his wife Le Neve founded the business in Brisbane in 1998. Eddie was entrepreneurial and had experienced success in milk distribution, which provided the capital to enter the childcare industry. His entrepreneurial nature would play a major role in the firm’s future growth plans. Over time, Eddie would be associated with various businesses and shortly before the demise of ABC, was listed as Australia’s richest person aged under 20. His wife also had a major influence on the company. Le Neve had an education background and would eventually complete a PHD subsequently; education programs became a key part of ABC’s market positioning.

Environmental factors
Demand for childcare has steadily increased since the 1970’s driven by the changing role of women. Women are now better educated, more career-focused, and are generally starting their families later. This social change, combined with the need for two-income families due to high home prices, has created a strong incentive for women to continue to work after having children.
The federal government has also been very supportive of childcare and provides subsidies through the Child Care Benefit. In 2004, it also introduced a childcare tax rebate scheme, which covered 30 per cent of the expenses of approved childcare. (this increased to 50 per cent in July 2008.) therefore, almost 60 per cent of industry revenue is from government subsidies, reducing the price sensitivity of consumers and leading to increase in fees.( For instance, ABC increased its fees by 11 per cent when the rebate rose to 50 per cent.) The government has also been encouraging people to have more children. In 2004, it introduced a ‘baby bonus’ scheme under which new parents received a lump sum payment.
It is the state governments’ responsibility to regulate the industry and grant licences to childcare operators. To be accredited, centres need to employ a number of qualified staff, maintain certain staff-to-children rations (such as one carer for five babies, in most states), have suitable facilities, and so on. These government requirements ensure that ht childcare industry is labour intensive, with a high underlying cost structure.
Another in influencing environmental factor has been the economy. From 2001 to 2003, the Australian All Ordinaries price index remained around 3200. However, the stock market boom form 2004 saw the index more than double by 2007. This provided the opportunity for many companies to grow, often through the easier availability of finance. However, the worldwide financial crisis eventually took its toll, and by the end of 2008 the index had returned to around 3500

Growth at all costs
ABC always pursued a growth strategy. As can be seen from Table 1, it roughly doubled the number of centres each year. Although the company had achieved a 20 per cent market share in Australia, it was concerned about its limited potential and the extent to which the government would permit it to grow. While ABC targeted 1500 centres in Australia/New Zealand by 2010, it saw more potential in the United States and United Kingdom.
The US and UK markets were targeted as they were culturally similar, were large and growing and had government incentives. ABC’s 1000 or so centres in the US represented a 2 per cent market share and were only considered as an initial footprint in the market.

Local and international marketing strategies
While growth was a centerpiece of ABC’s strategy, this approach contrasted with the traditional view that childcare centres require close hands-on management. As a result, ABC’s rate of growth was unparalleled by any other operator in the world.
The company’s growth in the Australian market resulted in extensive market coverage, with some centres being located close together. While this may have been an unintended outcome of its growth strategy, ABC has been accused of deliberately cluttering a market in order to drive out competition. In addition to growing through acquisitions, ABC partnered with large corporations to provide childcare facilities for their employees. The underlying logic for ABC’s emphasis on growth was that it would deliver significant efficiencies, an approach that had proven successful in the retail and fast-food industries.
In addition to its growth goals, ABC emphasized education and introduced the first national curriculum for preschoolers in Australia. Its educational emphasis was also extended internationally, where ABC offered different curriculums across its various brands.

TABLE 1 ABC Learing Centres by country, 2001-07
New Zealand
United States
United Kingdom

ABC had initiatives to retain staff, such as providing them with regular training. It also introduced across –the-board health insurance for its US-based employees. Such measures enabled ABC to claim that it had the lowest staff turnover ratio in the industry.
In the US market, ABC used multiple brand names, preferring to maintain the branding of the chains it acquired. One such chain was the La Petite Academy, which had more than 600 centres. As a result, the company’s US centres had a variety of market positioning, locations, educational choices and pricing. It was believed that this approach would provide greater potential for market dominance in the longer therm.

Questionable corporate governance and accounting
Unfortunately for ABC, its significant expansion inadvertently led to concerns regarding its accounting practices when its auditors, who were unable to continue to provide services as they lacked international capabilities, were replace with Ernst &Young.
The new auditors took a different view on the income items, particularly developers. When ABC acquired a childcare facility, it was common for a developer to provide a fee guarantee. These fees ensured that the centre was profitable, regardless of how many children were in the centre. The new auditors determined that these payments were not income, and it became apparent that ABC was losing money on its day-to-day operations. On further analysis, it appeared that the firm hadn’t generated an overall profit during its seven years in public life. The practice also resulted in almost $3 billion of childcare licences being reported as intangible assets in the company’s balance sheet representing munch of its $4 billion in total assets.
In addition, there were some concerns about corporate governance practices. For example, in 2006 the company awarded a $74 million contract for the maintenance of its centres to a business run by Eddie Grove’s brother-in-law. The contract was untendered and wasn’t passed by the board for approval.

Costly business model
While ABC’s goal was to achieve economies of scale, the structure of its business appeared to add many costs. With 39 companies in the group, it had to bear major corporate expense; it also required the use of outside support (such as recruitment firms, as it had in excess of 16000 employees). And it purchased some supplies through associated companies.

Final days
When ABC released its last full annual report (2006/07), it announced that income had almost doubled to $1.7 billion and profits were up 76 per cent to 143 million. However, in February 2008 its half-yearly results showed reduced profitability and a major increase in debt.
In order to reduce debt levels, in March 2008 the company decided to sell 60 per cent of its US business. Regardless, in April it dramatically revised its profit forecast downwards. These various concerns ultimately saw the share price fall to just 54 cents, from almost $9 in 2006. As the share price fell, Eddie Groves was forced to sell a large proportion of his shares in the company in order to meet a series of margin calls. He eventually stepped down as CEO in September 2008.
In August 2008, shares in ABC were suspended from trading, pending the release of its 2007/08 results. However, the company entered voluntary administration within three months. At the time of writing, the government had provided a total of $56 million in order to keep the unviable centres operation. Around 55 centres were closed in 2009, with a further 240 centres to be sold off (as they may be profitable under a different model).

1.         Outline the environmental factors that impacted on ABC. Did these factors have a positive or negative impact on the firm?
2.         Do you think that the success and ultimate failure of the company was an outcome of its environment or was it an outcome of its own strategies and actions?
3.         If the company had been able to continue to raise money and pursue its growth through an acquisition strategy, do you think it would have been successful in the long run?

4.         Do you agree with the company’s strategy choices? What strategy would you have chosen?

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