KINDERCARE CAN'T WAIT TO GROW UP : EXPANDING CHILD-CENTER BUSINESS MIGHT BE TOUGH.

Byline: Peter Passell The New York Times

It's 10 a.m., and the parents of some 90 infants, toddlers and preschoolers in this white-collar suburb about an hour's drive southwest of Manhattan know exactly where their children are.

Life within the cheerful, pristine confines of Kindercare's ``learning center'' is safe, cozy and, above all, predictable. On this sunny, not-too-chilly morning, the older children are busy attacking the plastic playground equipment, while inside the 3-year-olds are puzzling over cut-paper shapes and the babies are snoozing in their green and white cribs. In the kitchen, the cook is preparing pizza-like ``Italian dippers'' with broccoli for lunch from a four-week rotation that runs from meat loaf to toasted cheese.

If Kindercare Learning Centers' new owners, Kohlberg Kravis Roberts & Company, have their way, tens of thousands more preschoolers will soon be sampling the menu. While Kohlberg Kravis, the leveraged buyout specialists, declined to discuss its plans for Kindercare, Clifton Roberts, a general partner, has made no secret of the firm's wish to capitalize on Kindercare's goodwill.

``KKR intends to support the expansion of Kindercare through internal growth and acquisitions while continuing to promote industry-leading education and quality standards,'' Roberts explained in last fall's announcement of the buyout. And despite a tangled financial past, Kindercare is probably better positioned to expand than its rivals. It has long experience in operating a nationwide network and a strong reputation in the upper-middle end of the day-care market.

But the obstacles to success in the child-care business are substantial, a quandary that reflects both the problematic economics of day care and a cultural failure to adjust to the consequences of expecting mothers with young children to work.

There are several reasons. Care of the sort provided by Kindercare's Clark center - $150 to $205 a week - is out of financial reach of many families. And many others do not want it: Though experts say preschoolers benefit from the social context and stimulation of quality day care, many working parents prefer to re-create, with a mother-surrogate, a more traditional setting, even if it offers little more than baby-sitting.

``Parents and developmental psychologists disagree about what is best for children,'' said David Blau, an economist at the University of North Carolina, who has studied child-care providers. ``And many parents just don't want to pay for what the psychologists want.''

Quality has a price

Two-thirds of American women with preschool children now work, including half the women with infants under a year old. Yet a survey of 400 day-care centers in four states, conducted in 1995 by a team led by Susan Helburn, an economist at the University of Colorado, rated the quality ``poor'' to ``mediocre'' in six out of seven centers. While most centers ``meet children's basic health and safety needs,'' she concluded that few help to develop language, math and social skills, leaving even the children of America's middle-class inadequately prepared for less-sheltered environments.

Less is known about ``family'' child care - care in other people's homes. For while friends, grandparents and neighbors are the ones who most often must provide a safe, stimulating environment for preschoolers, the average quality varies widely from the most nurturing to the most neglectful.

For many parents, its great advantage is cost: Full-time child care in this largely unregulated part of the market runs $40 to $100 a week, just half the cost of unsubsidized care in a group center.

But it is group day-care centers to which more and more American families are necessarily turning.

Today, just 3 percent of preschoolers with working mothers are left at home with nannies, according to Barbara Willer, a consultant to the National Association for the Education of Young Children. That is down from 15 percent in 1965. And of the 20 million children now under kindergarten age, some 6 million spend at least part of the day in one of America's 100,000 group day-care centers.

Roger Neugeberger, publisher of the Child Care Information Exchange, an industry newsletter, reports that virtually all growth in the market has been in the centers.

For years, the accepted wisdom has been that any solution to the day-care problem would require a big injection of cash from the government. Roger Brown, the president of Bright Horizons, a company that manages 125 up-market day-care centers for corporate and government clients, offers the most common view. ``It's much like a famine in the midst of a well-fed world,'' he said. ``Good day care is out there, but the average person simply can't afford it.''

Margins are thin

But while more money to subsidize day care is clearly necessary to meet the needs of lower-income families and welfare mothers who are going to be required to work under the new welfare law, no level of government is likely to aim much money in the direction of Kindercare and others that cater to the middle class.

Moreover, investors, like Kohlberg Kravis, that are looking to make a profit in child care must contend with the willingness of small-scale entrepreneurs to enter the business with operations that run on razor-thin margins. Of the roughly 35,000 centers run as businesses designed to make a profit, 29,000 are little more than a single operations - often a converted house or a storefront. And in contrast to many other service industries, there is no clear trend to consolidation.

Brown of Bright Horizons thinks he knows why: Economies of scale in the business are modest. While chains can save a bit on supplies, training, insurance, real estate and marketing, most of the cost is in labor. The chains have some hiring advantages in being able to offer group fringe benefits and opportunities for promotion. ``We can get quality employees for $2 less in hourly wages,'' said Miriam Liggett, a regional vice president of Kindercare, who started as an assistant teacher.

But the chains face disadvantages, too, in competing directly with the ``mom-and-pop'' centers whose owners impute little cost to their own long hours on the job.

And there seems to be limited value to brand recognition. While parents may be relieved to find the same Big Mac in Pittsburgh or Prague, they have mixed emotions about the assembly line image in child care. ``There is some brand-name premium'' for chains that contract to manage centers for others, Brown concluded. But the contract business represents a small part of the commercial market.

Kindercare clearly wants to break out of the slow-growth mold. The company, which was founded in 1969, stumbled badly in the late 1980s after it was saddled with a huge debt in a buyout engineered by Drexel Burnham Lambert. It spent part of 1992 and 1993 in Chapter 11. But Kohlberg Kravis, which agreed to pay stockholders $467 million, has pledged to provide $175 million in new equity capital, plus a $300 million line of bank credit.

Determining costs

But can that injection overcome the inherent difficulties of running day-care centers at a return high enough to provide money for further expansions? A look at the finances shows just how hard it will be. Sandra Scarr, the president of Kindercare, who previously led a research program in developmental psychology at the University of Virginia, would not reveal the actual budget for the Clark center. But she provided enough detail to piece one together. Most of Clark's costs, it seems, are dictated by a combination of competition in the labor market and the state of New Jersey, which regulates health and safety at day-care centers and sets minimum staffing ratios for each age group served.

Every classroom at the Clark center has a full-time lead teacher earning $9 to $12 an hour, including benefits, along with enough full-time $8- to $10-an-hour assistants and part-time $6- to $8-an-hour assistants to satisfy the state. New Jersey requires one staffer for every four infants, one for every seven toddlers and one for every 10 children between 2-1/2 and 4. With a mix that requires roughly one worker for seven children at an average cost of $9 an hour, classroom labor runs a bit less than $1.30 an hour for each child.

Clark is open from 6:30 a.m. to 6:30 p.m., or 60 hours a week - a necessity, said Kristy Sugg, director of the Clark center, because ``most of our parents drop them off early on the way to work and pick them up late.'' Presumably, a full complement of workers is not needed across the entire day. Figure full staffing for just 50 hours a week, and the direct labor cost alone comes to $65 a child.

Each Kindercare center has a director and an assistant director. In a relatively high-wage area like Clark, the two earn a total of $60,000 to $80,000, including health benefits and virtually free child care. Figure supervisory costs (including regional and national management) at a minimum of $10 weekly a child when the center is running at 80 percent of its full capacity of 200.

Then there is real estate. Kindercare designs and builds its own centers for about $1.9 million in high-cost areas like suburban New Jersey. It probably takes at least 15 percent a year for capital and maintenance, or $285,000. Assuming the center runs at 80 percent of capacity, the weekly cost for each child is about $35. Food (breakfast, lunch, two snacks), insurance, cleaning, classroom supplies and marketing costs are harder to pin down, but $50 a week is conservative.

All told, then, Kindercare needs revenues of about $160 a week from each child for a spanking new, high-cost center like Clark to break even at 80 percent capacity. Currently, the fees run $205 for infants, $180 for toddlers, $165 for 2-1/2 to 3 years and $150 for 4 and above.

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Photo

Photo: The $150 to $200 per week charged at the Clark, N.J., KinderCare is beyond many family's budgets.

The New York Times