Martino liked the child-care idea so much that he offered to help Scandone franchise the business. It is, after all, one of the fastest ways to build a national company. And speed mattered. Scandone felt certain that if he did not move quickly, competitors -- perhaps the big chains themselves -- would vault past him. So Scandone and Martino started the company in 1988, the latter providing virtually all of the $250,000 capitalization and taking a majority of the stock.
Franchising does pose some difficult challenges, though. It has never worked in the child-care industry. Kinder-Care had tried franchising when the company started in the late 1960s but had given up and switched to company-owned centers. Other day-care franchisors had shut down or followed Kinder-Care's route.
All these operations had one problem in common -- the inability to control the quality of service delivered by the franchisees. It is difficult enough to control a franchised MAACO shop, where the procedures are relatively amenable to lists in an operations manual. But dealing with kids means a wild card every minute, more than a match for anyone who would distill a day's activities into a neat routine.
Scandone and Martino, however, argue that franchising is the biggest advantage they have for delivering quality child care. They dismiss the failed attempts by saying that, until now, nobody brought to child-care franchising the kind of track record they do. More than that, though, they believe local ownership will make the difference. "Quality control might be a big problem," says Martino, "but it won't be one-tenth of what you'd experience from a company-owned location. Quality is inherent in the fact that the owner is there. An owner will always do a better job than a manager.
"Remember that a manager is on a career path, and you rarely find one who says, This is the top, I've arrived. We turn over managers all the time at the MAACO shops. But the owner will be there a long time. His view is longer." If an owner allows quality to slip, Martino promises he will move quickly to revoke the franchise.
Quality control, the founders point out, will be a primary responsibility of the local operations manager, who will work with 10 or so franchisees and visit their facilities once or twice a month. Having a large staff of teachers will be another quality check, since they are likely to be sensitive to any shortcuts a franchisee takes in the educational and developmental program. Those teachers also will be, Scandone hopes, Goddard's most persuasive selling point.
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Even if Scandone has correctly perceived that parents want more education from child care in the 1990s, he still must effectively market his idea. Because he's franchising, he must worry about two groups of customers. One is made up of prospective franchisees. What will he offer them that is worth a substantial franchise fee and royalty? But perhaps the most important group of customers is the parents themselves. Will they see a clear difference in quality in the new centers?
As any working person knows, good child care is expensive. The cost varies with the age of the child -- typically it's highest for infants -- and by region of the country. What costs $330 a month for a toddler in Boulder, Colo., can cost $730 in Boston. By pricing his service 10% to 15% higher than his competitors, Scandone is aiming for an upper-middle-class customer in a major metropolitan area who can afford to spend an extra $500 to $1,000 per child each year. For the most part, that means families with incomes above $50,000.
Scandone says they're an underserved part of the market. When he analyzes a potential site, he uses census data to analyze the demographics within a five-mile radius, looking at such variables as family income, the number of working mothers, and the number of children under age six. Then he counts the spaces available in local child-care centers; usually, he says, there is plenty of room for another provider.
It's unclear, though, how many of these affluent parents he'll be able to corral. Less than one family in four earns $50,000 or more, and many of these are overburdened already by mortgage and credit-card debt. Others have more than one child, which would multiply the cost of switching to a more expensive provider like Carousel.
Scandone, then, faces a difficult marketing challenge -- reaching potential customers with a message that Carousel is clearly different. He is confident he can do this by using the usual media -- radio, newspapers, and the Yellow Pages -- to drive home the theme of education and childhood development. If the ads and word of mouth bring in parents for a look, he says, a tour of the facility will sell it to them.
"What we're charging extra for is visible and identifiable," says Scandone. "By seeing the number of teachers we have in the schools, they'll know what distinguishes us." Customers, he says, were not difficult to recruit in his own two centers. "I haven't met any price resistance, and my own schools are 12% to 15% higher than the competition."
If the franchisees can indeed attract customers, Scandone's projections demonstrate that the higher fees will bring them some huge margins. Each center should reach break-even in its first year, he says. By the end of its second year (see "Financials," page 4), it should be enjoying gross margins of about 21% by filling 80% of its seats. That would be two to three times the margins of the industry as a whole and of its two leaders, Kinder-Care and La Petite Academy.
