Back in 1968, real estate developer Perry Mendel had an idea that many people he talked to thought was outrageous, impractical, and probably immoral. Mendel wanted to create a chain of child care centers -- and he wanted to use the same techniques of standardization he'd seen work for motels and fast-food chains.
The critics didn't deter Mendel. Though he didn't know the first thing about education, he did understand financing and real estate. He was also convinced that the trend toward women working outside the home would continue. And eight of the business associates and friends he approached with his plan liked both the concept and the man who was proposing it.
In the 12 years since Mendel took $200,000 in seed money and started Kinder-Care Learning Centers Inc., the company has become a dominant force in the commercial child-care industry. Today there are 720 Kinder-Care centers in 36 states and two Canadian provinces. Revenues for fiscal 1981 were $87 million and should reach $112 million by next year. Since 1976, in fact, Kinder-Care Learning Centers Inc. has grown at a rate of 57% compounded annually, and this year ranks #98 on INC.'s list of the fastest-growing smaller public companies in the country.
Kinder-Care's success caught a lot of people by surprise -- including Wall Street investors -- but not Mendel. He had looked at the marketplace and discovered a widespread demand for child care services. He found thousands of individually owned centers, many of which were profitable despite the widespread belief that taking care of children shouldn't be a money-making effort. "When I saw the pro forma numbers on one child care center, I was amazed," Mendel recalls. "If the figures were that good for a single independent center, I knew they'd be phenomenal for a chain."
From the beginning, Mendel planned Kinder-Care as a national chain. He hired a professional nutritionist and a retired school superintendent. Before the first center went up, Mendel had in hand an operations manual for Kinder-Care Learning Centers. He compiled information on state zoning and licensing requirements so that, when he hired a local architect to draw up plans for a center, the design would conform to standards in all states.
He also recognized the need to have a clearly defined market. Kinder-Care would be aimed at the middle class, at families that needed two paychecks and couldn't pay premium prices for day care. To select sites, Mendel drove through neighborhoods looking for backyard swing sets and two-car garages with both cars gone. He spoke to mailmen and located the newest elementary schools.
Each center had to be on the side of the street on which morning traffic flows from the suburbs to where people work, so that parents in a hurry wouldn't have to cross traffic to reach the center. "Look for a 7-Eleven," says Mendel, "and you'll find a Kinder-Care center."
The centers accept children as young as three months (a separate room is furnished with cribs) and as old as 12 years.They serve the children a hot breakfast, a mid-morning and mid-afternoon snack, and a hot lunch. When Mendel introduced an after-school program for older children, total revenues grew 20%. The summer camp program initiated in 1972 cut the 30% drop in summer enrollment to only 8%.
Since the first Kinder-Care opened its doors in Montgomery, Ala., the low brick buildings with red tile roofs and bell towers have popped up like McDonald's all over suburban America. The McDonald's analogy is inevitable. With their black plastic bells that make no sound, Kinder-Care centers look like one more example of the standardization of the American landscape. Mendel freely acknowledges his debt to McDonald's and Holiday Inn, saying he set out to provide the same consistency in child care that McDonald's provides in fast food and Holiday Inn in accommodating travelers.
Jokes about "Kentucky Fried Children" don't bother Mendel and his associates much either. "I don't see that as terribly negative," says Gene Montgomery, who was hired away from Burger Chef to be Kinder-Care's vice-president of operations. "Your grandmother may be able to make better fried chicken than Colonel Sanders, but most mothers can't. There may be individual centers that do a better job than we do, but most centers just don't have the resources we have."
The children at the centers certainly appear happy. They're in a world designed for them, with 35 square feet of space per child, airy open classrooms divided by rows of four-foot lockers (each child has his or her own), and a fenced in play area with jungle-gyms, swing sets, and in most cases, small swimming pools.
The stress on learning helps Kinder-Care overcome a major obstacle to success as a national chain of day care centers: the guilt that many parents feel at leaving their children to go to work. The learning materials are from leading educational publishers like Addison-Wesley and Lippincott (learning materials are also developed by Kinder-Care's own education department) and there is one teacher for every 10 children on average. The educational materials are in separate "Discovery Areas": Sound Table, Library, Creative Art, Manipulatives, Science, Construction. The mother of two children who attend a center says, "When I'm home with my children I'm very busy. Even when I do have time to spend with them, I can't afford the crafts, books, paints, and puzzles they have at the center."
Mendel's fast-food approach to child care was accepted and proved to be profitable. But the fast-paced growth caused cash flow problems. "The difficulty of coordinating growth and capital is a common problem in any business," says Mendel. "We had quite a hassle trying to get it all together."
"We knew we were developing a new industry," says Dick Grassgreen, a tax attorney who joined Kinder-Care in 1969 as chief operating officer and executive vice-president. "This wasn't shoes or steel. There was nothing to look at. Had we not worked hard at our public position, it would have been very difficult to raise the money we needed to grow." The company obtained a $3.75-million mortgage commitment from the Eagle Savings Association, a Cincinnati bank, contingent on Kinder-Care's ability to show one dollar in net worth for every three it drew in loans. Somehow Kinder-Care had to come up with $1.25 million.
To meet that goal, Mendel decided to take Kinder-Care public late in 1969, hoping to raise $2.8 million. During the registration period before the public offering, the company drew $800,000 in construction financing to develop centers. The loan was drawn against the mortgage commitment in anticipation of the money to be derived from the public offering.
Unfortunately, the firm that was handling Kinder-Care's offering was acquired by Bache, which refused to go through with the offering because Kinder-Care was too small and still in the concept stage. The company found a new underwriter, but the Securities and Exchange Commission ruled that Kinder-Care would have to maeke a best efforts offering (an offering in which the underwriter does not guarantee to place the entire amount) because of the commitment of some of the directors to purchase stock in the offering.
With no guarantee of the offering, Mendel backed off. "We found ourselves with no more money," Grassgreen says. "We'd spent at least a couple of hundred thousand dollars just getting everything printed up and prepared for the public offering."
The most attractive alternative then was to sell out to Warner National Corp. Warner provided Kinder-Care $300,000 in capital and promised assistance for future growth. But within six months of the merger, Mendel and Grassgreen were unhappy about the arrangement. Warner was putting money into other interests and leaving Kinder-Care to fend for itself. Mendel and Grassgreen convinced Warner to allow them to take Kinder-Care public, and in June 1972 the offering was made.
Still, Mendel and Grassgreen were frustrated. "In our eyes, Warner's major position was a detriment to Kinder-Care," Grassgreen says. "We were a hybrid -- a public company in name only. We weren't growing; we were just stalled there." In 1973, Mendel and Grassgreen renegotiated the merger contract, which had included an earn-out: If Kinder-Care met certain growth goals, it would -- and it did -- earn additional Warner stock. That May, the original Kinder-Care investors exchanged the Warner stock they'd earned for Kinder-Care stock.
Still chafing under Warner's control -- it owned the largest percentage of Kinder-Care stock -- Mendel and associates finally decided to regain control in 1976. They raised $2.25 million from banks and another $2.25 million from investors and bought back Warner's Kinder-Care stock. Then they were stuck with the problem of raising money to pay off the bank loan.
Along came an offer by Taft Broadcasting to buy the company. Mendel and Grassgreen had been that route once and declined, but asked if Taft would be interested in a minority position. As it turned out, the idea appealed to Taft's chairman, Charles Mechem, Jr. So Taft picked up a 20% interest in Kinder-Care.
The remaining excursions into the public market were successful: $10 million in a convertible subordinated debenture offering in 1978; $4.5 million from a public offering of 490,000 shares of common stock in March 1980, and another $13 million from the sale of 825,000 shares in October 1980.
"We're very happy with our financial position today," says Grassgreen with the slightest of smiles. "We're sitting with a substantial amount of cash and a strong balance sheet." Investors are happy too: Since 1972, the stock has split three times (twice at 2 for 1 and once at 5 for 4), for a 15 times enhancement on the original investment.
In 1970, Mendel considered franchising, which would allow Kinder-Care to grow quickly with upfront cash. "But we abandoned franchises," says Mendel, because we weren't attracting business people. Those who were interested didn't know how to run a business or how to arrange financing. If we were going to end up managing the franchises, why should we settle for only a royalty?"
Mendel turned to leasing, which helped Kinder-Care preserve its capital and reduce the risk. Developers built centers to Kinder-Care specifications and gave the company 20-year leases with two 5-year renewal options. Kinder-Care has never closed a center, so the risk to the developers has proved negligible.
When interest rates started to climb in 1979, Kinder-Care began to grow through acquisition as well as through leasing. In 1980, Kinder-Care acquired or leased another 205 centers and in 1981 added another 168. "Acquisitions are very attractive," says Mendel. "We get an existing enrollment in quality physical facilities, with more favorable financing terms. We've expanded into Canada with the acquisition of Mini-Skools Ltd. That involved 88 centers."
The Equitable Life Assurance Society started Kinder-Care off on another venture, Kindustry, which is now a payroll deduction plan for Equitable employees. Parents who participate can take their children to the Kinder-Care center of their choice for 20% off. The attraction of Kindustry to employers and employees is obvious: A child care fringe benefit helps reduce employee turnover, and the parents receive a discount, a convenient payroll deduction, and the standard tax deduction for child care expenses.
Since Equitable, other companies have become interested in the Kindustry plan. Disney World now has a Kinder-Care center in Orlando for both employees' and visitors' children. It will accommodate 165 children and is open seven days a week, 16 hours a day.
Another offshoot is Kinder-Care Merchandising Inc. This company sells a variety of toys -- duplicates of those used in the centers -- plus T-shirts, scrapbooks, and tote bags. The retail outlets are the Kinder-Care centers.
In June 1978, Mendel and Grassgreen formed the Kinder-Care Life Insurance Co. "We'd been sitting around brain-storming about the services we could provide," Grassgreen recalls. "The idea of life insurance came up. We didn't even know if it was legal." It was. Today, Kinder-Care Life Insurance has $60 million in children's insurance in force and is increasing at a rate of about $1 million a week. Because the insurance is sold in the centers themselves, where the customers come to the salespeople, the insurance company has little overhead and is able to offer competitive rates and to pick up the first year's premium. "We expect Kinder Life to be a major contributor to our earnings in the future," says Grassgreen. It added $125,000 to net earnings in fiscal 1980.
Low overhead costs are another major factor in Kinder-Care's continuing success.The centers are staffed mainly by women who are willing to work at the minimum wage. "Child care is pleasant work," says Grassgreen. "The people who work in the centers like to be with children. They receive a strong sense of self-esteem from their work."
"There's no comparison between the caliber of workers in fast food and the people who work for Kinder-Care," adds vice-president Montgomery. "In fast food people are in it just for the money. In child care there are other rewards."
Still, the company suffers high turn-over among employees. While that won't change (pregnancy and spouse transfer are the major causes for resignations), the company's growth has allowed Kinder-Care to reward ambitious employees with advancement in the organization.
As Kinder-Care grew it became impossible to manage all the centers from headquarters in Montgomery, Ala. "We had to start putting supervisors out in the field," says Grassgreen. The regionalization of Kinder-Care has center directors reporting to area directors who report to regional directors. The center directors select their own staffs. Quality control is managed by a welter of weekly reports from each center on everything from tuition checks to maintenance.
The beauty of regionalization is that it allows for employee advancement, says Grassgreen. Some employees have stepped up to positions that pay as much as $40,000. "We don't want to create a bureaucracy," says Gene Montgomery, "but systems help you manage your good people more effectively. We need training programs now, particularly at the management level. We need specific salary guidelines and performance appraisals."
Montgomery has decentralized Kinder-Care still further. "I had 14 regional managers, each responsible for 20 to 50 centers, reporting to me," he says. "That's too many. I couldn't deal effectively with 14 different managers. So we went to zone management." Each zone has managers of operations, marketing, personnel and training, and construction and maintenance. Those managers report to a zone director, who reports to Montgomery.
Perry Mendel thinks Kinder-Care is today where McDonald's stood a decade ago. The trends suggest that by 1990, around 60% of the female population over 16, some 52 million women, will be working outside the home -- an increase of 11.6 million over the number of women in the work force in 1979. Even though the average number of children per family has been declining, the number of women of childbearing age will increase through the '80s.
Kinder-Care's growth has come during a decade when resistance to child care as an industry has been fading fast. Once that resistance disappears, as it seems likely to do, Kinder-Care's growth will probably be even more dramatic. Today, even though it has half the market for national child-care service chains, that market represents only 5% of the 19,000 licensed child-care centers in the country.
"Now we see the opportunity to grow and increase our income simply by letting people know we're here," says Perry Mendel.
KINDER-CARE LEARNING CENTERS:
THE BUSINESS OF CHILD CARE PAYS OFF
Year 1977 1978 1979 1980 1981
(year ending) (6/3) (6/2) (6/1) (5/30) (5/29)
Revenues ($ mil.) 12.8 19.7 28.6 56.6 87.0
Net earnings ($ mil.) .7 1.3 2.2 3.4 4.3
Current assets ($ mil.) 2.0 2.9 9.4 8.5 16.3
Current liabilities ($ mil.) 1.4 1.6 2.3 5.2 7.6
Working capital ($ mil.) .7 1.3 7.1 3.3 8.7
Current ratio 1.5 1.8 4.1 1.6 2.2
Long-term debt ($ mil.) 6.0 10.2 19.6 59.2 68.2
Average return on equity (%) 27.0 35.0 34.0 26.0 16.0