Strategic Planning

Facing the future?

What are the key strategic and financial issues facing independent schools over the coming years? A recent survey reveals the signposts to forthcoming trends. Dick Davison provides an overview of the key findings

Schools had just got the autumn term started when the story broke. “Private schools are warned on fees”, the headlines screamed: “Private schools must cut fees or risk going out of business”, “Middle class ‘priced out of independent schools’”.

The national dailies relished the story, knowing it to be an issue which would have their middle-class readers fulminating over their corn flakes.

The Times’ coverage was typical: independent schools “may have reached the limit of parents’ ability to afford their fees... numbers could fall by five per cent in the next ten years”. The Daily Telegraph echoed the same theme: “If the independent sector fails to curb the ever-rising cost of school fees, pupil numbers will start to fall.”

They were both reporting on the first objective business review of the independent schools sector to be undertaken in recent years. And while their instinct to simplify the issue dearest to their readers’ wallets was unerringly accurate, the media showed its characteristic inability to deal with more than one idea at once. The report, The mtmconsulting Independent Education Sector Report 2007, covers many more issues 7 than just fees and affordability; in its 140 pages, it maps and analyses the entire state of the independent school business at a time when it is facing increasing challenges.

The analysis was commissioned from Gavin Humphries, a business analyst, formerly research and analysis director at Datamonitor. And the first thing he pointed out was that the sector is a large one – worth £6.5 billion each year. That’s about the same as the amount people spend on shoes, toiletries, having their car serviced or taking short breaks to Europe.

What’s more, it’s been growing significantly, with more than 620,000 pupils at independent schools in the UK – five per cent up on a decade ago, and that is in spite of a three per cent drop in the total child population over the same period. A strong economy, a perception that state school standards are declining, and the increasing professionalisation of schools’ own marketing operations have all helped to drive this growth.

Sector breakdown
It is a fragmented sector made up of many small businesses (with an average annual turnover of just £2.7 million), but the report identifies a recent trend towards consolidation, with the growth of chains of schools both charitable, such as GDST, and for-profit, such as Cognita or GEMS. In the last five years, the number of schools that could be classed as being part of a chain has risen by more than a third and such schools now educate just over 68,000 children – 11 per cent of all independent school pupils.

The report draws a parallel between the independent sector today and the grocery retailing sector a century ago, when commercial chains accounted for only five per cent of grocery sales. Co-operative stores accounted for 15 per cent of sales; the remainder was in the hands of independent shopkeepers. It took 60 years for the commercial grocery chains to garner a 20 per cent share of the market, but today’s commercial school chains will do it in less than 15 years.

Commercial input
The commercial school groups have grown so rapidly because of the entry of venture capital firms into this market. There is, in the groups already established alone, a potential chest of about £1 billion for the further acquisition and consolidation of independent schools and the report predicts that the 3.5 per cent of independent school pupils currently in commercial group schools will treble in the next ten years.

While most people agree that the commercial groups have an advantage in their lower cost base, they have also been quick to point out disadvantages. But these criticisms, says Humphries, do not take into account the fact that these schools are run on a different business model. He warns in the report: “It is generally easy to underestimate the impact of new, perhaps marginal, competitors who subsequently act as the catalysts for much more significant change in a marketplace.”

Depth and width
After reviewing trends within the market – for boarding and for single-sex schools, for example – the report goes on to analyse the penetration of UK independent schools by age group, which varies from a 5 per cent share of pupils at primary level to 6.6 per cent at secondary level and over 12 per cent in the sixth form. “Secondary education has been the bright spot for independent schools. The number of pupils in the country as a whole has been increasing, and independent schools have been growing their share of this group.”

And although the number of 5 to 10-year-olds attending independent schools has declined, it has not fallen quite as fast as the number of primary school children nationally, so independent schools have gained share.
While this suggests grounds for cautious optimism, the report goes on to warn: “Unfortunately, this optimism may be misplaced. This is because independent schools don’t operate in the national market – they obviously appeal only to a certain segment of the population.”

That segment of the population, the managerial and professional classes, has been growing in recent years as the UK moves towards being an economy based on services – particularly financial and business services.
What’s more, these families are having more children than other classes of society and there are now an estimated four million children under the age of 19 in the pool from which independent schools have traditionally recruited.

But, says Humphries, even though the number of 0 to 19-year-olds born into managerial and professional households has increased by 3 per cent in the last five years, the number of children at independent schools remained almost static. The growth in independent schools numbers since 1997 took place almost entirely in the first half of that decade. The sector has most noticeably lost market-share among the 0 to 10-year-olds.

“Independent schools have not been recruiting from a smaller pool – they have actually been recruiting fewer pupils from an expanding pool of younger potential recruits. Parents are delaying sending their children to independent schools because they need more time to save for the fees, or need to use the saved fees for other purposes, for university tuition or even their own pensions, or both,” says Humphries.

Good news
Demographic and social trends will mostly be in favour of independent schools in the next decade. By 2017, the report says, social mobility will produce an extra half million of children in the managerial and professional “pool”, and the trends towards dual-income households and towards delayed childbirth (to an age when parents have higher incomes) will also help. Furthermore, the report predicts that there is unlikely to be any major improvement in the general perception of standards in the state sector.

The one major limiting factor will be affordability. Between 2001 and 2006, average school fees rose by 39 per cent, compared to an 18 per cent rise in average earnings. In fact, the situation is even worse for the clientele of independent schools – the average earnings of managers and professionals grew by only 15 per cent.

And yet...
A particular concern of independent schools in the southeast is the extent to which the sector depends on financial services in general and the London economy in particular.

London accounts for 12 per cent of UK households, but 18 per cent of households with incomes over £60,000 and 20 per cent of those with incomes over £100,000.

A prolonged downturn in the financial markets would have a disproportionately serious impact on south-east schools.
Other regions would be affected too: financial services, and the business services it supports, now account for one-third of total national income. Regional repercussions from a downturn would also be felt keenly in Scotland and the north-west.

In fact, it is the recent sluggish growth in the independent sector in the south-east that causes the report to issue its starkest warning. London has a strong independent sector – twice the penetration of the rest of the country – but the independent schools’ share of London pupils is static. In the rest of southern England, schools have maintained their share of the market, but the total number of independent school pupils has declined. The report says: “These may be the early warning signs that an affordability threshold has now been passed.”

Where to go
The report posits three scenarios – niche positioning, cost-cutting, and federating – which will dominate developments in the sector in the next decade.

Key issues
• the market for independent education is polarising between “premier league” schools and “niche” schools, so there are ever-fewer opportunities for good but medium-sized, all-round schools;
• only the top third of schools will be able to continue to increase fees by more than average earnings. Most will have to keep future rises in line with earnings, or even cut fees in real terms. That means that there is going to have to be a widespread reduction in costs over the coming years; and
• joining or forming federations will help schools achieve the economies of scale enjoyed by commercial groups while retaining some independence in nature. It may also help them in the forthcoming public benefit test.

The sector faces a challenging decade, the report concludes, and affordability is the most important issue it must tackle. But it maps clearly the potential routes to future viability and prosperity for a sector which has showed resilience and flexibility in the past.

Dick Davison is a senior consultant for mtmconsulting. The report is available (price £350) from mtmconsulting ltd, 43 High Street, Southwold, Suffolk, IP18 6AB, or call 01502 722787, or email office@mtmconsulting.co.uk

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