As simple as ABC?

Running a business with booming demand (much of it funded through the public purse), and a big lead in market share and accessibility to consumers should be a license to print money.

That was certainly the logic behind the strong growth of stock market darling ABC Learning over the past few years down here in Australia. This firm modernised, aggregated and expanded a previously mum-and-dad (excuse the pun) business – childcare. They eventually ran more than 1200 childcare centres in Australia (upwards of 20% of the market), and another 800 or so in New Zealand, the US and the UK. Alas, it is has all gone very badly in the past 6 months or so for the firm and its founder. As of yesterday (November 6, 2008), they have gone into receivership (comparable to US-style Chapter 11).

So what went right and wrong?

In terms of the external environment in which this firm (let’s use Porter’s Five Forces) operated it looked like a great scenario:

– desperate buyers in the form of working parents often starved of local alternatives and increasingly subsidised by a complicit government

– low-paid employees with limited bargaining power

– a substantial first-mover advantage from securing properties in prime locations (creating a barrier to entry at the local level) and developing arrangements to supply services to corporate clients

– few relevant substitutes (stay-at-home parenting, nannies or grandparents)

– limited industry rivalry due to considerable market share advantage and the localised nature of competition.

So what wrong?

Here we see the issue of inadequate internal resources and capabilities. The systems and routines don’t appear to have been in place to adequately assess the merits of new properties and business lines (the firm had diversified into early primary education and also toys). General mangerial nous seems to have been scarce (it is a much bigger task running 1200 centres and 16000 employees than the 40 centres when the firm first went public). The financial management now looks incompetent (if not downright fraudulent). The international expansion was bold, but here also it may be that the firm underestimated the complexity of engaging in very different institutional environments, and mismanaged the huge financial risks of high borrowing in multiple currencies.

All in all, it turns out babysitting ain’t as easy it looks.


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5 Responses to “As simple as ABC?”

  1. Steve Sammartino Says:

    Great blog post Andre. As a previous investor – it seems the macro environment factors you mentioned had me enamored while the micro managment issues I seemed to ignore. I guess the key investor lessons are two fold: be very suspicious of outragous growth of a relatively ‘young’ company, and be wary of debt based expansion.

    It so often seems that a well managed internal enviornment is far more important than ‘external advantages’….

    I wonder if Eddie is as Broke as he claims to be?

  2. Shaun Says:

    Clearly Mr. Groves didn’t take any of your strategic management classes André – basic resource-based theory! For the most part it seems that internal deficiencies were the case because the market is (was, pre-financial crisis) prime for this service. Could it also be a case of growing too quickly?

  3. charles Says:

    would it be a case of the sub-prime loan/ credit crunch whichever you like to call it. it happen as early as april 07 i think and since then, consumers would have experienced issues in repaying their loans. This might leads to the holding back of consumption and in this case, child-care learning centre. If people in the US and UK have difficult repaying their loans, sending their kids to childcare learning center would definitely be the least of their worries.

    I dont know if this would be the impact for ABC, but as i have seen for a company in SIngapore, they were forced into bankruptcy because of their failed foreign investments despite having well-performing business in Singapore.

  4. Shaun Says:

    André, you might be interested to know that my girlfriend Amanda only recently left ABC to work at Honeybees due to poor internal management (HR) – good timing too as a lot of her friends’ entitlements have been frozen! Anyhow, I was chatting to her yesterday and she said the pre-school service offered by ABC didn’t include any education that you would get at your traditional pre-school. Essentially all it was, was day care for children of a pre-school age. Seems a silly venture doesn’t it? Trying to diversify into a related, yet different market (almost education), yet not providing an educational service… No wonder it flunked!

  5. Andre Sammartino Says:

    That is interesting Shaun. Actually the education diversification I was talking about was in the US and UK. I was not aware of any Australian endeavours (Not to say there wasn’t any, only that, at the time, I had noted these elements of the overseas ventures to be considerably outside their core expertise).

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