A qualitative assessment of Covid 19 impact on preschool franchisees in India

A qualitative assessment of Covid 19 impact on preschool franchisees in India

A qualitative assessment of Covid 19 impact on preschool franchisees in India

Last Updated:- 2020-06-11

With the global pandemic upon us and all our lives thrown into a turmoil never imagined before, is it a surprise that the preschool industry in India would not be able to carry on business as usual?! It would be a surprise if you believed the national preschool franchisers who kept yelling that a preschool franchise is low-risk, downturn resistant and high reward business opportunity without any caveats.

The preschool industry is by and large a lower risk and higher reward proposition as compared to businesses with similar investment outlay, say between Rs 5-10 lacs. It does not come shock proof to downturns of this nature that is unleashed due to the novel corona virus. It is a cash flow shock of an unprecedented nature and as far as the hierarchy of importance is concerned, preschooling comes anywhere in the last 10 percentile of ‘essentials’ deemed by parents today in most cities and towns. Not surprisingly, given that the age group is considered susceptible to corona virus and since preschooling is still to gain the recognition of being an essential requirement in early childhood in the eyes of most Indian parents.

For preschools that have taken a franchise of a typical national franchisor in a tier-A market, one is looking at a total investment outlay of between Rs 15-25 lacs. And if this investment has happened over the course of the last 3-18 months it makes matters even worse.The lockdown and then the expected after-effects of the corona virus playing on the judgement of parents with preschool aged kids with regard to sending toddlers to school will, in our opinion, be significantly detrimental to the financial health of these preschool franchisee’s thereby making business unviable for most.

In a subsequent article, and this would be the first article of its kind in India, we have tried to quantify the financial impact on a preschool in India due to the lockdown and the subsequent after effects on the financial health of similar businesses. This article focusses on discussing the headwinds facing preschools in India due to the lockdown and the prevailing covid-19 situation with regard to its expected impact to preschool franchisees in particular.

Whichever scenario one may consider, the most optimistic outlook is a slow return to ‘normal’, anywhere between Oct 2020 to Jan 2021. Considering this to be the best possible case, the following would be the pain points for preschool franchisees in India in a post covid-lockdown world – 

1. High Capital Investment ( Depreciation Cost)

This is a real cost and not the figment of an accountants imagination. Contrary to what most preschool franchisors keep sharing with their prospective preschool partners, Teeny Beans, which offers a non-franchise zero royalty preschool solution to anyone who wishes to start a new preschool or upgrade an existing preschool franchise, shares a detailed and realistic financial projection with every partner. Cost of depreciation is also a very relevant metric that our partners are made aware of. Factoring that in gives them the ability to take the right pricing decisions during the course of the year.

ARs 20 lac spend with a 5 year franchise tenure has a depreciation cost of between Rs 3lacs to Rs 4 lacs per year depending on the specifics of your outlay which impacts how you treat specific capital expenditures. For instance, spend on IT infrastructure is usually depreciated over 3 years, land and building 20 yrs, your franchisee fee over the tenure of agreement and so on. 

Bottom-line is that there is a hidden Rs 25,000 to Rs 35,000 operating expense on depreciation that is just cost of operating a business regardless of your cash flows.

A good preschool start up spending strategy that prioritizes spend on real assets like curriculum enablers, purpose driven spend on interiors that is directly aids delivery of curriculum instead of spends on franchisors will help preschool owners limit the impact of depreciation on their balance sheets. 

2. Rentals

The problem with overstating the HIGH returns that unscrupulous preschool franchisors are perennially peddling is that it emboldens franchisees to overspend on multiple quarters, including rentals. The situation today for preschool franchisees in the post covid reality is very grim largely on account of a large operating overheads sitting in their balance sheets. Common understanding of the rental spend for preschool franchisees is that it forms between 40%-60% of cash overheads incurred. This is of course not relevant for self-owned properties but it is a fact that most entrepreneurs running with national franchisors actually are on rented properties.

The bottom-line is that rentals can vary between Rs 15000 to Rs 1,50,000 in cities. A wise cash flow projection made considering all variables will help you ascertain the right business plan (revenue plans, overhead plans, resourcing plan). Preschool franchisors in India are atypical in their bull headed rituals – 50 kids by year 1, 100 kids by year 2, 150 by year 3 and so on. There is no cash flow management training that newbies often require especially considering that this is a very different business, making decisions taken by them, questionable. Teeny Beans prides itself in providing very advanced cash flow and business management training to partners that helps entrepreneurs build appreciation of the nuances of business management. 

3. Rollover Admissions

For the preschool industry in India, the lockdown couldn’t have come at a worse time. March end and Apr are usually the months when preschools complete cash collections for the majority of the year. With the onset of Covid, parents were understandably delaying payments and then the lockdown happened… February and March are also usually the months when franchisees commit financially to franchisors for student kits and royalties. This payment happens to ensure a smooth delivery process and no delay in starting the session in Apr or July depending on which part of India you are in.

With the lockdown in place, in one deft blow, preschool franchisees who were waiting for cash collections to replenish their short term investment outlay were wiped off cash that they so desperately require to survive this crisis. Teeny Beans’ raison d’etre has been to bring affordability to every aspect of preschool operations. This includes zero royalty and no franchise fee. Royalties which form a big part of a franchisees yearly spend eats into this free cashflow that helps businesses fight cash flow shocks that the industry is currently facing. 

The bottom-line - Saving royalty alone is obviously not enough but just to give you a sense of what you could’ve saved – a typical royalty spend for a 50 kid strong preschool for a tier A franchise is between 3-4 lac Rupees a year. That is the amount of cash overheads you’d incur on your teaching and administrative staff for half a year!

4. Loss of Human Resources

Every preschool spends countless hours in training teachers and administrative staff in handling every aspect of school operations. A disruption like this is bound to affect your team dynamics. While businesses, faced with the prospect of closure, would look at pruning headcount, it does not necessarily follow that one would necessarily get their trained resources back at the school when the schools reopen. Working post covid 19 requires a great deal of self-motivation. The abysmal work environment and terms of engagement makes most preschool teaching engagements highly reliant on the self-motivation of teachers in the first place. With the uncertainty surrounding health and safety, there may be many who may prefer taking a break from teaching assignments especially if the rewards are not commensurate to the risk.

The bottom-line – Preschool owners have to brainstorm on the possible ways by which teaching assignments can be relooked at. More on this in our next article on Impact on Covid 19 on preschool franchisees in India – How to fight back!

5. Future Cash Flow Uncertainty

If the present is bad as it is, what makes it worse is the uncertainty of the medium term future. The cash in hand + working capital, which would typically reduce to 1-2 months by the month of March each year (Apr being the month for rollover admissions)is going to be inadequate to sustain cash expenses beyond June/July 2020.

In a scenario where preschool businesses are looking at zero to minimal cash flows between now and October 2020, preschool business, especially the ones on high rentals have to dig deep into their resources to survive the cash flow shock. 

The bottom-line – To survive, preschools have to invest effectively between 6-9 months of  working capital. For preschools with student strength between 20-40 kids and running on rental mode, it would be not too dissimilar to the initial investment they incurred in setting up the school. For most, this would be difficult to sustain and many would prefer to stop operations and forfeit the security deposit on the rental space rather than continue bleeding. 

While the doomsday tenor of this article is with good reason, it is not to suggest that it is only gloom and doom for preschool business owners in India due to the prevailing circumstances. There is always a light at the end of the tunnel. 

And this is what we will explore in our next Article – Covid-19 impact on Preschool franchisees in India : How to fight back!

You can also read a more analytical article on the Covid-19 Impact on Preschool franchisees in India :An analysis.

Published By:- Teeny Beans