Child Care: The McDonald's Model David Henry wants to get rich providing child care to poor families. Investors think he can do it. The question is, at what cost to the children?
(FORTUNE Magazine) – Picture David Henry. He's a classic. Clean-cut, energy and ambition to burn. Wears those loose-fitting khakis and that wide-striped Polo shirt as if he'd been born in them. Has a look in his eyes that fairly screams he's onto something huge--you'll see. Gets his kicks out of building an organization that really hums, selling whatever. Above all, he's a pragmatist--the kind of entrepreneur who asks, "Why is building a better, more expensive service more valuable? Rolls-Royce is not the most valuable car company in the world."
With that philosophy as his guide, Henry, now in his early 30s, set about several years ago building a national chain of for-profit day-care centers catering exclusively to poor families in blighted urban neighborhoods. He had no intention of building the best centers, just ones that were good enough. He was going to build lots of them. They would always be full, and they would run efficiently. It was a formula bound to ignite controversy. Today his company, Allegheny Child Care Academy, is the biggest child-care provider in Pennsylvania, with 24 centers in Pittsburgh and Philadelphia. (It also has one in Detroit.) Henry has raised a total of $7 million in debt and equity financing from regional VC firms like Mid Atlantic Venture Funds and Kitty Hawk Capital, as well as from socially conscious investors like the Delaware Valley Community Reinvestment Fund and the Sustainable Jobs Fund. He's using the money, plus profits from mature centers, to fuel expansion. Right now he's looking at sites in Michigan, Ohio, New Jersey, New York, Georgia, and California, and signing new leases at the rate of five a month.
While sales last year totaled $8.7 million, nearly all of it came in the form of government child-care subsidies. That hasn't stopped Henry from forecasting exponential growth. His latest estimates are for $17 million in sales this year and $40 million in 2001, at which point he'd like to take Allegheny public. "I have got to believe that the socially conscious mutual funds would kill each other to get their hands on some shares," says Fred Beste of Mid Atlantic, an early backer. "There's a need all over the country for what they're doing, and nobody else is doing it but Allegheny Child Care Academy."
That said, the implications of Henry's venture go beyond private dreams of IPO riches. Finding decent child care is a problem all working parents can relate to, but nowhere is it more deeply felt than among America's poor. Thanks to welfare reform, the number of families on welfare today is half what it used to be. That's great. But when welfare mothers get jobs, they need child care and they need help paying for it. In fact, while federal and state welfare cash expenditures fell from $23 billion in 1994 to $12.4 billion last year, total outlays for child-care subsidies rose sharply. Unfortunately, the average annual per child subsidy (it varies by state and city) is grossly inadequate, child-care advocates say. The upshot: Many poor families have no choice but to settle for substandard, unreliable care.
It's a huge problem, and no one seems to know what to do about it. Not the few really good nonprofits that close the gap with fundraisers and foundation grants; they lack capacity. Not right-minded corporations like Marriott, whose small-scale efforts to provide day care for service-industry workers in Atlanta and Washington, D.C., while laudable, have not made much of a dent in the problem. And certainly not the big for-profit outfits like Bright Horizons, which do a great job for their privileged clients but rely on corporate subsidies. Bright Horizons does operate two day-care centers for homeless children in Boston, but that's through a nonprofit subsidiary that's 50% dependent on private donations. "We have just found that to run a high-quality program," says Bright Horizons co-founder Roger Brown, "and really pay teachers well, and have good [student-teacher] ratios, the amount of money the government gives you is just not enough to do it."
Henry, however, thinks it's close. Or close enough, at least, to provide day care that's several notches above the alternatives in the neighborhoods where he operates--and, oh yeah, make a profit too. That's not to say the entrepreneur doesn't have his share of doubters. Many child-care professionals in Philadelphia harbor a deep distrust of Henry and his executive team (all four, including Henry, are recent Carnegie Mellon B-school grads). Mary Graham, director of Children's Village, a model nonprofit, looks at Allegheny's bare-bones curriculum and its inexperienced teachers, and asks, "At what cost to the children?" Denise Dowell, the organizing director of the United Child Care Union, who collected enough signatures last month from Allegheny workers to file for a union election, says flatly, "He's not concerned with providing quality jobs or quality care." Henry disagrees. He admits his labor costs are low but claims he pays better than the industry average (a recent government study backs him up). And to those in the nonprofit world who question his motives, he says sneeringly, "Well, we took their hobby and made it a business."
Give him credit for that. Henry could write a textbook on ways to squeeze water out of a stone. He augments his main source of income, the child-care subsidies, with money he collects from a different government agency for serving meals. Whenever he can, he hires people directly from the welfare rolls (76 in 1999 alone, he says), and gets a rebate from the government on half of their wages for the first three months. He saves money on rent. Henry's idea of a great location is a vacant, boarded-up building on a bus line that someone else is willing to buy for him and renovate in exchange for a ten-year lease. Average capacity: 175 children. All his centers are wired for DSL, so that one day soon his operations guy back in Pittsburgh will be able to monitor staff levels and occupancy rates in real time and move teachers around accordingly. ("Too many staff or too little staff are both equally bad," he contends.)
To spend a day with Henry driving around the mean streets of North Philadelphia, dropping in on his centers, is to catch, inevitably, a dose of his enthusiasm. "It's a billion-dollar industry, and we're the only player right now," he says. These are not Rolls-Royce centers, but neither are they Romanian orphanages. The sites I visited--one a former warehouse, another an old five-and-dime in a largely vacant shopping center--were depressing on the outside but bright, clean, and cheerful inside. The kids didn't seem unhappy to be there. The staff seemed engaged. "I like their service, how they deal with the children," parent Malika Speaks told me later. "They give me respect when I walk through the door and when I leave."
But sometimes Henry is his own worst enemy. No Allegheny parent or employee would appreciate the comment he made to me at that old five-and-dime center, standing in a maze of waist-high yellow room dividers while all around us children were taking their midday naps. "The day-care model is much like the fast-food model," he said. "You bring in the teachers. They're moderately qualified, and that's generous. You give them an environment in which you don't ask them to do anything outside of their skill sets. And they're fine."
Employees who spoke to me, on the condition I not use their names, described an environment that would confirm many of Henry's critics' worst suspicions: classrooms frequently out of compliance because they don't have the right teacher-to-student ratios; employees routinely being sent home early, or to other centers, depending on how many children show up that day; and children who never know which classroom they'll be in from day to day, or who their caregiver will be. Earlier this summer, in an incident that never made the Philadelphia papers, a child was sexually abused at an Allegheny center, allegedly by a maintenance worker who has since been let go. "Regardless of who did it, something happened to that little girl," Henry acknowledges. "There's no good ending to this."
Henry acknowledges that staffing problems exist. But if the centers are so bad, he asks, "why are our enrollment rates so high?" He says he's doing the best he can in a difficult environment where no one else is willing to operate. "I didn't create the situation," he says. "I addressed it."
Meanwhile, Allegheny's expansion continues apace. Henry expects to open five new centers in Philadelphia alone in the next month. That's 150 new jobs in inner-city neighborhoods; 800 new licensed day-care slots (in a city that was about 23,000 short, according to a 1997 Temple University study); and therefore hundreds of new opportunities for disadvantaged people who want to work or go to school but can't without day care for their kids.
To Henry and his backers, that's a lot of good, even if Allegheny itself isn't perfect. But in the end, I'm not sure. Put it this way: Would you want Allegheny taking care of your kids?
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