The expansion of the funded hours appears to be offering a promising outlook for nursery providers. More parents are taking advantage of the entitlements, demand for places is rising and nurseries, for the first time in years, have started to open waiting lists. Nursery groups, meanwhile, are expanding existing provision, opening baby rooms and looking to acquire premises to meet demand.
But this optimism comes amid mounting financial pressures. Expansion has been put on hold for some nursery groups following National Insurance and minimum and living wage increases. Meanwhile, the Government's decision not to relieve nurseries in England from business rates has led some larger groups to proceed ‘more cautiously’. Recruitment challenges in some areas of the UK, particularly in areas of disadvantage, are causing some providers to exit the market entirely (see Case study).
‘Last year saw a stabilisation of the marketplace, as interest rates and inflation became more under control,’ explains Courteney Donaldson, managing director of childcare and education at Christie & Co. ‘And with better visibility of the funding rates over the year ahead, some settings in strong locations have seen their occupancy grow and are performing quite well financially.’
But the picture is ‘mixed’ across the UK, she adds. ‘Some smaller settings are still having challenges, particularly those in deprived locations where fewer parents seek childcare in excess of their entitlements.’
YMCA Fairthorne in Hampshire, for example, a federation of 18 settings, lost 11 settings between 2023 and 2024. Staff recruitment and retention and high numbers of children with special education needs are cited as the main reasons. But with the expansion of the funded hours, the charity says it is harder to offset the Government funding rates in its more affluent areas (see Case study).
EXPANSION ON HOLD
Tops Day Nurseries’ ability to acquire new settings has been impacted by the rise in the minimum wage and National Insurance contributions (NICs). Cheryl Hadland, managing director of the 33 nurseries in the South-West of England, says the NICs changes are going to cost ‘hundreds of thousands of pounds’ and it is ‘very difficult to see how we can fund that, unless the Government funding significantly increases to match it’. She adds, ‘It's not helped that we're still having to pay full business rates. Business rates cost us £500,000. We were planning to open another two nurseries this year. And it's on hold. We were planning to do some expansion of some of our nurseries, but we're waiting for local authority funding for some of that.’
FINANCIAL PRESSURES
The National Day Nurseries Association (NDNA) estimates that from April, increases in NICs and minimum and living wages will cost nurseries, on average, an extra £2,600 per employee in England. The average nursery also spends £21,000 a year on business rates, according to the NDNA, and the impact is being felt across the board.
Diane Lumsden-Earle, chief childcare and operations manager at iStep, which entered the marketplace in May 2023 and now owns 22 settings in the East and West of England, says, ‘We need to be particularly strategic in how we move forward. Challenges around rising NICs and the minimum wage require us to balance sustainable growth with our promise of providing the highest-quality care and education.’
The nursery group is ‘actively looking to expand’ in regions where it already has a presence. ‘We remain committed to supporting our staff teams by maintaining their salaries and investing in their development. But addressing the issue of business rates remains a priority to ensure the sustainability of our services,’ Lumsden-Earle adds.
Sarah Mackenzie, CEO at Storal, says a ‘revised approach’ to business rates could better support providers as they contend with increased operating costs, NICs rises and the funding expansion.
‘Rises in NICs are an unwelcome development,’ she adds. ‘They don't appear to be fully reflected in the movements we're seeing in funding.’
‘There are undoubtedly areas where the Treasury and Department for Education could better enable the funded places expansion by being more joined-up, as well as areas where more pragmatic approaches are needed to overcome challenges, such as better facilitating of overseas recruitment to support childcare providers operating in hard-to-recruit areas.’
Despite this, Storal is looking to expand this year ‘at a sensible pace that's right for us’, explains Mackenzie. Last October, the group acquired the Children 1st nursery group of 23 settings.
‘We're still seeing attractive acquisitions coming to market and some consolidation. There are fewer medium-sized groups, which reflects the overall shape of the industry. And some sellers have specific preferences who they want to sell to, which is understandable as they consider their legacy,’ she adds.
Mackenzie says Storal has ‘really felt the benefits’ of expansion over the past year. ‘It's allowed us to offer promotion and development opportunities to team members, share best practices, innovate on ways of working, and invest further in our central support team, infrastructure and systems.’
Acorn Early Years, a charitable social enterprise with 18 settings in Milton Keynes, Northamptonshire and Bedfordshire, is also planning to expand ‘at a manageable pace, of ideally one new nursery per year’, says chief executive Dr Zoe Raven.
‘Finances are always a challenge, which is why we like a slow pace of expansion, but it's also about the recruitment situation. We have occasionally passed over good opportunities where we haven't been confident of being able to recruit whole staff teams,’ she adds.
MEETING NEED
In light of changes to funding entitlements, some have taken proactive steps to meet the increased demand for childcare services.
Lumsden-Earle at iStep says, ‘We've expanded our facilities, for example, we've created new baby rooms, to accommodate more children while ensuring we provide high-quality care tailored to the developmental needs of all ages.’
Aware of the difficulties of making small nurseries ‘financially sustainable’, Acorn Early Years is looking at whether any of its nurseries can be increased in size. ‘We're also looking to extend our geographical spread. And we've changed the age profile in most of our nurseries, as there is more demand for babies, and more competition from schools for the pre-school age group,’ Raven says.
Storal's nursery management teams have made several changes to support increased demand for baby places, including opening new baby rooms within existing nurseries and increasing the number of baby places offered.
SCHOOL-BASED PROVISION
Uncertainty remains around school-based nurseries and how the offer will impact local providers. ‘There's a risk of unfair competition when schools open up nurseries when there are already PVI settings locally,’ Raven says. ‘It's not a level playing field, and schools don't have the additional National Insurance issue looming as we do.’
Hadland says under-subscribed schools are ‘jumping at the thought’ of generating income from early years children. ‘We've been approached by schools that want us to run a “one classroom” day nursery for them, or want staff to be theirs on their school contracts, or want to offer no security on the lease. One expected us to make a large profit and to then give them that! None of these are financially viable. I don't think they realise how tight expenditure controls must be, nor how high occupancy must be to break even in a nursery setting.’
Despite this, Tops has two projects under way to expand its day nursery provision on primary school sites. ‘Both benefit from the manager already being in place, but are subject to getting capital funding because we cannot borrow funds for projects given the uncertainty of how to pay it back if the Government persists with its position on National Insurance, business rates and under-funding the cost of provision,’ Hadland adds.
Acorn Early Years, which operates on two school sites, has also experienced difficulties with insecure tenancies. Raven says, ‘Both are short-term tenancies. At one, the school could cease our tenancy at any time, with just six months’ notice. We'd really like to install a full kitchen but can't justify the capital expenditure while the future is not secured. The other site has a slightly longer lease, but it opened its own provision for funded two-year-olds in addition to their main nursery class for three- and four-year-olds. We couldn't prevent them from taking over our sessional provision for funded two-year-olds as it was on their premises. So, we are now limited to a smaller number of children overall, and can no longer offer sessional two-year places.’ iStep runs one school-based nursery for two-to four year-olds in West Sussex. Last year, due to local demand, it expanded the provision to include a baby unit for birth to twos, which is run from the old family centre next door to the school. ‘This partnership has been a fantastic opportunity to strengthen our ties with the community while providing even more tailored support for local families,’ Lumsden-Earle says.
Storal has three nurseries ‘successfully operating within school grounds’, in both the maintained and independent sectors. Mackenzie says, ‘With the right partners and space that enable us to provide high-quality provision, we would be interested in running more. It's a far better model for children, families, schools and nursery providers than schools opening and running their own provision.’
case study: YMCA's growth impacted by recruitment challenges
A shortage in qualified staff and challenges in staff retention are the ‘key obstacles’ preventing YMCA from moving forward with its expansion plans, explains David Bridson, head of policy, campaigns and research at YMCA England & Wales.
As the largest voluntary provider in the UK, the charity works with 3,658 children across 60 settings in England and Wales through a federation of local YMCAs. Two years ago, YMCA was ‘expanding at pace’. But over the past 12 months, providers in some federations have ‘struggled’ to such an extent that they have ‘exited the market’. For example, YMCA Fairthorne in Hampshire previously had 18 settings but is ‘now down to seven’, Bridson says.
‘Fundamentally, the biggest reason is around staffing. It's about having trained, qualified workers and being able to retain them. We've got whole settings that haven't had a deputy manager for a year and are really struggling locally.
‘The number of childcare workers entering the market is growing, according to DfE figures, but we are not feeling this on the ground. In fact, we are in a worse position,’ he adds.
Julia Honeywell, director of children's services at YMCA Brunel Group, says some settings have to ‘cap the number of places we offer in order to maintain compliance and stay within ratio’.
YMCA federations have trialled innovative solutions to retaining staff. In the Black Country area, it created its own bank staff to float between settings. In Lincolnshire, one YMCA had multiple members of staff leave at the same time, leading to staff working across two settings and it offering Level 3 qualifications as an incentive to stay.
Many YMCAs work in disadvantaged communities where families have been unable to afford additional non-government-funded hours. YMCA offsets the low funding rate by cross-subsidising in its more affluent areas.
‘We've essentially created an ecosystem,’ Bridson says. ‘But with the new expanded entitlements, this is becoming harder and tighter to control. It creates a huge vulnerability for us long term because parents won't need to pay for the extra hours and we are beholden to whatever rate the Government puts out. If the rate doesn't keep pace, the whole system will collapse.’
High numbers of SEND children is also adding to the pressure. ‘In some settings, 70 per cent of children have SEND, diagnosed and undiagnosed. Because we're a charity, we take them in, but we end up not having the funding to support them on a one-to-one basis. Whereas private providers are turning them away,’ Bridson adds.
Meanwhile, YMCA Fairthorne Group has calculated that the new National Insurance plans along with the rise in the National Minimum Wage will cost it an extra £95,000 a year.
YMCA is keen to be ‘back in the space of growing and expanding’, Bridson says. ‘If rates for three- and four-year-olds were reviewed in line with what it actually costs to deliver a place, we would be more confident to expand and help the Government deliver its mission.’
