IBIS Tutoring & Test Preparation Franchises Industry Report (1).pdf

WWW.IBISWORLD.COM Tutoring & Test Preparation Franchises in the US July 2014 1

IBISWorld Industry Report OD5609Tutoring & Test Preparation Franchises in the USJuly 2014 Dmitry Diment

Extra credit: Operators will focus on providing highly qualified staff to combat rising competition

2 About this Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance4 Executive Summary

4 Key External Drivers

6 Current Performance

8 Industry Outlook

11 Industry Life Cycle

13 Products & Markets13 Supply Chain

13 Products & Services

14 Demand Determinants

15 Major Markets

15 International Trade

16 Business Locations

18 Competitive Landscape18 Market Share Concentration

18 Key Success Factors

18 Cost Structure Benchmarks

20 Basis of Competition

20 Barriers to Entry

21 Industry Globalization

22 Major Companies22 Kumon North America Inc.

24 Operating Conditions24 Capital Intensity

25 Technology & Systems

25 Revenue Volatility

26 Regulation & Policy

27 Industry Assistance

28 Key Statistics28 Industry Data

28 Annual Change

28 Key Ratios

29 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


This industry offers exam preparation and tutoring services. Academic schools, colleges and universities are excluded, as are schools that offer instruction in

business, driving, management, computers, technical and trade areas, fine arts, athletics and languages. Online-only operators are excluded from this industry.

The primary activities of this industry are

Tutoring

Exam preparation

61143 Business Coaching in the USOperators in this industry offer short courses and seminars for management and professional development.

61151 Trade & Technical Schools in the USOperators in this industry offer vocational and technical training in a variety of technical subjects and trades.

61169 Tutoring & Driving Schools in the USOperators in this industry provide exam preparation and tutoring services, automobile driving schools and other miscellaneous educational services.

61171 Testing & Educational Support in the USOperators in this industry provide noninstructional support services for the educational sector.

Industry Definition

Main Activities

Similar Industries

Additional Resources

About this Industry

For additional information on this industry

www.educationindustry.org Education Industry Association

tutoring.sylvanlearning.com Sylvan Learning

www.census.gov US Census Bureau

The major products and services in this industry are

Exam preparation

Tutoring

IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go to www.ibisworld.com


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Per capita disposable income

SOURCE: WWW.IBISWORLD.COM

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Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2014)

65%Tutoring

35%Exam preparation


Key Statistics Snapshot

Industry at a GlanceTutoring & Test Preparation Franchises in 2014

Industry Structure Life Cycle Stage GrowthRevenue Volatility Low

Capital Intensity Low

Industry Assistance Low

Concentration Level Low

Regulation Level Light

Technology Change Low

Barriers to Entry Low

Industry Globalization Low

Competition Level Medium

Revenue

$861.0mProfit

$56.0mWages

$491.4mBusinesses

1,254

Annual Growth 14-19

2.1%Annual Growth 09-14

0.3%

Key External DriversPer capita disposable incomeGovernment funding for primary and secondary educationPercentage of services conducted onlineNumber of K-12 studentsNumber of college students

Market ShareKumon North America Inc. 8.7%

p. 22

p. 4

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 28



Key External Drivers Per capita disposable incomeBecause tutoring and test preparation services are largely discretionary in nature, household income levels influence demand for the industrys services. When disposable income rises, parents are better able to afford personal tutoring services for their children, and adult students are able to spend more money on tutoring and

test preparation services. Per capita disposable income is expected to increase in 2014, representing a potential opportunity for the industry.

Government funding for primary and secondary educationThe federal governments No Child Left Behind (NCLB) program provides

Executive Summary

The poor economic environment has hampered demand for the Tutoring and Test Preparation Franchises industry over the past five years. Despite a growing number of primary school and college students, demand for industry services was undermined by a high unemployment rate and low disposable income. Tutoring and test preparation services are largely discretionary in nature; therefore, economic conditions negatively impacted consumers ability to pay for industry services. However, the dip in demand was counteracted by pervasive concerns about the quality of

public education, which have historically driven demand for tutoring as a supplement to primary education. As a result, parents have increasingly enrolled their school-aged children in after-school tutoring programs over the past five years. The industry also received a one-time boost from the American Recovery and Reinvestment Act, which enabled schools to draw on a stabilization fund to prevent budget cuts, limiting the drop in demand for tutoring services. Largely as a result of negative trends, industry revenue is forecast to rise just 0.3% per year on average to $861.0 million during the five years to 2014,

although revenue is forecast to grow 1.3% in 2014 on account of improving economic conditions.

Industry operators have also faced escalating competition from online tutoring and test preparation services during the past five years, a trend that is expected to persist moving forward. Online services often provide less costly personalized instruction and more flexible schedules for students and teachers alike. Furthermore, online companies are not limited to a local market and can therefore more efficiently allocate resources to clients that demand particular services, such as on-demand help and instruction. To combat this competition, tutoring and test preparation franchises have spent an increasing proportion of revenue on teachers and marketing. Accordingly, industry employment is expected to grow about at an annualized rate of 6.4% during the five years to 2014.

During the next five years, industry growth is expected to strengthen as the economy improves. In addition to substantial disposable income growth, which is expected to make industry services more affordable for consumers, the industry will continue to benefit from expanding markets, particularly burgeoning college enrollment. As a result, industry revenue is projected to grow at an annualized rate of 2.1% to $953.6 million during the five years to 2019.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Revenue will expand as people return to work, but online-only operators still pose a threat


Industry Performance

Key External Driverscontinued

funding for after-school tutoring services, which this industry provides. Although overall government funding for primary and secondary education is expected to increase during 2014, funding for the NCLB program is expected to fall in 2014, resulting in reduced revenue for tutoring and test prep services.

Percentage of services conducted onlineThe industry excludes companies that exclusively offer online tutoring and test preparation services. As a result, the percentage of services conducted online is a proxy for external competition from such online services, which are a substitute for industry offerings. When the amount of services offered online increases, the amount of external competition rises, undermining demand for industry services. During 2014, the percentage of services conducted online is expected to increase, representing a potential threat to the industry.

Number of K-12 studentsA rise in the number of students (kindergarten through 12th grade) will raise competition for college admission, which has been a growing trend in the past five years. This trend stimulates demand for exam preparation and tutoring services, as students try to gain an edge on the competition. The number of K-12 students is expected to increase slowly during 2014.

Number of college studentsA rise in the number of college students increases competition for graduate and law school admissions, which increases demand for test preparation services. Growth in the number of college students also results in stronger demand for tutoring for college and licensing examinations in other fields. The number of college students is expected increase during 2014.

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Percentage of services conducted online


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Dip in demand Many students use tutors to help boost their chances of admission into a preferred college. During the past five years, a growing number of high school graduates created intense competition for admission to the nations top universities. Subsequently, this trend has positively impacted demand for tutoring and test-preparation services. At the same time, however, a growing number of colleges are making standardized tests an optional component of admission. The industry earns a large proportion of its revenue from services that prepare students for such tests; therefore, this trend has negatively impacted demand for industry services.

Despite the growing number of K-12 and college students, industry revenue has languished during the past five years in line with the economic contraction and subsequent slow recovery. Although the unemployment rate has declined since peaking in 2010, it has remained significantly above its prerecessionary rate. Concurrently, disposable income declined for the first time in nearly two decades and grew anemically during the duration of the period. High unemployment and weak disposable income growth undermined consumers ability to pay for industry services, as tutoring and test preparation services are largely discretionary in nature.

Current Performance

A weak economic environment, coupled with escalating competition from online tutoring and test preparation, has hampered industry growth since the recession. During the past five years, the high unemployment rate, which peaked at 10.6% in 2010, diminished demand for industry services, as students unable to find work found more free time to study on their own and unemployed adults had more time to help their children study. Furthermore, anemic employment growth undermined disposable income and negatively impacted consumer spending, especially on personalized industry services. However, continued concerns about the quality of public education and a temporary increase in federal funding prevented industry revenue from declining more severely during the period. Consequently, IBISWorld expects revenue for the Tutoring and Testing Preparation

Franchises industry to rise just 0.3% per year on average to $861.0 million during the five years to 2014. However, revenue is forecast to grow for a second consecutive year in 2014, as improving economic conditions push revenue upward 1.3%.

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Industry revenue




Competition squeeze The industry has faced escalating competition from online tutoring and test preparation services during the five years to 2014. Online services can provide less expensive personalized instruction and more flexible schedules for students and teachers alike. Because online companies are not limited to a local market, they can more efficiently allocate resources to clients that demand particular services, such as on-demand help and instruction. In particular, online competitors are able to hire workers in overseas countries for relatively low wages and offer tutoring services in the domestic market. This circumstance has enabled online companies to lower their prices, conflicting with traditional industry pricing models. To combat this competition, industry operators have diversified services, including investing in computerized software and implementing their own online education systems, to attract clients at various price-points. In addition, operators boosted their marketing initiatives to differentiate their products

by emphasizing teacher quality and the benefits of their programs.

An emphasis on teacher quality has led some operators to hire more teachers. Consequently, employment is expected to expand at an annualized rate of 6.4% to 53,436 workers over the five-year period. Wages, too, have risen, albeit at a slower rate of 4.5% per year on average, as the industry has continued to favor the traditional approach of part-time employment, keeping the average wage relatively low. Although industry profit has risen since bottoming out in 2009, wage growth and stagnating revenue throughout much of the period have squeezed profitability. Fixed costs like rent, utilities and administration limited the adjustments that operators could make to their business models.

Educational concerns and government funding

Concerns about the quality of public education have historically driven demand for tutoring as a supplement to primary school education. Federal policy has highlighted these problems with its emphasis on testing and accountability in schools. Parents of school-aged children are increasingly enrolling them in afterschool tutoring programs to meet personal education standards that are sometimes well above those delivered by the standard school system. Such demand is not considered discretionary by many consumers and prevented a more drastic dip in demand during the recession and slow recovery.

This industry benefits from federal funding for elementary and secondary

schools. In 2009, the American Recovery and Reinvestment Act (ARRA) gave the education sector a much-needed boost. As part of the package, schools were able to draw on a $54.0-billion stabilization fund to prevent budget cuts. These funds were desperately needed, since many states suffered budget shortfalls and made budget cuts in every area that they could. While the ARRA helped sustain the industry early in the five-year period, IBISWorld expects education boards to provide limited funding in core areas and cut spending on educational support services in 2014, counteracting improving economic conditions that are expected to push the industry to growth.

To combat rising competition, operators have boosted marketing to emphasize teacher quality



Industry Outlook

Improving economic conditions and rising student enrollment are expected to propel the Tutoring and Test Preparation Franchises industry to growth during the next five years. Moreover, improving access to credit is expected to open up opportunities for new franchises to open their doors and supply services. However,

the continued movement toward online-only services is anticipated to impede industry expansion. Nonetheless, positive drivers will likely outweigh rising competition, with revenue forecast to increase at annualized rate of 2.1% to $953.6 million during the five years to 2019, including growth of 2.2% in 2015.

Demand expansion As the US economy strengthens, demand for industry services is expected to rise. The unemployment rate is forecast to decline 1.1% during the next five years, approaching its historical average by the end of 2019. Likewise, per capita disposable income is projected to accelerate, rising at a 2.2% annualized rate during the period. Consequently, consumers are expected to have more money to spend on discretionary services, including tutoring and test preparation. As a result, the industry is expected to experience five consecutive years of revenue growth through 2019.

In addition to improving economic conditions, demand for educational support services is expected to benefit from continued enrollment growth in elementary and secondary schools as well as higher education during the next five years. During the recession,

enrollment in higher education grew as people unable to find jobs went back to school. Although this trend is expected to slow as the unemployment rate declines, rising employment and disposable income levels will also enable families to better pay for college educations, causing the number of college students to grow at an even faster rate. During the five years to 2019, college enrollment is anticipated to increase 1.1% per year on average to about 22.3 million students, spurring demand for industry services as a result.

Benefits of franchising

Following the downturn, prospective business owners have been more wary of opening independent businesses. Instead, they have turned to proven business models like the companies in the Tutoring and Test Preparation Franchises industry. These operators come with a complete business strategy and a recognizable brand like Kumon or Sylvan Learning Center. Consequently, the number of industry establishments is expected to increase at an annualized rate of 3.2% to 2,967 during the five years to 2014.

National brand recognition and an aggressive business strategy have made franchises increasingly popular over the past five years. Franchises are able to offer lower prices due to their ability to purchase in bulk. For example, operators receive educational support materials through their franchises at much lower prices than they would receive if they operated independently. In addition, operators do not have to spend time marketing their services, making franchises beneficial.

Working consumers will have less study time, but higher incomes will offset demand declines



Demand expansioncontinued

Parents have also been enrolling their children in tutoring programs at younger ages to help their children progress academically. Industry player Kumon, for example, has attributed the success of its preschool program to this strong enrollment growth. Consequently, the projected 0.7% average annual growth in the number of K-12 students during the next five years,

coupled with the rising enrollment of younger students, is expected to benefit industry operators. This growing market, in particular, is expected to lead to an increase in the number of tutoring and test preparation franchises during the five years to 2019. IBISWorld forecasts that the number of industry establishments will rise at annualized rate of 3.1% to 1,458 by 2019.

Further challenges More colleges are making standardized tests an optional part of admission. Currently, more than 800 colleges no longer require the SAT (Scholastic Assessment Test) or ACT (American College Testing) exams. Furthermore, a study commissioned by the National Association for College Admission Counseling and led by Harvards dean of admissions found that the SAT and ACT tests were not accurate measures of students true abilities. The industry earns a large proportion of its revenue from services that prepare students for these tests. Therefore, any substantial move away from the SAT, the ACT or

other standardized tests will hurt this segment substantially.

Legislation to overhaul college loans will also affect the industry over the next five years. Under recent legislation aimed at keeping college costs down and increase transparency, colleges and universities must report more information

Competition pressuring profitability

Online companies that are developing study tools to compete with industry offerings will undermine growing demand, however. Online operators are able to offer lower prices for similar tutoring and test preparation services because of the low fixed cost and unlimited market range of online operations. Consequently, industry operators will be forced to provide more value-added services to justify higher prices, in addition to running more extensive marketing campaigns.

The growing number of industry franchises will also result in more

competition from similar tutoring and test preparation businesses. Meanwhile, the industry is anticipated to continue hiring more employees to sway clients from choosing depersonalized online tutoring and test preparation services. Industry employment is forecast to grow 3.5% annually on average to 63,596 people in the five years to 2019. While the industry is expected to become more profitable on account of rising demand for services, growth is expected to be marginal as wages outstrip revenue.

Schools moving away from the SAT and ACT may hurt future demand for industry services



Further challengescontinued

about their costs to the Department of Education. Regulations deal with textbooks, tuition and fees, alumni activities, fire safety, graduation rates and

various other areas. Such changes may boost student fees and, as a result, reduce students ability to spend money on industry services moving forward.


Industry PerformanceThe market for tutoring and test preparation is expandingCompanies are offering new types of products and servicesThe industrys contribution to the economy is projected to rise

Life Cycle Stage


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DeclineShrinking economicimportance

Quality GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

MaturityCompany consolidation;level of economic importance stable

Quantity GrowthMany new companies; minor growth in economic importance; substantial technology change

Key Features of a Growth Industry

Revenue grows faster than the economyMany new companies enter the marketRapid technology & process changeGrowing customer acceptance of productRapid introduction of products & brands

Business Coaching

Public Schools

Computer Stores Trade & Technical Schools

Private Schools

Tutoring & Test Preparation Franchises



Industry Life Cycle The Tutoring & Test Preparation Franchises industry is in the growth stage of its life cycle. During the ten years to 2019, industry value added (IVA), which measures the industrys contribution to overall economic growth, is expected to expand at an average annual rate of 4.0%. Gross domestic product, meanwhile, is projected to grow at an annualized rate of 2.5% over the same period, indicating that the industry is expanding at a faster rate than the overall economy.

The market for industry services is expanding as student enrollment rises in primary and secondary education. For example, K-12 students, the largest market for industry services, are expected to grow at an average annual rate of 0.7% to more than 57.5 million during the next five years. Likewise, as the economy continues to recover, the number of college students is forecast to increase at

an annualize rate of 1.1% to an estimated 22.3 million over the five years to 2019. In addition, these markets are expected to be better able to afford industry services as the economy improves.

Although competition from online operators will limit expansion and pressure service pricing, the industry is responding through higher-quality offerings. Industry operators have hired more employees during the past five years, and this trend is expected to hold moving forward. Over the ten years to 2019, IBISWorld expects industry employment to grow 5.0% per year on average, while wages will increase at an annualized rate of 4.0% over the same period. This increase in wages a major driver of the industrys growing contribution to the overall economy, as operators look to meet escalating market demand for tutoring and test preparation services by hiring more workers.

This industry is Growing


Products & Services Exam preparationAccounting for about 35.0% of industry revenue, exam preparation services include preparation for college entrance

exams and professional examinations. During the past five years, this segment has grown as a percentage of industry revenue as an increasing number of

Products & MarketsSupply Chain | Products & Services | Demand Determinants Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

61111a Public Schools in the US Under NCLB, many public schools are required to offer students free tutoring.

61111b Private Schools in the US Schools often provide tutoring on an as-needed basis for students.

61131a Colleges & Universities in the US Universities provide tutoring services for students to supplement lectures.

61131b For-Profit Universities in the US Universities provide tutoring services for students to supplement lectures.

9901 Consumers in the US Consumers use this industry for tutoring services and preparation for standardized examinations.

KEY SELLING INDUSTRIES

44312 Computer Stores in the US Computer hardware and software are used for training and administrative services provided by this industry.

45121 Book Stores in the US Teachers and students use books in studying.

45321 Office Supply Stores in the US Tutoring and test prep franchises use stationery and office supplies.

53112 Commercial Leasing in the US Tutoring and test preparation firms generally rent office or retail space in which to teach classes.

Supply Chain

Products and services segmentation (2014)

Total $861.0m

65%Tutoring

35%Exam preparation



Products & Markets

DemandDeterminants

Disposable incomePer capita disposable income is key to determining demand for tutoring and test prep services. As disposable income increases, more consumers are able to afford additional tutoring and test preparation services, which are discretionary. However, when disposable income is low, consumers will seek less costly test preparation alternatives, such as online programs and services.

Government assistance and policyGovernment funding for education is an important determinant of demand for industry services. During times of low government funding for education, individuals will seek tutoring and test preparation services to supplement available education at public schools. However, when government funding for education is high, schools and universities will provide more individualized tutoring services, which may reduce the need for consumers to find outside help. Because funding for education is largely determined at the state and municipal levels, this factor varies significantly on a regional basis.

Nonetheless, broad changes in education requirements and spending at

the federal level have the capacity to impact the industry as a whole. Federal government requirements under the No Child Left Behind Act of 2001 (NCLB) have stimulated industry demand. The NCLB requires school districts to provide free tutoring to underperforming children from low-income families that attend Title I schools. A school is in need of improvement if it fails to make adequate yearly progress according to established benchmarks. As schools have fallen behind, demand for tutoring has increased, thereby benefiting this segment of the industry.

Online resources The continued movement to online services is increasingly siphoning demand from in-person tutoring and test preparation services. Online tutoring and online test preparation resources are becoming much more accessible and are posing a threat to the industry, especially as the quality and specificity of these services increases. As the percentage of services conducted online grows, consumers will turn to online services for supplementary tutoring, undermining demand for the industry.

Products & Servicescontinued

students prepare for standardized testing and compete for college admission. K-12 students generally use exam preparation services for the SATs, ACTs and other placement exams for college classes. College students use industry services for graduate school admissions exams such as the GMAT, LSAT and MCAT exams.

TutoringTutoring services represent the largest percentage of industry revenue at 65.0%. Growing concerns about the quality of public education is driving

demand in the industry. Private tutoring services have become an increasingly popular service due to the rising number of students and increasing academic competition. During the past five years, the number of K-12 and college students has grown steadily. Tutoring services are more popular among K-12 students due to customers limited access to educational resources. College students generally have more access to on-campus tutoring services and thus represent a smaller market for industry services.


Products & Markets

International Trade Due to the service-based nature of industry services, there is no international trade in this industry. Furthermore, because online services are not included in this industry, the use of international tutors by

companies to provide services to students in the United States is not considered relevant to the industry. As a result, only revenue from services provided within the United States is included in this industry.

Major Markets

K-12 StudentsK-12 students represent the largest market for industry services, accounting for about 70.0% of total industry revenue. During the past five years, this market has grown as a percentage of industry revenue as more parents seek to provide their children with an advantage in an increasingly competitive academic environment. K-12 students use tutoring services to improve academic skills and receive better grades in preparation for college applications. At the same time, K-12 students use exam preparation services for specific standardized tests, such as the SATs and ACTs, which are required by many universities for admission.

College studentsCollege students represent about 30.0% of the industrys revenue. During the past five years, this market has declined as a percentage of industry revenue because online resources have increasingly become available to college students. These students use exam preparation services for standardized testing related to graduate school applications for business school, law school, medical school and other graduate programs. While some college students use the industrys private tutoring services, on-campus tutoring services are offered through universities, reducing demand from this market.

Major market segmentation (2014)

Total $861.0m

70%K-12 students

30%College students



Products & Markets

Business Locations 2014

MO1.1

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

VT0.4

MA2.8

RI0.4

NJ4.1

DE0.2

NH0.6

CT1.4

MD2.7

DC0.5

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Additional States (as marked on map)

AZ1.8

CA16.1

NV0.6

OR1.2

WA3.1

MT0.3

NE0.4

MN1.8

IA0.6

OH2.8 VA

2.9

FL6.7

KS0.5

CO2.5

UT1.1

ID0.4

TX6.0

OK0.7

NC2.6

AK0.3

WY0.2

TN1.2

KY0.9

GA3.7

IL4.0

ME0.7

ND0.1

WI1.8 MI

2.5 PA3.2

WV0.2

SD0.1

NM0.5

AR0.5

MS0.4

AL0.7

SC1.0

LA1.1

HI0.6

IN1.7

NY8.5 5

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Mid- Atlantic

Establishments (%)

Less than 3% 3% to less than 10% 10% to less than 20% 20% or more

Great Lakes


Products & Markets

Business Locations The geographic spread of this industry is consistent with the population distribution in the United States; establishments are generally located in heavily populated regions. Industry firms tend to be located closer to areas with many academic institutions. The highest concentrations of establishments are in the West and Mid-Atlantic regions.

Demand for tutoring and test preparation is also influenced by per capita disposable income. Thus, more establishments are located in areas with higher disposable income. Higher disposable income in the Mid-Atlantic contributes to a larger concentration of industry revenue in the region. The region accounts for 24.3% and 19.2% of revenue and establishments, respectively. The Mid-Atlantic region also has a notably larger proportion of employees than establishments, indicating that the average firm in this region is larger. Despite a population share of about 15.6%, the region employed 21.0% of all people working in the industry.

The West has the largest share of establishments in this industry,

accounting for 21.9% of the total number and 21.5% of industry revenue. The majority of establishments in this region are located in California, which is home to a high number of academic institutions. California alone accounts for about 16.1% of establishments and 17.2% of total industry revenue.

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Cost Structure Benchmarks

ProfitIndustry profit, measured as earnings before interest and taxes, is estimated to account for 6.5% of revenue in 2014. Compared with the entirety of the education sector, which is largely run on a nonprofit basis, this is relatively high. During the past five-year period, profit margins bounced back somewhat after contracting during the recession, as declining revenue hampered operators bottom lines. In 2009, average industry profit stood at just 4.2% of revenue. Nonetheless, profit margins remain below prerecessionary highs and are expected to continue to remain pressured. As competition from online services has escalated, companies have spent an increasing proportion of revenue on wages, which has impeded profit growth.

WagesThe Tutoring and Test Preparation Franchises industry is service oriented, and the majority of revenue is dedicated to wages as a result. IBISWorld estimates that wages will total about 57.1% of revenue in 2014. During the past five years, slowing industry growth and demand for more personalized attention have resulted in a significant increase in wages as a share of revenue, from about 46.4% of revenue in 2009. In particular, competition from online tutoring and test preparation businesses has resulted in a higher emphasis on staff quality at learning centers. IBISWorld expects these trends to persist during the next five year, with wages rising to an estimated 61.1% of revenue during the next five years as employment growth outpaces revenue growth.

Key Success Factors Understanding government policies and their implicationsEstablishments need to know how they can benefit from various government policies on education, most importantly the No Child Left Behind Act.

Having a high prior success rate (including completed prior contracts)Establishments that have a high success rate for formers students will find it easier to attract new students. This

factor is particularly important in exam preparation and tutoring.

Having a high profile in the marketEstablishments with a high profile may find it easier to attract students.

Having a good reputationIn order to attract students, establishments in this industry must have a good reputation for the quality of training provided.

Market Share Concentration

The Tutoring and Test Preparation Franchises industry has low market share concentration, with the four largest companies accounting for less than 20.0% of total revenue. The industry has a large number of similar-sized firms that cater to the US market. Low barriers to entry and increasing demand for test preparation services are encouraging new operators to enter the

industry. As a result, enterprise numbers have risen at an average annual rate of 3.1% over the five years to 2014. Industry firms that specialize in tutoring services are slightly more fragmented, and some firms serve a specific geographic region. However, due to the nature of standardized testing, firms that specialize in test preparation tend to serve a wider region.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks Basis of Competition | Barriers to Entry | Industry Globalization

Level Concentration in this industry is Low

IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive Landscape

Cost Structure Benchmarkscontinued

PurchasesCompanies are expected to spend an estimated 9.6% of industry revenue on purchases in 2014. Franchised establishments benefit from buying most materials through the larger franchise of which they are a part. This helps reduce purchases costs because franchise organizations are able to procure supplies in bulk. Furthermore, as wage costs have skyrocketed, companies have cut back spending on educational materials during the five years to 2014, particularly because an increasing amount of information can be sourced and distributed online.

Rent and utilitiesExpenditure on rent and utilities, estimated to account for 8.8% of industry revenue in 2014, are

significant because industry operators require physical locations to deliver tutoring and test preparation in person. The cost of utilities has risen over the past five years. The price of electricity has increased steadily, growing each consecutive year since 2004. Water and gas prices have also climbed, due to higher input prices such as coal. Rent expenses also include property taxes and property insurance. Additionally, rental costs are up, due to low rental vacancy rates in commercial space, which places a premium on price per square foot.

MarketingMarketing costs make up about 3.3% of industry revenue. Companies spend a significant amount on extensive marketing campaigns because they

Sector vs. Industry Costs

Profi t Wages Purchases Depreciation Marketing Rent & Utilities Other

Average Costs of all Industries in sector (2014)

Industry Costs (2014)

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Barriers to Entry The Tutoring and Test Preparation Franchises industry has low barriers to entry. The most significant barrier to entry is competition among industry firms that already have an established reputation for quality. Franchises in this industry rely on their name brand and reputation to attract students investing in their education. However, individual operators are able purchase franchise rights with relative ease and are able to benefit from the companys established reputation as a result.

Capital investment required to start a tutoring or test preparation franchise is relatively low. Besides spending on rent

and utilities, as well as the purchase of some computer equipment and software, the majority of industry costs are related to wages. IBISWorld

Basis of Competition Internal competitionFirms in the tutoring and test preparation industry compete heavily on quality. Industry franchises must establish a reputation for quality, which is highly attractive to students looking for direct results from test preparation. At the same time, parents that seek tutoring services for their K-12 children also consider a companys reputation when investing in the future of their children. As a result, industry operators must hire highly skilled employees that are experts in the fields that they tutor. Also, instructors must be highly proficient in effectively teaching their respective subjects.

Competition among the test preparation segment is higher due to the standardized nature of the industry.

Students will seek the industry operator with the highest reputation for success and the highest results for important standardized tests, such as the SATs and ACTs, for K-12 students.

External competitionThe industry is facing increasing competition from companies that provide tutoring and test preparation services solely online. Online tutoring has become more popular during the past five years and poses a threat to traditional tutoring and test preparation services. At the same time, more online courses have become available for test preparation and for all kinds of standardized testing. These online interactive courses provide a cost-effective and time-saving alternative for students with limited resources.

Cost Structure Benchmarkscontinued

benefit each franchise. Many reach out to school counselors, teachers and parents to garner as much business as possible. Additionally, franchisees pay a franchising fee, a portion of which is dedicated to marketing the parent companys brand.

Other costsDepreciation, legal fees and administrative expenses make up the majority of remaining industry costs. Overall, these costs are relatively steady as a share of revenue from year-to-year because they can be anticipated ahead of time.

Level & Trend Competition in this industry is Medium and the trend is Increasing

Barriers to Entry checklist LevelCompetition MediumConcentration LowLife Cycle Stage GrowthCapital Intensity LowTechnology Change LowRegulation & Policy LightIndustry Assistance Low


Level & Trend Barriers to Entry in this industry are Low and Increasing



Industry Globalization

The Tutoring and Test Preparation Franchises industry has a low level of globalization. Some industry operators have establishments in a number of other countries. One of the major players in the industry, Kumon, is based in Japan and

has locations in countries across the world. However, due to the personalized service nature of the industry and the differences in standardized testing among countries, the majority of industry firms are based in the United States.

Barriers to Entrycontinued

estimates that spending on wages will amount to 57.1% of industry revenue in 2014, up from 46.4% in 2009. As the industry does not include online-only tutoring, wage increases have stemmed

from operators need to hire more specialized instructors to compete with increasingly specialized online services and to meet demand for more personalized attention from customers.

Level & Trend Globalization in this industry is Low and the trend is Steady


Player Performance Founded in 1958 in Japan, Kumon predominantly provides tutoring for mathematics and reading, operating across more than 48 countries across the world. As of 2013, more than 4.0 million students have been enrolled in Kumon courses globally. Kumon has been operating in North America for more than three decades; the first Kumon center was opened in New York City in 1974. In 2013, Kumon is estimated to have enrolled 340,000 students in more than 2,000 individually owned and operated centers in North America alone.

The majority of Kumon centers are individually owned and operated through a franchise system. Of the centers located in the United States, only 27 are not operated as franchises. Franchisee instructors are certified to teach the Kumon method after undertaking a company-training course. Franchising

agreements span a period of five years and are renewable at the end of the term. Kumon has been named the leading franchise in the afterschool education industry by Entrepreneur magazine for over a decade.

Financial performanceDuring the five years to 2014, Kumons industry-relevant revenue is expected to grow at an average annual rate of 1.7% to $75.0 million, making the company the largest franchiser in the United States. Despite the industrys struggles, company revenue is forecast to increase in five consecutive years to 2014. Kumon has benefited from its strong brand recognition for quality and results. Coupled with the increasingly competitive environment for college admission, with many parents willing to pay for tutoring to give their children an

Major CompaniesKumon North America Inc. | Other Companies

91.3%Other

Kumon North America Inc. 8.7%SOURCE: WWW.IBISWORLD.COM

Major players(Market share)

Kumon North America Inc. (US industry-relevant segment) fi nancial performance*

YearRevenue

($ million) (% change)Operating Income

($ million) (% change)

2009 69.0 N/C 7.0 N/C

2010 70.0 1.4 7.5 7.1

2011 72.0 2.9 7.6 1.3

2012 73.0 1.4 9.3 22.4

2013 75.0 2.7 9.5 2.2

2014 75.0 0 9.3 -2.1

*EstimatesSOURCE: ANNUAL REPORT AND IBISWORLD

Kumon North America Inc. Market share: 8.7%


Major Companies

Other Companies Educate Inc. Estimated market share: 4.5%Educate Inc. provides tutoring and other supplemental educational services to children from K-12 schools and learning centers. The companys Sylvan Learning Center was founded in 1979 and provides tutoring services at 585 centers in the United States and over the internet. Sylvan provides tutoring in reading, writing, math and study skills, while also offering test-prep services for college entrance exams. Through its Catapult Learning segment, Educate provides tutoring and other supplemental education services to students in public and private schools through government-funded contracts. In 2014, the company is estimated to generate about $38.7 million in industry-relevant revenue.

Huntington Learning Centers Inc. Estimated market share: 3.5%Established in 1977, Huntington Mark opened its first location in Oradell, NJ. The company has been accredited by the Middle States Association of Colleges and Schools since 1996. Huntington provides tutoring for academic skills in reading, writing, mathematics and vocabulary for students of varying ages. The company also provides specific subject tutoring ranging from algebra to physics. Also, Huntington provides exam preparation courses for K-12 students, including test preparation for SATs, ACTs, AP courses and other preuniversity exams. In 2014, the company is expected to generate about $30.1 million in industry-relevant revenue.

Player Performancecontinued

advantage at a young age, the company has seen its tutoring revenue for K-12 students rise consistently over the past five years. Profitability has also

improved, growing at an annualized rate of 5.8% during the five years to 2014, with margins well exceeding the industry average.


Capital Intensity The Tutoring and Test Preparation Franchises industry has a low level of capital intensity. For every $1.00 spent on labor in 2014, industry operators will invest an estimated $0.05 on capital equipment. Capital investment in this industry, as with other education related industries, is largely limited to computer software to compliment in-person tutoring. In addition to facilitating learning, computer software allows larger operators to automate test delivery and grading services, slightly reducing their requirements for labor. Capital intensity has, however, declined slightly over the past five years. In 2009, for every $1.00 spent on labor, industry operators invested an estimated $0.07 on capital equipment. Capital investment declined

partly due to establishments being able to rent premises on an as-required basis; particularly for those firms offering

Operating ConditionsCapital Intensity | Technology & Systems | Revenue VolatilityRegulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


Labo

r Int

ensi

veCapital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services, Health and Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old Economy

Agriculture and Manufacturing. Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment Economy

Information, Communications, Mining, Finance and Real Estate. To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Business Coaching

Public SchoolsComputer Stores

Private Schools


Level The level of capital intensity is Low

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit


Other Services (except Public Administration)

Economy

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit


Other Services (except Public Administration)

Economy


Operating Conditions

Revenue Volatility Despite the turbulence of the recession and subsequent recovery, the Tutoring and Test Preparation Franchises industry has experienced a low level of revenue volatility over the five years to 2014. During the period, revenue declined as much as 1.4% in 2011 and is expected to increase to a five-year high of 1.3% in 2014. Fluctuations in industry revenue largely follow trends in per capita disposable income. Clients are more likely to purchase tutoring and test preparation services when disposable income rises, as these services are discretionary. The relative stability of industry revenue growth is,

however, underpinned by the stability of broad demographic trends; from year to year, the number of student enrollments at elementary, secondary and higher education institutions is relatively stable.

Changes in government policy and funding introduce a moderate level of variability and therefore risk for industry operators. Changes in the level of government funding of education can affect the provision of non-instructional services. In years of budget shortfall, schools and other educational organizations will have fewer resources to pay for educational

Technology& Systems

The Tutoring and Test Preparation Franchises industry has a low level of technological change. As the industry does not include online-only tutoring services, the nature of industry services has remained labor intensive during the past five years, and will continue to remain so moving forward. The majority

of industry services involves a classroom setting and does not require a high level of technology beyond standard computer equipment and software. Nonetheless, industry operators are increasingly utilizing computers and software that can administer practice tests and provide immediate feedback.

Capital Intensitycontinued

short-term courses. Furthermore, during the recession establishments delayed upgrading their capital equipment, in an effort to cut operating expenses.

As with most industries in the education sector, wages and salaries account for a high proportion of industry revenue. In 2014, wages are estimated to account for 57.1% of industry revenue, whereas depreciation is expected to account for just 3.0% during the year. While the capital intensity of firms varies based on the type of services offered, teaching is done on a face-to-face basis, which is unlikely to change. Industry

operators must hire highly educated employees with appropriate accreditation to tutor students. Additionally, employees that provide test preparation services tend to be former students that have already successfully completed the test for which they are teaching. While the development new test preparation and tutoring services via computer-based programs may complement industry services, labor will remain a critical component moving forward. This is especially so because online-only operators are excluded from this industry.

Level The level of Technology Change is Low

Level The level of Volatility is Low



Regulation & Policy The Tutoring and Test Preparation Franchises industry faces a low level of regulation. In general, industry firms are able to operate with considerable independence and autonomy. Industry operators are not required to participate in accreditation programs, although some do to establish and maintain a good reputation. For example, Sylvan Learning Center (owned by Educate Inc.) was the first supplemental education provider to earn accreditation by the Commission on International and Trans-Regional Accreditation (CITA). Accredited schools must abide by various rules and regulations, and so accreditation certifies that they meet standards of educational quality.

Under the No Child Left Behind (NCLB) Act of 2001, the federal government provides funding to school districts to supply free afterschool tutoring to low-income students attending a failing school. Eligible students can seek free tutoring from a list of state-approved providers of supplemental educational services (SES). Approved tutoring operators have a responsibility under the NCLB legislation to provide course content that is adequate to achieve certain educational gains. They must also report student progress to the local educational agency and to parents. Instruction must also be secular, neutral and nonideological.

Revenue Volatilitycontinued

support services. Legislative changes have also impacted demand for academic testing services, as demonstrated by the No Child Left

Behind Act of 2001. Changes to this legislation and other legislation concerning education industries will raise revenue volatility.


Volatility vs Growth

Reve

nue

vola

tility

* (%

)

1000

100

10

1

0.1

Five year annualized revenue growth (%)30 10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level & Trend The level of Regulation is Light and the trend is Steady



Industry Assistance The Tutoring and Test Preparation industry has a low level of industry assistance. Tutoring and supplemental education services providers can receive federal funding under the No Child Left Behind (NCLB) Act of 2001. The act subsidizes afterschool tutoring at private establishments for students from low-income families who attend eligible schools. This provision has boosted demand for industry services considerably by both promoting tutoring services and funding them at a federal level. Some

industry operators generate a significant portion of their revenue from these programs. However, the future of NCLB is uncertain, as funding for the program is expected to fall moving forward.

A number of industry associations provide assistance to industry operators. For example, the Education Industry Association (EIA) provides information, professional development and advocacy services for its members in this industry. The EIA has over 800 corporate and individual members.

Level & Trend The level of Industry Assistance is Low and the trend is Steady


Key StatisticsRevenue

($m)

Industry Value Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages ($m)

Domestic Demand

Per capita dis-posable income

($)2005 721.6 405.3 1,881 792 27,587 -- -- 326.2 N/A 34,4282006 772.0 439.5 2,017 849 30,757 -- -- 355.1 N/A 35,4612007 867.3 461.5 2,395 1,004 34,099 -- -- 367.1 N/A 35,8702008 858.8 491.3 2,509 1,061 37,173 -- -- 390.8 N/A 36,0822009 849.4 456.0 2,531 1,071 39,122 -- -- 394.4 N/A 35,6002010 856.3 486.9 2,663 1,122 43,683 -- -- 425.3 N/A 35,7052011 844.5 533.4 2,745 1,157 49,122 -- -- 456.7 N/A 36,2942012 842.8 544.6 2,813 1,187 50,248 -- -- 464.8 N/A 36,7592013 850.3 557.6 2,882 1,216 51,870 -- -- 478.0 N/A 36,7712014 861.0 572.6 2,967 1,254 53,436 -- -- 491.4 N/A 37,7092015 879.9 593.8 3,053 1,289 55,508 -- -- 509.9 N/A 38,7082016 901.1 615.2 3,156 1,333 57,528 -- -- 528.4 N/A 39,4962017 917.1 635.4 3,253 1,374 59,553 -- -- 546.1 N/A 40,3512018 934.4 655.0 3,355 1,418 61,444 -- -- 563.1 N/A 41,2322019 953.6 677.1 3,449 1,458 63,596 -- -- 582.3 N/A 42,016

IVA/Revenue (%)

Imports/Demand

(%)

Exports/Revenue

(%)

Revenue per Employee

($000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of the Economy

(%)2005 56.17 N/A N/A 26.16 45.21 14.67 11,824.41 0.002006 56.93 N/A N/A 25.10 46.00 15.25 11,545.34 0.002007 53.21 N/A N/A 25.43 42.33 14.24 10,765.71 0.002008 57.21 N/A N/A 23.10 45.51 14.82 10,513.01 0.002009 53.68 N/A N/A 21.71 46.43 15.46 10,081.28 0.002010 56.86 N/A N/A 19.60 49.67 16.40 9,736.05 0.002011 63.16 N/A N/A 17.19 54.08 17.90 9,297.26 0.002012 64.62 N/A N/A 16.77 55.15 17.86 9,250.12 0.002013 65.58 N/A N/A 16.39 56.22 18.00 9,215.35 0.002014 66.50 N/A N/A 16.11 57.07 18.01 9,196.05 0.002015 67.48 N/A N/A 15.85 57.95 18.18 9,186.06 0.002016 68.27 N/A N/A 15.66 58.64 18.23 9,185.09 0.002017 69.28 N/A N/A 15.40 59.55 18.31 9,169.98 0.002018 70.10 N/A N/A 15.21 60.26 18.31 9,164.44 0.002019 71.00 N/A N/A 14.99 61.06 18.44 9,156.24 0.00

Figures are inflation-adjusted 2014 dollars.

Revenue (%)

Industry Value Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

Domestic Demand

(%)

Per capita dis-posable income

(%)2006 7.0 8.4 7.2 7.2 11.5 N/A N/A 8.9 N/A 3.02007 12.3 5.0 18.7 18.3 10.9 N/A N/A 3.4 N/A 1.22008 -1.0 6.5 4.8 5.7 9.0 N/A N/A 6.5 N/A 0.62009 -1.1 -7.2 0.9 0.9 5.2 N/A N/A 0.9 N/A -1.32010 0.8 6.8 5.2 4.8 11.7 N/A N/A 7.8 N/A 0.32011 -1.4 9.6 3.1 3.1 12.5 N/A N/A 7.4 N/A 1.62012 -0.2 2.1 2.5 2.6 2.3 N/A N/A 1.8 N/A 1.32013 0.9 2.4 2.5 2.4 3.2 N/A N/A 2.8 N/A 0.02014 1.3 2.7 2.9 3.1 3.0 N/A N/A 2.8 N/A 2.62015 2.2 3.7 2.9 2.8 3.9 N/A N/A 3.8 N/A 2.62016 2.4 3.6 3.4 3.4 3.6 N/A N/A 3.6 N/A 2.02017 1.8 3.3 3.1 3.1 3.5 N/A N/A 3.3 N/A 2.22018 1.9 3.1 3.1 3.2 3.2 N/A N/A 3.1 N/A 2.2

2019 2.1 3.4 2.8 2.8 3.5 N/A N/A 3.4 N/A 1.9

Annual Change

Key Ratios

Industry Data



Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that new companies struggle to enter an industry, while low barriers mean it is easy for new companies to enter an industry.

CAPITAL INTENSITY Compares the amount of money spent on capital (plant, machinery and equipment) with that spent on labor. IBISWorld uses the ratio of depreciation to wages as a proxy for capital intensity. High capital intensity is more than $0.333 of capital to $1 of labor; medium is $0.125 to $0.333 of capital to $1 of labor; low is less than $0.125 of capital for every $1 of labor.

CONSTANT PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using the current year (i.e. year published) as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the real growth or decline in industry metrics. The inflation adjustments in IBISWorlds reports are made using the US Bureau of Economic Analysis implicit GDP price deflator.

DOMESTIC DEMAND Spending on industry goods and services within the United States, regardless of their country of origin. It is derived by adding imports to industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time, temporary and seasonal employees, working proprietors, partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed and keeps management accounts. Each enterprise consists of one or more establishments that are under common ownership or control.

ESTABLISHMENT The smallest type of accounting unit within an enterprise, an establishment is a single physical location where business is conducted or where services or industrial operations are performed. Multiple establishments under common control make up an enterprise.

EXPORTS Total value of industry goods and services sold by US companies to customers abroad.

IMPORTS Total value of industry goods and services brought in from foreign countries to be sold in the United States.

INDUSTRY CONCENTRATION An indicator of the dominance of the top four players in an industry. Concentration is considered high if the top players account for more than 70% of industry revenue. Medium is 40% to 70% of industry revenue. Low is less than 40%.

INDUSTRY REVENUE The total sales of industry goods and services (exclusive of excise and sales tax); subsidies on production; all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); and capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industrys contribution to GDP, or profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international trade is determined by ratios of exports to revenue and imports to domestic demand. For exports/revenue: low is less than 5%, medium is 5% to 20%, and high is more than 20%. Imports/domestic demand: low is less than 5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth, maturity and decline. IBISWorld determines an industrys life cycle by considering its growth rate (measured by IVA) compared with GDP; the growth rate of the number of establishments; the amount of change the industrys products are undergoing; the rate of technological change; and the level of customer acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with no paid employment or payroll, also known as nonemployers. These are mostly set up by self-employed individuals.

PROFIT IBISWorld uses earnings before interest and tax (EBIT) as an indicator of a companys profitability. It is calculated as revenue minus expenses, excluding interest and tax.

VOLATILITY The level of volatility is determined by averaging the absolute change in revenue in each of the past five years. Volatility levels: very high is more than 20%; high volatility is 10% to 20%; moderate volatility is 3% to 10%; and low volatility is less than 3%.

WAGES The gross total wages and salaries of all employees in the industry. The cost of benefits is also included in this figure.

Industry Jargon

IBISWorld Glossary

FRANCHISING The practice of using another firms business model and brand name for a fee.

PRIMARY SCHOOL An educational institution in which children receive the first stage of compulsory education.

SECONDARY SCHOOL An educational institution following primary education.

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IBIS Tutoring & Test Preparation Franchises Industry Report (1).pdf

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