This Franchise Chatter report on tutoring franchises was written by Brian Bixler.
Tutoring franchises learned a harsh lesson during the recent economic downturn in the United States: When times are tough for American families and money is tight, supplemental education programs take a hit as parents have less discretionary income to hire private tutors to help children with their school work.
According to an IBISWorld market research report released in March 2013, annual revenue for tutoring and test preparation franchises declined 0.2 percent from 2008-2013. Moreover, profitability has been squeezed due to an increase in wages for highly qualified employees that franchises are hiring to compete with cheaper online programs. As a result, profit fell from about 7.4 percent of revenue in 2008 to 6.4 percent in 2013, according to IBISWorld.
But potential franchisees should not be discouraged by those numbers. Tutoring and test preparation is a $4.5 billion industry fueled by parents who want their children to do well in their elementary, secondary and post-secondary education. It is still a growth industry and as economic conditions improve and unemployment rates decrease, the tutoring franchise industry is expected to bounce back.
Nearly 60 franchise companies compete for market share in the U.S., with additional companies expected to enter the sector during the next five years. In addition to going up against leaders such as Kumon, Sylvan Learning and Huntington Learning Centers, smaller franchises must also compete with numerous boutique firms as well as private tutors who might service a local area.
However, the competitors to worry about might well be online services that offer affordable and convenient services accessed via computer. Parents seem to like the lower price of Internet services as well as the fact that children can make use of them any time of day, rather than scheduling a specific time, which is usually required by most brick-and-mortar franchises.
Some companies in the industry are countering the cyber attack by adopting their own online services, but the most prevalent strategy has been to beat the online bunch by hiring employees with excellent teaching credentials to sway parents in their direction. The downside of such practices is they increase costs for wages and further stymie profitability.
While competition is expected to increase in the next five years, there are some bright spots in the forecast for tutoring and test preparation franchises.
“In the five years to 2018, the industry will benefit from rising employment, school enrollment, government funding and disposable income,” the IBISWorld report states.
Changes in Education
Still, franchisors are limited in what they can do with their business models to stay competitive. Many of their costs, such as rent, utilities and administration, are fixed. Perhaps more than other businesses, they can also be more susceptible to external forces such as government regulation and changes in educational standards in the United States.
It is unclear what effect the College Board’s decision to change the Scholastic Aptitude Test will have on the industry. Early in 2014, the board announced that the test’s format will change in 2016 by making the essay section optional, eliminating penalties for guessing wrong, and removing rarely used vocabulary words.
Students generally use exam preparation services for the SATs, ACTs and other college placement exams. College students use industry services for graduate school admissions exams such as the GMAT, LSAT and MCAT. Test preparation represents 35 percent of the franchise business with tutoring services making up 65 percent.
With enrollment growth in elementary and secondary schools and colleges projected to remain steady in the next five years, there should be continued demand for supplemental education services. College enrollment alone is estimated to increase by 0.8 percent annually on average to 16.5 million by 2018.
The bottom line from IBISWorld is that tutoring and test preparation franchises should see revenues increase at an annualized rate of 0.9 percent to $876.9 million by 2018.
- Parents, particularly those that would like to see their children attend Ivy League schools, are growing increasingly concerned about the education their children are getting in public schools. Such concerns are driving demand in the industry. Parents are turning to private tutoring services as student numbers (and class sizes) in schools increase along with academic competition. Tutoring is especially popular for K-12 students because college students have better access to tutoring programs that exist on campus.
- Expect franchisors to offer more online education systems to combat online-only programs that are eating away at revenue. Pricing will also become more important. Franchises are already offering a range of price points to compete with online competitors and make themselves more affordable to parents who may be experiencing declining income. Finally, franchisors will continue to implement new marketing plans to differentiate their products, emphasize teacher quality and the benefits of their systems.
- A move toward cheaper online resources and decreased reliance on tangible educational materials should reduce costs and help boost profitability.
- Employment opportunities in the tutoring and test preparation field will continue to expand as franchises differentiate themselves by the quality of their employees. Industry employment grew an estimated 4 percent annually from 2008-2013. At the same time, wages increased 6.3 percent annually on average.
- The number of students in grades kindergarten through 12th grade will continue to rise, creating greater competition for eventual college admission. The trend stimulates demand for exam preparation and tutoring services.
- The students using tutoring programs are progressively younger than in previous years as parents enroll their children early, sometimes even at preschool age. For example, industry leader Kumon has attributed the success of its preschool program to this strong enrollment growth. This growing market should spur growth in the number of companies at a rate of 5.2 percent annually, with tutoring and test preparation franchises reaching some 72 companies by 2018.
Kumon Math & Reading Centers
According to IBISWorld, Kumon is the industry leader with 8.9 percent market share. Interestingly, the parent company was founded in Japan in 1958. Its founder, a high school math teacher named Toru Kumon, developed the Kumon method when his son was struggling with second-grade arithmetic.
Kumon has been a recognizable brand in North America since it opened its first location in New York in 1974. Providing tutoring primarily in mathematics and reading, it is estimated to have 340,000 students enrolled in more than 2,000 units spread throughout North America alone. Globally, Kumon has more than 25,000 locations, serving some 4.3 million students, according to its most recent annual report.
It has been ranked as the leading franchise in the sector for 13 straight years by Entrepreneur magazine and has landed in the top 20 of the magazine’s Franchise 500 for the last five years.
The company’s earnings are reported in yen. The latest annual report shows that sales were up 7.3 percent and net income increased a whopping 70.5 percent.
Better known for its flagship company, Sylvan Learning, Educate Inc. captures 4.5 percent of the fragmented market, according to IBISWorld; however, Entrepreneur ranks two competitors, Eye Level and Club Z! In-Home Tutoring Services, above Sylvan on its 2014 Franchise 500 list.
Sylvan Learning was founded in 1979 and provides tutoring services at some 900 centers in North America and over the Internet. In addition to Sylvan’s tutoring programs for students K-12, Educate Inc.’s Catapult Learning segment provides tutoring and other supplemental education services to students in public and private schools through government-funded contracts.
Educate Inc. is owned by a consortium of investors, including majority owner Sterling Partners, which took Sylvan Learning private in 1997.
Because of stunted growth brought on by the recession, which prompted several unit closings, the company has invested heavily in upgrading technology during the past few years, including the launch of SylvanSync. The new digital teaching platform allows owner/operators to receive and share educational materials via iPad, allowing existing franchisees with a bricks-and-mortar center to expand their reach in satellite facilities such as schools, libraries and community centers, providing more options, convenience and flexibility to clients.
While Sylvan comes in second in market share, it enjoys 94 percent brand recognition among consumers, according to its website.
Huntington Learning Centers
Established in 1977, Huntington has grown to become an industry leader with an estimated 3.5 percent market share, according to IBISWorld. The company has been accredited by the Middle States Association of Colleges and Schools since 1996.
Like many of its competitors, it provides tutoring for academic skills in reading, writing, mathematics and vocabulary for students of varying ages, but it differentiates itself by also providing tutoring for specific subjects such as algebra and physics. Additional revenue comes from test preparation services for students K-12, especially to get students ready for taking SATs, ACTs, AP courses and other pre-university exams.
With some 234 franchises and 32 company-owned units—all of them in the United States—Huntington has far fewer units than other competitors. It also ranks lower on the Entrepreneur Franchise 500 than newcomer Tutor Doctor as well as more established companies such as Eye Level, Club Z! and JEI Learning Centers.
However, the Huntington brand has longevity as the oldest national provider of supplemental education services for the K-12 market. The company is still run by its founders, Dr. Raymond and Eileen Huntington, both of whom have extensive backgrounds as educators.
Eye Level Learning Center
During the last five years, Eye Level has been inching its way up the Entrepreneur Franchise 500 list, from No. 125 in 2010 to the No. 69 spot in 2014, making it the second-highest tutoring franchise on the list behind Kumon.
The company was established in Korea in 1976 under the Daekyo brand and in 1991 the company established Daekyo America, better known by the Eye Level brand (or E.nopi). Today the parent company has tutoring centers in more than 16 countries that use a learning method developed by Dr. Young Joong Kang.
Setting itself apart from its competitors, Eye Level emphasizes individual learning, adjusted to the performance level of each student. Self-directed learning and critical thinking are at the core of the Eye Level philosophy, which provides a customized learning experience for students.
With some 1,150 units worldwide, including 600 company-owned operations, Eye Level is also considered one of the fastest-growing franchises in the United States, ranking among Entrepreneur’s top 50 for growth in 2014. It has more than 220 centers in North America and continues to grow in the United States by covering topics outlined in the Common Core State Standards. According to the company’s website, the number of locations in the country increased nearly 40 percent from 2012-2013, from 157 to 218.
Club Z! In-Home Tutoring Services
The name of the company indicates how it differentiates itself from other tutoring franchises. Tutors will make house calls to create a customized program for individual children. It also provides small-group services at locations such as school campuses and libraries.
Club Z! is one of the newer tutoring and test preparation franchises in the United States. Founded in Tampa, Fla., in 1995, it began franchising in 1998. Since then, it has grown to some 400 units in the United States and a few in Canada.
Franchisees offer one-on-one, in-home tutoring services, including preparation for ACTs and SATs and tutoring subjects include foreign languages, computers and music, and other academic pursuits. In addition, the company is an approved supplemental educational services provider in more than 40 states under the No Child Left Behind Act.
Franchisees also have access to the company’s proprietary Z! Tutor Match system. The system strives to match students with the most appropriate tutor based on personality, learning preferences, and academic strengths and weaknesses. The company has gone so far as to guarantee matching students to the right tutor every time.
The industry has a large number of similar-sized firms that cater to the U.S. market, including the Tutoring Center and Above Grade Level In-Home Tutoring, that are vying for greater market share. Low barriers to entry and increasing demand for test preparation services will continue to encourage new operators to enter the industry, but firms that specialize in tutoring services will remain slightly fragmented with some serving a specific geographic region only.