A class act

In full bloom

Tree House has near-perfected the art of running its pre-school business through its self-owned and lease strategy

It was a nightmare countless urban parents live through annually. Ten years ago, Rajesh Bhatia could not get the ‘first-come-first-served’ admission to a good preschool for his 2-year-old son. What’s more, an investment banker at the time, Bhatia had no strings to pull. To his credit, Bhatia turned the dead-end into a turning point. “I realised that there was a need for good quality, affordable preschools in Mumbai,” says the managing director of Tree House Education Accessories, who quit his job in January 2003 to set up the company’s first preschool in a leased 2,000 sq ft property in the western Mumbai suburb of Andheri. 

“My wife and I were completely hands-on in running our first school,” Bhatia says of Tree House’s flagship centre into which he invested his savings. “We spent all our time trying to understand how we could offer the best education at an affordable price.” By 2006, Bhatia had opened six more centres and, in 2008, Tree House got its first round of private equity (PE) funding: $7 million from Matrix Partners India. There has been no looking back since then. 

Today, Tree House runs 304 centres in 37 cities, including Pune, Kolkata, Ranchi and Patna with over 1,000 teachers. Renuka Sridhar, a resident of Andheri in suburban Mumbai, which incidentally is Tree House’s biggest market, says, “The playschool’s refreshing style of teaching ensured that my daughter learnt and enjoyed her year at the school.” Not surprisingly, investors, too, have shown their faith: Matrix invested another $3 million in 2010; FCVI India Venture pumped in $6 million in 2011; and in the same year Tree House went public by raising Rs.114 crore.

Besides preschools, Tree House also runs 21 K-12 (kindergarten to class 12) schools in Rajasthan, Maharashtra and Gujarat. The company follows a management services model for this segment, entering into 30-year long-term agreements with schools that pay an annual consultancy fee to Tree House and a share in revenue for every child enrolled.

The company’s third vertical is teacher training: a 3-month training programme priced at Rs.18,000 is currently available at over 50 centres. Most trainees are absorbed by the chain, which keeps staff costs under control. An after-school activity programme and a day care centre are other asset utilisation strategies. But for now, preschools remain Bhatia’s bread and butter business, contributing a huge 85% to the Rs.81 crore business, with K-12 chipping in 8-10%.

To franchise or not

India has about 22 preschool brands (Kangaroo Kids, Euro Kids and Kidzee are well-known names) and most of them have opted for the franchise route to expansion. What sets Tree House apart is its differentiated business model: nearly 80% of Tree House schools are owned by the company (only 65 out of the 304 schools it operates are franchised, and then only in tier 3 and 4 towns).

Bhatia is convinced that the self-operated model is the only way to succeed in the education business. “Profit is only the by-product,” he insists. “My focus is on offering quality education and a franchise model will never give the desired quality.” When he does resort to franchising, he picks the real estate, hires and trains teachers, and pre-selects the curriculum: “I am personally involved in everything and I ensure that my franchise partner grows as much as I do.”  

Tree House’s investors have another compelling reason for believing in his business model: they say only a self-owned model can be scaled up.  “Franchising may lead to quicker cash flow, but it’s not a scalable model. A company-owned model enables better quality control and higher margins,” says Rishi Navani, managing director, Matrix India, which has a 33% stake in Tree House. 

Not everybody agrees. “When real estate cost comprises 60% of the cost of setting up a school, only the franchise model is viable,” says the head of a leading preschool chain, who does not wish to be named. Setting up a school in a city, she says, can cost Rs.40-50 lakh and scaling up without a partner is impossible.

There are other ways of looking at this. Debabrat Mishra, founding partner of the online education start-up, UbQool, recommends the franchise model only if non-core operations such as administration and real estate are franchised. Bhatia clarifies that his franchise partners handle only the administration; he takes care of everything else: right from the curriculum to training teachers. 

Tree House’s self-operated schools follow a rental model where property is taken on lease for three to five years at Rs.200-300 per sq ft as rent in an upmarket locality such as Bandra in Mumbai, or Rs.100-150 in a more middle-class suburb such as Thane. The company then calibrates its fees to the rentals: the annual fee for a student at the centre in Bandra is about Rs.60,000 a year, and Rs.35,000 in Thane. Each playschool has about 75 children per academic year.

The math of schooling

While there’s no doubt that the preschool segment has enormous opportunity to grow, Raj Grover, advisor and consultant, Kangaroo Kids Education, cautions, “It’s a complex business to understand, and one can’t run it unless one is extremely passionate about it.” He adds that despite the segment’s growth potential, with increasing spending powers, the cost of setting up a school is much higher than the ability to raise fees. 

Matrix’s Navani agrees that high real estate costs, employee salaries and tech investments make the business challenging. “But Rajesh Bhatia has done a great job in perfecting the model,” Navani feels. “There were only five Tree House preschools in the first five years. Bhatia perfected the model before he embarked on an expansion spree and that’s the reason why I have invested in the company.”

The numbers only buttress what Navani is saying. Over FY08-FY12, Tree House’s revenue has grown at 96% CAGR driven by centre additions and improved utilisation of existing centres. Over the same period, operating margins expanded from 17% to 54%, thus leading to an operating profit CAGR of 165% over the period. In Q1FY13, profits were up 54% to Rs.8 crore and sales rose 69% to Rs.28 crore. Analysts believe the high operating margin gives it enough leeway to compete in a price-war scenario, especially given its concentration in Mumbai.

Running 127 centres in Mumbai is a conscious decision. “We are concentrated in Mumbai because it’s a high density market unlike other cities”, says Bhatia. “In certain centres we run a third shift in evenings, which is reflective of the brand pull rather than brand push. Besides, the moment we do a third shift, the impact on operating margins is high.” 

In FY13, the company is looking at 25-30% growth with 400 centres. Not surprisingly, against such a backdrop the stock has risen over 67% from its offer price of Rs.135 a share to Rs.226 levels.

So, what’s next for Rajesh Bhatia’s Tree House? UbQool’s Mishra believes, “Tree House needs to think of a larger K-12 set-up to spread the cost of infrastructure and administration, and to make the company more cost-efficient.” However, Bhatia loves preschool and that’s where he wants to remain — as a household name in preschooling across the country.