The history of the private education market in Brazil has been marked by periods of euphoria and crisis. This market enjoys a significant competitive advantage over many others, as it is viewed as a basic necessity and is therefore the last to be affected by its clients’ budget cuts. This advantage, however, comes with a significant downside: because it is a service that places a very heavy financial burden on its customers, in times of crisis it is very difficult to avoid significant revenue losses, notably in the form of increased requests for discounts and rising delinquency rates.

            The general public’s perception of a private school is that it is a low-risk and extremely profitable business. The reality, however, is not quite like that. The average profitability of a private school varies depending on external factors, particularly those related to the macroeconomy, but generally ranges between 9% and 11% of revenue. It is an average—and this is crucial to emphasize—with a large standard deviation. There are schools that achieve profit margins of over 20%. And there are many schools whose margins are close to zero, if not even negative for many periods. The realization that this is a market with only reasonably average profitability and a high standard deviation rules out the notion that it is a low-risk business.

            The level of this risk, however, varies from period to period—and reaches its highest levels during times of crisis. Looking at market history, we can identify four crises that significantly impacted average returns:

• The period between the Cruzado Plan and the Real Plan (1986–1994). During those years, there was no crisis in demand, but the market operated in an atmosphere of extreme turmoil due to government actions, which constantly sought to prevent schools from making the necessary adjustments to cope with rampant inflation. It was a very difficult period for schools. Many were on the verge of closing because their prices could not cover their costs.
• The second half of the 2000s and the early 2010s. There was a serious mismatch between the growth in supply and demand for spots in the sector. Demand continued to grow, but supply increased dramatically with the opening of new schools and courses, leading to a crisis of underutilization that hit many institutions hard.
• From 2014 to 2017, Brazil experienced its worst recession in history, and this affected schools, which saw a surge in applications for financial aid and a spike in delinquency rates.
• The COVID-19 pandemic is still ongoing. Schools have faced a “perfect storm”: a loss of students, an increase in discounts and delinquencies, and a sharp decline in the availability of extracurricular activities.

The extent of the damage caused by the current crisis can only be effectively measured once it is over—which has not yet happened, and it is unclear when it will. It can already be said, however, that this crisis has hit schools offering only early childhood education the hardest. And the impact is by no means small: in the city of São Paulo, for example, 80% of students enrolled in early childhood education at private schools were, before the pandemic, attending institutions that offered only this program. This is a highly fragmented segment of the market, but also a significant one in terms of volume.

These schools have experienced an unprecedented level of closures since the start of the pandemic. Worse still, many of those that have survived so far will not be able to last much longer. To weather the worst of the crisis, these schools had to take on an alarming level of bank and tax debt. Even if they manage to partially recover their profitability, it will not be enough to meet the commitments they have made.

At the turn of the first to the second semester of 2021, schools began to bring back students they had lost. Similarly, extracurricular activities—especially full-day programs—regained their importance. If health indicators continue to improve and there are no new setbacks, schools can look forward to a 2022 that is close to pre-pandemic normalcy in terms of financial health.

To that end, however, there is some work to be done, and it is being called for now. Schools need to be mindful of some specific issues at this time:

• The end-of-year enrollment period should be moved up, as there are a huge number of families who will be looking for early childhood education schools for their children for the 2021 school year—a phenomenon that was uncommon before the pandemic.
• The school's health and safety measures should become part of its marketing message highlighting its unique features.
• Extracurricular activities should be prioritized, within the limits of health protocols. Families, in general, are eager for this offering and tend to choose schools that offer the broadest and most interesting range of activities.
• The additional discounts offered to parents due to the pandemic should be reviewed. There is no way to avoid this face-to-face interaction, and the initiative will have to come from the school. Each percentage point of discount has a significant impact on each institution’s profitability.
• Pricing for 2022 must take cost projections into careful consideration. Profit margins are too low to allow for adjustments that fall short of what is necessary. Therefore, everyone must keep a very close eye on inflation projections.

Now is the time for rebuilding. Those who survive what is shaping up to be the worst crisis in the history of private education will likely emerge stronger. This is one final characteristic of the private education sector: it is extremely resilient. Crises come and go, and private education grows stronger with each one.

 

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Learn more about the author:

Fernando Barão

With a degree in Economics from the School of Economics and Business Administration at USP and an MBA in Business Economics from USP, Barão served as director of Sieeesp (Union of Educational Institutions of the State of São Paulo) and managed private schools for nine years. He serves on the board of several educational institutions. He has been working as a business consultant since 1994.

 

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