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Kids Quest seeking path to profit, expansion

By Jim McCartney

Does daycare mix with retail? Perhaps if it expands its market to include staff as well as shoppers.

New Horizon Kids Quest at Mall of America, an hourly childcare center, is hoping eventually to expand into other shopping centers.

New Horizon Kids Quest made its debut at Mall of America last spring.

Kids Quest said it has had plenty of interest from other malls since its spring 1998 debut at the Bloomington, Minn., megamall, but the firm isn't ready to launch its expansion. That's because the childcare company based in Plymouth, Minn., has not figured out how to make money yet.

In fact, William Dunkley, the CEO of New Horizon Kids Quest, singled out the center in his company's fourth-quarter report, saying that the company was "very disappointed'' in the megamall outpost, especially over the holiday season.

"It's been slower than we anticipated,'' said Sue Dunkley, president of New Horizon Kids Quest. She and her husband, William Dunkley, founded New Horizon Kids Quest in the early 1970s as a chain of daycare centers.

Despite getting a reduced rent from Knott's Camp Snoopy and the owners of Mall of America (Teachers Insurance Annuity and Simon Property Group), Kids Quest lost $454,184 last year, including $130,941 in the fourth quarter alone.

Sue Dunkley feels that the center just hasn't been promoted and marketed enough by fellow megamall tenants. An out-of-the-way location far from adult nightlife activities on the fourth floor also has hurt sales, she said.

"We're working with tenants on making shoppers more aware of the availability of our services,'' said Troy Dunkley, a vice president at the company and the son of Sue and William Dunkley.

"Most people now just seem to stumble on Kids Quest. We'd like people to plan to use us as part of their plans for an evening of dinner and a movie.''

The company invested about $2 million in a state-of-the-art hourly childcare facility that overlooks Camp Snoopy. The 18,000-square-foot center, which can take children ranging from six weeks to 12 years of age, features an elaborate climbing maze, interactive karaoke stage and electronic games. It also offers play areas featuring Barbie dolls, Legos and Duplos, and a separate play and sleeping area for infants and toddlers.

But while Kids Quest can handle with adequate staffing up to more than 200 kids at any given time, it has cared for a maximum of only 120, and most days it attracts just a fraction of that.

In addition to new marketing and awareness programs, Kids Quest hopes to boost sales at its megamall unit by selling reserved slots to retailers at the mall for use by employees who have an emergency need for daycare. Kids Quest is offering the retailers a guaranteed spot at a discounted prepaid rate. Kids Quest hopes to sign up to 40 slots. The company is also looking into blocking off part of its large center for permanent daycare for mall employees, according to Troy Dunkley.

Offering hourly childcare to time-strapped shoppers who don't want to worry about losing Junior in a maze of clothes racks would seem to be a no-brainer of a business. Add to that a lavish, state-of-the-art childcare entertainment facility in the country's biggest, busiest mall already oriented to families, and you would seem to have a winning proposition.

But Kids Quest officials knew it was no sure bet. The megamall center isn't the firm's first venture into shopping centers. For nearly five years, it has operated a smaller hourly childcare center at the Eden Prairie (Minn.) Center, and so far it has yet to make money there. The company recently negotiated its lease at the center, which has had struggles of its own, and Kids Quest now operates on a month-to-month basis, Troy Dunkley said.

Yet the struggles are not due to inexperience. Kids Quest brings more centers to the table than most similar enterprises. It owns 86 childcare facilities, including 49 private daycare centers in 11 states.

But for the most part, it's been a struggle. The company has eked out a profit the last two years, ending 1998 with net earnings of $21,508 on sales of $15.6 million. Kids Quest went public in 1995 at $5 a share, rose to a high of $12.25 in June of 1996, but then fell to a low of $1.68 a share in late January. At press time, it was at $1.6275 per share.

Nor is Kids Quest by any means the first company to run into trouble making money selling childcare in shopping malls. A few years ago, Amazing Space, another child entertainment facility at the megamall, lasted less than a year before closing.

Other "pay for play'' concepts in Twin Cities centers also have had trouble making money, such as Jumpin' Jax (in Maplewood Mall and Burnsville Center) and Discovery Zone (in a strip mall near Southdale in Edina and near Northtown Center in Blaine), both of whose troubles led them to bankruptcy court.

"It sounds like a good idea, but in practice, it's been very difficult to make it work especially as a chain,'' said Sid Doolittle, a partner at McMillan/Doolittle, a Chicago-based retail consulting firm.

He cites a variety of problems, from getting good help to the reticence of parents in leaving children with strangers. A steep hourly rate at Kids Quest also may deter some visitors. Kids Quest charges $6 an hour for each child over the age of two-and-a-half, and $7 for those under that age.

Some Kids Quest centers in casinos offer rates as low as $3 an hour, because the casino subsidizes the discount. In 1997, the company received $1.1 million in reimbursements for rate discounts (down from $1.3 million in 1996), most of which was from the casinos owned or managed by Grand Casinos, a major shareholder. After Grand sold its casino resorts in Mississippi to Hilton, Grand's remaining holdings, including 30% ownership in New Horizon Kids Quest were transferred to a successor company called Lakes Gaming.

Casinos have other advantages for childcare centers that shopping malls lack. For instance, children are not banned from stores as they are from the gaming floor. Casino patrons with children have no safe alternative but to use childcare facilities or leave the casino.

Casinos also understand the value of having hourly childcare available, according to Troy Dunkley. Although casino resorts don't aggressively market childcare services to families, they aren't shy about letting customers know about them. Las Vegas-based Station Casinos, which has Kids Quest at a number of its casinos, includes Kids Quest in its promotions geared for "young families who want a night out,'' said Jack Taylor, Station's spokesman.

Station also has a "date night'' deal, in which it offers special family packages of dinner and a movie for two, a free stay at Kids Quest for the kids, and a roll of quarters.

Kids Quest officials are hoping to put together some similar types of cross-promotions with other megamall tenants to boost awareness of its center.