Thursday, January 9, 2014

The Macy's Story and Its Relevance to Higher Education ... Too Many Colleges, Too Few Students, Too Few Good Job Prospects, Too High Tuition and Too Little Money Available from Government and Parents

There are too many retail stores in America as Amazon and online selling grows to replace the need for exclusively bricks and mortar outlets. In this ongoing excess capacity story, the latest evidence is Macy's cutting 2,500 jobs, closing stores to cut costs, which states in part:

"Macy's said Wednesday it plans to lay off about 2,500 employees and close some stores as part of a cost reduction plan.

The retailer said it will combine its Midwest and North regions and reallocate within its regional divisions to streamline its operations. . . . It expects the moves to save it about $100 million a year.

Macy's said it will keep hiring employees in its online operations, direct-to-consumer fulfillment outfit and new stores. The company has 175,000 associates."

Now let's talk colleges costs, capacity and the inevitable downsizing that's going to occur as excess capacity and weak demand are brought together in order to contain costs and improve the quality of the 'consumer' offering.

In simple language, something's gotta give in American higher education: We have too many colleges charging too much money to too few students who are borrowing too much money from a government that can't afford to keep the money flowing.

Meanwhile, we have parents and students who can't afford to pay the high tuition costs of today and shouldn't be borrowing to get the money to pay those costs, especially to attend a private college that doesn't represent a value for the high cost of attendance.

And that's all topped off by weak job prospects which often don't pay enough to make the cost of getting a so-so college degree even worth the time and effort spent in getting that degree. Hence, fewer students attending college are contributing to the excess capacity which will have to be eliminated over the next several years.

So let's begin today's story with the 'plight' of private colleges, as many of these institutions will probably be closing their doors sometime during the next several years. Their longstanding pricing formula for tuition has been (much like traditional department stores) to publish a high regular list price for tuition and then discount that price sufficiently to get enough butts in the seats to fill their needs and cover their operating costs as an institution.

In other words, much like dinosaurish traditional retailers like JC Penney and Sears, they establish high regular prices and then offer 'sales' and 'scholarships' to entice students to enroll in sufficient numbers to fully occupy their faculty and facilities overhead structures. But now there aren't enough students entering college so they are trying new pricing approaches with the hope that somehow their financial issues can be brought under control. It won't work.

Getting Out of Discount Game, Small Colleges Lower the Price has the story behind the pricing story for small private colleges today:

"SPARTANBURG, S.C. — A higher education riddle: When can a college slash tuition by almost half, without losing revenues? Answer: When nobody much pays full tuition anyway.

When Converse College, a tiny women’s college here, announced that it was “resetting” next year’s tuition at $16,500, down 43 percent from the current year’s published price of $29,000, the talk was about affordability, transparency and a better deal for struggling families.

But of Converse’s 700 undergraduates, only a small number — in the single digits, its president said, paid the full sticker price in recent years. Almost everyone received a tuition discount from the college, along with, in many cases, financial aid from the state and federal governments. Now, like some other small private colleges, Converse is cutting tuition and reducing discounts....        

For decades, most private college pricing has reflected the Chivas Regal effect — the notion that whether in a Scotch or a school, a higher price indicates higher quality.       

“Schools wanted a high tuition on the assumption that families would say that if they’re charging that high tuition, they must be right up there with the Ivies,” said David L. Warren, president of the National Association of Independent Colleges and Universities. “So schools would set a high tuition, then discount it. . . .      

Over all, private colleges discounted freshman tuition by 45 percent last year, a new high, according to a survey by the National Association of College and University Business Officers, and the share of freshmen getting institutional aid rose to 87 percent last year, from 80 percent in 2002, also a new high.       

For all but the top-tier private colleges, these are tough times. Enrollment is flat or declining in many parts of the country. In November, Moody’s issued a report finding that more than 40 percent of colleges and universities face falling or stagnant tuition revenue. With family incomes stalled, many bargain-seeking students are drawn to public institutions. And for colleges that are not well known, the race to lure students with big discounts is becoming unsustainable.

As a result, many private colleges are rethinking their pricing — whether cutting or freezing tuition, or locking in the freshman tuition for all four years.

“Whether you in fact make it more affordable with a reset or a freeze is not clear, since net revenues tend to come out about the same,” said Richard Ekman, president of the Council of Independent Colleges. “But there’s a public assumption that private higher ed is unaffordable, so anything that gets people’s attention and lets you have the conversation explaining that most people don’t pay full price, that it is within reach, is very important.”. . . 

Roger Williams University in Rhode Island turned to fixed-rate tuition after some market research.

“When I got here in June 2011, there were so few people paying full price that one wondered why we bothered,” said Donald Farish, the university’s president. “If everybody’s getting a discount, the notion that there is a full price is almost meaningless. It’s a model that makes no sense, and makes you feel like you’re in a Middle Eastern souk bargaining with the tourists who just arrived.”

Mr. Farish talked to the board about cutting tuition “to present a more authentic number,” and hired consultants, Maguire Associates, to find out whether current and prospective families would prefer a campus that charged $23,000 or one that charged $36,000 but offered an average of $13,000 in aid.       

To Mr. Farish’s surprise, twice as many families preferred the high-cost, high-discount approach, and the consultants warned that cutting tuition would cut the freshman class in half. So instead, Mr. Farish has locked in freshman tuition for four years. This year, the university overshot its enrollment target by 100 students, he said, bringing in 40 more freshmen, and retaining 60 more sophomores, “which I think was largely because their tuition didn’t go up.”"


And now we'll consider the issue of the decreasing relative value of a college degree today in How the College Bubble Will Pop, which is appropriately subtitled 'In 1970, less than 1% of taxi drivers had college degrees. Four decades later, more than 15% do:'

"The American political class has long held that higher education is vital to individual and national success. The Obama administration has dubbed college "the ticket to the middle class," and political leaders from Education Secretary Arne Duncan to Federal Reserve Chairman Ben Bernanke have hailed higher education as the best way to improve economic opportunity. Parents and high-school guidance counselors tend to agree.

Yet despite such exhortations, total college enrollment has fallen by 1.5% since 2012. What's causing the decline? . . . The answer is simple: The benefits of a degree are declining while costs rise.

A key measure of the benefits of a degree is the college graduate's earning potential—and on this score, their advantage over high-school graduates is deteriorating. . . . According to data collected by the College Board, for those in the 25-34 age range the differential between college graduate and high school graduate earnings fell 11% for men, to $18,303 from $20,623. The decline for women was an extraordinary 19.7%, to $14,868 from $18,525.
Meanwhile, the cost of college has increased 16.5% in 2012 dollars since 2006, according to the Bureau of Labor Statistics' higher education tuition-fee index. Aggressive tuition discounting from universities has mitigated the hike, but not enough to offset the clear inflation-adjusted increase. Even worse, the lousy economy has caused household income levels to fall, limiting a family's ability to finance a degree.

This phenomenon leads to underemployment. . . . We now have more college graduates working in retail than soldiers in the U.S. Army, and more janitors with bachelor's degrees than chemists. In 1970, less than 1% of taxi drivers had college degrees. Four decades later, more than 15% do.

This is only partly the result of the Great Recession and botched public policies that have failed to produce employment growth. It's also the result of an academic arms race in which universities have spent exorbitant sums on luxury dormitories, climbing walls, athletic subsidies and bureaucratic bloat. More significantly, it's the result of sending more high-school graduates to college than professional fields can accommodate.

In 1970, when 11% of adult Americans had bachelor's degrees or more, degree holders were viewed as the nation's best and brightest. Today, with over 30% with degrees, a significant portion of college graduates are similar to the average American—not demonstrably smarter or more disciplined. Declining academic standards and grade inflation add to employers' perceptions that college degrees say little about job readiness. . . .

Yet dire financial straits from falling demand for their product will force two types of changes within the next five years.

First, colleges will have to constrain costs. . . . Excessive spending on administrative staffs, professorial tenure, and other expensive accouterments must be put on the chopping block.

Second, colleges must bow to new benchmarks assessing their worth. With the advent of electronic learning—including low-cost computer courses and online courses that can reach thousands of students around the world—there is more market competition than ever. . . .

This educational entrepreneurship offers hope that creative destruction is coming to higher education. Many poorly endowed and undistinguished schools may bite the dust, but America flourished when buggy manufacturers went bankrupt thanks to the automobile. The cleansing would be good for a higher education system still tied to its medieval origins—and for the students it's robbing."

Summing Up

The creative destruction of marketplace competition is a good thing, and finally it may be coming to a college near you. Just like it's come to Macy's.

The cost of attending college today is unnecessarily high, and the jobs awaiting college graduates often aren't worth the time and money spent while attending college.

This is especially the case for those students who don't take academics seriously and take on burdensome student loans while pursuing a degree that won't prepare them to get a good job upon graduation.

And the smaller private colleges who are playing the 'Chivas Regal' game are living on borrowed time, if only because there are fewer potential student butts available to occupy all the existing seats and the 'you can't fool all of the people all of the time' retailing rule as well.

Global competition mandates that our U.S. educational system in its entirety be competitive on all fronts, including costs. And as government subsidies for public colleges decline as a result of budgetary discipline, that will put even more pressure on the already higher cost private institutions to further reduce their cost structures or go out of business.

Thus, big changes are coming to higher education. Let's make sure our kids and grandkids are smart consumers and are ready to take advantage of the new ways to get a dramatically less expensive and much higher quality education than has long been the case.

In that regard, long distance learning is here to stay, and that's a good thing. Amazon works.

Thanks. Bob.

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