China: BabyCare Ltd.

Turning playtime into payday

It's mid-morning, and the Rainbow Room is alive with a dozen squealing infants crawling or attempting to walk on a multicolored mat while their mothers keep a watchful eye. This is not an ordinary rumpus room. Every activity at this Beijing facility is aimed at helping these tots develop their spatial perception and motor skills through play. There's even a homework assignment at the end of the weekly, hourlong class, in which mothers are to practice what they've learned with their kids.

Welcome to , where staffers believe it's never too soon to start working on a child's development. This idea resonates particularly well with China's emerging affluent class, since parents often have just one child and are determined that he or she get a good start in life. "There's a Chinese proverb that says the first three years are critical to a child's future," says Jiang Hua, a 27-year-old Beijing native with a 10-month-old girl enrolled at BabyCare. "So we are willing to spend a lot of time and money here to ensure our daughter's future."

BabyCare is the brainchild of Matthew J. Estes, a 39-year-old San Diego native who has lived and worked in China for 15 years, part of that time as a sales manager for pharmaceutical maker SmithKline Beecham, now GlaxoSmithKline PLC (GSK ). He founded BabyCare to exploit what he saw as a big potential market in China for nutritional supplements for expectant mothers and infants. That idea hadn't caught on in China -- "it's hard to change 5,000 years of tradition," says Estes. So in 1998 he opened his first center in Beijing to educate women on pregnancy and child rearing -- and sell them supplements at the same time.

GROWING UP FAST

Today, BabyCare operates 20 centers in 16 cities and plans to expand to eight more cities in 2006. Sales are expected to increase 100%, to $20 million, in 2005, and double again, to $40 million, next year, says Estes. Estes says the enterprise is profitable, but he won't provide figures. The great bulk of BabyCare's revenues -- 95% -- come not from the centers' classes but from sales of vitamins, baby formula, and educational toys. However, the centers, which offer everything from classes on breast feeding and Lamaze birthing techniques to how to be a good grandparent, are key to attracting new customers.

In addition to selling products through its centers, BabyCare employs an army of 4,500 sales representatives, most of whom were customers. They earn between $38 to $62 per month in base salary and can double or triple that through commissions. The typical customer spends up to $300 a year on products and services. But middle-class families spend more. Jiang, who works as an editor at Huawen Publishing House and whose husband is a U.S.-educated lawyer, lays out $150 a month on vitamins, formula, and classes at the center.

BabyCare's rapid growth has, predictably, attracted venture capitalists. The company has raised a total of $24 million in three rounds of funding since it began. Investors include Silicon Valley VC fund Sutter Hill Ventures, and Hong Kong's Pacific Group. "We saw strong management that had built businesses in China for other people," says Kevin Murphy, Pacific's head of private equity. "It's a great niche with a lot of unmet consumer demand." For the moment, no initial public offering is planned.

By Frederik Balfour in Hong Kong and Dexter Roberts in Beijing

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