Capella University trying to revive its flagging fortunes

  • Article by: JAMES WALSH , Star Tribune
  • Updated: February 26, 2012 - 6:43 PM

Competition and a sluggish economy have slowed Capella. Its leaders hope new strategies send it back to the top of the class.

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Photo: Glen Stubbe, Star Tribune

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Not long ago, Capella University ranked as one of the hottest business start-ups in Minnesota.

From the first class in 1993, enrollment in the online-only school grew steadily to 14,600 in 2005. Then new rules opened up federal financial aid to virtual universities, and by the end of 2010 Capella had 38,000 students in programs from undergraduate degrees through doctorates.

Wall Street loved it. The Minneapolis-based company's shares rose nearly 400 percent in their first few years on the market, ranking for a time as the most successful Minnesota initial public offering of the new millennium.

But, like a straight-A student whose grades start to slip, Capella is facing new challenges.

When the company announced its 2011 results earlier this month, a number of once-unfamiliar trends were apparent. Nearly a third fewer students signed up than the year before, and profits were down. Meanwhile, the company's stock has lost more than half its value from the 2010 peak.

The reasons are many, including a weakened economy, increased competition and new regulation. Capella executives insist they have a strategy to get things moving in the right direction at the company, which remains one of the nation's larger for-profit universities.

But observers say the landscape that enabled Capella's explosive growth has changed -- perhaps for good. Students who flocked to Capella and its online rivals are growing more wary of spending money on programs that won't necessarily lead to significantly higher incomes.

"We are not going back to the go-go period of a few years ago," said Peter Appert, an analyst with Piper Jaffray. "But I see it moving positive."

In an interview at the gleaming Capella Tower in downtown Minneapolis, chief executive Kevin Gilligan promised changes in the company's approach. In much the same way Capella continually tweaks its curriculum to meet market changes, so too is the university promising to change how it recruits, retains and supports its students.

"First, we're making steady progress as we look to return to new enrollment growth," Gilligan said. "Second, we have a plan in place to significantly improve learner success. And, third, we continue to be encouraged by our brand-driven marketing strategy."

He added: "I'm very bullish on the long term."

Major cuts

Even after cutting nearly 200 non-faculty positions, the company employed about 2,900 people at the end of last year. It offers 43 degree programs in areas as varied as health, public safety and business.

But there have been rumbles of potential trouble for several years. The Obama administration in 2010 proposed rules that would have limited access to loans if graduates accumulated debt that exceeded a set percentage of their earnings. The concern was that for-profit colleges were luring "at-risk" students into taking out massive loans with false promises of success.

Capella was never accused of that, and Appert of Piper Jaffray said the company "has a well-deserved reputation for high quality."

But the proposal rattled the entire $30 billion industry. While the rules that finally passed are expected to have less effect than the industry once feared - affecting about 5 percent of schools -- the proposal pushed Capella's competitors to go after "safer" students, meaning students more likely to earn degrees and find career success.

"What we began to see then is more pressure to enroll the type of learners we historically served," Gilligan said. Eighty percent of Capella students are pursuing master's degrees or doctorates.

At the same time Capella's competition increased, the economy sputtered. The Great Recession prompted many to delay returning to school for an advanced degree because they were unwilling to take on the debt, Appert said.

An average MBA at Capella costs nearly $27,000. The average Doctor of Education costs more than $39,000. "These programs are very expensive," Appert said.

Paul Ciochetto, 35, of Owatonna, graduated from Capella with an MBA, with an emphasis on project management, in September 2011. But it took him three years to complete his program instead of two because he was laid off from his previous job.

That layoff jeopardized his MBA because he used a combination of student loans and tuition reimbursement from his employer to pay for school. When he lost his job, the tuition reimbursement went away. So, too, did school.

After searching for months, Ciochetto found a new job that offered tuition reimbursement and completed his degree. He said he likes Capella's quality and convenience. But the school must find ways to better connect with students -- especially first-year learners.

"As a learner, we're the customer," he said. "If they lose students, they need to change their business model so they can retain those students."

New strategies

The folks at Capella say they are doing just that.

Gilligan said Capella's graduation rate of 50 percent is strong for schools that cater to people with full-time jobs; it's even better for students who stay past the first year. Using analytics, Capella hopes to spot the warning signs of a learner who might be drifting away, while also capitalizing on the best practices of the school's most successful teachers.

Scott Kinney, who recently joined Capella as president, calls it improving students' "persistence rates."

"It can be an on-again, off-again thing," Kinney said. "We just want to make sure we're doing everything we can to assist them along the way."

Another change is how Capella is marketing itself. The school long bought lists of people who had expressed a desire in continuing their education.

Now, Gilligan said, Capella is shifting that investment into building its own brand through radio, television and social media. The idea is to create a "community of people who want to make a difference," he said.

The end result, Capella officials hope, is that the students Capella attracts in the future will be more committed to the school and to their educational success. That, in turn, will mean more sustained growth for Capella.

Appert, the analyst, is optimistic. "The bottom line is they have the high-quality programs and are making the right strategic decisions," he said.

James Walsh • 612-673-7428

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