Unfortunately this seems to be common place. Some DC outgrow their school, others feel sidelined when new pupils attend their school which affects established relationships and confidence, and some teachers are just not equipped to deal with growing issues.I do know of some talented children who have considered giving up dance because of similar issues, and that would be such a shame.
For me, if the matter cannot be resolved with the school / teacher directly, then without a resolution I cannot see how the situation can improve, and therefore as a paying customer and with your DC's happiness and best interests at heart, it may be best to look into moving schools.
It's an emotional and distressing situation to be in, but no harm in looking into other local schools and seeing what they have to offer. Maybe visit a few and get a 'feel' for the place?