During the remainder of my Accion Ambassadorship at Fundación Paraguaya, I will be focusing on their microfranchise initiative. So, why not dedicate my next few posts on this theme – the advantages, the challenges, and the evolving popularity of this model.
So, what even is Microfranchising?
“Microfranchising is built on the concept of franchising – the development of a turn-key business model, designed for replication, that is inherently less-risky than a standalone start-up enterprise.” The above statement, which I found in a discussion on socialedge.org, successfully summarizes the key elements of this bottom of the pyramid business concept (or the BOP, as it is known within the industry)
This image is credited to Jason Fairbourne, director of the MicroFranchise Development Initiative at Brigham Young University and one of the thought leaders in the microfranchise space.
In other words, microfranchises have an established business model that enables their franchisees to hit the ground running. In the typical microfranchise, microentrepreneurs receive intensive training, pre-conceived operational guides, and marketing and promotional materials. They are often provided with credit and/or customized funding, ongoing business support, and an incentive scheme to meet sales targets, ensuring long-term sustainability.
The assumption that microfranchises, as opposed to general microenterprises, are inherently less-risky stems from the replication of a successful business model. As a franchise, the product design has already been fine -tuned, the operating procedures adjusted to maximize efficiency, and supplier relationships established using the bargaining power of the larger-scale franchise. Additionally, as the microfranchise expands, microentrepreneurs benefit from growing brand awareness, product innovation, and increasing scale.*
Fundación Paraguaya and VisionSpring
Fundación Paraguaya’s first microfranchise experiment was the kit de lentes (or glasses kit). In 2007, the Fundación began a partnership with VisionSpring (http://www.visionspring.org), a non-profit social enterprise focused on distributing reading glasses to low-income communities. Following VisionSpring’s model, the Fundación has provided local vendors (mostly members of the women’s committees) with “a business in a box,” each containing 12 pairs of glasses of varying magnification, as well as cases, strings, booklets, and a briefcase. The vendors must raise enough capital (or take out a loan) to purchase the kit, which costs about 200,000 Gs, or about $44. They are then trained to perform vision tests and instructed in sales strategies.
The women earn about 20,000 Gs, or about $4.44 per sale.
One of the kits from Vision Spring.
Other microfranchises that the Fundación is currently trying to jump-start include jewelry-making kits, clothing kits, anti-dengue kits (these contain a variety of mosquito repellents), as well as alimentos (food), such as bread filled with cheese, barbecued meat, empanadas, and others. Last Friday, I accompanied two other interns to Encarnación to see how they were conducting their market surveys. In the next few weeks, I will be designing my own survey and exploring new strategies to increase the sales of current “kits.
Why Franchise?
Ultimately, Fundación Paraguaya aims to use microfranchising to both diversify and amplify the earnings of its clients, providing them with an opportunity to stabilize their income and better provide for themselves and their families. Furthermore, microfranchising presents an efficient distribution method for needed goods (such as reading glasses and mosquito repellent), selling at affordable prices to those without access.
Microfranchising, however, also has specific challenges. It is essential to maintain low costs and low risk (since the potential franchisees have little extra income to invest) as well as cater to BOP consumers, who are extremely price sensitive.
A potential ice cream microfranchise considered by the Fundación, for example, was just too pricy. It seemed like a great idea to me – the climate in Paraguay is usually very hot, there is a cultural love for ice cream, and the foundation was planning to partner with a well-known brand. However, after exploring the actual costs, it became apparent that the high overhead and steep price structure would hinder the business’s success.
I am now investigating other opportunities, including a retail business for local artisans, and looking into strategies to improve the sales of reading glasses. Stay tuned!
And let me know what you think! In your opinion, is microfranchising an effective way to create sustainable and scalable opportunities for microentrepreneurs?
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* The information on microfranchising in this blog post was sourced from the book: Microfranchising: How Social Entrepreneurs are Building a New Road to Development, edited by Nicolas Sireau. I highly recommend it!
July 12, 2012 at 10:18 pm
I love that you’re covering microfranchising – as I haven’t heard/read too much about it in action. Looking forward to reading about what you find next!
August 2, 2012 at 9:21 pm
I definitely think that microfranchising is an incredible way to create sustainable and scalable opportunities for microentrepreneurs. I think it’s an interesting way to leverage the for-profit sector and the developing world to create systems that generate profit for both parties. In your experience, have you found that the corporate world is interested in this type of business?
August 7, 2012 at 2:53 pm
Hi Tessa,
Thanks for your comment. I am certainly not an expert on microfranchising (this being my first summer working in this area), but I think that many microfranchises have the potential to be profitable. And for many business that wish to reach bottom-of-the-pyramid customers efficiently, microfranchising can be an effective method. For example, FanMilk, a Ghanaian microfranchise that was established in 1962, had an annual revenue of approximately USD 125 million in 2011 and engages with about 25,000 agents and vendors (http://www.fanmilk.com/). More examples can be found in the book, Microfranchising: How Social Entrepreneurs are Building a New Road to Development, edited by Nick Sireau, which I would highly recommend reading.
At the same time, the success of microfranchise models also depends on the market. When trying to brainstorm new microfranchise ideas for the Fundación here in Paraguay, my colleague and I were having difficulty thinking of business ideas that would require a minimal upfront investment, take advantage of a need in the market, and serve BOP customers. We analyzed the possibility of a crafts business, since many of the Fundación’s clients make hand-made shirts, elaborate hammocks, and beautiful lace tablecloths, but the market is fairly saturated, and the upfront cost for distributors would be comparably high. To mitigate some of the upfront risk for vendors, we are exploring a micro-consignment model to be used for the repayment of inventory. However, since the Fundación has always functioned via the distribution of microloans, we have encountered some resistance to this suggestion. I am currently writing some proposals. We’ll see if they decide to test it in a certain area, perhaps with new VisionSpring vendors.
August 7, 2012 at 12:43 am
I think micro franchising is a great way to open up new markets and improve lives at the bottom of the pyramid. As you mentioned, it is a distribution mechanism that can reach customers that cannot be served by traditional outlets, such as those living in rural villages, who don’t have easy access to consumer products stores. Another interesting example of a microfranchise like the ones you’ve been describing is Living Goods. They provide cheap health products in rural Africa. It is interesting how such a business can also serve to get the word out about the importance of sanitation, vaccination, etc. Thus it serves as distributor and educator, and improves the lives of the microfranchisee and the customer.
August 7, 2012 at 3:18 pm
Thanks, Jesse. I will definitely look into Living Goods. It seems like a very interesting model. There is also a microfranchise run by the HealthStore Foundation called CFWshops, which aims to improve access to essential medications (http://www.cfwshops.org/model.html).
My concern re: health-focused microfranchises is whether they can ever be financially self-sustaining. Right now, the CFWshops require heavy subsidizing from the HF, mostly to cover operating expenses, and HF is only able to cover a small portion of these costs with sales. What is your opinion? Perhaps the value in this type of microfranchise is as the Acumen Fund states, that “philanthropic investments in a healthcare distribution infrastructure are allowing individual microfranchisees to develop profitable enterprises at the local level while effectively addressing critical health needs.” (http://www.acumenfund.org/uploads/assets/documents/Microfranchising_Working%20Paper_XoYB6sZ5.pdf)
August 7, 2012 at 4:43 am
This is a very interesting topic. I’ve been following Jason Fairbourne’s work… it seems to be gaining a lot of momentum and may be the best way to get outside investments into some of these less fortunate regions of the world.
Great writing and I look forward to your future posts.