Microfranchising

How Social Entrepreneurs are Building a New Road to Development

Nicolas Sireau, Nicolas Sireau

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351278706
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

It is increasingly clear that fifty years of international development have done little to reduce poverty in Africa. Indeed, more and more academics and practitioners are highlighting the detrimental effect of traditional development – as carried out by international agencies and NGOs – which often leads to dependency, inefficiency, waste and poor governance.

Yet there is a new movement that is surging ahead in its attempt to reduce poverty and generate wealth in Africa: microfranchising. Set up by pioneering organizations such as VisionSpring and HealthStore, microfranchising is based on one of the most successful market-based models in Western economies: franchising. From McDonald's to Coca-Cola, franchising has proven itself to be an effective and replicable way of scaling up a business rapidly in the Western context.

It is only recently that members of the growing body of social entrepreneurs have turned to the franchise model as one of the responses to Africa's endemic economic stagnation. And the results have been inspiring: instead of the dependency generated by traditional charity development projects, these new social capitalists have generated enterprise and self-sustainability in the most challenging environments of rural Africa.

This long-needed book looks at the growth in microfranchising as a tool to generate wealth among poor communities in Africa. The book traces the evolution of the concept of microfranchising, from its foundation in Western models to its implementation in African countries today. It provides practical steps from the world's leading experts on how to set up a microfranchise, from recruiting franchisees, to building a brand and a supply chain. It gives case studies of successful microfranchises, told by the enterprises themselves. It continues with a theoretical analysis of the place of microfranchising within global social entrepreneurship. It ends with a look at the future for microfranchising, with recommendations for development. Edited by the former CEO of SolarAid, which created the Sunny Money microfranchise, the book provides a ground-breaking set of case studies and analysis of microfranchising for development. It brings together academics and practitioners to provide context, analysis and practical advice. Indeed, it provides the theory, the practical advice and the case studies to guide any entrepreneur, NGO, business or government interested in setting up their own microfranchise scheme.

1
Introduction

Nicolas Sireau

SolarAid, UK

I first came across the concept of microfranchising in early 2007, when we were just starting SolarAid, the UK’s first non-profit organisation to focus exclusively on solar power for developing countries. For the previous few months, we had been struggling with finding a model of micro-enterprise that could realistically be replicated on a large scale in order to wipe out the use of kerosene in Africa through the sustainable distribution of solar lamps. John Keane, SolarAid’s new head of programmes, had extensive experience of setting up solar micro-enterprises with community groups across Africa—something he had been doing for years. But his experience, and that of SolarAid’s first projects, was that reaching scale was difficult without a clear business model and a well-defined way of identifying, training and supporting entrepreneurs.

Our first project in late 2006 and early 2007, in Malawi, involved training a small group of young people affected by HIV/AIDS to convert kerosene lamps into solar lamps using light-emitting diodes (LEDs), rechargeable batteries, thin-film solar glass, handmade wooden frames, a few locally sourced wires and some crocodile clips. We then trained them in business skills—market research, business planning, cash-flow forecasting—so that they could sell these solar products, generate an income and set up a self-sustaining business. As the project developed, we realised this was going to be difficult. First, there was a free-rider problem: the young people constituted themselves as a community group, but many of them made hardly any effort while benefiting from the hard work of the few dedicated ones, which eventually brought the group to a standstill. Then there was the problem of product quality: the converted kerosene lamps and handmade solar panels were poorly put together and broke quickly. There were problems with products being over-priced by entrepreneurs wanting to make a quick buck; logistical challenges with components running out and sourcing proving difficult; credit issues with consumers not being able to afford the products; problems with products going missing; and tax barriers with a 47.5% import tax into Malawi on our solar components. The list of challenges we faced seemed huge—yet we soon realised that these were the same cultural, logistical, financial, infrastructural, legal, human resource and other barriers facing any enterprise working in Africa.

Furthermore, the aid industry has made the situation much worse. Non-governmental organisations (NGOs) proliferate across Africa and have muddied the context to such a degree with their failed hand-out projects that a culture of dependency has settled in. SolarAid comes across this every day. In Zambia, for instance, we visited a community to find out whether they would be interested in setting up a solar business to sell solar lamps to villagers and create jobs. The reply was disappointing: community leaders explained to us that the day before our visit a German NGO had come by to distribute free products to the community, while the next day a French NGO was coming over to give cash for free for schooling. ‘We don’t need to set up a business,’ the community leaders said. ‘We can just wait for more NGOs to come over and give things out for free.’ Although well intentioned, the NGOs were having a detrimental effect. They were killing enterprise, killing the market and killing any hope of pulling these communities out of poverty. Indeed, the only way Africa will ever develop is if it can build healthy market economies and create sustainable employment for a large part of its population. Unfortunately, most NGO programmes do the very opposite.

That’s why we were so excited when we first read the World Resources Institute’s report (Clemminck and Kadakia 2007) on VisionSpring (then called the Scojo Foundation)’s microfranchise programme. The origins of SolarAid lay deeply in the commercial sector—having been set up with a grant from Solarcentury, the UK’s largest solar company—and the concept of microfranchising struck a chord. VisionSpring, with its vision entrepreneurs, its ‘business-in-a-box’ and its sustainable supply chain, was pioneering a new way of scaling up micro-enterprise that seemed adaptable to SolarAid’s vision. Microfranchising provided a solution to many of the problems we faced, particularly the need to offer our entrepreneurs a standardised business model with access to a supply chain, marketing, financing, training and ongoing management. We immediately began finding out more and looking at how to implement this.

We began by looking at the history of franchising, which became during the 1990s the most popular method of expanding commercial retail stores rapidly with limited risk (Bradach 1998; Montagu 2002). The World Franchise Council and the International Franchise Association estimate that there are approximately 16,000 franchised systems operating in 140 countries, with more than 1.6 million franchised outlets generating total sales of $1 trillion (Duckett and Monaghan 2007). Franchising works across all sectors where businesses operate through branches: hotels, restaurants, real estate, car hire, coffee shops, cleaning, teaching to drive and more. Franchises such as McDonald’s, Snappy Snaps or The Body Shop are everywhere, providing locally owned stores that deliver services from a standardised model. There are several reasons for this: it is particularly easier to scale up a franchise than a company-owned store because the capital investment and many of the management decisions are made by the franchisee; fixed costs are spread out over many outlets, providing significant economies of scale for marketing and advertising; and the franchisees have more incentives to work hard and make their franchise succeed because of their personal financial investment in the business. This means that franchisors do not have to provide the same level of supervision of franchisees as they would if they were running a network of company-owned businesses. Some franchisors are large brands, some are just regional networks, and many are somewhere in between (Duckett and Monaghan 2007). All of them are based on having a proven business system that others can be easily taught to operate at a profit.

The most widely accepted definition of a franchise is that of ‘a contractual relationship between a franchisee (usually taking the form of a small business) and a franchisor (usually a larger business) in which the former agrees to produce or market a product or service in accordance with an overall “blueprint” devised by the franchisor’ (Stanworth et al. 1995 cited in Montagu 2002). As will be explained in further detail in subsequent chapters, franchises exist in two broad types: traditional and business format. Traditional franchises grant the right to sell a product or service in a geographical area, such as for a car dealership or a gas station. The business format provides advertising, service methods and delivery models to a franchisee, while strictly regulating the activities of the franchisee. Montagu (2002) also draws a distinction between stand-alone franchises and fractional franchises. Stand-alone franchises are the norm in the West: they exclusively promote the goods and services of the franchisor, such as in the case of McDonald’s, which does not allow franchisees to sell Burger King burgers or any others. A fractional franchise, which is more the norm for microfranchises in developing countries, adds a franchised product or service to an existing business, creating additional income for the franchisee and using existing business assets such as shop space.

The beauty of microfranchising—which some people also call social franchising—is that it uses franchising methods to achieve social as well as financial goals. According to Montagu (2002):

The goal of social franchising programmes is to use the commercial relationship of a franchise network to benefit provider members, and then to leverage those benefits into socially beneficial services; socially beneficial either because they are of higher quality than services previously available, or because they are less expensive, or because greater availability and awareness of availability leads to greater use of a good service (Montagu 2002: 123).

The attraction of microfranchising for development is that it offers clear and well-practised business systems to minimise risk and maximise returns within a particularly difficult context. While traditional micro-enterprise techniques deliver moderate results at best within the context of the developing world, according to our experience, microfranchising, with its set format, clear-cut rules and franchisee-focused incentives system, can offer a faster and more effective way to reach scale. As mentioned, all the factors that businesses take for granted in the developed world are lacking, making business in poor countries risky: infrastructure is crumbling, creating serious problems for maintaining an effective supply chain; communication systems, despite the growth in mobile telephone networks, are unreliable; the banking system, particularly for providing working capital to the poor, is limited; the legal system, which should provide protection from corruption and business malpractice, is too weak; and the primary, secondary and tertiary education systems, which should train people for working life, are under severe strain.

Entrepreneurs in the informal economy—who form the majority of entrepreneurs in developing countries—suffer the most: they do not have the working capital, the business training, the backup or the support needed to grow their businesses. So any change in their circumstances—such as a drought for a farmer or an illness for a hairdresser—can ruin them rapidly. Most, therefore, choose to run a variety of small business enterprises, never investing much in any of them, and moving quickly from job to job or business idea to business idea. Hence micro-franchising provides a less risky venture for such entrepreneurs. They can roll out a tried-and-tested business system, supported by a larger organisation’s training, marketing and human resources, with access to a more reliable supply chain.

Microfranchising has had some significant achievements—as the case studies in this book will show. Nevertheless, it is not a formula for inevitable success, as the barriers to scale remain huge. While the SolarAid team embarked enthusiastically on developing and implementing a microfranchise model, we soon realised that it was not the magic bullet we were hoping it would be. Indeed, there is no magic bullet for solving global poverty: just much hard, painstaking work and a firm commitment to market-based solutions. Still, our experience and that of others shows that microfranchising, if implemented carefully and correctly, can go a long way towards resolving many of the replication and scale-up problems that social entrepreneurs face, as this book will demonstrate.

Following this introduction, Chapter 2 goes over the theory of microfranchising. Written by Kurt Illetschko, one of the founders of the South African franchise movement and a global expert on microfranchising, it explains the history of franchising, the emergence of business-format franchising, the legal and financial implications and the different theoretical models of franchising. The chapter is important as it places microfranchising squarely within the framework of the traditional franchising that emerged in the West over the past century or so. Nevertheless, as Chapter 3, also by Kurt, shows, microfranchising then adapts the franchising concept to the particularities of the developing world, which is so different from the Western world for which franchising was originally developed. Kurt provides an oversight of a few of the key microfranchise enterprises that will then be discussed in subsequent chapters. Indeed, the reader will notice that some examples—particularly microfranchise pioneers such as VisionSpring, HealthStore Foundation and Drishtee—are referred to throughout the book and analysed from a variety of angles. On the one hand, this is testimony to their central status in the development of microfranchising over the past decade. On the other hand, it shows that the microfranchise sector remains young, with still just a handful of organisations adopting its techniques.

Chapter 4 is by P. Clint Rogers, Jason Fairbourne and Robert Wolcott, researchers who are leaders in the field of microfranchising. They focus on the key principle of replicating success to scale through three enabling characteristics: organic nature, modularity and microscalability. They discuss how microfranchising can solve many of the problems of traditional approaches to introducing innovations in emerging economies. They describe as case studies two microfranchise organisations offering information and communication technology services: Drishtee and OneRoof.

Chapter 5 is by Harry Andrews, a social entrepreneur for whom I have huge admiration. Harry’s Barefoot Power business has been leading the way in the solar-lighting industry for half a decade and has been a major source of inspiration for SolarAid. His chapter is a case study of Barefoot Power’s microfranchise pilot programme in Uganda. It shows promising results and learnings and was only halted because of lack of financing to scale it up—which is a problem facing many social enterprises in developing countries.

Chapter 6, by David Lehr and Lisa Jones Christensen, two authors with years of relevant experience, deals with this issue of how to finance a microfranchise. This is an area many social entrepreneurs struggle with, as access to capital is difficult at the best of times. Many still rely on an unpredictable variety of grants that come with all kinds of strings attached and are not suitable for their scale-up needs. As David and Lisa explain, a range of social investment opportunities are starting to become available that may go some way towards addressing this problem.

Chapter 7, by Peter Ryan, tells the story of the creation and growth of the Micro-Loan Foundation, a microfinance organisation set up by Peter that works in Malawi and is now expanding to neighbouring countries. As well as giving insights into how microfinance and microfranchising can work together, Peter describes his experience of starting at a micro level and then slowly building the systems, teams and processes needed to scale up effectively. Indeed, a challenge for all social enterprises is to get it right from the start—otherwise, they may end up replicating a faulty model that will ultimately collapse.

Chapter 8 looks at how microfranchises have to create the market from scratch in order to generate demand for their products: rural communities have generally never heard of the products on offer and hence need to be educated about them before they can develop a desire to buy. The chapter also looks at the process for identifying and training franchisees, which is arguably the most important part of microfranchising. Without hard-working, skilled and honest franchisees, a microfranchise has no chance of reaching scale. The author, Miguel Ramirez, has been working for SolarAid for a number of years and has extensive field experience from which he draws to make his case, adding to this some examples from other successful microfranchises.

Chapter 9 looks at social-sector franchising, particularly applied to the healthcare sector. The author, Michael Seid, is a franchising expert who goes through all the key elements of setting up and running a franchise focusing on social outcomes. His argument that most aid fails because it focuses too much on funding levels and not enough on the method of execution is a sound one and reflects the experience of others in this field. Michael emphasises the need to build a strong brand for the social-sector franchise and to implement processes that allow the franchisor to stick to the brand’s promises in order to provide consistent delivery of high-quality products and services—something that is often missing from NGO programmes and business services in developing countries.

Chapter 10 offers valuable insights into the challenges facing microfranchises trying to replicate and scale up their operations in the developing world. The author, Ryan Swee Ann Lee, starts by debunking some of the myths around franchising’s success in the Western world, showing that a significant number of franchises fail over time. Although it is a proven and tested model for scaling up certain types of business, Ryan argues that franchising is not the unbeatable success formula that many of its proponents claim it is. Ryan then looks at the role of microfranchising within the context of the base of the pyramid (BoP). He shows how the BoP presents specific challenges—such as lack of infrastructure and lack of education— that many microfranchises struggle to overcome. He also argues that social entrepreneurs need to think carefully before adopting a microfranchise model in order to be sure that their particular business proposition is indeed franchisable—otherwise, it will not be replicable or scalable via a microfranchise system. He provides a few pointers from the BoP Protocol developed by Cornell University to help social entrepreneurs set up their pilot microfranchise businesses.

Chapter 11, by Melissa Richer and Nate Heller from Ayllu, is a solid piece of research looking at why social enterprises often cannot scale in the developing-world context. So many of us social entrepreneurs spend our time discussing business models and scaling strategies, yet without understanding the contextual factors that limit growth. These challenges include financing problems, difficult access to information, lack of learning from others, inadequate partnerships, corruption, and lack of skilled personnel. As Richer and Heller show, there is an urgent need to research how we can create a more enabling context that will allow social enterprises and microfranchises to flourish at the base of the pyramid.

I have structured the book to alternate between more theoretical chapters and case studies in order to emphasise how theory and practice are closely linked. As the reader will realise, there is still much to be learnt about the potential of micro-franchising for tackling poverty and how the model can be improved. The context in which microfranchises operate is particularly difficult; yet it is clear that only through constant experimentation, learning and sharing can we hope to overcome the hurdles to scaling up and reducing poverty on a global basis. As the aid industry continues to implement a failed model of development that tends to promote dependency and corruption, there is an urgent need for socially guided, market-based solutions that can create employment and economic development on a sustainable basis. My belief, and that of the authors who contributed to this book, is that microfranchising is one of these solutions.

2
Microfranchising

The theory

Kurt Illetschko

Franchise consultant, South Africa

An introduction to franchising

Modern-day franchising originates from the USA but is now practised in all corners of the globe. This is because the underlying concept is compelling in its simplicity and highly efficient. I...