Microfranchising Series

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This e-book is a compilation of blog posts from the iuMAP series on microfranchising, published by NextBillion in the summer of 2010. iuMAP is a web-ba sed d i rec tor y o f BOP soc i a l enterprises that was launched by Ayllu in July 2010, in media partnership with Next Billion.

Ayllu collects, analyzes and shares key information and data about social enterprises in BOP markets. Next Billion is a blog that brings together the community of business leaders, social entrepreneurs, NGOs, policy makers, and academics who want to explore the connection between poverty alleviation and enterprise.

This series provides an overview of different types of microfranchising, profiling social enterprises that use this distribution strategy, and providing insights and information for both investors and those looking for funding. It is part of a rich discussion about microfranchising that has been going on recently, which you can find out more about in Ayllu’s resource library.

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ContributorsFrancisco is NextBillion's Managing Editor, as well as the Founder and co-Editor of NextBillion en Español, a website and blog aimed to advance the development through enterprise community in Latin America. He is currently a graduate student at Columbia University's Masters in Development Practice, in New York City.

Until August of 2010, Francisco worked as an Associate with the Markets and Enterprise Program at the World Resources Institute, in Washington DC. At WRI he did research on the role of small and medium-sized enterprise in sustainable development, leading the launch of the New Ventures initiative in Colombia in collaboration with Universidad de los Andes.

Francisco also has experience in investment banking and management consulting, and is a co-founder at Prospéritas Microfinanzas, a microfinance organization that provides business development and credit to microentrepreneurs in Colombia. Francisco holds a degree in Industrial Engineering from Universidad de los Andes in Bogotá, Colombia.

Twitter @fjnoguera.

Francisco NogueraManaging Editor,

NextBillionNew York, NY

Nate is Ayllu’s COO and editor of the Next Billion series. Prior to Ayllu, he consulted with a

variety of social enterprises around the world, including VisionSpring and Pratham Books in India, Conversion Sound in Nigeria, and Somos Más in Colombia. Nate spent the first 6 years

of his career primarily in West Africa, with the United Nations Food and Agriculture Organization, the Institute for Transportation and Development Policy, and the US Peace

Corps. Nate is originally from Washington DC and holds an MBA from the Yale School of Management, an MA in International Relations and Economics from Johns Hopkins University

(SAIS), and a BA in Philosophy from Connecticut College.Nate HellerCOO, Ayllu

Sao Paulo, Brazil

Shital is a Managing Editor for ThinkChange India, a blog tracking social innovation and social entrepreneurship in India, and is an alumna of the Indicorps fellowship. She has previously worked with the UN, Acumen Fund, Oxfam International, and the World Bank. Shital completed her MPA in international development from NYU Wagner and is currently working as a management consultant in Washington, DC.

Shital ShahBlogger, iuMAP

Washington, DC

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ContributorsTayo is a recent graduate of the Johnson Graduate School of Management at Cornell University, where she concentrated in Sustainable Global Enterprise. Her professional interests include BoP entrepreneurship, African telecom, boutique consulting, scenario analysis, and social impact assessment. 

Tayo previously worked for Burke & Partners, a Chicago-based consulting firm, as well as Catalyst, a New York-based research and advisory organization that helps businesses build inclusive environments and expand opportunities for women.  After nearly four years with Catalyst, Tayo accepted a Princeton in Africa Fellowship to do democracy and governance work with an international NGO in Abuja, Nigeria.  At the conclusion of her fellowship, she joined the marketing department of an emerging telecommunications company in Nigeria, Suburban Telecom.  Tayo holds a Bachelor's degree in Sociology from Princeton University.

Tayo AkinyemiBlogger, iuMAP

Chicago, IL

Josh is a consultant who works with innovative ways of using markets to further social and economic development in base of the pyramid markets. His current research includes social intrapreneurship, microfranchise, and corporate engagement at the BoP.

Josh collaborates with Ayllu as a blogger and as a strategy consultant. His past work has focused on enabling companies, individuals, and organizations to use the power of business to create positive social and environmental change. He has worked for TransFair USA, Net Impact, and PDAI (a microfinance provider in Cochabamba, Bolivia). Josh earned his BA in Political Science from the University of Michigan, where he helped establish Brewing Hope, a Fair Trade coffee partnership. Josh can be reached via email at josh.j.cleveland@gmail.com

Josh ClevelandBlogger,

Next BillionSan Francisco, CA

Melissa is the Executive Director of Ayllu, which provides critical support to social enterprises in emerging markets to scale their impact. Recently, in media partnership with Next Billion, Ayllu launched  iuMAP, the world's largest directory of BOP social enterprises. Melissa previously worked for Ashoka: Innovators for the Public. She has worked on international development projects in Africa, Europe, the Middle East, and Latin America that include education, maternity care, conflict resolution, immigration, and minority rights. Melissa is originally from Philadelphia, PA, is a graduate of Duke University, and lives in São Paulo, Brazil. Twitter @melissaricher Melissa Richer

Founder, AylluSao Paulo, Brazil

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Index

Spotlight on Microfranchising: A look into the Future of

Social Enterprise

Page 8

A Closer Look at the “Business in a Bag” Model

Page 10

“Machine Powered” Entrepreneurs: Infrastructure-

based Microfranchising

Page 12

The State of the Field

Page 17

A Closer Look at “Conversion Franchising”

Page 14

Human Networks for Social Good

Page 20

Investing in Microfranchising: What Should I Know?

Page 22

An Interview with Deborah Burand

Page 25

Introduction: What’s Next for

iuMAP

Page 7

Foreword by Francisco Noguera

Page 6

Support for Microfranchising: Knowledge, Funding, and

Missing Links

Page 31

Acknowledgments & Resources

Pages 37 & 38

Is Microfranchising the Next ‘Big Thing’?

Page 33

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ForewordSeptember 16, 2010

“Innova0on”is quickinbecominga buzzwordina nascentindustry like socialenterprise.As students,academics,andprac00oners embracethe idea, interest in learning about experiences, technologiesandbusiness modelsbecomesincreasinglyapparent.Learningiscrucial beforeaEemp0ngtoinnovate;ontheotherhand,uninformedenthusiasm –the mere desire to innovatewithout much knowledgeof past experiences—leads to repe00on,wastedenergyandinefficientresourcealloca0on.

NextBillion cameabout in response to that learning need: it was conceived as a journal and repository forknowledge, analysis and experiences around the s0ll‐new and growing idea of market‐based approaches topovertyallevia0on.Ourgoal is tomakeitanindependent,crediblesourceofinforma0onandanalysis whenthetaskathandis learningaboutexis0ngapplica0ons ofthis idea.We worktokeepita freshandrelevant,aimingtofacilitatetheinterac0onamongpeopleandins0tu0onsthataretryingtosolvesimilarproblems.

The site is effec0ve in that purpose, but there are somelimita0onsof its format andmodel. The format ofNextBillion–a blog,complimentedbysome addi0onal sec0onstostorenews andresearchpieces— lendsitselfwell to some,butnotall purposes. It’sexcellent forencouraginganalysisanddiscussion,as well as toaggregateexternal resources like news ar0cles, papers and publica0ons. What a blog is not very good at is filteringinforma0on.Ifyou’reinterestedinlearningaboutbusinessmodels toaddress energy‐relatedchallenges,asearchonNextBillionwill pointyoutolinks andreferencesmainlytointeres0ngar0cles andpublica0ons,butitwillcomeshort inproviding alist of relevant andcurrentenergy projects, presented inaconsistentway thatmakes theinforma0oncomparableanduser‐friendly.Un0lrecently,nosuchresourceexistedforsocialenterprise.

This is why wewere intriguedby Ayllu’s project tomapand open thedatathey had spent quite some0megathering and organizing. Theresul0ngproject, iuMAP, goes beyonda mapor a directory; it is a knowledgemanagementtool in manyways complimentarytoNextBillion´s informa0onsharinggoals.Thise‐bookis the proofofit; itcontains a series ofar0cles andinterviews thatappearedonNextBillionandresultedfromdissec0ngthemap’s informa0on in one way –of hundreds possible. We hope the informa0on in it will be valuable forresearchersandprac00oners,andwillalsohelpyouappreciatethepoten0alofiuMAPasatool.

WeencourageyoutoexploreiuMAPandpar0cipate initby providingfeedbackandcasesnot yet included.Wealsolookforwardtoyour feedbackonthise‐bookandways wecankeepimprovingthisformat as a vehicle toshareinforma0oninthefuture.

Francisco J. Noguera Managing Editor, NextBillion.net

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September 4, 2010

Greetings Readers!

In July 2010 Ayllu launched iuMAP, which tracks and shares information on BOP social enterprises in over 60 countries. As we discussed in our first and second Next Billion posts, we built iuMAP because there is a need for centralized information that is easy to access, and easy to digest. We did this because we believe information is key for social enterprises to reach millions more people living in poverty. iuMAP will help our sector learn from successes, failures, and challenges so that decisions can be made more easily, quickly, and cheaply.

iuMAP is currently a web-based directory and a blog where we publish our Next Billion posts. It lists more social enterprises than any other available public resource. In its first month iuMAP received visits from 78 countries and many funders and social enterprises used it to find new opportunities. So far we’re off to a good start, but in the coming months iuMAP will become an increasingly useful tool. We will make it more interactive, using it to share up-to-date information that we’ve collected and analyzed through our global surveying. Look out for a major upgrade in September, and for an increasing amount of data by the end of the year.

iuMAP is a place to learn about social enterprises, opportunities, best practices, benchmarks, trends, markets, and connections. Our vision is a "complete puzzle" for social enterprise, and a system that allows us to find missing pieces in an efficient fashion. Vetted and reliable information will give us a better sector picture and allow us to establish the frameworks and transparency necessary for our young market to become a mature industry.

You can help us enormously by submitting social enterprises that are unlisted and by giving feedback. We’re so excited to put social enterprise on the map with you!

Melissa Richer, Founder, Ayllu

What’s Next for iuMAP

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Microfranchising is a way to distribute products and services through a business the size of a microenterprise. Microfranchises are demand driven and tend to have local buy in because they employ community members who sell these products/services to other community members.  The standardization built into microfranchise in terms of business processes and branding among others, is helpful for scaling purposes since it makes models replicable and adaptable to new locations.

However, growth and expansion is not guaranteed - while a solution may work in one location, expanding to other areas may test the limits of standardization, as operating in many locations can require a level of systematization that is difficult to achieve. With micro-franchising, local context is extremely important; there are many key ecosystem elements to the success of a business model, so transporting a model from one place to another requires not only standardization but also adaptation. 

Microfranchising is frequently compared with microfinance, but they actually fit in different baskets.  A microfinance institution is a stand-alone business whereas a microfranchise is part of a larger business (the 'franchisor') and is used as a distribution channel.  In this way microfranchising is more like group lending, a common tool used in microfinance.  Group lending is a way to address the challenges of making loans to people with no collateral.  Similarly, microfranchising is a way to solve the challenges of distributing products at the Base of the pyramid.

Actually, microfranchising can act as a link between social enterprises and microfinance institutions; community members often need loans to buy stock of beneficial products / services, or to start a microfranchise. Milaap and Frontier Markets are two startups working on making product loans happen.  Interestingly, microfranchising may actually help microfinance institutions overcome their own scaling challenges, which you can read more about in a Beyond Profit article by Ayllu.

Today, the social enterprise sector is still experimenting, confirming, and growing.  Microfranchising is so new that a lot of questions remain unanswered, which is allowing the concept to generate healthy debate.  Deborah Burand of CGAP recently provided a good overview of the existing gaps, including lack of knowledge sharing and issues with financing,

Spotlight on Microfranchising: A Look Into the Future of Social Enterprise

By Shital Shah and Melissa RicherPublished on NextBillion July 6, 2010

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regulation, and technology (her team at the William Davidson Institute also just completed an Omidyar-funded study on the topic).  In addition, it is not yet clear which kinds of social enterprises best fit with microfranchising: which products or services can easily and profitably be distributed by community members?  In which cases is another distribution strategy going to create more wide and deep impact?

Definitions and points of contention aside, what does microfranchising look like in action?  At Ayllu we stay in touch with social enterprises about how their business models are evolving.  We try and understand what's working and how it is structured, so we're digging deeper into the many forms microfranchising can take. We start below by briefly introducing the schemes we will discuss in more detail in the coming weeks.

Business in a bag: In the same way the cosmetic company Avon provides a full kit to equip any interested woman to sell makeup products, social enterprises can provide a standardized process and training to allow ordinary members of communities to act as direct sales micro-entrepreneurs.  These entrepreneurs sell products within their community mainly through organizing sales events or going door to door.  VisionSpring, the popular affordable reading glasses provider, puts this in action through vision entrepreneurs who conduct basic screenings and sell glasses.  Living Goods involves community members who sell affordable health products door to door to low income households.  Armed with the proper training and equipment, community members are empowered to become the owners of their own microbusinesses.

Conversion franchising: Conversion franchising can be done in two ways: 1) absorbing existing businesses into a franchise network (CareShops, CDI  Lan), or 2) inserting a microfranchise strategy into an existing business, as Nuru Lights does by training shopkeepers to operate its

pedal-powered light charger.  Building and managing a microfranchise network can be labor intensive, but distribution may be easier because it takes advantage of established micro-enterprises with established customer bases.  

Infrastructure based:  Social enterprises can also scale up by creating franchisees that use machinery or other forms of capital.  One example again is Nuru Lights, which sells solar lights in East Africa and trains local shopkeepers/microfranchisees to run rent-to-own pedal powered machines to charge them. Sarvajal is another example, selling purified water in India through microfranchisees who run rent-to-own purification machines.  By providing small infrastructure installments, social enterprises can provide services in all corners of a country.

Agent networks:  Using an agent network to expand a business model is especially common for sec tor s such a s mob i l e bank ing .  Organizations like Mobile Transactions, a mobile based money transfer service, and Esoko, a mobile service that provides current agriculture market data via SMS, use agents as a key part of their model.  In these models, the size of the network is a key part of the businesses' value-add (market data collected from more locations; more potential locations to transfer money to).  Agents are existing community members that either sell products or provide information for a business.  Since agents are usually already involved in a business or industry, they are well placed to link with a social enterprise and extend their product offerings.

The next post in this series will go in depth about businesses in a bag, so be sure to look out for more insight on how that form of microfranchise works.  To learn more, you can find resources on microfranchising here.

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A Closer Look at the “Business in a Bag” Model

By Tayo AkinyemiPublished on Next Billion July 29, 2010

Business‐in‐a‐bag. It's a blissfully self‐explanatorymoniker. For VisionSpring,asocialenterprise that trains men and women to sellreading glasses to members of their villagecommuni0esandbeyond, the business‐in‐a‐bagcontains everything its vision entrepreneursneed to run their microfranchises‐ eyeglasses,eye charts, repair kits, uniform, marke0ngmaterials, forms, etc., "Like Subway has afranchise store, our backpack is our unit offranchise. That backpack has all the contentspeople need to start their liEle business," saysVisionSpringfounderJordanKassalow.ThesameistrueforLivingGoods,asocialenterpriseinEastAfricawitha similarmodel that focuseson thesale ofhealth products,which prevent or treatdiseases like malaria and promote familyplanning,reproduc0vehealthandpersonal care.LivingGoodswasbornoutofthe realiza0onthatpreven0on and treatment for diseases likemalaria and diarrhea weren't lacking, but asystema0cmechanism to distribute such itemstothoseinneedcertainlywas.Anotherexampleis ToughStuff, which sells solar panels throughvillage entrepreneurs in Madagascar with a'BusinessinaBox'model.

Apart from the bag or basket containing theproduct, many business‐in‐a‐bag models shareoneormorecommonelements,including:

• providingentrepreneurswithongoingtraining,• offering financing or consignment models for

entrepreneurs'ini0alinventory,• systema0zed promo0on and marke0ng

strategies, such as branded uniforms,

• strict protocols that incorporate penal0esforrule‐breaking,and

• helpingentrepreneursdevelopareputa0onasauthorita0ve service providers withintheircommunity.

However, thekeyvariable forsuccess is aligningentrepreneur profitability with communitywellness. For example, "providing effec0ve,sustainable incen0ves to village‐based healthworkersisatthecoreoftheLivingGoodsmodel.ThemoreprofitabletheHealthPromoteris, themore0me shewill invest inherwork, andthusthegreaterthehealthimpactshewillhave."

Like other microfranchising models, thebusiness‐in‐a‐bag model can be a dynamicsystem for market crea0on, which involvestransla0ngneedfora problemtobesolvedintodemand,findingaworkablebusinessmodel,anddistribu0ng solu0ons in product form. Thisgenerally involves knowledge flowing in twodirec0ons, from the social enterprise to thecommunity about the solvability of theaddressed problem, and from the entrepreneurand the communityabout the bestmethodsofreachingthem.

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Quite oden, many of the issues addressed bysocial enterprises were unrecognized by thecommunity before the entrepreneur startedopera0ng. As Dr. Kassalow explained toNextBillion: "[Latent demand] is an organic,physiological needthatdoesn'tgetperceivedasa need because people don't know there's asolu0on for the problem. The physiologicaldemandisthere,but it'slatent because it's notperceived as a problem, nor do they knowthere'sasolu0on."

Similarly,manyof thedistribu0onmethodsthathave worked well were unrecognized by thesocial enterprisesbefore theytestedthemwithentrepreneurs. VisionSpring originally tried tosell its glasses door to door, but eventuallylearned from entrepreneur feedback thatholding 'Vision camp' events in public placeswhere communitymembers can see eachotherbuyingisamuchbeEerwaytos0mulatemarketdemand.

This two‐way learning is well described in anar0cle in MIT Innova0ons Journal by Greg VanKirk of Community Enterprise Solu0ons, whodeveloped the MicroConsignment Model usedbyVisionSpring andCESolu0ons: "The...modeluses both a boEom‐up and a top‐downapproach to push new products out into thecommuni0es... The organiza0on... finds a newproduct andthenlookstothe entrepreneurs toassessthe need forit,astheyare acon0nuous,reliable source of real‐0me market knowledge.To succeed, the entrepreneurs must beresponsive to vi l lagers' needs‐and theorganiza0on must be responsive to theentrepreneurs'needtoservethosevillagers."

The business‐in‐a‐bag concept shares a fairamount with tradi0onal direct selling. Directselling, as defined by the World Federa0on ofDirect Selling Associa0ons is "the sale of aconsumerproduct orservice, person‐to‐person,awayfromafixedloca0on." Boththe business‐

in‐a‐bag model and tradi0onal direct sellingaddressthe perceivedneedsofcustomers, (e.g.once they recognize the u0lity of eyeglassesVisionSpring customersdemandstylishmodels),support the livelihoods of franchise entre‐preneurs, depend on their ability to learn andmanageanewbusiness,andusetheirsellers assourcesofR&D.

Thesesimilari0esmight suggest thebusiness‐in‐a‐bag model could derive good prac0ces fromdirect sales businesses like Avon. In fact,LivingGoods founder Charles Slaughter usedAvonCosme0cs'directsellingbusinessmodelasablueprintforLivingGoodsandspent0measan"Avon Lady" to learn the intricacies of how itworked. Twoareas where thismight applyarethe use of distribu0on partnershipsandmobiletechnology.Forexample,VisionSpringhasfoundthat while an entrepreneur‐centered model isideal forproduct and business‐relatedR&D, it'sdifficulttoscaleandmakeprofitable,par0cularlygiven the significant on‐the‐ground presencerequired. To that end VisionSpring andLivingGoods have both enlisted the massivedistribu0on network of BRAC, a globalmicrofinance ins0tu0on founded in Bangladeshto delivertheirgoods. In termsof technologyadapta0on, Avon has recently set up a virtualmobilenetwork foritssalesassociates,enablingthem to call in orders. Perhaps anotherapproach to business‐in‐a‐bag distribu0on is tocreate"phone lady‐like"kiosks wherecustomerscan buy goods (and make a phone call) whileentrepreneurscallinrequestsforinventoryandshareideasfornewproductsandservices.

Itwill be interes0ngtosee how thebusiness‐in‐a‐bagmodel evolves as more social enterprisesuseandadaptit, par0cularlygiventhe fact thatmany of the items being sold don't requirefrequentreplacement.Only0mewilltell.

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“Machine Powered” Entrepreneurs: Infrastructure-based Franchising

By Shital Shah Published on Next Billion August 3, 2010

Continuing our exploration of microfranchising, we'll move on from discussing the business-in-a-bag model to one that requires a larger physical presence for the franchise: infrastructure based models.    As suggested by the title of this post, some social enterprises offer services, such as electricity or water, that require small scale machinery to provide.  To franchise operations, they need to equip each franchise with the appropriate infrastructure to offer the service to their customers.  Generally, those interested in forming franchises buy a machine and then can use it to earn continued revenue off customers by becoming, for example, their source of water or power.  Franchise owners continue to make money well after the initial investment is paid off, offering a sustainable livelihood option. 

Several existing models demonstrate the use and success of the infrastructure approach.  Sarvajal, based in India, establishes water franchisees that provide customers with clean water.  More on Sarvajal's operations can be read here.  In order to provide the clean water, each "water entrepreneur" operates a water filtration unit and charges customers for the filtered water.  Nuru Lights, profiled here, offers a low cost rechargeable LED light kit as an alternative to kerosene in East Africa and India.  Franchisees, usually shopkeepers, are equipped with pedal-powered chargers and customers pay them to have their lights recharged.  By creating "solar entrepreneurs" who sell power to community members using RFID cards, Solar Energy Foundation similarly creates "solar entre-preneurs" who sell power to community members using RFID cards.  All these businesses include a machine or technology and local

entrepreneurs who buy the infrastructure or rent-to-own, creating a basic franchising framework.

There are also a number of other models that offer these same types of services by placing infrastructure in underserved communities, but d o n o t q u i t e fi t t h e f r a m ewo r k o f microfranchising because they do not involve an entrepreneur.  For example, Naandi Water uses a community owned and managed user fee based model that expands access to safe drinking water;  Husk Power Systems uses miniature power plants that use gasification technology powered by rice husks;  IDEAAS leases solar technology to the poor in Brazil.  While we do not place these models under the infrastructure microfranchise category, we would like to hear if others have a different take.

Infrastructure based microfranchising rests on several key factors.  At the center of this model is, of course, the entrepreneur running the franchise. Creating a successful franchise requires

One of Husk Power Systems mini plants

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robust processes to identify, recruit, train, and retain the franchisee owners.  The social enterprise essentially has to trust the franchisee to offer quality services using a prescribed process.  Training is especially important in this approach since operating and caring for the machines may require some technica l knowledge.  Moreover, trust becomes an issue as the enterprise relies on the microentrepreneur to manage cash and report statistics accurately; as cheating to get a little extra money can pose a risk to the enterprise's profitability and brand name.  Another issue for the enterprise is that this approach entails providing repairs, troubleshooting, and general support for the franchise, particularly since the business requires the machinery to be operational to function.

Since this model does involve infrastructure, there are also capital costs that go along with the machines.  Financing the franchise poses a challenge, and the social enterprise often has to assist the franchises in obtaining a loan or finding ways to cover their costs at the beginning.  In turn, this issues impacts the profitability of the social enterprise and how attractive it may look to investors.  Operating leases could provide relief to enterprises who take on franchisee debt, but while such leases are common in the private sector, they have not yet found their way into the social enterprise world. 

For social enterprises that offer a service centered around equipment or machines, the infrastructure approach is an appropriate way to scale up and continue to offer services locally, strengthen branding, and encourage entre-preneurship.  As more businesses test out this idea and innovate on ways to address the

challenges, the potential for scaling up will grow stronger.  However, not all social enterprises can apply this model, and the next post in this series will cover yet another option for micro-franchising: the conversion approach.  

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A Closer Look at “Conversion Franchising”By Tayo AkinyemiPublished on Next Billion August 11, 2010

What is conversion franchising?For social enterprises that have a business model that provides an improved version of a product already being provided to their target customers, conversion franchising may be a viable option. 

Conversion franchising transforms pre-existing, independently-owned businesses into members of a standardized network.  Scalability and profitability may be enhanced because potential franchisees already have a physical location, business experience, and regular customers.  Not surprisingly, several benefits accrue to a potential franchisor including:

• Streamlined process as compared to starting new business;

• Lower capital requirements because infrastructure is already built;

• Distribution of risk because shops serve different populations in different locations;

• Shop owners' local customer knowledge, e.g. common ailments and treatment patterns

The franchisee potentially benefits from an increase in income, access to business training, a streamlined distribution network often including volume discounts on products, and a strong franchisor brand. 

Conversion franchising has been used to network pharmaceutical sellers in Ghana (Careshops Ghana), midwives in Peru (Redplan Salud), internet cafes in Brazil (CDI LAN), and rural service kiosks in India (Drishtee), among others.  

What Does It Take to Succeed?

The benefits of conversion franchising do not accrue automatically.  One of the major positives of this model is that the franchisee is not starting from scratch but already has a business in the franchise field.  However, this can also be one of the biggest challenges, because the existing practices of the franchisee do not always fit the needs of the franchisor.  If incentives are not designed correctly, franchisees may pick and choose which of the franchisor's rules to adopt, or may try to use their previous connections to compete with the franchisor on supplies or other inputs. 

The franchisor must strike a balance between implementing standard practices and customizing parts of the business model to suit the local context. This can be difficult to accomplish when the individual and aggregate needs of conversion franchisees cannot be reliably anticipated.  The demise of CareShops Ghana demonstrates this well.

CareShops Ghana: Confronting the Pitfalls of Conversion FranchisingCareShops Ghana was a conversion franchisor founded to enhance "access to non-prescription

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drugs with significant health impact such as malaria and diarrhea medication ...by improving the service quality and drug supply chains of Ghana's chemical sellers."  CareShops was launched by the Ghana Social Marketing Foundation under the auspices of its for-profit subsidiary, Ghana Social Marketing Foundation Enterprises Limited (GSMFEL).  Many Ghanaians, particularly in rural areas, have limited access to healthcare facilities and experience poor service and uncertain availability of medication.  Consequently, those who cannot see trained health professionals will seek the council of licensed chemical sellers (LCS).

CareShops provided its franchisees with a streamlined distribution network that included on-site delivery, extensive business training, and a strong branding scheme supported by the renovation of franchisee stores.  In turn, the financial success of Careshops' model was contingent upon several factors, such as

• the collection of franchising fees;• achieving a significant volume discount on

drug purchases from suppliers;• margin earned on sales of medication to

franchisees (which assumed that GSMFEL would be an exclusive supplier); and

• rationalization of SKUs. 

Unfortunately, all of these factors would present challenges to CareShops' sustainability.

• First, GSMFEL could not enforce its sole distributor status. Not only did it face competition from suppliers who elected to sell directly to CareShop franchisees, but these suppliers were often better equipped to respond to market demand and undercut GSMFEL's prices. In fact, CareShops only accounted for 15% of franchisees' product purchases during its best year, while supporting all of the costs

of being a full-fledged distributor.• Secondly, CareShops was unable to

reduce the number of different products it supplied to franchisees, driving up inventory costs. Initially, it had planned to limit its inventory, but it was forced to expand in order to respond the needs of its franchisees and their customers.

• CareShops was unable to secure the level of volume discounting (20%) on which its business model was based. In reality, the discount was closer to 12%, significantly below break-even.

• Additionally, GSMFEL had a difficult time collecting payment for its deliveries. For example, some shop owners would arrange to be away at delivery time, leaving behind assistants who were reluctant to pay in the absence of their supervisors.

• Finally, although LCS's are prohibited from stocking prescription drugs, many did so anyway. Because GSMFEL did not supply these drugs to its franchisees, it missed out on the revenue that the sales would have garnered.

In the end, CareShops Ghana could not change these practices and failed because the cost of capital associated with sustaining a failing business was too high.

Drishtee: A Model of Progress in Conversion FranchisingDrishtee, a social enterprise based in India, uses entrepreneur-managed kiosks to provide a wide range of fee-based products and services ranging from insurance and microcredit to seeds and phone cards.  Each kiosk has a different suite of offerings, chosen from Drishtee's thirty templates.  These products are complemented by local services and goods that Drishtee doesn't supply, like printing and stationery.  Established as

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a for-profit in 2000, Drishtee reached break-even in 2005 and profitability in 2006, and has been hovering around profitability since then.

Drishtee's foray into conversion franchising came with the advent of rural retail points (RRPS) in 2008, which converted village shops selling fast moving consumer goods (FMCGs), like packaged food and hygiene products into Drishtee franchises. As with other models, franchisees benefited from the franchisor's distribution system.

On the surface, it's tough to tease out the differences between CareShops and Drishtee.  What enabled one to survive while the other struggled?  Although several factors contributed to Drishtee's success,   a few are particularly relevant as points of comparison to CareShops.

• Effective supply chain management. Given the variety of products that Drishtee kiosks carry, it is difficult to achieve the volume discounts that drive down procurement costs. Consequently, Drishtee has created a web-based inventory management tool that enables kiosk managers to order supplies online and helps Drishtee better manage and aggregate orders. Drishtee's focus on FMCGs also helps it reduce costs as the frequency of sales, and therefore the monthly volume, is higher. Drishtee's continued success will be partially contingent upon supplier adoption of its online tool.

• Incentive alignment as a substitute for enforceable contracts. As we learned in the CareShop case, contract enforcement is difficult, if not impossible in many cases. Drishtee has circumvented this challenge by offering financial incentives to shape behavior. For example, it will offer higher commissions on certain goods to help

entrepreneurs overcome lack of fam-iliarity with the products.

• Using revenue sharing as a financing mechanism. Drishtee was able to reduce upfront franchise fees, reducing risk for entrepreneurs and eliminating fee collection challenges by focusing on sales-based revenue sharing.

Lessons LearnedDespite its troubles, CareShops established a need and demand for business training among franchisees.  Additionally, it demonstrated the effectiveness of the microfranchise format as a platform for providing "behavior changing" education and support.  Drishtee's business model exhibits some of the key principles outlined by the Acumen Fund, including the following:

• Efficient supply chains are needed, but difficult to create.

• Contracts and legal considerations must be situationally appropriate.

• Microfranchisees require financing.

See Acumen's working paper entitled "Micro-franchising at the Base of the Pyramid" for additional details.  

Although it is difficult to make a definitive statement about the success of conversion franchising as a way to create profitable, scalable business models, the early successes of social enterprises like Drishtee, Redplan Salud, and CDI LAN are certainly encouraging.

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The State of the FieldBy Josh ClevelandPublished on Next Billion August 18, 2010

•Does the emperor of microfranchise have any clothes? I certainly thought so. I was first drawn to the concept while working on a microfinance project in rural Bolivia. At PDAI, most of our prospective clients were not actually entre-preneurs. They were farmers in communities with fairly widespread social problems. They needed new jobs and they needed service provision. We were there to give loans and build financial capacity. But many times we couldn't offer them what they really needed.

While in Cochabamba, a friend forwarded me an email from BYU on this thing called "micro-franchise." Understanding that there is still considerable debate over what microfranchise is, I employ the definition used by researcher Deborah Burand: "microfranchises employ many of the practices used in commercial franchising to create scalable business opportunities that are affordable enough to be owned and operated by people who live at the base of the economic pyramid." (For more discussion of this, please refer to the Dalberg report: Franchising in Fronteir Markets.) Jobs, social good, economic development, scalability - it sounded like just what we needed so I sent an email to Jason Fairbourne, a microfranchise guru (and co-author of a great recent article on the topic in Stanford Social Innovation Review), asking for his thoughts on how other MFIs were approaching the concept. Jason sent me some helpful info on what he was up to and how we might tap into the idea but by the time I could think about

implementation, we had gone another route. My stay in Bolivia soon came to an end and I was on a plane to my next job at Net Impact.

I am now back looking at this tool for social and economic development under a different lens. With my investigative NextBillion hat on, I'm here to ask whether progress is really being made in the microfranchise world and what can be done next to move the field forward.

Before we address what's holding microfranchise back, lets check in briefly on where the sector stands by looking at some examples of active microfranchise networks.

VisionSpring. According to an Acumen Fund report, to date VisionSpring and partner organizations have sold over 100,000 pairs of reading glasses, trained over 1,000 Vision Entrepreneurs, and referred over 80,000 people for advanced eye care.

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Drishtee. The organization's +8,000 entre-preneurs reach more than 500,000 rural Indian residents with access to fast moving consumer goods.

HealthStore Foundation. This network has provided for approximately 2,000,000 patient visits from low-income customers in Kenya seeking health care since its inception in 2000.

SELCO Solar Lighting. This organization, which works with MFIs to train and finance entrepreneurs to sell small-scale solar power systems has distributed and serviced over 100,000 solar systems.

These are impressive accomplishments for the microfranchise model: 100,000 solar systems in use, improved eyesight for 180,000 BoP consumers, 500,000 reached with valuable, otherwise inaccessible consumer goods, and over 2,000,000 reached in Kenya alone with high-quality, low-cost healthcare. And that's only the data from four leading organizations.

The innovative products and models don't stop there...

The Grameen Foundation, no stranger to BoP business models, launched a Village Phone program that "works as an owner-operated GSM payphone whereby a borrower takes a $200 loan from Grameen Bank to subscribe to Grameen Phone and is then trained on how to operate it and how to charge others to use it at a profit." There are now well over 255,000 Village Phones in operation in 55,000 villages throughout Bangladesh. (Check out past NextBillion articles for more info on this project.)

Ecotact Limited, an investment of the Acumen Fund, generates revenue through its IkoToilet franchises by providing access to high-quality, environmentally responsible sanitation facilities. IkoToilet franchise owners attract customers by offering other services like shoe shines, refreshments, and newspaper sales and then impressively uses biogas generators to convert the waste into fertilizer. The franchise plans to expand to serve over 200,000 new customers and employ over 2000 workers in the coming five years. (Find more info in Benje Williams NextBillion post here.)

Just in those examples listed above, we've covered the fields of energy, healthcare, consumer goods, eyeglasses, sanitation, and communications.  The organizations here reach major BoP markets in sub-Sahara Africa, Asia, and Latin America. More examples abound.

For deeper insight on the specific models that guide those organizations, check out the recent posts in the Ayllu series on conversion franchising, infrastructure-based franchising, and agent networks.

The innovations are there. So what's lacking? Three words: financial sustainability and scale. These two issues are intimately linked, especially when you're talking about BoP business. With thin margins you need scale to get revenues high enough to cover costs. Talk to any one of the organizations mentioned above (each with the exception of Drishtee is not yet financially self sufficient) and sustainability and capital rank high on their list of concerns. The shining light at the end of the tunnel - self-sufficiency - is still dim in

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most cases. Indeed, as reported in , a Emerging Markets, Emerging Models Monitor Group publication: "On the whole, although many socialfranchisees are - or have the potential to be - financially sustainable, few have becomecommercially viable."

Here's what this all points to: the ideas are there. Promising products, services, and models have been developed for microfranchising. But some large roadblocks are preventing this much-hyped development opportunity from stretching its wings. The following posts in this week-long series dive deeper into those challenges and suggest some pathways forward for the field.

As you read these and other posts on the topic, I'd encourage you to use the recent articles and reports listed below as references to find more information:

• Franchising in Frontier Markets: What's Working, What's Not, and Why by Dalberg Global Development Advisors

• Microfranchising at the Base of the Pyramid by the Acumen Fund

• The Promise of Microfranchise: Leap-frogging a Decade by Deborah Burand

• A Good Business for Poor People by Jason Fairbourne, David Lehr, and Lisa Christiandsen Jones in the Stanford Social Innovation Review.

• The Next Generation of Microfinance: Microfranchising by Melissa Richer of Ayllu in Beyond Profit Magazine.

• Emerging Markets, Emerging Models: Market-Based Solutions to the Problems of Global Poverty by the Monitor Group.

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•"Build on existing assets and make new connections." Ayllu's research into micro-franchising models has found this to be a common theme.   Just as with the business in a bag, infrastructure, and conversion models, the agent network model strengthens the assets of local markets, but in this case by creating franchises through a network of agents that are already embedded in communities.  

Why would a social enterprise want to use an agent network?  With a network, the enterprise can spread into every corner of a market without actually setting up a shop. The reach of the agent network is usually a key part of the business model - for a mobile money company, the more agents, the more access points from which someone can transfer money.  For other companies, more agents may mean a larger collection of information for a specific service.  Additionally, since one of the hardest parts of scaling up is moving into new markets, bringing on agents allows the enterprise to create extensions that already belong to and under-stand the market.

And what's in it for the agents?  Most agents are already entrepreneurs - they own a small grocery shop, a pharmacy, or perhaps a travel booking agency.  By "partnering" with the social enterprise and selling a new product or service, the agent can add on another income stream at little or no expense to their business.  By selling the new service, agents will also see increased footfall in their shops and new customers that are drawn to their business that may not have otherwise come in.

Take the example of eSoko.   Their online software, which allows agricultural market price information to be easily uploaded to mobile phones or computers, helps individuals and businesses in West Africa to make more informed decisions about buying, selling, and trading.  Users of the software train agents in market towns across the region to collect and upload information, and pay them a commission for their work.  Without agents, accurate price reporting from numerous parts of the region would be difficult, if not impossible.  

Agent networks are also common with mobile money companies, such as Mobile Transactions, which operates in Zambia. Since the lack of bank branches and ATMs make financial inclusion challenging, and since the infrastructure is expensive to build, using the existing reach of mobile networks to increase financial access is a promising model.  The more agents a company like Mobile Transactions has, the more likely customers are to have an agent near them for activities like making payments or sending

Usingexis0nginfrastructure:AgentnetworksinBrazil.

ImageCredit:CGAP

Human Networks for Social Good

By Shital Shah Published on Next Billion August 24, 2010

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money.   Other similar models exist and are emerging in all regions of the world, such as M-PESA in Kenya and GCASH in the Philippines.  Agents are attracted to mobile money companies because by offering a quick and easy service, they are able to add value to their own businesses.

Three key components can drive this model:

• The agents - the agent is essentially the microfranchise; they become a service provider or information gatherer, in addition to what other line of business they may already engage in. The agent is the human face of the service.  

• The network - getting the extent and reach of the network right is what makes this model work. The network is what creates the limits of what the business is able to do.

• The technology - mobile phones is a common one, but there is definitely scope for other pieces of technology to connect the network: the Internet, a switchboard or kiosk, or any type of communication technology.

Given the ubiquity of small corner shops in both urban areas and villages, there is a sense that more agent network models will emerge with a diverse range of services as social enterprises try to improve their reach.  What other kinds of companies could optimize and build on these networks?   With a new mix of established technology and existing communities, agent networks may prove as a natural step to connect the services of social enterprises with those who need them most.

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Investing in Microfranchising: What Should I Know?

By Tayo AkinyemiPublished on Next Billion August 25, 2010

To date, this series has focused on the mechanics of microfranchising from the entrepreneurs' s point of view.  (The term "entrepreneur" represents both the franchisee and the franchisor.)  But to succeed, i.e. become profitable and scale, new businesses more often than not require infusions of capital to fuel growth. To that end, we at Ayllu would like to take a look at microfranchising from an investor's point of view. 

Probably the first thing to keep in mind, as we have mentioned in previous posts, is not to look at microfranchising as a business model in itself.  There are a few organizations which specifically focus on microfranchising, and plan to introduce a number of businesses using this method (an example is Microfranchise Solutions), and others, like Community Enterprise Solutions, that are focused on perfecting versions of microfranchising l ike microconsignment.  However, microfranchising is generally a distribution method used by different types of social enterprises as part of their business models (training community members to provide eye-screenings, providing clean water or renewable energy via a machine). Therefore, the first question to answer is why microfranchising is being used by the investee and whether it is the best method of distribution. 

There are several general positives from the investor perspective to the use of micro-franchising for distribution.  First, it can potentially be less risky than individual business ownership. Why?  In the franchisee's case, s/he is implementing a tested business model, which increases the likelihood of financial success.  For the franchisor, the benefit often comes from

engaging experienced entrepreneurs. (Contrary to popular belief, franchising doesn't always produce first time business owners.)   Second, by using community members as salespeople, microfranchising increases the likelihood that the social enterprise will be able to understand their customers well enough to meet their needs (often a challenge for development projects).  Third, for more socially oriented investors, microfranchising creates the social benefit of new jobs in the community, in addition to that of the product or service provided.

However, the risk/return relationship for microfranchises varies widely.  The major factors include the franchisor organization's size, age, and maturity, and the chosen industry, Profitability is particularly difficult to achieve for franchises that deliver public goods like health and education, as they frequently have to compete against subsidized nonprofit or government models, driving down prices and margins.  In fact, research from the University of California, San Francisco indicates that the only ways for health franchises to both serve the

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poor and be profitable are to offer niche services or to serve higher income, high-density urban populations.

Recommendations for Investing in Microfranchised Social EnterprisesWhen a potential investee has adopted a microfranchising model, how can an investor know if it is likely to succeed?  What are the risks? What are likely to be the crucial factors?  One strong source of information is a December 2009 report by Dalberg Global Development Advisors entitled: Franchising in Frontier Markets: What's Working, What's Not, and Why.  The report produces several insights about microfranchising, all of which is useful to tease out and discuss.

1. Traditional vs. Business Format Franchising. One challenge many franchisors face operating in BOP environments is the lack of a strong legal and regulatory framework enforcing contracts, intellectual property rights, and resolving conflicts of interest. Traditional microfranchises, i.e., variants on the business in a bag model, are less susceptible to these challenges than business format franchises, in which the franchisee licenses a business model, rather than products or services. This is because the relationship between the franchisee and the franchisor is often easier to manage. For example, there are less likely to be issues with contract enforcement; there is often less intellectual property to protect; and there are fewer conflicts of interest. Additionally, franchisees have less responsibility for managing the franchise, e.g. less input into things like marketing, and less power due to

the ease with which the franchisor can dissolve the relationship.

2. Target Selection. A key focus in the due diligence process should be the size and density of the potential market for the distributed product. Density can be a key factor for franchise success, both because it makes it easier for customers demanding the product to reach the franchisee, and because word of mouth spreads more quickly among denser populations, making the product easier to promote.

3. Under s t and un i t p rofi t ab i l i t y. Not surprisingly, the margin generated by each unit has a significant impact on franchise profitability. Without unit profitability, franchise failure is more likely. As a result, it should be considered as the franchise's purchase price and expected return are calculated.

4. Focus on outlet growth. Once the business model is set, adjusting unit profitability is difficult, partially because franchisees are reluctant to shift the product and price mix. Consequently, outlet growth can be a strong contributor to profitability.

5. Manage agency costs. Investors should identify agency costs, e.g. the costs associated with monitoring franchises, and reduce them. More specifically, areas of potential conflict between franchisees and franchisors should be minimized because conflict increases risk, which in turn impacts franchise value.

6. Focus on reducing barriers. Barriers such as access to capital (both financial and human),

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and durability of contracts can constrain outlet growth, and investors must understand these and work to reduce them.

7. Grant-subsidized microfranchises can be problematic. While they may be necessary, especially in the start-up phase, grants and subsidies can discourage entrepreneurs from developing their business model toward profitabil ity. Additionally, i f for-profit franchises exist in the same market, the existence of subsidized franchises can create a negative competitive effect. Dalberg's study finds that it has thus far been difficult for most grant-subsidized franchises to suc-cessfully transition to Focus on outlet growth. Once the business model is set, adjusting unit profitability is difficult, partially because franchisees are reluctant to shift the product and price mix. Consequently, outlet growth can be a strong contributor to profitability.

8. Third Party Payors. Some microfranchises provide services which are needed but seemingly impossible to make profitable at prices the customer can afford (often in the aforementioned health and education sectors). One possible way to bridge the gap between costs and customer ability to pay is the use of third party payers (government service providers, insurance companies). If a franchise can provide a service more cheaply and/or effectively than these third parties were providing it before, voucher systems can be developed where the third party pays each time the service is delivered, retaining incentives better than with grant support.

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An Interview with Deborah Burand

By Josh ClevelandPublished on Next Billion August 25, 2010

This post  focuses on the recent insights from a study conducted for the Omidyar Network by Deborah Burand of the University of Michigan.

* * *

To get to the core challenges facing micro-franchise today, I recently spoke with some of the leading researchers in the field. For her latest project funded by the Omidyar Network, Deborah Burand brought over two decades of experience in microfinance, law, and international development to bear on the issues facing the microfranchise field by surveying 37 micro-franchise networks.

At the time of this interview Deborah Burand was the Director of an International Transactions Clinic at the University of Michigan Law School, the first of its kind in the world. She since has joined the executive leadership team at the Overseas Private Investment Corporation (OPIC) where she now is the General Counsel. (The opinions expressed in this interview are her own personal views and should not be attributed to OPIC.)

Prior to her work at the University of Michigan, Deborah spent nearly a decade working in the microfinance sector - first at F INCA International where she launched the Capital Markets Group of that microfinance network and served on the boards of several of FINCA's transforming microfinance institutions, then at Grameen Foundation where she served as the

Executive Vice President of Strategic Services.  She also has worked as a consultant for CGAP, co-founded Women Advancing Microfinance (WAM) International, chaired the Board of Microfinance Opportunities, and served as a member of the Investment Committee of the Global Commercial Microfinance Consortium and the Advisory Board of Microvest.

In this interview Deborah helps us better understand what microfinance could teach microfranchise networks, why sustainable microfranchise is so hard to find, and also

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provides a vision of where microfranchise might be a decade from now. If readers are interested, you can check out this past post by Deborah and also her bio info before reading on.

Without further ado, here's what Deborah had to say about the future of microfranchise.

Josh Cleveland, Next Billion: Before we dive into your knowledge of the microfranchise sector, let's start off with a question about you, Deborah. I've been putting together articles on BoP Career Paths as well so I have to ask, why did you get interested in learning about the microfranchise? And why is it so important today?

Deborah Burand: I have to admit that my interest in the microfranchise sector has been a long time coming... maybe too long.

Nearly ten years ago I was visiting with microentrepreneurs in Tanzania that were microfinance clients of a company where I then worked. One Tanzanian female client approached me to talk about the microcredits that she had received. According to a translator, this woman was thanking me for her "soft knees." At first I thought I had not understood correctly.  Then I learned that, thanks to these very small loans, she had used the profits from her business to pay for the school fees of her children so that she no longer needed to kneel before her husband to beg for money for their children's education.

That was such a powerful story. that I left Tanzania feeling like a newly ordained, albeit secular, missionary for microfinance. But as I

reflected on this experience, I realized that there was more to this Tanzanian woman's story. She also was telling me, at least implicitly, about her dreams for her children - and, importantly, about the investment she was making in those dreams by paying for her children's schooling.

Over the years I have wondered if that Tanzanian woman's investment paid off as she hoped. I worry that it did not. I worry that her microenterprise is one of those many businesses that have remained micro, never growing into a small or medium-sized enterprise. And I worry that her now teenage children are counted among the approximately 85 million unemployed youth (aged 15-24) in the world.

If a study conducted by FINCA International in 2004 is correct, I have good cause to worry. In that study, FINCA surveyed 1500 microfinance clients in Mexico, Guatemala, Honduras, El Salvador and Haiti. Of the surveyed microfinance clients' children that had completed all or part of their secondary education, only one in six was employed in the formal sector working for a salary. The other working age children of FINCA clients were unemployed or employed in the informal sector where they were earning less than US$3 a day.

Fast forward to 2007 ... I was attending a conference in San Francisco, California where I met Chuck Slaughter and heard of his plans for a microfranchise network called Living Goods. That was the beginning of my "eureka" moment. Within a year I had left the microfinance sector to begin researching the microfranchise sector for it seemed to me that Chuck and the other microfranchise pioneers that I since have come

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to know hold an answer to the dreams of that woman in Tanzania. These leaders in the microfranchise sector are building businesses that can scale at the base of the pyramid, providing both employment and investment opportunities for those now living in poverty.

Josh Cleveland, Next Billion: To get everyone on the same page, what do you mean when you say 'microfranchise'?

Deborah Burand: Good question as there are many competing definitions of this term.  When I say "microfranchise" I am talking about a business models that employs many of the practices used in commercial franchising to create scalable business opportunities that are affordable enough to be owned and operated by people who live at the base of the economic pyramid.  Yet even here there is much room for debate.   What is, for example, "affordable enough"?  That calculation is likely to vary from country to country, just as the size of a "microcredit" can vary significantly from country to country.

Josh Cleveland, Next Billion: Now let's dive into your work in the sector. Tell me about your most recent research initiatives in microfranchise.

Deborah Burand: This past spring, with support from the Omidyar Network, I led a team that surveyed 37 microfranchise networks on their business models, challenges, and opportunities.  We also surveyed many of these networks' funders (13) and partners (14) to hear their perspectives on the state of the microfranchise sector.   Alex Nosnik and Lea

Werbel very ably and insightfully conducted all 64 of these surveys.

Josh Cleveland, Next Billion: What were some of the big "aha" moments of your recent research that the Omidyar Network funded? What are some of the main learnings that you can share with NextBillion readers?

Deborah Burand: I personally had four big "aha" moments. First, we saw a wide spectrum of evolving business models and the absence of an identifiable/self-identifying microfranchise sector. Yet, at some stage, what became clear from our research is that, no matter what you call these networks, there is much that they can learn from each other. All along the spectrum - from the most franchise-like networks to the most product/service distribution-oriented networks - these networks face many common challenges as they work to build inclusive business opp-ortunities at the base of the economic pyramid.

The second, more personal, "aha" moment for me was that I realized how much more complex it is to build scalable and inclusive business networks at the base of the economic pyramid than it is to make loans to the poor.  Building a viable microfinance provider is never easy; building a viable microfranchise network is harder still.

Third, I came to realize that the type of product or service being sold will influence the need for control over the point of sale (and delivery).  Services and products that differentiate themselves based on quality often demand significant control over points of sale (and delivery).   Now this may not seem like a

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particularly keen insight, but it helped me to understand why some of the microfranchise networks that we surveyed pay much more attention to branding and microfranchisee recruitment and training than do others.   In short, in most cases, I could map the need for control (over brand and microfranchisee behavior) to the need for quality.  

Finally, and related to all of the above, I saw how important, indeed crucial, it is to embed a microfranchisee-focus into the microfranchise network.   This focus is at least three-dimensional.   It is important from a financial viability sense (the microfranchise has to generate financial returns for the individual microfranchisees as well as the microfranchise network as a whole).   It is important from a more general business sense (information gathered from and among microfranchisees needs to be incorporated into a business feedback loop so that the microfranchise network as a whole is learning and adapting to an often challenging and changing business environment).   And it is important from a mission or development impact sense (the social as well as financial returns of microfranchise depend very much on how well microfranchisees are treated).

Josh Cleveland, Next Billion: We've talked about what microfranchise is and some of the different models for microfranchise here on NextBillion, especially in some recent posts by the Ayllu team. Something that comes up in every conversation is "sustainability" and the apparent lack thereof in this sector. What makes building a sustainable microfranchise so hard?

Deborah Burand:  There are at least two levels to that question.  One is understanding what is needed at the microfranchise network level.  Second is understanding what is needed at the microfranchisee level.  

On the microfranchise "network" level there are issues surrounding the development of robust and efficient product/service distribution chains. These issues will vary, of course, depending on both the "what" and the "where" - eg, 1) the type of product or service being distributed through the microfranchise and 2) the places where these products and services are  created and the places where they are sold.  

Then there are issues that are likely to be common to any microfranchise network.  These are the "how" issues. They generally include questions about how to find sustainable sources of patient funding, how to tap into and learn from the lessons of peers, and how to gain franchise know-how.  

With respect to this latter point - that is developing franchise know-how, others who are more expert than I am in franchising tell me that all organizations that begin franchising face a steep learning curve.  As they put it, franchising organizations are engaging in a whole new business because "the business of franchising is so different from the business being franchised."  

So let's say you are really good at producing and selling valuable "widgets" to customers at the base of economic pyramid.   Selling these same widgets through a network of microfranchisees requires another whole set of business skills.  You must be able to market a microfranchise

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opportunity, recruit microfranchisee candidates, train successful microfranchisee candidates, and complete all of the other steps necessary to help these microfranchisees open for business.  Then, once these microfranchisees are in business, you need to be able to meet their changing and growing needs (including, possibly, funding). That is hard work in any business environment.  Then add the challenges of working at the base of the economic pyramid in emerging markets and this work becomes even harder.

Josh Cleveland, Next Billion: To your research in the microfranchise sector, you bring nearly a decade working in microfinance. Tell us what microfranchise can learn from micro-finance.

Deborah Burand: One of the significant accomplishments of the microfinance sector is that it has demonstrated that scale can be reached while serving people who live at the base of the pyramid without sacrificing quality.  That should be a goal for the microfranchise sector too.  Here are six important lessons that I think microfranchise can borrow from the microfinance sector:

1. Start building an investment-ready micro-franchise sector long before available donor capital is exhausted.  This means developing microfranchise networks that are capable of attracting and absorbing capital investments from a variety of investors (profit seeking as well as social/development impact seeking).

2. Advocate for friendly, enabling legal/reg-ulatory regimes.  As microfranchise reaches critical scale, host governments need to see

the value of supporting (or at least not interfering with) a vibrant and growing microfranchise sector.

3. Measure the success of the microfranchise sector holistically - combining financial and social returns.  Anecdotes are not enough to p rove t he deve lopmen t impac t o f microfranchise networks.

4. Frontload microfranchisee protections into the system.   A focus on consumer protections was too long in coming to the microfinance sector.   The microfranchise sector should think long and hard about how to ensure that transparency and integrity are hardwired into every microfranchise network before rogue actors or other troubling issues surface.

5. Invest strategically in technology solutions with a view to applying these solutions across the microfranchise ecosystem.  There is no need to re-invent technology solutions, microfranchise by microfranchise.   

6. Prize and invest in the human capital of the microfranchise sector.   As microfranchise reaches scale, human capital becomes even more valuable than financial capital.

Josh Cleveland, Next Billion: If everything goes right, where do you see microfranchise a decade from now?

Deborah Burand: I can imagine a world where, by 2020, the microfranchise sector will have as large and impactful a global footprint in the world as the microfinance sector enjoys today. Business and employment opportunities in

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the micro-franchise sector will have reached over 100 million households, and investment opportunities in the microfranchise sector will have grown to over US$25 billion.

Harder to quantify, but just as exciting -- valued and valuable products and services will be reaching poor communities around the world at unprecedented penetration rates, no matter how physically isolated or remote these communities are.  New technology solutions will be linking microfranchise networks and their micro-franchisees so that information is flowing in real time, thereby increasing both the efficiency and cost-effectiveness of microfranchises.  

And, best of all, when women like that mother I met in Tanzania invest in their children's schooling, they will do so confident that their children will be able to apply that education to find gainful employment in their very own backyard.

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Support for Microfranchising: Knowledge, Funding, and Missing Links

By Shital Shah Published on Next Billion August 26, 2010

For the last month or so, we've covered the different types of microfranchises as they exist today. The series has also included interviews with researchers and practitioners.  In this final post, we' l l cover exist ing support for microfranchising. 

As more businesses see the value in micro-franchising, and as others try to learn more about the concept, building a support network will require information sharing, appropriate linkages, and fund efforts underway.  Often, there is talk of building an "ecosystem" for social enterprises to thrive; similarly, microfranchising will also require building blocks to propel it forward.

As practitioners and academics explore this concept, valuable pieces of research have helped identify trends and gaps, and upcoming publications promise to provide even more context.  For readers that want to dig deeper into this idea, there are a number of useful resources.  Jason Fairbourne, out of Brigham Young University, is leading the MicroFranchise Development Initiative, which aims to research and develop microfranchising as an economic development tool .  Dalberg 's repor t on  Franchising in Frontier Markets, covered by NextBillion  here  and discussed yesterday in Tayo's post, provides a critical, global outlook and raises pert inent quest ions for fur ther research.    Acumen Fund  reflected on the experiences and lessons learned from their investees,  Drishtee  and  VisionSpring, through a working paper.

An upcoming book by Nick Sireau of Solar Aid is

called Micofranchising: How Social Entrepreneurs are Building a New Road to Development  and will focus on how microfranchising can be used as a tool for poverty reduction in Africa.  Kirk Magleby's book,  Ending Global Poverty: The Microfranchise Solution, also focuses on microfranchising as the "most important business model on earth."  Books and papers like these not only serve to provide information and analysis, but are an important way to raise general awareness about microfranchise as a viable business option.

Others are filling in gaps on missing links in building businesses.    Milaap, for example, is developing an online platform that offers loans to help franchises with their start up costs - a major hurdle for an infrastructure based model, as we discussed  before.  The  Microfranchise Development Corporation  also supports

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different initiatives in this arena by helping to build businesses using microfranchises.

Besides building knowledge and making links, money is always needed to fund efforts.  Several players have already started funding micro-franchising projects.  The Clinton Global Initiative has a commitment  focusing on market based solutions beyond microfinance, including microfranchise.  The World Bank Development Marketplace is another arena that has supported microfranchise models with IDE Cambodia.  Not surprisingly, there are not many funders in this space yet - whether this is due to the lack of viability of most models, high risk, or low levels of awareness amongst funders, without more sources of funding, microfranchise will see difficulty in moving forward.

The research is growing, but the case study options are limited.  If funders encourage the development of microfranchises, and org-anizations like Milaap provide the necessary linkages, we may see further implementation of this concept.  Perhaps the tendency to speak in a very general way about microfranchises or the common use of for profit examples, such as McDonald's, rather than successful hybrid models, points to the need for further support for microfranchising in the social enterprise sector.  As various stakeholders - universities, experts, umbrella organizations, corporations - get involved, we'll see an expanding support network for microfranchises, which will hopefully also lead to stronger, more established and replicable models.

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As of NextBillion’s series on the Future of Microfranchising, I spoke with Robin Miller and Wouter Deelder, the head authors of a recent report by Dalberg Global Development Advisors titled "Franchising in Frontier Markets: What's Working, What's Not, and Why." In addition to providing an insightful look into franchising in general, the report takes an often-critical perspective on franchising as it relates to development. The hard questions asked in the repor t fo rm a g rea t founda t ion fo r understanding the challenges facing the emerging micro and social franchising fields. Make sure to take some time to look over the report - especially the sections on "innovative solutions" - before or after continuing with this post. 

A Note on DefinitionsPerhaps the most important distinction amongst franchises is between business format franchising and traditional franchising. Business format franchising focuses on the holistic delivery of a business concept by licensing a business model rather than a product or service. Traditional franchising is closer to a supply chain distribution mechanism whereby a company owns a particular product or service and offers distribution rights to the franchisee. To add yet another level that distinguishes a franchise further, on NextBillion.net our discussions most often refer to social franchising. This is tricky to pinpoint since the “social” aspect can relate to the good being franchised, the economics of the business model (nonprofit in many cases), and/or the motivation and objectives of the entrepreneur in question. To avoid confusion, Robin and Wouter use ‘the

franchising of public goods and services’ in lieu of social franchising. While microfranchising is often assumed to be social in nature, perhaps given its semantic similarity to microfinance, microfranchising can take either franchise form (business format or traditional) and refers to the size of the franchise (generally one person), not the social impact of the enterprise.

With all those distinctions, I think it’s also important to distinguish real “franchise” from “replicable models or processes.” Often times in development circles we’re seeing anything that looks replicable and is disseminated in a systematic fashion amongst entrepreneurs linked to a central organization is termed “microfranchise.” If there isn’t a contractual relationship there though, it’s not a genuine ‘franchise’ model.

The Dalberg report suggests that the hype surrounding “microfranchising” is coming dangerously close to eclipsing the focus on the underlying economics of products and services

Is Microfranchising the next ‘Big Thing’?

By Josh ClevelandPublished on Next Billion September 14, 2010

PhotoSource

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provided by organizations focused on market-based BoP development. By being clear on the definition of franchise as it relates to development, we can help reduce the tendency to group ideas and models into convenient and fashionable buckets.

After that discussion of definitions, Robin, Wouter, and I sat down to speak about what’s next in regards to franchise models and development:

Josh Cleveland, Next Billion: Let’s start to address the title to this post. The conclusion from the Dalberg research with regard to franchising as a whole appears to be "no." Tell us a bit more about why the international development community might want to be skeptical about the promise of the franchise concept as it relates to social and economic development.

Robin Miller, Dalberg: Our answer isn’t “no”. We’re actually agnostic to the answer. But we are interested in the underlying economics of these organizations that are trying to serve the poor at scale and using franchising as a growth strategy.

Some of the organizations that we looked at consider franchising as a way to achieve sustainability rather than defining the core economics first and then considering franchising as a mechanism to grow. Franchising is just one of a number of growth strategies to increase the reach of already profitable models. As readers of Next Billion will know, getting the business economics right is quite difficult especially for social enterprises serving base of the pyramid populations. It’s important to ensure that the unit economics and system-level economics work first. Franchising is an option for growth, not a business model in and of itself.

Josh Cleveland, Next Billion: The report sounds a hopeful note in regards to traditional microfranchising (as opposed to franchising in general). Tell us a bit more about that.

Robin Miller, Dalberg: Several char-acteristics of traditional microfranchises may leave them better positioned for sustainability and scale. However, these are early-stage, preliminary thoughts, which require significant additional research.

First, micro-franchisors may naturally tweak the concepts to local circumstances and consumers to a greater degree. One of the real challenges uncovered in this study and others that we have worked on, is that we know very little about the preferences and needs of BoP consumers. And market research is very limited. Traditional microfranchising and microfranchisors may be better placed to circumvent this hurdle. Second, the franchisees may be better positioned to navigate the local business and regulatory environments.

In addition, and somewhat separate from the traditional vs. business format discussion, our study noted that a number of case-studies with headquarters overseas incurred higher overhead costs.

Josh Cleveland, Next Billion: Most franchises - micro, social or otherwise -  in "frontier markets" are missing two very big, often interlinked components: profitability and scale. The report covers the reasons for this in significant detail in Chapter 3. In the coming years can we hope to see successful cases of franchise in the BoP that overcomes the key challenges?

Wouter Deedler, Dalberg: We will undoubtedly see some successful cases of franchising. However, more interesting and relevant will be the distribution of success

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across all cases / models. Of course, at the highest level it’s a game of probability. As more organizations try franchising models, some are likely to succeed. However, how many will not succeed, and for which reasons?

The danger we want to emphasize lies in focusing more on the model by which an organization can grow than on the core business model of the firm. Those that have a robust core business model and employ franchise as a means to grow should be successful. Those that focus on franchise as their model with out building on solid economic ground will certainly not.

Josh Cleveland, Next Billion: Many of the issues facing franchises outlined in the report are problems facing the SME sector as a whole. Consequently, the report suggests focusing on solutions for the whole sector, not just franchise in general. Does this mean that policy makers and investors should avoid a strong focus on driving development in microfranchise at this time?

Wouter Deelder, Dalberg: There are two way to look at this: from the perspective of the policy maker and the perspective of the investor. Let’s begin with the perspective of the policy maker. The policy maker wants to create a suitable environment for small businesses to grow. Some of those businesses are small franchises. Yet the foundation that the policy maker needs to build is for all small businesses. This includes attributes such as access to finance, property rights, ease of doing business, ability to hire employees. The basic foundation necessary is similar for all businesses and in most countries; there remains an enormous amount of work to be done to build this environment.

Only when that environment is in place will there be a situation where franchise businesses could be handicapped because of franchise-

specific restrictions. At this stage, policy makers should focus explicitly on policies that make the legal and business environment more franchise-friendly.

On the whole, it is still an open debate whether franchises are better positioned to build skills, increase learning, and create development amongst franchisees than non-franchise chains. As a policy maker, you probably should thus foremost be concerned with increasing levels of SME activity, and growth, replication and scale-up in the economy, regardless of the number of franchises it contains.

Robin Miller, Dalberg: It is interesting to note that often the challenges that franchises faced was less to do with the absence of policies, but more with the lack of enforcement

Wouter Deelder, Dalberg: Second, from a (social) investor’s perspective, there are two considerations. On one hand investors are interested in profits over time and on the other hand, they are interested in social impact over time. The social impact component encompasses the impact on your beneficiaries and your employees. There might be a (small) difference in level of skill building and entrepreneurial energy amongst franchisees than traditional company owned structures. However, most important is the direct correlation between impact and scale: the larger chains will have more social impact. This reinforces the case for sustainability and profitability, so chains can scale-up and reach impact in this manner.

Josh Cleveland, Next Billion: What would you recommend for readers of NextBillion who want to do more? If someone is looking to get more involved in this space and hoping to help the concept develop and become more useful in market-based international development ef for ts , what would you recommend?

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Wouter Deelder, Dalberg: Ask the hard questions. Whatever we are going to see in the future, take a long hard look at the business model. Challenge the assumptions about profitability. Make sure that the models being championed and that the stories that get attention can stand up to scrutiny.

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The authors of the articles contained in this e-book are the products of countless recommendations, insights, and best practices shared by practitioners and researchers in the microfranchise field. While the list of contributors is too large to include in its entirety here, we'd like to thank the following advisors, mentors, and friends for their contributions and advice that was invaluable in the composition of this resource. Peter Eliassen of VisionSpring, Jason Fairbourne of Fairbourne Consulting, Greg Van Kirk of CE Solutions, Harish Hande of SELCO, Graham Macmillan of Citi Foundation, Bernardo Faria and Marcel Fukuyama of CDI Lan, Sameer Hajee of Nuru Lights, Daniel Mensah of Healthkeepers, Satyan Mishra of Drishtee, Ajaita Shah of Frontier Markets, Anand Shah of Sarvajal, Nick Sireau of SolarAid, Anoj Viswanathan of Milaap, Dave Vosburg of Mobile Transactions, Robin Miller of Dalberg, Wouter Deelder of Dalberg, Deborah Burand of OPIC, Daniel Aspilcueta of RedPlan Salud, Alex Banful formerly of CareShops Ghana, Molly Christiansen of Living Goods, and Mark Davies of eSoko. Additional thanks to Ayllu team members Daryl Poon, Evan Chen, Melanie Quall, Dexter Zhuang, and Monica Logani, whose indispensable contribution made iuMAP possible.

Acknowledgements

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ResourcesFor those looking to dig deeper, we suggest reviewing the following publications and organizations we referenced in our research for this e-book, as well as Ayllu’s resource library. Of course, feel free to contact the authors for further discussion or post your comments on NextBillion.

The Promise of Microfranchise: Leapfrogging a Decade Deborah Burand, CGAP Blog

Emerging Markets, Emerging Models: Market-Based Solutions to the Problemsof Global Poverty Monitor Inclusive Markets

Microfranchising: Creating Wealth at the Bottom of the Pyramid Jason Fairbourne, Stephen Gibson, and W. Gibb Dyer

Microfranchising at the Base of the Pyramid David Lehr

The Next Generation of Microfinance: Microfranchising Melissa Richer, Beyond Profit Magazine

Microfinance and Microfranchising: A Feasibility Study FINCA and George Washington University

Franchising in Frontier Markets: What's Working, What's Not and Why Dalberg Global Development Advisors

A Good Business for Poor People Jason Fairbourne, David Lehr, and Lisa Christiansen Jones, Stanford SocialInnovation Review

Ending Global Poverty: The Microfranchising SolutionKirk Magleby

The Microconsignment Model: Bridging the “Last Mile” of Access to Products and Services for the Rural PoorGreg Van Kirk