NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Last week, I attended a workshop on “Franchising in Frontier Markets” hosted by IFC and the John Templeton Foundation. More than 50 investors, consultants, and practitioners using franchise-based methods to serve BoP markets participated in what turned out to be a very interactive day – very few presentations, and lots of talking around our packed round tables.

There was some debate as to whether we were discussing “social franchising” or “micro-franchising” or whether either of these terms is really necessary. Maybe plain old “franchising” is enough. Or maybe the point is to understand and apply relevant lessons, whether we’re actually using franchising or not.

Participants seemed to focus on three such lessons: standardization, replication, and what Sagittarius Brands Chairman and HealthStore Foundation Board Member Sid Feltenstein called “a passion for franchisee profitability.”

We’ve all heard of examples in which otherwise smart and well-meaning ventures lose focus on the unit economics of their franchisees, micro-distributors, or independent salespeople. I can think of cases from Colombia to Bangladesh. Even the celebrated Grameen-Danone joint venture failed to foresee that the Grameen Ladies it intended to sell its yogurt door-to-door weren’t getting such a good deal. They were asked to purchase a perishable product up front, and had to sell 70 cups a day to earn what was considered an acceptable minimum, $0.70. The joint venture had to rethink its distribution plan.

As Jim Kramer, a more than 30 year veteran of McDonald’s, pointed out, “For a franchise system to work, the pie has to be big enough to split between two parties.” This is serious food for thought for enterprises taking franchise or franchise-like approaches in BOP markets, where margins can be paper-thin – especially on “basic needs”-type products. Will franchisees, micro-distributors, and independent salespeople spend their time marketing low margin, high social value products if higher margin, lower social value products are out there? We’re already seeing soft drinks distributors shifting toward beer, housing materials salespeople shifting toward cosmetics. Will these trade-offs become even more common now that companies seeking to serve BOP markets are encouraged to leverage existing distribution platforms?

As Scott Lehr of the International Franchise Association pointed out, for franchisors to succeed, they need to be able to establish and enforce standards. It may be that BOP businesses using largely informal, independent distribution networks will need to formalize in some respects if they want to continue to reach consumers with low margin, high social value products. But we can’t lose focus on the unit economics facing the people that make up those networks.

We’ve been hearing the “low margin, high volume” refrain ever since the notion of “serving the world’s poor, profitably” first hit the mainstream. We know we have to get to scale, for economic as well as social reasons. But as Dalberg’s Wouter Deelder reminded participants at yesterday’s event, franchising is a strategy for growth, not profitability. You’ve got to have a profitable model first.

Businesses at earlier stages of their journeys – and hybrids that don’t intend to be profitable, instead using public or philanthropic funding to subsidize the poorest – can still learn a lot from franchising. Dalberg, BYU’s Jason Fairbourne, and UCSF’s Dominic Montagu have spent a lot of time distilling relevant lessons. Highly recommend their work.