This is the second of a three-part series focusing on economic self-reliance. The next article, in the fall 2007 issue, will highlight a single-mother initiative.
Anecdotes and information about microcredit are finding their way into the press and filtering into dialogue worldwide. It was brought to the forefront early in 2007 when Muhammad Yunus won the Nobel Peace Prize for his pioneering work in microcredit, the provision of loans to people who have no access to formal financial institutions. Through microcredit, millions of people have been lifted above the poverty line.
Building off of that work, a new initiative has emerged from BYU’s Economic Self-Reliance Center that helps people become more successful in market economies, ultimately moving them up the economic development ladder faster. These operations, called microfranchises, go beyond loans. They provide full-service, prepackaged, business systems that can be replicated by those who have little or no formal education.
HOW IT WORKS
Microfranchising borrows from established business concepts found in traditional franchising systems and applies them to enterprises in developing countries.
There is much more to the franchise business model than fast food places like McDonald’s. Franchising provides people opportunities to own and operate a proven business. Business franchising is extremely successful in developed countries. In the United States, franchises account for more than $1 trillion in sales annually and employ more than eight million people.1 People generally seek franchise opportunities because of the reduced level of risk when compared to starting a business from scratch.
One key strength of the microfranchise model is that the franchisor creates and standardizes the business model for a successful enterprise. Thus, all the microfranchisee needs to do is manage the business by following explicit directions. Microfranchising is beneficial in the developing world primarily because of the shortage of basic education and well-developed infrastructure.
New business ideas result as industry builds off industry. Since industry in developing countries often lacks variation, business idea creation is more difficult. For people whose primary activity is merely trying to survive, finding the amount of time and effort needed to grow a profitable business is challenging and unrealistic.
The difference between franchising and microfranchising is the social component (see Figure 1). There are three primary components to microfranchising: micro, franchising, and for-profit. Micro means more than “small.” Micro embodies a meaning of benevolence, poverty assistance, and helping the poor. Franchising means the replication of businesses. For-profit simply means that microfranchises are not charities; they are created with the intent to generate income. A true microfranchise business must include all three components.
KEY BENEFITS
“Microfranchising has enormous promise. First, the model makes sense: it fits the reality of the bottom of the pyramid, has the right incentive structure, and can enable more people to have good jobs than the microfinance model (which truly requires entrepreneurial talent). Second, the model allows social entrepreneurs to invest in poor countries, allowing them to ‘do well and do good’ at the same time.”
—Katherine Terrell, Professor of Business Economics and Public Policy, University of Michigan Three benefits of microfranchising are job creation, specific training, and effective delivery.
Job Creation
Most developing countries have extremely high unemployment rates, which force people to become entrepreneurs out of necessity to survive. These people typically don’t create businesses that flourish. Microfranchises are proven business systems that have a much greater potential for growth and job creation.
In Kenya, HealthStores operates seventy-five microfranchises, employing an average of three employees apiece. As with the franchise model, each microfranchisee follows specific rules to achieve and maintain his or her status. One rule is that all employees must meet a specified level of education, which most often results in the creation of formal jobs instead of relying on children and other family members.
Specific Training
In a globalized market it is imperative that people learn how to operate businesses successfully, utilizing creativity, know-how, social capital, and financial capital resources. Microfranchisors meet this need by providing the business model and specific operational training. Microfranchise training is essential because it is shorter and more pertinent than general business training. Furthermore, microfranchisors provide ongoing instruction and mentoring to ensure success.
Effective Delivery
In developing countries there is often a lack of goods and services, resulting in high costs for consumers.
A phone call, loaf of bread, or shirt often costs more in developing countries than in the United States. This dilemma has come to be known as the poverty penalty. One reason for the increased costs is the delivery systems—it costs more to deliver products to rural remote areas than it does to cities. Microfranchising is often used as a way to get goods and services at an affordable price to people living in remote areas.
THE MICROFRANCHISE DEVELOPMENT INITIATIVE
BYU’s Economic Self-Reliance Center sponsors a MicroFranchise Development Initiative (MFDI), which aims to create a microfranchise research and training center. BYU is the only academic institution with an organization dedicated to microfranchising, putting it in a unique position to lead this important movement. As the initiative moves forward, it will connect an active network of researchers, sponsors, and practitioners across the world.
With help from students, faculty, and practitioners, MFDI evaluates microfranchising best practices, disseminates information, and piques the interest of possible associates.
This initiative allows individuals, other universities, nongovernmental organizations, practitioners, governments, and multinational companies to propagate microfranchise research—thus improving the economic well-being of the poor throughout the world.
CONCLUSION
A recent Economic Times article declared, “Microfranchising: The Next Big Thing.” Microfranchising has many strengths that could facilitate its spread for decades to come, such as its linkages to value chains, training, ongoing mentoring, scalability, and business creativity.
Just as microcredit is working its way into the business lexicon, microfranchise is gaining notoriety as a viable tool to lift people out of poverty. Education specialists like the concept because of the knowledge sharing and training components. Businesses like it because it’s an effective delivery system to provide goods and services at the base of the economic pyramid. Microfinance institutions like it because of the value-added benefits it brings to borrowers. The individual microfranchises may be small, but they have potential to do big things.
HOW A BACKPACK CAN CARRY SOMEONE OUT OF POVERTY
Single mother Rosi Hernández Campos travels around her El Salvadorian community, helping other people see better while earning a solid living for her family of four.
Campos is a microfranchisee for Scojo Foundation, an organization that aims to create jobs and increase access to affordable reading glasses. Most people will need glasses at some point in their lives, but in many places, purchasing glasses is difficult and expensive. Scojo microfranchisees purchase a vision kit for about $120, which includes a backpack filled with glasses and an eye examination kit. The microfranchisee takes the backpack around his or her community and earns a 50 percent margin on each pair of glasses sold.
This microfranchise has helped Campos become financially independent and has given her confidence and means to dream big. Other examples of microfranchises include Cellular City, which sells reconditioned and second-hand cell phones; Honey Care Africa, which trains people as beekeepers; and Grameen Phone, which provides telecommunication services to rural areas.
HOW GHANAIANS ARE PEDDLING THEIR WAY TO PROSPERITY
Fan Milk Ltd. is Ghana’s leading manufacturer of ice cream and yogurt. A group of Scandinavian investors founded it in 1960 to produce milk that would provide Ghanaians with needed protein.
In 1962, the company began producing ice cream, yogurt, and popsicles. In 1990, Fan Milk was listed on the Ghana Stock Exchange. At the end of 2005, the company had more than four thousand shareholders. As a microfranchise, it employs more than 350 people directly and more than eight thousand indirectly. It is the only dairy company in Ghana that sells its products by using street vendors on bikes—those street vendors are microfranchisees.
The start-up cost for a microfranchise is 200,000 cedis (U.S. $22) for purchasing a bike. Vendors earn an average profit of 50,000 cedis (U.S. $5.50) each day. Fan Milk provides free equipment repair services to all vendors and rewards top sellers. Twice a year, vendors receive training on product handling and hygiene. Some even qualify for health insurance.
Additionally, all microfranchisees are required to save about 10 percent of their profits. Fan Milk puts the money in a bank for them, and returns it when they leave the company. Most vendors stay with Fan Milk for around eight years; they usually leave because they want to use their savings to start a larger enterprise.
There is a fine line between a mutually beneficial financial arrangement, like Fan Milk, and an exploitative one. There are other opportunities in Ghana that look like microfranchises because they are small, replicated businesses. But many are set up to take advantage of those desperate for a job, instead of trying to promote a business that’s good for the microfranchisee and the community.
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Article written by Jason Fairbourne
Some photos are courtesy of John-Michael Maas.
ABOUT THE AUTHOR
Jason Fairbourne is director of BYU’s MicroFranchise Development Initiative. He earned his MSC from London School of Economics. For additional information contact him at jason.fairbourne@byu.edu or look for Microfranchising: Creating Wealth at the Bottom of the Pyramid, available in bookstores.
NOTE
- Economic Impact of Franchised Businesses: A Study for the International Franchise Association Educational Foundation, 2004.