David Lehr presenting at the SVMN event

Chuck Slaughter answers questions following his presentation

November 18th SVMN speaker Event recap written by Cindy Law:

Beyond Microfinance: How Franchising Makes Communities, Businesses and Lenders Richer

“In the development community, a lot of people have the mindset that if we can overcome capital constraints, get small loans to micro-entrepreneurs, or train them in business development techniques, some magic which we don’t understand will happen and will unlock the entrepreneurial potential of people. That, I think, is few and far between. The basic concept of capital as the constraint in microfinance should be called into question.” – David Lehr

Dubbed “Microfinance 2.0,” microfranchising is a budding innovation in development that challenges one of microfinance’s fundamental assumptions: that the majority of the developing world is suited to be an entrepreneur. Critics argue that microfinance fails to address the needs of another segment of the population – the non-entrepreneurial poor – that is forced into entrepreneurship by necessity and would be better served by alternative models for income generation.

SVMN’s event on Nov. 18, 2009 featured guest speakers David Lehr (Senior Advisor, Social Innovations at Mercy Corps) and Chuck Slaughter (Founder, Living Goods), who discussed this next wave of innovation as a means to create more effective employment options and to help microfinance reach the next level of social impact and scale.

David discussed two formats for franchising: product distribution or a fully operationalized business model providing the product, pricing, financing, and brand management. In addition to operating the franchise concept on a smaller scale, he said, microfranchising “couples the concept with a social component – providing poor communities with access to beneficial goods at a lower cost.”

Both speakers underscored powerful benefits to the parties involved:

• Franchisor: By leveraging local resources, franchisors and commercial players can rapidly grow their business and penetrate new markets, overcoming environments that are typically cost prohibitive and operationally challenging
• Franchisee: Franchisees gain shared learning, tools, and ongoing support, with reduced risk in launching a business enterprise; in David’s words, “It’s a great way to go into business for yourself but not by yourself.”
• Lender: Microfranchising lowers lending risk, streamlines the due diligence process, and lowers lenders’ underwriting costs
• MFIs: Microfranchising can help MFIs reach individuals who may not otherwise be creditworthy, lowering risk and the cost of financing  for those customers
• Community: On a larger scale, the entire community gains access to new products or services, ideas, and businesses

David raised three examples of successful microfranchise businesses: VisionSpring’s “business in a bag” model for treating presbyopia in rural communities; Grameen Bank’s shared access model providing access to rural phone services in Bangladesh; and Fan Milk Ltd.’s ice cream distribution model enabling entrepreneurs in Ghana to sell fresh products via bike and cooler. In each case, key innovations include training the franchisee in managing sales and delivery techniques and providing continual, accessible support to each franchisee.

Chuck shared his experiences with starting Living Goods, an organization that seeks to simplify the inefficient supply chains of rural retail markets. Inspired by the Avon model, Living Goods sells a broad portfolio of health products through a distribution network of local field agents. Candidates undergo rigorous screening and training before being provided with product inventory and standard sales tools.

Living Goods seeks to scale through two growth drivers: geographic expansion and product extensions. While it is currently a health distribution model, its vision is to “build a sustainable distribution platform for the poor” that ultimately serves broader applications across energy, water, agriculture, and other areas with high prices and weak distribution.

The organization has also begun piloting “money-making products”: products designed for the poor, such as water filters and solar lighting that provide economic value to the consumer. Because such products range from $5 to $15 and are often considered a capital expense, Living Goods has instituted a financing option with a more affordable installment payment plan.

Living Goods’ partnership with MFI partner BRAC, Chuck said, demonstrates broad synergies that can be achieved through microfinance-microfranchise relationships. In addition to using BRAC’s branch offices as supply points and for field staff support, Living Goods recruits field agents from BRAC’s borrower base. BRAC also funds microloans to Living Goods’ field agents to purchase inventory. Cost efficiencies to Living Goods, however, are limited as Living Goods pays BRAC for all resources used.

One of Chuck’s key takeaways is that while partnerships can provide value, MFIs should not necessarily be operators of microfranchises by virtue of their significantly different business models. “There’s a lot of talk these days about ‘Let’s link products and services and put it through this beautiful distribution system that these MFIs have created,’” he said. “[MFIs] are just struggling to stay alive to make the profits they need to be competitive in the capital markets… adding a product or service into that system is, for most of them, a distraction. They’re symbiotic, but not necessarily cooperative.”

Despite the potential of microfranchising, he said, the key limitation remains: few microfranchise organizations are financially sustainable today.

The event was moderated by SVMN Board Member Steve Hardgrave of Gray Ghost Ventures.