Steve Beck, with Wouter Deelder and Robin Miller
Franchising in Frontier Markets
What’s Working, What’s Not, and Why
If you happen to need a cab in Bangalore, call SPOT City Taxis. SPOT (自己-
employment Program for Organized Transport) is now the largest taxi operator in
the capital city of India’s “Silicon Valley,” having grown organically from 18 cars in
1999 to the more than 300 operating today, 24/7.
SPOT was started to promote employment, enable asset ownership, and build
credit history among low-income households. Unlike other taxi operators in the
城市, SPOT’s fleet is driven by owners, who operate franchise businesses linked by
a common brand, a computerized radio dispatch system, and standards for serv-
冰, 流程, and values. Typical of franchise businesses the world over, SPOT
combines the management and financial strengths of an established corporate
entity with the entrepreneurial vigor and aligned incentives that come with busi-
ness ownership.
SPOT drivers purchase the cars on installment over a three- to four-year peri-
od, with vehicle leases arranged on favorable terms by the franchisor. 此外
to arranging financing, SPOT offers an established network of pooled customer
要求, fleet-management services, and a dispatch center that channels customer
Steve Beck is a senior fellow at the John Templeton Foundation and co-Founder of
SpringHill Equity Partners, a private equity fund manager providing growth capital
and support to small, growing businesses in Africa. Wouter Deelder and Robin Miller
are consultants with Dalberg Global Development Advisors.
This essay provides a brief summary of the findings of a six-month survey conducted
by Dalberg Global Development Advisors, with funding from the John Templeton
Foundation and support from the International Finance Corporation of the World
Bank. The primary purpose of the study was to explore the potential of franchise busi-
ness models to stimulate economic growth, create jobs, and develop entrepreneurial
skills in frontier economies. The report won the 2009 Arthur Karp Annual Franchising
Research Award from the International Franchise Association for best applied research
in franchising. A full copy of the research findings can be downloaded from the web-
sites of the John Templeton Foundation (www.templeton.org), the International
Franchise Association (www.franchise.org), and from the News/Recent Publications
section of Dalberg’s website (www.dalberg.com).
© 2010 Dalberg Global Development Advisors
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Steve Beck, with Wouter Deelder and Robin Miller
桌子 1. Comparison between traditional and “business-format” franchise models.
requests directly to the drivers. The business is profitable for franchisee and fran-
chisor alike. After paying for fuel, 维护, finance charges, and royalties,
franchisees net more than three times the average income in India, build a credit
历史, and own a valuable asset. 同时, the franchisor—SPOT—has a prof-
it margin that exceeds 20 百分.
在过去的几年中, researchers and the international development communi-
ty have begun to promote franchising as the potential “next big thing” in develop-
蒙特. As in developed economies, franchise businesses in frontier markets are
designed for replication, require less experienced entrepreneurial talent to manage
a proven business format, and provide business-learning opportunities within a
defined support structure. But is this promise being realized? Before addressing
this question, we need to take a step back, define our terms, and review salient les-
sons from the history of franchising in developed markets.
FRANCHISING DEFINED
Franchising is commonly understood as a “contractual agreement between two
legally independent firms in which one firm, the franchisee, pays the other firm,
the franchisor, for the right to sell the franchisor’s product and/or the right to use
its trademarks and business format in a given location for a specified period of
time.”1 Franchise formats range from the right to sell and/or service a product
acquired from the franchisor—as with Avon cosmetics, automobile dealerships,
and gas stations—to a more complex agreement that includes a license to an entire
business model—as with many well-known restaurant and hotel chains. The for-
梅尔, simpler model is commonly referred to as “traditional or product format
franchising,” whereby the franchisee resells the franchisor’s product. The latter,
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Franchising in Frontier Markets
more complex model is known as “business-format franchising,” whereby the fran-
chisee pays a license fee and royalty or commission on revenues to the franchisor
(见表 1.)
Terms like “micro-franchising” and “social franchising” have entered the devel-
opment lexicon in recent years and are often confused with each other. To clarify,
micro-franchising refers to businesses in which the franchisee is very small—even
a single person—and the required investment and infrastructure is minimal.2
Social franchising refers to franchises whose primary objective is the effective
delivery of public goods and services such as health care and education, 哪个是
often supported by some kind of philanthropic subsidy.
FRANCHISING LESSONS LEARNED
Franchising can be viewed as a centuries-old phenomenon. One of the oldest fran-
chise models can be traced back centuries, to the practice of European royalty
granting land rights to individuals in the Middle Ages. These land franchisees (这
noblemen) were required to protect the franchisor’s (the monarch’s) territory by
establishing an army. In turn they were free to charge tolls and to establish and col-
lect taxes, a portion of which was remitted to the monarch.3 In modern times,
Coca-Cola has been franchising its bottling processes to extend its geographic
reach for over 100 年. McDonald’s and Subway are symbols of 21st-century
franchising. The International Franchise Association was established 50 几年前
to represent and serve this growing sector of the economy.
Much has been learned over the decades that helps inform franchise growth
strategies in frontier markets. Three factors are particularly relevant.
Why Franchise?
Businesses choose a franchise growth strategy over other forms of expansion pri-
marily to extend their geographic reach, access capital (as franchisees typically
invest their own capital), lower the costs of performance monitoring (机构
成本), and harness entrepreneurial incentives. 有效, franchising turns corpo-
rate managers into profit-sharing owners.
Unit Profitability Comes First, Growth Second.
Successful franchised chains grow in a predictable manner. Most spend several
years developing, 精制, and proving a profitable, replicable business model at
the unit level before franchising. McDonald’s opened its first franchised restaurant
在 1955, 15 years after the company’s founding. Subway waited nine years before
opening its first franchise outlet, and Holiday Inn waited five. It takes a good deal
of time to test the profitability and sustainability of a business model and to pre-
pare the processes, 产品, and procedures for reliable replication.
One of the most common mistakes we observed in our research on franchises
in frontier markets is the attempt to franchise before achieving profitability at the
unit level, and doing so with the belief that the franchising will change the funda-
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Steve Beck, with Wouter Deelder and Robin Miller
mental business economics. Growth increases profitability primarily through
economies of scale; franchising per se has only a small positive effect on profitabil-
ity.4 One large, well-established fast-food franchisor disclosed that the cost levels of
their franchisees are just 0.5 百分比到 1 percent lower than those of company-
owned outlets. We could not find a single example of a chain that started with a
loss-making outlet and franchised its way to chain-wide profitability.”
Franchises Are Not Necessarily Lower Risk.
Owning and operating a franchise business is often promoted as being “low-risk”
by franchise organizations, franchisors, and industry forums. On the surface, 它
seems logical that running a tried-and-tested business model with support from
the franchisor is less risky than starting and managing an independent business.
然而, the conventional wisdom is not supported by data published in 2005,
which shows that 35 percent of franchised businesses fail over a five-year period, A
slightly higher percentage than independent businesses.5 As ever, the reality is even
more complex and nuanced. For the franchisee, the risks of franchising are higher
than for independent entrepreneurship when the chains are smaller and newer,
and lower when the chains are larger and more mature. In the case of recently fran-
chised chains, the franchisee faces not only the risk that his or her own franchised
unit might not succeed, but also that that the franchisor might bankrupt the entire
链.
FRONTIER MARKET CHALLENGES
When we researched low-income markets, we found relatively few large-scale
international franchises operating in these challenging markets. 例如,
KFC has only three outlets and Subway just seven in sub-Saharan Africa, a multi-
country market of 800 million consumers.6
These multinational chains face the same constraint every business faces in
sub-Saharan Africa: a population with limited disposable income. Our study iden-
tified two additional barriers that compound the challenge of establishing fran-
chise businesses in frontier markets: limited access to growth finance, and the lack
of legal frameworks to manage franchise relationships and assets.
Limited Disposable Income.
The average worker in Nairobi labors for 90 minutes to purchase a Big Mac, com-
pared to just 13 minutes in New York City.7 While sub-Saharan Africa represents a
huge potential market, it currently cannot sustain a sufficient number of outlets to
encourage investment by the large multinational chains. Only four of the top ten
international franchise chains have ventured out of South Africa into other sub-
Saharan markets, with a total of 30 outlets between them.8 As we noted above,
franchising requires, rather than generates, a profitable business model. Basic eco-
经济学, 所以, will limit the international expansion of large chains to larger,
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Franchising in Frontier Markets
more affluent emerging markets such as Brazil, 中国, and Russia, at least for the
time being. This creates a great opportunity for local and regional chains whose
economics are better adapted to lower income markets.
Limited Access to Finance.
Small and medium-sized enterprises are poorly served by local banks in frontier
市场, leaving a large gap in financing options between microfinance and tradi-
tional corporate debt. This gap, known as “the missing middle,” encompasses cap-
ital needs between $10,000 和 $2 百万. The financing needs of most fran-
chisees in frontier markets fall within this range. 所以, just as franchising typ-
ically shifts the financing burden from the franchisor to the franchisee in devel-
oped markets,
the franchisee in frontier markets struggles to access the needed
capital on viable terms. This fact further constrains an already very limited avail-
able pool of talented, qualified franchisees.
Loose Legal Frameworks.
Business format franchising flourishes in an environment that includes the legal
and regulatory frameworks and the technical and legal advisory services it needs to
prosper. These factors benefit franchisor and franchisee alike. 然而, where they
are absent, the risks and costs of franchising increase significantly. A franchise-
friendly environment is largely absent in sub-Saharan Africa and South Asia,
although we observed significant differences between national markets.
In most frontier markets, policy reforms that help small and medium-sized
enterprises (中小企业) must be established before any franchise-specific initiatives
will yield results. Priority should be given to reforms that (A) increase the ease and
speed of opening new businesses by reducing red tape and restrictive registration,
licensing, and permit laws; (乙) strengthen contract frameworks and enforcement;
和 (C) expand access to finance for SMEs through credit facilities and loan guar-
antees. Once progress is made on these reforms, strengthening intellectual proper-
ty protection and enacting franchise-specific laws related to registration, 购买,
and sale will help accelerate the growth of franchise businesses.
PROMISING MODELS
Having noted these formidable challenges, our research identified several promis-
ing franchise models, like SPOT, that have adapted and are thriving despite less
than ideal conditions.
Homegrown chains are better positioned than Western chains.
Homegrown chains’ tailored products, pricing, cost structure, and better align-
ment with the local enabling (or disabling) environment helps them succeed.
Nando’s is a good example of an indigenous franchise fast-food business that is
thriving in frontier markets that have not been penetrated by better known
Western chains. Founded in South Africa in 1987, Nando’s has since expanded to
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Steve Beck, with Wouter Deelder and Robin Miller
31 countries on five continents. The company currently operates in 14 frontier
markets across sub-Saharan Africa and South Asia, and it continues to expand into
new territories, often through master franchise agreements. As if to prove the
观点, Nando’s most recent market entry is through a master franchise with Bantu
Investment Holdings in Kinshasa, Democratic Republic of Congo.9
Traditional format (product distribution) franchising is better suited to
frontier markets than business format franchising.
Simpler is better in frontier markets. Traditional format franchisors simply out-
source the distribution of their products to their franchisees. 像这样, they experi-
ence fewer franchisor/franchisee conflicts, require less capital, and are less depend-
ent on favorable legal and policy environ-
评论. Kegg Farms (印度), Natura
(巴西), Coca-Cola’s Manual Distribution
Centers (非洲), and Fan Milk (加纳)
are all good examples of successful tradi-
tional format franchise businesses in fron-
tier markets.
Founded in the early 1960s, Fan Milk
Ltd. is a publicly listed company in Ghana
and the country’s leading producer of ice
cream and yogurt. Fan Milk distributes its
products primarily via franchised street
vendors on bicycles. The franchisor has 350 employees who serve the more than
8,000 micro-franchisees selling dairy products on bikes.
The initial capital required of a Fan Milk franchisee is $55 to purchase an appropriately fitted bicycle. 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 qualify for health insurance. Franchisees’ average profit is one-third more than the average national income of Ghana. Fan Milk requires franchisees to save 10 percent of their profits, which is paid directly into a bank account the company establishes for them. After an average tenure of eight years with Fan Milk, many franchisees invest their savings in a larger enterprise.10 Successful franchises have innovated to overcome frontier market challenges. Innovative franchisors address the challenge of accessing capital in a number of ways: Underwriting the capital requirement of franchisees. SPOT City Taxi borrowed to finance the purchase of vehicles, which in turn were purchased by the franchisee drivers on installment, with financing costs included in their monthly franchise fee. 这样, SPOT transferred the assets to the franchisee over a three- to four- year period. 158 创新 / winter 2010 从http下载的://direct.mit.edu/itgg/article-pdf/5/1/153/1838378/itgg.2010.5.1.153.pdf by guest on 07 九月 2023 Franchising in Frontier Markets Partnering with microfinance institutions (MFIs). MFIs are often in a good posi- tion to aid in franchisee selection and provide capital for franchisees to get started and/or to expand their franchise businesses. As franchisors seek to access bottom-of-the- pyramid markets, MFIs will become increasingly important sources of capital for their franchisees. We are skeptical, 然而, of MFIs becoming a distribution channel for non-financial products and services. Financial institutions have tried this the world over, without success. Supplying on consignment. Under this model, traditional product franchisors sup- ply initial stock and whatever else is needed on consignment to overcome the franchisee’s inability to access the capital required to purchase stock. The franchisee purchases the stock after it is sold, with financing cost typically included in the repayment. International franchisors have employed master contracts to simplify the man- agement task and entrust franchisee management to a national entity better equipped to manage the local environment. Successful franchisors also have used technology to compensate for loose contractual, 合法的, and regulatory frameworks. SPOT, 例如, uses the radio dispatch system and (最终) GPS to provide low-cost monitoring and to exclude “rogue drivers” from receiving franchise ben- 收益. FRANCHISING OF PUBLIC GOODS AND SERVICES: PROMISE AND PROBLEMS Some of the most interesting franchise models we studied were designed to deliver such public goods and services as health care and education in low- income markets. Socially motivated development entrepreneurs have started creative franchises in these sectors in the last decade. The best known examples are The Healthstore Foundation’s (HSF) chain of 85 micro-clinics in Kenya and Rwanda; VisionSpring’s network of trained “vision entrepreneurs” who sell eyeglasses to low-income consumers in rural India; and Living Goods’s Avon- style distribution of health and consumer products to peri-urban markets in Uganda through community health promoters. These chains were all started with grant capital, thereafter seeking to rapidly replicate a standardized service with diminishing grant subsidies and, 在某些情况下, to achieve economic self- sustainability. While franchising may be more efficient than the current publicly or foreign- aid funded delivery of health care and education services in these markets, no one has yet created a proven, self-sustaining model that can meet these needs on a large scale. Sector economics in health and education in low-income markets are espe- 创新 / winter 2010 159 从http下载的://direct.mit.edu/itgg/article-pdf/5/1/153/1838378/itgg.2010.5.1.153.pdf by guest on 07 九月 2023 Steve Beck, with Wouter Deelder and Robin Miller cially problematic. 例如, VisionSpring lost $641,000 在 $150,000 of sales in
2007. Having sold 100,000 pairs of eyeglasses in its first seven years of operation,
VisionSpring has calculated its break-even point at 80 million glasses sold per
annum.11 Its business model clearly is a very long way from being able to generate
enough cash to fuel its own growth.
Driven by acute local needs and a passion to meet them, all of the social fran-
chises we studied pursued franchised expansion before establishing financial sus-
tainability at the unit level. In so doing, they neglected a key lesson from franchise
history and triggered (至少) three problems:
• An insatiable demand for grant financing, focusing top resources on fundrais-
ing rather than on serving customers effectively
• Increased conflict between franchisees and franchisor, especially with regard to
how to grow, improve, and expand the business
• Subsidized competition against new entrants who might otherwise be able to
serve the market profitably
With these social franchises, the “good” has become the enemy of the “great.” While
it may be good to continue with a grant-subsidized delivery model if quality serv-
ices are delivered more cost effectively than by public or aid-funded models, 这
grant subsidy impedes the creative and urgent search for a profitable great business
model that can fuel its own growth to provide services at a large scale.
The fact that HSF recently decided to restructure from a grant-fueled to a for-
profit business model is telling. HSF was established as a charity in 1997 与一个
mission to address the acute need for essential drugs and medicines in low-income
countries at the quality standard necessary to provide effective treatment. 在里面 10
years that followed, HSF established 82 franchised medical clinics and medicine
shops under the brand Child and Family Wellness (CFW) in rural, peri-urban, 和
urban-slum Kenya, plus three in Rwanda. CFW franchisees paid an initial fee to
acquire a franchise, and HSF lent the balance needed to open a clinic. Care was
taken to ensure that franchisees were self-sustaining, but little effort was made to
ensure that HSF’s franchisor in Kenya was self-sustaining. 在实践中, the fran-
chisor subsidized the franchisees by providing training, marketing support, 和
central services free of charge. No royalties or advertising and marketing fees were
charged to the franchisees. 同时, the franchisor sought to plug ever-growing
losses with grant funding.
After a decade of operation, HSF’s founder, Scott Hillstrom, realized that the
mission was unattainable with the current model. HSF could not meet the need for
essential drugs and medicines on a large scale with a grant-subsidized model. 在
2008-2009, the organization embarked on an ambitious restructuring plan
designed to yield a profitable—and therefore scalable—franchise business model.
HSF has slashed overhead in the Kenyan franchisor organization; is positioning
new CFW clinics in more densely populated areas, screening potential franchisees
for their business acumen and entrepreneurial drive, in addition to their clinical
qualifications; and outsourcing procurement, 贮存, and distribution functions
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Franchising in Frontier Markets
to a high-quality drug distributor. HSF projects that it will break even at 225 出去-
lets by 2015, with increasing profitability in following years.
HealthStore’s primary goal is not to make money off the health care needs of
the poor in Africa but to finance its own growth and achieve the desired health care
benefits on a large scale. Whether this is achievable remains to be seen, but it is cer-
tainly worth the effort. We believe that local or national third-party payors (例如,
private or state-funded insurance or voucher schemes) will ultimately prove more
effective and sustainable than foreign grant subsidies. 任何状况之下, the franchising
of public goods and services in frontier markets warrants further empirical
research and creative, intelligent entrepreneurial effort.
SUMMARY
Franchising, and its younger cousins micro-franchising and social franchising, 是
not the next big thing in development. 的确, we should be suspicious of
anything purporting to be the “next big thing.”
尽管如此, it is encouraging to see a wide variety of franchises innovating
and thriving in very challenging markets. SPOT Taxis’s innovations have overcome
capital constraints and enable them to monitor franchisee performance. SPOT
thereby generates employment, enables asset ownership, and builds credit history
among hundreds of low-income households in Bangalore. Fan Milk has employed
traditional format franchising to become Ghana’s leading supplier of dairy
desserts. The company provides experience in business ownership for thousands of
first-time entrepreneurs, many of whom move on to start other businesses.
Nando’s has established an enviable footprint across 14 frontier markets and is
now challenging more mature fast-food chains in their home markets. 和
Healthstore has embarked on a quest for a truly great business model, one in which
profits fuel the needed growth of a large-scale franchise chain that supplies high-
quality essential medicines and health care to low-income consumers in East
非洲.
Franchising in its various forms can accelerate the entrepreneurial growth of
small and medium-sized businesses in frontier markets. The examples we studied
point to the potential for success when the lessons of franchise history are observed
and business models are creatively adapted to frontier market conditions. 那是
promising news for entrepreneurs, investors, and students of development alike.
1. Francine Lafontaine and Roger D. 布莱尔, Economics of Franchising (剑桥, England:
剑桥大学出版社, 2005).
2. We are grateful for the pioneering work on micro-franchising by Jason Fairbourne and BYU’s
Marriott School of Business. According to Fairbourne, “The overall objective of micro-franchis-
ing is to promote economic development by developing sound business models that can be repli-
cated by entrepreneurs at the base of the pyramid; 所以, the start-up costs of micro-franchis-
es will be minimal.” See Jason Fairbourne, 斯蒂芬·W. 吉布森, and W. Gibb Dyer,
Microfranchising: Creating Wealth at the Bottom of the Pyramid (Northampton, 嘛: 爱德华·埃尔加,
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Steve Beck, with Wouter Deelder and Robin Miller
2007).
3. For a compelling history of franchising, we recommend the article “Where it all began. . . 这
evolution of franchising” by Michael Seid at
http://www.whichfranchise.com/us/article.cfm?articleID=255. We have borrowed one of his
early examples here.
4. James W. Bronson and Cyril P. 摩根, “The Role of Scale in Franchise Success: 证据来自
the Travel Industry,” Journal of Small Business Management 36 (1998).
5. Lafontaine and Blair, Economics of Franchising.
6. Entrepreneur.com 2008 rankings; company websites.
7. “UBS Prices and Earnings,” 2006 版, 可以在
http://www.ubs.com/1/e/wealthmanagement/wealth_management_research.html Methodology:
Local price of the product divided by the weighted hourly wage in 14 职业.
8. Entrepreneur.com; company websites.
9. “Nando’s Seeks to Spread Its Wings in Congo’s Heartland,” Business Day, 二月 10, 2010.
10. Fan Milk’s story has been well documented over the years by Jason Fairbourne at BYU’s Marriott
School of Business.
11. “VisionSpring 2008 Growth Capital Offering: 5-Year Prospectus,” 2008.
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