Franchising in Paraguay: Going beyond microcredit
The World Wide Web tells us that: “traditional franchising is when a firm with an established product or service (the franchisor) enters into a contractual relationship with other businesses (the franchisees). Franchisees operate under the franchisor’s trade name and guidance — in exchange for a fee.”
Microfranchising is a business model that applies traditional franchising (e.g. McDonalds) to very small businesses or micro-entrepreneurs, like cleaning supplies, eggs, and reading glasses in the case of Fundación Paraguaya. Microfranchising is a concept that differs from microcredit in that it mainly provides a proven and successful business model for replication, rather than just startup capital.
With the financial support of IDB, the Inter-American Development Bank, Fundación Paraguaya has been adjusting and expanding its microfranchise product offering. With this support, the Fundación has also been able to hire “impulsoras,” who are responsible for promoting the microfranchise program, informing and educating the clients that become a microfranchisee and act as a link between the franchisor and franchisee.
What’s in it for the franchisor?
Penetrating low-income markets in developing countries has proven difficult. Particularly in rural villages, corporations and NGOs struggle in four areas: distribution to retailers, understanding the end consumer, advertising to the end consumer, and winning the end consumer’s trust (Source: From access to finance to access to franchise – Scheffler 2010). The idea behind microfranchising is that the very low cost base of micro-entrepreneurs allows them to operate profitably in markets in which traditional sales channels of the franchisor cannot operate profitably due to high fixed costs. Therefore, microfranchising can be a way for organizations to reach those markets. The critical advantage of the partnership with Fundación Paraguaya is that the due diligence of potential franchisees is outsourced to the Fundación.
What’s in it for Fundación Paraguaya?
Fundación Paraguaya uses the microfranchise program to increase its product offering and distinguish itself from the competition. Most importantly, it provides its clients with additional sources of revenue (income diversification is also one of the indicators of the Poverty Stoplight). Potentially, the program could also generate a profit for the Fundación. At the moment, the microfranchise program is loss-making though, and the aim is to at least break even when the support from the IDB will stop early 2017.
What’s in it for the client?
Microfranchises go beyond loans. They provide full-service, pre-packaged business systems that can be replicated by those who have little or no formal education. Microfranchising is beneficial in the developing world primarily because of the shortage of basic education and well-developed infrastructure. In these countries, business idea creation is more difficult because the industry often lacks variation (shops are the same everywhere!) and for people whose primary activity is merely trying to survive, finding the time and effort needed to grow a profitable business is challenging and sometimes unrealistic. The existing microfinance model requires entrepreneurial talent. Microfranchises can be a solution to poor people that do not have that talent or not the time to exploit that talent (Source: Marriott School Magazine – Jason Fairbourne,– 2007). Basically, microfranchising reduces the risk for potential microentrepreneurs considerably, thereby also lowering the entry barriers to becoming an entrepreneur.
Fundación Paraguaya is still a long way from creating a financially sustainable microfranchise program. In my view, they need to provide more financial training for clients starting a microfranchise, especially for those that lack experience in sales. Financial training should include basic things like administration of costs and revenues, preparing a budget, analyzing local competition, the importance of building up working capital, etc. This should help to reduce the high percentage of clients that early on decide not to continue the microfranchise program because of various reasons related to lack of understanding. Once the Fundación is able to tackle this, the amount of users will increase significantly, and this will increase its leverage to negotiate additional fees with the franchisor companies.
In my last weeks in Paraguaya, I have created an Excel tool that helps the Fundación in making decisions towards a sustainable microfranchise program. As the success depends on several factors that might have different effects for different microfranchises (e.g. the implementation of a new training approach as described above), the tool considers all these factors and calculates the expected costs and revenues for the coming quarters until the financial support from IDB ends. I hope they find it useful!
Dennis van Erp is working out of Asunción, Paraguay, where he’s collaborating with Accion partner Fundación Paraguaya on developing a business plan for their microlending program.