Siddharth Durgavanshi, Janos H. Katter, José María San Juan, Nora Szeile, & Zoraida Velasco The Fletcher School of Law and Diplomacy - Tufts University B243: Market Approaches to Human Development: Reaching the base of the economic pyramid through social enterprise Prof. Kimberly Wilson Medford, MA May 2, 2014 TIENDAS DE LA SALUD Recommendations for a sustainable micro-franchise Prepared especially for: Nancy Swanson and Anna de la Cruz, Linked Foundation
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TISA - Recommendations for a Sustainable Micro-franchise
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Siddharth Durgavanshi, Janos H. Katter, José María San Juan, Nora Szeile, & Zoraida Velasco
The Fletcher School of Law and Diplomacy - Tufts University B243: Market Approaches to Human Development:
Reaching the base of the economic pyramid through social enterprise Prof. Kimberly Wilson
Medford, MA
May 2, 2014
TIENDAS DE LA SALUD Recommendations for a sustainable micro-franchise
Prepared especially for: Nancy Swanson and Anna de la Cruz, Linked Foundation
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Table of Content
Page
Background & Introduction 1
Introduction 1
Brief SWOT 2
Optimizing Customer Experience 4
Optimizing Franchisee Experience 5
Financial and Operational Challenges 9
Social Metrics Challenges 14
Expansion Strategy 15
Conclusion 21
Annex 23
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Background
Tiendas de la Salud (TISA) is a micro-franchising project located in Guatemala and made
possible through a partnership between Farmacias de la Comunidad (Farmacias), the country’s
largest pharmacy chain, Mercy Corps, and Linked Foundation (the Foundation). Its purpose is to
provide rural communities with access to modern pharmaceutical products through health shops
that sell inexpensive medicines. This allows Farmacias to serve not only the social purpose of
providing access to health products, but to support economic development in rural areas while
expanding their supply chain and gaining profit. Currently, the project has opened over 70 stores
and has been able to reach over 120,000 people.
Farmacias provides store owners with generic medicines at 20% discount. The store
owners sell the product and other health and basic food items while receiving business and
health support from not only Farmacias but Mercy Corps staff as well. Additionally, after investing
in building the store, they have access to loans from Banrural that are designed to cover start-up
costs.
Introduction
Linked Foundation, as an investor in the TISA project, requires the business model to have
a diminishing subsidy level with a goal of achieving financial sustainability and allowing them to
exit from the project. With this in mind they have requested the assistance of students from
Professor Kim Wilson’s Market Approaches to Human Development: Reaching the base of the
economic pyramid through social enterprise class at the Fletcher School of Law and Diplomacy in
assessing the viability of a sustainable expansion strategy for the project. The goal of this case
study is to evaluate how well the TISA stores meet the program's mission of improving access to
essential medicines with three objectives: 1) understand when and how community members
use the TISA stores 2) assess the community-level effectives of the program 3) assess the
operations and management of the TISA stores. Ultimately the objective is to increase revenues
to make the project sustainable and less reliant on funding from the Foundation. The following
report is a SWOT (strengths, weaknesses, opportunities, and threats) analysis derived from the
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work of five teams from the class which focused on the following different aspect of the business
alliances among others. Its main goal is to create synergies among the listed areas to improve the
individual performance of each store, as well as the overall performance, and to reach cash flow
sustainability. The strategy is divided into the five following sections:
a) Consignment scheme:
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Farmacias will help Tisa’s store owners by giving them part of the medicines they need in
consignment, allowing them to reduce their initial investment and working capital future needs.
Store owners will pay to Farmacias the next time they go to restock their store. The benefits of
this scheme are as follows:
● Shared risk between Farmacias and store owners.
● Increase the level of engagement with the project in both parties.
● Appropriate inventory levels to satisfy customers demand.
● Less financial burden to store owners, and a higher cash flow per month.
● Monitoring the sales of each store by Farmacias.
● Identify the fast moving and essential medicines per community.
b) Negotiate a better margin from Farmacias
Tisa stores’ gross margin is 20%, while Farmacias is around 56%. In addition, Farmacias
expected net profit -profit after taxes- is around 20%. The difference among margins is high, and
if we consider that the risk is mostly taken by the store owners, it seems an unfair situation.
Farmacias can lower their prices without harming their financial sustainability. There are two
potential outcomes from this price renegotiation:
1. Reduce price to increase store owners profit margin: by reducing the price store owners
can have a better margin from each product they sell.
2. Reduce wholesale price to reduce the retail price: As mentioned before, the low
purchasing power of the customers is a barrier to some stores. Medicines at a reduced
price will become more affordable for customers, increasing their willingness to buy.
The second option is better because it is in line with the project goals - providing medicines
at affordable prices to low income communities - and it will increase the flow of the people in
the stores. The question Farmacias needs to address is: Do they want the 56% of 10 or the 30%
of 100? Increasing the volume of sales will benefit the performance of the whole project.
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c) Strategic Alliances
The TISA store project created a new distribution channel aimed to reach unattended
communities in Guatemala. Forty eight percent of Tisa stores are non-medical products. This
creates opportunities for large companies like Nestle, P&G and Unilever, whom are looking to
expand their businesses in emerging countries. A strategic alliance with large multinational
companies can be made to diversify the products offered by the stores, to ensure the quality of
them and to increase the sales margin of the store owners. In addition, they can provide support
with the initial investment of the stores.
d) Credit Payment Scheme
The low purchasing power of the consumers is a barrier to increase the average sales per
customer and the number of sales per day. This could be solved by implementing a community
credit scheme that would enable purchase of medicines on credit. In the case they are in need of
a medicine, the cost may be already covered, and if it not, and they don’t have enough money to
cover it, the store owner can give them a small credit to afford it. The key is to create engagement
between the stores and their clients.
e) Training in Basic Health Services
Customers’ willingness to buy in TISA stores increases when the shopkeeper has some knowledge
of health services. Unfortunately, the store owner with this knowledge is commonly there only
for few hours at night. Investing in basic health services training for the store shopkeepers,
particularly for those who staff the shop most of the time, will increase the flow of customers.
f) Financial & operational dashboards.
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“If you can measure it, you can’t manage it.” To understand the performance of the stores it is
important to measure their operations and financial situation. The next metrics will help keep
track to the performance of the stores and from the project in general:
● Operational / Sales
● Average sales per client
● Clients per day
● Composition of the average ticket:
○ Medicines participation in each average ticket
○ Hygiene products participation in each average ticket
○ Other products participation in each average ticket
● Monthly Average Sale per Store
● Restocking travels per month
● Financial Metrics
● Profit Margin (medical products and non-medical)
● Compound Annual Growth Rate (CAGR) of Sales and Revenues
● Operational margin: EBITDA/Revenues
● Inventory turnover ratio
● Working Capital
This strategy needs to be complemented with a marketing campaign focus on highlighting
the benefits and goals of the stores. Community members need to be aware of the value added
provided by TISA, and how can they be benefit from it. For the average net income and cash flow
and expected net income numbers see Annex 1.
Social Metrics Challenges
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For TISA, we recommend using utility focused monitoring and evaluation methods that fit
the existing operations so when it comes to integrating monitoring and evaluation (M&E) to the
whole TISA system, it won't be an extra burden to resources and people. In order to collect social
metrics, TISA has to have a plan to verify the direction they are moving towards and have a
baseline to compare the change to.
To ensure a return for Linked’s philanthropic investments, M&E is crucial component to
the due diligence process. Yet this is only an investment worth making if there is some system
for analysis and learning. The best way to capitalize on M&E systems is to create an evaluative
culture in the organization that supports learning and provides feedback loops for iteration of
programs when needed. Adequate M&E systems contribute to knowledge management, higher
and better transparency, and accountability.
Hiring an M&E-specialized consultant to design a social metrics system to meet the
criteria above and to engage with TISA and Linked staff in the design and learning process should
be the first step. For that engagement, we recommend making the ToC explicit; creating metrics
that align to the changes the program seeks to make; and investing in an M&E system.
Make the Theory of Change explicit
Well-articulated ToC is crucial to promote social change. ToC depicts the change pathway
and reflects the organization’s mission. The more explicit it gets, including the list of assumptions
one has to make; the better social metrics can be built to measure change. This process does not
only serve the purpose of monitoring and evaluation but fosters discussions regarding the
mission, vision and the related strategic decisions. The latter discussion and decisions derived
from it will help to contribute to develop a standardized brand for TISA too.
Create metrics that align to the changes your program seeks to make
Social metric systems should primarily be informative and useful to the end-user so that
it informs the decision-making process and tracks changes. Each objective should have a basket
of indicators to triangulate the changes by both qualitative and quantitative data. Besides
considering what data should be collected, TISA also needs to thinking thoroughly about who will
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be the data collectors and their supervisors, who will evaluate the data, and finally, who will make
the final decisions based on the evaluations.
Invest in a Monitoring & Evaluation system through the following
● Develop a process for data collection, analysis and learning
● Anticipate spending financial and organizational capital on this
● Align system with existing operational structure and expansion plans preferably “light
touch” using tablets and/or field officers (see technology recommendations under
Expansion Strategy).
● Deliver monitoring data to the right person to inform decision-making
● Engage at all levels throughout the organization to create an evaluative organizational
culture for learning with the ultimate purpose of betterment
● Align social and financial metrics
Expansion Strategy
While the initial expansion strategy sought to open 2440 stores (look at business plan) in 18
months of time, since its inception, Farmacias has opened over 70 TISA stores at a rate of 3 stores
per month. This has allowed them to serve over 120,000 people with access to pharmaceutical
products they would otherwise have to travel great lengths to purchase. While TISA’s rapid
growth has allowed this social enterprise to reach a larger audience, there are specific aspects of
the value chain that need to be carefully evaluated and improved before considering any further
expansion. This section will particularly address: Recruitment, Training & Funding; Product
Procurement; Marketing & Sales; and Monitoring & Evaluation.
Figure 1 - TISA’s Value Chain
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Source: Presentation on March 7, 2014. By Blaen Abraham, Chuck Dokmo, Allison Hutchings Claudia Schwartz, Nora Szeile, Zoraida Velasco
Analysis
A number of the assumptions underlying the enterprise are challenged. These are related to
the value chain and include:
● Accessibility: The lack of awareness of TISA stores in some areas coupled with physical
access from health centers make accessibility difficult due to distance and/or costly
transportation.
● Availability: Most TISA store owners find themselves working multiple jobs to make ends
meet. This decreases the amount of time they have available to tend to the TISA store.
This coupled with the fact that they do not always have professional medical or business
training affects their credibility towards the consumer. Additionally, stock outs at
Farmacias outlets also have an impact on this. The lack of direct connections to the
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network of health centers affects their product offerings and availability for training and
professional development.
● Affordability: There is evidence that customers have difficulty paying for products,
especially during lean periods. Store owners report experiencing low sales volumes and
small profit margins which makes turning a profit/paying back Banrural loans difficult.
● Acceptability: Customers have expressed a preference for seeking medicines and advice
from trained health professionals, however, often store owners and/or staff members do
not have health credentials. There is also concern that customers seek products via other
outlets including free products at government health centers. Furthermore, there is often
a highest demand for non-pharma products which has led store owners to complain about
not being able to stock certain items that they think would be beneficial to customers like
antibiotics and contraceptives.
Recommendations
Premature scaling risks long-term financial sustainability and brand reputation. Before an
expansion strategy can be pursued, the operational model needs to be optimized, as described
in the previous sections of this report, to increase profitability for franchisees, improve the
consumer experience and reduce cash flow issues. A systematic approach needs to be developed
to address the value chain’s weaknesses and to implement a controlled expansion that maintains
brand integrity. Considering the fact that Guatemala had 103.5 percent mobile phone
penetration in 2013, final recommendations for TISA revolve around the incremental use of
technology, and are as follows:
a) Recruitment, Training, & Funding
Store owners, staff and field technicians are all key to the success of a TISA store. Health
resources need to be made available to the store owners and their staff. This could be done by
providing them access to a health database (similar to the one displayed in figure 2) through a
tablet or similar device. Investment in a Tablet or Smartphone based application for TISA owners
could give them access not only to health information but to other training components on topics
like marketing and accounting to better run their business. Additionally, apps on the tablet or
mobile device would help with mobile health delivery and provide the opportunity for customers
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to receive expert advice from remotely located doctors. This technology could also serve as a
platform to connect with other public health centers and share patient information as noted
previously.
Figure 2 - Example of a health database
As outlined in the Optimizing the TISA Experience section, there is a need to better screen
field technicians to guarantee they have the necessary business skills. Incentives need to be
established to encourage them to continue providing quality support to TISA stores. Moreover,
technicians could also serve as financial advisors and encourage the creation of micro-savings
groups for health in the communities they serve.
b) Product Procurement
Product procurement can be improved if a better tracking system is implemented in relation to
sales and inventory. A data-driven inventory management system operated through the same
tablet used by store owners to obtain health information would help consolidate and compare
purchasing trends as well as log information about inquiries related to specific ailments and
product needs from consumers. Furthermore, as mentioned previously, clustering new stores
would allow, store owners to travel together when needing to restock. Plus, if the stores are close
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enough to each other they can buy or trade inventory from one another instead of traveling to
the Farmacias warehouse for just a couple of items. Additionally, Farmacias could provide loans
or other financing options for store owners to purchase products and they should allow store
owners to diversify their non-pharma product offerings. The framework displayed in figure 3 is a
sample of how the inventory can be customized.
Figure 3 - Customizing inventory
Source: Presentation on March 7, 2014. By Blaen Abraham, Chuck Dokmo, Allison Hutchings Claudia Schwartz, Nora Szeile, Zoraida Velasco
c) Marketing & Sales
Aside from providing training to store owners through a mobile application, there are
several other initiatives that could be pursued to improve marketing and sales for TISA stores. A
marketing strategy needs to be designed to strengthen the TISA brand and distinguish from
competitors. This can be accomplished by developing strategic partnerships with institutions and
businesses frequented by the members of the community where a TISA stores are currently
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located or will be opening. These partnerships would allow for an ad campaign highlighting why
TISA stores are different than its competitors and what the benefits and goals of the program
are. These benefits could include things like diversified payment options for customers, the
micro-savings groups, and the use of technology like M-PESA to allow mobile payments. For
details on M-PESA and possible strategic partnerships see Annex 2.
Another component of the marketing and sales plan would strive to solidify and extend
the distribution network and increase sales. This may be done by launching a pilot program of a
rural travelling sales team. Field technicians already have extended networks in the areas and are
respected by the communities they serve. If given the right incentives, field technicians can be
encouraged to become mobile TISA stores and visit the more rural areas to extend the services
and products offered by the stores. The use of technological analytic tools such as Social Network
Analysis and Geographic Information Systems (GIS) and can help determine the extent of the
field technician’s networks and the most underserved areas in terms of access to health in
Guatemala, respectively. See Annex 4 for a sample of the capabilities a GIS in-depth analysis can
provide.
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Conclusion
TISA, as a social enterprise, has to excel in accomplishing its social mission while also
creating a business model that is profitable and scalable. In order to reach its social mission, TISA
has to build a well-articulated ToC that is supported and measured by useful and informative
social metrics. Further crucial steps to be taken before scaling up are optimization of the
franchisee experience and enhancement of consumer satisfaction.
Both franchisees and the target customers are the key to stabilization of the current
operations. Currently there are teething troubles with both the franchisee owners and
customers. In order to consolidate the gains of recent past and prepare the organization for
future expansion, TISA will have to address the weaknesses within the stores’ network, as well
as its value proposition to the low income consumers to address if the consumers are really being
benefitted. Current operations of the stores can be stabilized and made effective with enhanced
capacity building of the TISA store owners. Creating an integrated and synergistic inventory
system and complementing the current supply chain can improve both the franchisee and the
customer experience.
As the areas under TISA operations are underserved by medical professionals, TISA store
owners invariably double up as para-physicians and managers. If the store owners are trained on
basic communicable and recurrent diseases, the target population would benefit.
Franchisees are currently facing profitability and cash-flow issues; moreover, they have
to deal with inventory and supply chain difficulties. Technological intervention can help in the
inventory management, although it will be expensive and can be considered for investment. A
manual yet robust bookkeeping system would probably be required before implementing an
automated management information system.
TISA’s partnership with Farmacias is another area where some low hanging fruits exist. As
a sole partner, Farmacias has a natural leverage and bargaining power over TISA and that may in
the future result in rent seeking behavior from Farmacias, if it is not already happening. The
foundation of this partnership must be based on a mutually beneficial relationship that is
equitable for the smaller partner (TISA). It will not be just a matter of choice to renegotiate but a
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matter of long term commercial sustainability for TISA to try to diversify its supplier base away
from Farmacias and also to renegotiate on supply payment terms such as purchase on
consignments.
The overall recommendation is to optimize the business model and create functional
social and financial metrics to measure whether the goals in both financial and social dimensions
are being accomplished. Once TISA has the solid foundations and a perfected franchising model,
it will be in a better position to expand and grow sustainably while investing in improved
technologies, continuous training, partnerships for collective impact and iterating the TISA model
in the social and business context.
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ANNEX 1
Financial Analysis
1a. Average Net Income and Cash Flow of TISA Stores
Figures in USD
1b. Farmacias de la Comunidad Expected Net Income
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Annex 2
Inspirations & Potential Partners
INSPIRATIONS
About M-Pesa M-Pesa is a mobile-phone micro-financing service for Safaricom and Vodacom. Currently, as the most developed mobile payment system in the world, M-Pesa allows users with a national ID card or passport to deposit, withdraw, and transfer money in a fast, secure and convenient way by using the SMS (text messaging) feature of a mobile device. Social Benefits The service enables its users to:
Deposit and withdraw money
Transfer money to other users and non-users
Pay bills
Purchase airtime
Transfer money between the service and a bank account (in some markets) Scaling M-PESA M-Pesa was first launched by the Kenyan mobile network operator Safaricom, in March 2007. It quickly captured a significant market share for cash transfers, and grew astoundingly quickly. Today M-Pesa can be found in the following countries:
Kenya
Tanzania
Afghanistan
South Africa
India M-PESA has inspired other mobile money platforms to spring up in other areas of the world. For more information: www.mit.edu/~tavneet/M-PESA.pdf http://en.wikipedia.org/wiki/M-Pesa http://www.safaricom.co.ke/personal/m-pesa/m-pesa-services-tariffs/relax-you-have-got-m-pesa www.mpesa.in
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About M-KOPA M-KOPA was established in Kenya in 2011 and provides affordable solar power to over 50,000 Kenyan households that are not otherwise connected to the electric grid. The Product M-KOPA sells an LED lamp and radio/phone charging station powered by a solar panel that is fixed to the owner’s roof. Customers can pay for their purchase of the solar panel, lamp and charging station with installments sent via SMS on M-Pesa’s mobile money network. M-KOPA products are currently sold through more than 750 retail shops throughout Kenya. The Social Benefit M-KOPA views solar-powered lighting as a cost-effective substitute to kerosene lamps and anticipates customers saving an entire year’s income within three years of owning the product. Additionally, M-KOPA’s home system eliminates the accidental fires and indoor air pollution caused by kerosene lamps and improves productivity and educational outcomes through reliable and long-lasting electricity. For more information: http://www.m-kopa.com/ http://acumen.org/investment/m-kopa/
About Bridge International Academies Founded in 2007, Bridge International Academies aims to provide high-quality primary education for poor families by scaling a for-profit “academy-in-a-box” franchise. Bridge ensures standardization by issuing all teachers an e-tablet pre-loaded with lesson plans and activities. Social and financial metrics are regularly sent to Bridge’s headquarters and provide a near-real time monitoring and feedback for adjusting the programming and franchise model as it scales. In 6 years, they have grown to 134 academies and more than 53,000 pupils in Kenya. This year, they plan to expand outside of Kenya. For more information: http://www.bridgeinternationalacademies.com/
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POTENTIAL PARTNERS
About Quetsol Quetsol is a social enterprise in Guatemala whose mission and business model is similar to the M-KOPA model in Kenya. For more information: http://www.quetsol.com/
About Movilway Founded in 2010 and based in Spain, Movilway is a leading pre-paid mobile top-up company in Latin America. Like M-PESA in Kenya, Movilway provides a mobile electronic payment platform for the unbanked in Latin America. They also recently developed their own customized tablet with inventory management and point of sale (POS) applications—particularly aimed at helping rural entrepreneurs succeed. Movilway recently moved into Guatemala and expects to reach 2,500 outlets within the country. They are now present in 8 Latin American countries and spend $15M annually in the region. For more information: http://www.movilway.com http://m.prnewswire.com/news-releases/movilway-arrives-in-guatemala-to-compete-in-mobile-recharge-market-129532408.html http://techcrunch.com/2012/03/04/movilway-expands-services-in-latin-america/