Franchising in Frontier Markets

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Introduction to the report

Need a cab in Bangalore? Call SPOT. Since its founding in 1999, SPOT City Taxi has grown from 18 cars to more than 300, making the company the largest taxi operator in the capital of India’s Silicon Valley. SPOT’s drivers are franchisees—independent owner-operators linked by a common brand, radio, and computerized dispatch system. What has made SPOT work when so many other franchises in the “frontier markets” of Sub-Saharan Africa and South Asia barely get off the ground? A new research report by Dalberg Global Development Advisers sets out to find the answers.

“Franchising in Frontier Markets,” which was supported by a grant from the John Templeton Foundation, is the result of over 50 interviews conducted with businessmen, investors, and policymakers in these areas. The report offers surprising findings on microfranchising, an idea touted by many in the international development community as the next big thing to help the world’s poor.

Dalberg researchers found that familiarity with local conditions, including consumer tastes and ways of doing business, make home-grown chains better positioned to operate in frontier markets than Western franchises, whose business model may be a poor fit. Plus, in microfranchising, the rule seems to be: Keep it simple. Small franchisors—think Avon rather than Burger King—require less capital for start-up. Because they are less dependent on favourable legal and policy environments, small franchises can be more agile in negotiating complex bureaucracies.

Steve Beck, the principal investigator on the project, was startled to discover how little research there was on microfranchising. What scant reports existed, he says, had been “written by enthusiasts who were promoting their own model.” For the most part, he concludes, those models are not working well, especially in the delivery of social services. The Dalberg report found that successful franchises generally rack up six profitable years before expanding. By contrast, failed franchises—like a Kenyan healthcare operation cited in the study—expand too quickly, and survive only if they can secure private or government aid. Unsurprisingly, these subsidies often have a negative long-term impact on the viability of franchises.

Dalberg’s research was initially presented last fall at a Washington meeting of the World Bank’s International Finance Corporation, an event that brought together franchisors, academics, donors, and investors. The International Franchising Association (IFA) is a key player in the field and has taken positive note of the Dalberg findings. The final version of the microfranchising report received the IFA Educational Foundation’s Arthur Karp Research Award “for the best research paper on a subject of relevance and practical usefulness to the franchising community.” The approach of the report is in keeping with the Templeton Foundation’s commitment to developing enterprise solutions to the problem of poverty and to making sure those solutions actually work.

Steve Beck hopes that the report will be “the first word rather than the last word” on microfranchising in frontier markets. He says IFA members are already talking about establishing a kind of Peace Corps of franchisors—”people willing to get on planes and help start up franchise businesses in frontier markets.”

Introductory article from http://www.templeton.org/templeton_report/20100217/

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Franchising in Frontier Markets | What’s Working, What’s Not, and Why

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