Franchising in Frontier Markets
What’s working, what’s not and why.
By Steve Beck, Wouter Deedler and Robin Miller
If you happen to need a cab in Bangalore call SPOT. SPOT City Taxis is now the largest taxi operator in the capital of India’s “Silicon Valley,” having grown organically from 18 to more than 300 cars operating around the clock.
SPOT, which stands for Self-employment Program for Organized Transport, was started in 2002 to promote employment, enable asset ownership and build credit history among low-income households. Unlike other taxi operators in the city, SPOT’s fleet is driven by owners who operate franchise businesses linked by a common brand, radio and computerized dispatch system, service delivery standards, processes and values.
Drivers purchase the cars on installment over a three-to-four year period, with vehicle leases arranged on favorable terms by the franchisor. In addition to arranging financing, SPOT offers an established network of pooled customer demand, fleet management services and a dispatch call center that channels customer requests directly to the driver.
The business is profitable for franchisee and franchisor alike. After paying for fuel, maintenance, finance charges and royalties, franchisees net more than three times the average income in India, build a credit history and own a valuable asset. Meanwhile, the franchisor, SPOT, earns a profit margin that exceeds 20 percent.
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 business ownership.
Franchising seems to have a lot to offer frontier markets that seek to develop their local economies. Franchise businesses are designed for replication, require less experienced entrepreneurial talent to run a proven business format, and provide business-learning opportunities within a defined support structure. In the last few years researchers and the international development community have begun to promote franchising as potentially the “next big thing” in development.
Frontier Market Challenges
Yet when we researched low-income markets, we found relatively few largescale international franchises operating in these challenging markets. For example, KFC has only three outlets and Subway just seven in sub-Saharan Africa, a multicountry market of 800 million consumers.
Compounding the challenge of limited disposable income that constrains all businesses in these markets, our study identified two key barriers to the growth of franchise businesses in frontier markets: limited access to finance, and the lack of legal frameworks to manage franchise relationships and assets.
Limited disposable income and market size: The average worker in Nairobi labors for an hour and a half to purchase a Big Mac, vs. just 13 minutes in New York City. While sub-Saharan Africa represents a huge potential market, it currently cannot sustain sufficient outlets to encourage investment from the large chains. Only four of the top 10 international franchise chains have ventured out of South Africa into other sub-Saharan markets, and then with only 30 outlets between them. Franchising requires, rather than generates, a profitable business model. So basic economics will limit the international expansion of large chains to larger, more affluent emerging markets (such as Brazil, China and Russia), at least for the time being.
Limited access to finance: Small and medium-sized enterprises are poorly served by local banks in frontier markets, leaving a large gap in financing options between microfinance and traditional corporate lending. This gap, known as “the missing middle,” encompasses capital needs between $10,000 and $2 million. Franchising typically shifts the financing burden from the franchisor to the franchisee, but the franchisee in frontier markets often struggles to access the needed capital on viable terms.
Loose legal frameworks: Businessformat franchising flourishes in an ecology that includes the legal and regulatory frameworks and specialist technical and legal advisory services it needs to prosper. The existence of these factors benefits franchisor and franchisee alike, while their absence significantly increases the risks and costs of franchising. A franchiseconducive ecology is largely absent in sub-Saharan Africa and south Asia, though we observed significant differences between national markets.
Having noted the formidable challenges, our research identified several promising franchise models, such as SPOT, that have adapted and thrive in the challenging conditions.
Home-grown chains are better positioned than Western chains: The tailored products, pricing, cost structure and better alignment with the local enabling (or disabling) environment of home-grown chains helps them succeed. Nando’s is a good example of an indigenous (South African) franchise fast food business thriving in frontier markets that have not been penetrated by better-known Western chains.
Traditional format (distribution) franchising is better suited to frontier markets than business format franchising: Simpler is better in these markets. Traditional format franchisors simply outsource the distribution of their product(s) to the franchisee (think Avon vs. McDonald’s). As such, they experience fewer franchisor/franchisee conflicts, require less capital and are less dependent on favorable legal and policy environments. SPOT Taxi, Fan Milk (Ghana), Kegg Farms (India), Natura (Brazil) and Coca-Cola’s Manual Distribution Centers (Africa) are all good examples of successful traditional format franchise businesses in frontier markets.
Successful franchises have innovated to overcome frontier market challenges
Innovative franchisors address the accessto-finance challenge through partnerships with banks and microfinance institutions, or by selling goods on consignment. International franchisors have employed master franchise contracts to simplify the management task and entrust franchisee management to a national entity better equipped to manage the local environment. And successful franchisors have compensated for loose contractual, legal and regulatory frameworks with technology. In SPOT’s case, the radio dispatch system and, eventually, GPS provide low-cost monitoring and enable the exclusion of “rogue drivers” from franchise benefits.
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 chain of 85 microclinics in Kenya and Rwanda; VisionSpring’s network of 700 “vision entrepreneurs” selling eyeglasses to lowincome consumers in India; and Living Good’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, seeking to rapidly replicate a standardized service with diminishing grant subsidy, and in some cases, to achieve economic self-sustainability.
While franchising may be more efficient than the current public or foreignaid funded delivery of health care and education services in these markets, no one has yet proven a self-sustaining model that can meet these needs at a large scale. Sector economics in health and education in low-income markets are especially problematic. And all of the social franchises we studied pursued franchised expansion before establishing financial sustainability at the unit level. This caused three key problems:
• Insatiable demand for grant-finance, focusing top resources on fundraising rather than 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.
That the HealthStore Foundation recently decided to restructure from a grant-fueled to a for-profit business model is telling. HealthStore’s primary goal is not to make money off the health-care needs of the poor, but rather to finance its own growth and achieve the desired health care benefits at a large scale. Whether this is achievable remains to be seen, but it is certainly worth the concerted effort. We believe that local or national third-party payors, (e.g., private or statefunded insurance or voucher schemes) will ultimately prove more effective and sustainable than foreign grant subsidies. In any case, the franchising of public goods and services in frontier markets warrants further empirical research and creative, intelligent entrepreneurial effort.
Steve Beck is an advisor to the John Templeton Foundation and founder/CEO of SpringHill Equity Partners, Wouter Deelder an associate partner with Dalberg Global Development Advisors in Geneva and Robin Miller a senior consultant with Dalberg Global Development Advisors in Johannesburg. Beck can be reached at
Deelder at +41 22 809 9900 or
and Miller at +27 82 557 83775 or
This article 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. A copy of the research findings can be downloaded in the News/Recent Publications section of Dalberg’s Web site: