SOCIAL SECTOR MICROFRANCHISING:

How the Ideas Behind McDonald’s Can Help Save the World

Justin Berk Yale MPH Candidate 2011

justin.berk@yale.edu

Burden of Disease

A short list of treatable diseases accounts for 70% of all childhood illness and death in the developing world. (Black, Morris, and Bryce 2003)

THE PROBLEM:

Only 35% of the populations in developing countries have access to essential

medicines. (WHO 2009)

Over 50% of the drugs in the market are counterfeit or sub-standard. (WHO 2009)

Disease Burden of Treatable Illnesses

Data taken from WHO Global Burden of Disease: 2004 update (2008)

Treatments are Affordable.

Disease Estimated Annual Deaths (2004)

Estimated Cost of Single Dose

Malaria 860,000 $0.83 / £0.53

Diarrheal Disease 1,810,000 $0.09 / £0.06

Respiratory Infections 2,940,000 $0.10 / £0.06

Total 5,610,000 <£1.00

- Death statistics from WHO 2008 - Treatment costs based on calculated averages taken from the HealthStore Foundation

Why is this happening?

•  The public system is broken.

•  NGOs have limited capacity.

•  Private markets exploit the poor.

Government Clinic Inefficiencies

The average public sector availability of generic medicines ranged from 30% to 54% across WHO regions. (Cameron et al. 2009)

Courtesy of HealthStore Foundation

Lack of Consumer Confidence

India: “No one uses public [health-care] facilities very much,

and if anything, the poor use them less than the non-poor.” (Banerjee, Deaton, and Duflo 2004)

Uganda: “Public health facilities were perceived to offer low

quality care with chronic gaps such as shortages of essential supplies.” (Bakeera et al. 2009)

Limitations of the Charity Model

•  Charity creates dependence on external donor support – Accountable to donors, not beneficiaries

•  Grant conditions may restrict operations

Private Market Exploitation •  Over 50% of drugs in

developing countries are counterfeit (WHO 2006).

•  Private sector patients paid 9–25 times international reference prices for generic products (Cameron et al. 2009).

•  No government regulation

The Microfranchise Model

The Social Innovation:

HealthStore’s “Three Point Test”

•  Standardization: ensure consistent quality to ensure effectiveness and gain confidence

•  Scalability: geometric growth to serve millions of customers or patients

•  Economies of scale: achieving lowest possible costs as the network grows

How It Works

Corporate Franchisor

Franchisee Franchisee Franchisee Franchisee

A Microfranchise

Through a business model of standardization:

•  Consistent quality

•  High customer volume

•  Low cost

•  Financial accountability

Franchisors provide:

•  Business manuals

Franchisors provide:

•  Business manuals

•  Regulations

Franchisors provide:

•  Business manuals

•  Regulations

•  Brand name

Franchisors provide:

•  Business manuals

•  Regulations

•  Brand name

•  Sometimes loans

The Franchise Model Passes the “Three Point Test”

•  Standardization: builds a brand name to ensure replicable quality at all outlets

•  Scalability: Subway scaled from 16 to over 27,000 outlets in 86 countries in 33 years

•  Economies of scale: achieved in advertising, distribution, information systems, supplies etc.

Methods of Funding

•  Lowest price •  Grant dependence

Grant based

•  Low price, no donor dependence •  No access to private investment Sustainable

•  Greater access to investment capital •  Need for profit margins;

how much investor return? For-profit

Case Studies

Two practical examples of the social sector microfranchise model

HealthStore Foundation: The “Subway” Model

Living Goods: The “Avon” Model

Is it affordable to the poor?

Is it affordable to the poor?

•  HealthStore Foundation: Over 540,000 customers served

•  Base-of-Pyramid Health Sector: $158 Billion (Hammond et al. 2007)

– Currently non-competitive and inefficient – Over 50% spent on pharmaceutical drugs

Is it profitable?

HealthStore Foundation

2008: Of 59 CFW outlets, 88% reported a profit (Beck, Deelder, and Miller 2010).

2010: HSF operates 85 locations: 82 in Kenya, 3 in Rwanda

Is it profitable?

Living Goods

Necessary Sales per Representative: $200/month Average Rural Household in Uganda: 5.5 people Households per representative: 200 (1100 people)

$200 / 1100 people = 18 cents per month

Current Challenges

•  Need for “social investments”

•  Low market density in rural areas

•  Legal and regulatory obstacles

•  Competition with NGOs

A Cautionary Tale: The Medicine Shoppe - India

How Microfranchising Works Problem Microfranchise Solution

Counterfeits Creates reliable brand name

Stock-outs Incentives to maintain inventory

Corruption Franchisor regulates and penalizes

Financial Sustainability

No dependence on donors

Overcrowding Reduces strain on public system

Affordability Limited menu keeps costs low

How Microfranchising Works

It creates incentives that induce franchisees to comply with quality standards, then uses this standardization to scale exponentially.

Limitations

•  Does not reach the poorest of the poor; there is always a need for charity

•  A complement to the public system, not a replacement

•  Requires strict adherence to the franchise model

For the full paper

www.justinberk.com/senior-essay/

justin.berk@yale.edu

Thank You

-Justin Berk justin.berk@yale.edu

References Bakeera, Solome K et al. 2009. “Community perceptions and factors influencing utilization of health services in Uganda.”

International Journal for Equity in Health 8(35). Available at: http://www.equityhealthj.com/content/8/1/25. Banerjee, A., A. Deaton, and E. Duflo. 2004. “Health care delivery in rural Rajasthan.” Economic and Political Weekly: 944–

949. Beck, S., W. Deelder, and R. Miller. 2010. “Franchising in Frontier Markets: What's Working, What's Not, and Why.”

Innovations: Technology, Governance, Globalization 5(1): 153–162. Black, R. E, S. S Morris, and J. Bryce. 2003. “Where and why are 10 million children dying every year?.” The Lancet

361(9376): 2226–2234. Cameron, A. et al. 2009. “Medicine prices, availability, and affordability in 36 developing and middle-income countries: a

secondary analysis.” The Lancet 373(9659): 240-249. Hammond, A. L., Kramer, W. J., Katz, R. S., Tran, J. T., & Walker, C. 2007. The Next Four Billion: Market Size and Business

Strategy at the Base of the Pyramid. Washington, DC: World Resources Institute and International Finance Corporation.

HealthStore Foundation, 2010. “The HealthStore Foundation” http://www.cfwshops.org/ Living Goods. 2010. “The Living Goods Model: A Sustainable System for Defeating Diseases of Poverty.” http://

www.livinggoods.org WHO. 2008. “The top 10 causes of death. Geneva: World Health Organization.” http://www.who.int/mediacentre/factsheets/

fs310/en/index.html WHO. 2009. “Access to affordable essential medicines.” In UN - MDG Gap Task Force 2009. http://www.who.int/medicines/

mdg/en/index.html.

Photos courtesy of HealthStore Foundation or Google Images