Franchising In Rural Uganda: A Float or Drown Situation For Living Goods?

by rosemaryezimuo (student)

University Degree Business and Administrative studies

Concept

The concept illustrated in this New York Times article:

Is franchising. Franchising as a low risk, cost effective business model for revenue generation.

Concept Utilization

Franchising is one of many business models adopted by companies to generate revenue. However there is a dire need for these organizations to consider very wisely the specific business environment, the market conditions and products before jumping on a bandwagon solely because it has yielded results for other companies. This article will analyze Living Goods’ Franchising decision.

Summary

Living Goods, founded by Chuck Slaughter, was born out of a trip to Africa and the need to reduce child mortality. Slaughter was in Kenya visiting the Health Store Foundation’s clinics. They were busy in spurts but idle majority of the time, so nurses started traveling out into the community to administer health care treatments to patients personally. Slaughter wondered whether the clinic was necessary at all. Slaughter saw this not only as a call to social action but also as a revenue generation opportunity.

Living Goods franchises its brand and business model to women entrepreneurs who work as independent agents. To launch their Living Goods franchise, agents receive a loan and a free “Business-in-a-Bag” that includes uniforms, signs, a locker, basic health and business tools. The Living Goods franchise is very similar to the Avon-like networks of independent entrepreneurs. It utilizes the Avon model to sell items like sanitary pads, soap, de-worming pills, iodized salt, condoms, nutritionally fortified foods, kits for clean delivery of babies, malaria treatments, bed nets, high-efficiency cook stoves, solar lamps and cellphone chargers to consumers. They utilize all the key characteristics of successful franchises: screened agents, expert training, strict quality monitoring, uniform branding, product mix and effective promotions. The Franchisee receives training in basic health care — preventive measures, and also learn how to diagnose and cure the most common diseases in Kenya: malaria, childhood pneumonia, and diarrhea. They spend two weeks in the field, learning the tricks of the trade by following a working sales representative. Then they go back to their communities introducing themselves and the Living Goods brand to consumers on a door-to-door basis.

Analysis

The idea of a Franchise model seems like a good strategy for Living Goods. For reasons such as:

Distribution platform: The ability to create a sustainable distribution platform for a wide spectrum of products. Often time, Innovators in health, energy, and agriculture often fail to scale because they try to build new distribution systems solely for their one new product. In contrast, Living Goods bring these high-impact products together, creating assortments in which the marginal cost of adding new innovations is near zero.

Cross-subsidy: Their broad product mix enables ...

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Analysis

The idea of a Franchise model seems like a good strategy for Living Goods. For reasons such as:

Distribution platform: The ability to create a sustainable distribution platform for a wide spectrum of products. Often time, Innovators in health, energy, and agriculture often fail to scale because they try to build new distribution systems solely for their one new product. In contrast, Living Goods bring these high-impact products together, creating assortments in which the marginal cost of adding new innovations is near zero.

Cross-subsidy: Their broad product mix enables them to cross-subsidize prices – dropping prices on key impact items such as sanitary pads, soap, salt and bed nets, while making the margin up elsewhere.

Continuous Revenue Streams: Franchisors like Living Good benefit from continuing royalties that are, typically, based upon a percentage of franchisee gross sales and paid on a per unit or monthly basis

Brand Development: The Multi-unit expansion associated with franchising serves to supplement and expand the value of your brand. As noted in the article, Living Goods’ Franchisees go door –to-door educating community members about the living goods brand thereby creating awareness for the brand. This serves to expand brand recognition.

Consequently, There are some concerns worth mentioning.

Cost Coverage: Living goods needs to be realistic about the cost of establishing a franchise network against the time it will take for it to see a return on its investments. The article offers evidence of these investments. A loan for every franchisee, a free “Business-in-a-Bag” that includes uniforms, signs, a locker, basic health and business tools, a support system in form of a field staff that provides franchisees with ongoing support through refresher trainings, field mentoring, and performance monitoring. This all cost a lot of money and when the end is to drive product sales and cover cost, then it becomes a big concern. Especially considering the fact that most of the medicines Living Goods sells, like Malaria medicines are supposed to be free in Uganda’s health care system. Why, then, would someone spend precious money to buy drugs or a safe delivery kit from Living Goods?
Consumer Trust Issues: More so, consumers are more open to buying consumer goods like household items, groceries and personal care items from friends, family and colleague but when it comes to health products, they are usually extra cautious and are more trusting of the hospital system.

Wild assumptions: Finally, the article points out the fact that the rationale behind its franchising decision lies in the comparison of rural America (as with Avon’s David McConnell experience) to rural Africa today, this I consider a sweeping generalization as rural Africa today still lags behind when considering factors like development and Per Capita Income. Consumers might not be able to afford these products and have become accustomed to free supplies from their government. World bank in its ‘Kenya poverty and inequality assessment’ (http://siteresources.worldbank.org/intafrregtopgender/resources/pakenya.pdf) states that In 2005/6, almost 47 percent – or 17 million -- Ugandans were unable to meet the cost of buying the amount of calories sufficient to meet the recommended nutritional requirements and minimal non-food needs. The vast majority, about 14 million—live in rural areas.

Recommendation and Conclusion

I would recommend that living Goods did some research on the product category that the Ugandan government offers its citizens for free and either discontinue it’s production or invest in an innovative market strategy that puts them at an immense advantage making these consumer purchase their products over the free ones offered by the government.

Another recommendation, this time around to drive revenue maximization would be for Living Goods to stick to it franchise model and products but perhaps think in the area of diversification. Perhaps selling more consumer goods at competitive market prices. For example possibly partnering with Nestlé Kenya Limited (which, is a wholly owned subsidiary of Nestlé Group) In developing new nutritional products to add to its basket.

In Conclusion, Living goods has adopted a very smart business model which has brought immense success for many organizations this is not to say that it is fail proof. However haven considered very wisely its market environment and made adjustments to some of its products line, the Opportunity can outweigh the risk.

This could well be the difference between staying Afloat and drowning in this ever-growing franchise business world.