Hapinoy Is An Open Source Model for Low-Income Markets
Originally posted on February 16, 2011. Also posted on Next Billion
If you’ve ever been to the Philippines, you’ve no doubt seen a row of identical tiny stores selling Coca-Cola and laundry detergent. In fact, there are about 630,000 of these sari-sari stores serving the 90 million Filipinos across the country (a little less than one per 100 people), and each one may record less than $10 per day in sales. Each store sells the same single-use household and food products, but buys its inventory from grocery stores in the cities. As a result, the BoP end up paying even more for products and services.
Mark Ruiz and Bam Aquino of MicroVentures recognized the opportunity to consolidate this supply chain by centralizing sourcing and reducing distribution inefficiencies. The result isHapinoy, a franchise that has reached nearly 10,000 sari-sari stores in a few short years.
Hapinoy is an example of a conversion franchising model, which “transforms pre-existing, independently-owned businesses into members of a standardized network.” The company manages its operations and negotiates supplier contracts with Nestle, Unilever and others from its headquarters in the capital city of Manila. Products are purchased in bulk and distributed via Hapidelivery to a network of community stores, each of which serves between 50 and 100 “suki” stores (Hapinoy sari-sari stores). The suki stores buy from the community store at a lower cost and sell at a higher margin.
Ruiz, one of the co-founders of Hapinoy, is a former marketing manager with Unilever, where he handled channel strategy development and category management. He explains the principle underlying the company: “These sari-sari stores have been largely untapped because they’ve mushroomed independently and thus have no unifying system or organization to unleash that inherent power. And so what MicroVentures/Hapinoy is doing is merely awakening a sleeping giant – a human network of microentrepreneurs at the BoP that can band together and realize their strength. And as we organize these sari-sari stores together, we then create a vibrant alternative channel to bridge the gap to the BoP. There’s no more need for costly set-up of infrastructure. It sounds funny but the best way to reach the BoP (the people), is actually through the BoP (the sari-sari stores) itself. It’s a distribution platform made up of the poor, in order to help the poor.”
As part of the Hapinoy package, store owners have access to microloans through partnership with CARD Bank, the largest microfinance institution in the Philippines. Hapinoy offers capacity-building and training on pricing, inventory management, and other business principles, alongside leadership and personal development. And store owners have access to Hapinoy’s low-cost inventory and new business offerings.
While Hapinoy would like to systematize each microfranchise, it will never look like McDonalds or 7-11. According to Ruiz, “In the BoP, we have to change our notion of the term microfranchising. Many consider it as just scaling down franchising models as we know it. But there are huge differences in the model once it is scaled down. With Hapinoy, the introduction of franchising in terms of systematization will come progressively, and then cap off at around 50% (as opposed to McDonald’s, which is 100%). We start with financing systems, then add assortment / inventory systems, then supply systems, then merchandising systems, and so and on so forth. There’s a phase-in. It’s actually a lot messier than a traditional franchise, but that’s the reality of working in the BoP sector.”
As Hapinoy expands, it reaches more of the BoP market. Through its network of suki stores, the company is able to offer other products and services that do not currently reach the BoP.
The founders like to think of Hapinoy as analogous to the iPhone. In the same way that the Apple device is an open-source platform for apps created by outside programmers, Hapinoy is a distribution vehicle for products to the BoP developed by social entrepreneurs. For example, through its stores Hapinoy sells solar lanterns, mosquito nets to combat dengue fever, and, starting in April, eyeglasses.
A few years ago, it created a pharmacy program, selling low-cost over-the-counter medicines. Hapinoy stores also are mobile cash agents for Smart Money and act as a mail acceptance counter for Mail and More. In the future, it will focus on nutrition and water, health and wellness, technology, energy, and livelihood opportunities. Ruiz would like to incorporate local producers into its supply chain network. “One key pillar of the future is to open up the Hapinoy Distribution Platform for the products of community-based microenterprises as well. Product development exists to help microentrepreneurs create BoP products, but many have difficulty in marketing and sales.”
In terms of expansion opportunities, the sky seems to be the limit and the opportunity for scale is enormous. The Philippines offers a unique opportunity to build a strong microfranchise with virtually unlimited potential. Hapinoy builds on top of low-cost existing infrastructure and works with existing independent retailers. The 600,000+ individual sari-sari stores account for 30-40 percent of total retail sales in the Philippines. To date, it has 160 community stores serving 10,000 suki stores. In the future, it has the lofty, yet achievable goal of serving 100,000 stores. There is no doubt that Hapinoy can increase market penetration by adding new stores. As it grows, its role as a platform for delivering products and services to the BoP will expand.
One of reasons the model has been so successful is because it has been able to leverage the presence of a robust network of existing retail stores selling identical products. In this author’s opinion, the genius of Hapinoy is its mastery of supply chain logistics and ability to transform an unaffiliated network of stores into a distribution platform for the BoP. By managing its own supply chain and coordinating distribution of products to its franchisees, Hapinoy reduces the costs to both the store owners and the consumers, raising incomes across the board. Right now, for example, it is piloting a mobile phone-based ordering system with five of its stores. But it is through its role as a distribution channel for the BoP where it can create systemic transformation in the country.
As readers of this blog can attest, there are countless products designed for the BoP markets. The bottleneck is not in innovation, but rather in distribution. Getting the products from the factory to the BoP can be the biggest challenge faced by companies serving the BoP. Mobile money providers have to overcome the chicken-and-egg problem of simultaneously building a customer base and an agent network. Manufacturers of solar lanterns and cook stoves rely on independent agent networks, which are difficult and costly to manage; and MFIs, which are financial institutions, and not retailers. The problem is that very few global-scale companies (with the exception of Coca-Cola) serve the BoP market. Thanks to Hapinoy, the BoP market in the Philippines is open for business.