Guatemala Health Stores Case Study 16 May 2013

 A MERCY CORPS SOCIAL INNOVATION IN GUATEMALA Sustainable Community Health Stores The Agency’s First Microfranchise Business Model Successfully Transitions to the Private Sector INTRODUCTION: MERCY CORPS AND SOCIAL INNOVATION Mercy Corps believes that innovative solutions will solve some of the world’s toughest problems – the problems our organization tackles every day as we help people build more secure, productive and just communities. We support and invest in social innovations that take responsible risks, champion new ideas and have a high potential to reduce suffering, poverty and oppression. Mercy Corps’ Sustainable Community Health Stores project in Guatemala (known as TISA for its acronym in Spanish) is an innovation that was successfully incubated and adopted by the private sector. It is now poised to improve access to medicine, supplies and health information for millions of people who have lacked even such hygiene staples as soap. Following is a review of TISA’s origins and trajectory, as well as the valuable lessons we learned in developing this groundbreaking program. BACKGROUND: POVERTY IN GUATEMALA Guatemala is an extremely poor country. More than half the population – 6.5 million people – lives in poverty, and 60 percent do not have access to the most basic education or health care. In particular, Guatemala suffers from the region’s third-­‐highest child mortality rate (32/1,000), a rate that increases by 50 percent among rural and indigenous children. In rural areas, malnutrition and mortality rates are exacerbated by the lack of common medicines the developed world takes for granted. In recent years, the Guatemalan government and local non-­‐government organizations (NGOs) have introduced many health programs for rural communities. Yet available services are limited and usually focus on women of childbearing age and children below the age of five, leaving much of the population without adequate access to medicine and health care. Furthermore, the teams of community health facilitators trained to detect and manage common illnesses don’t have the resources and support to effectively treat the people they seek to help. AN EFFORT TO IMPROVE ACCESS TO MEDICINE Since 2001, Mercy Corps has worked to reverse these statistics by strengthening Guatemala’s rural health systems and improving access to health information, services and medication. To access medicine, rural Guatemalan communities often rely on small, informal pharmacies run by community volunteers that are typically set up and supported by NGOs, including Mercy Corps. These botequines provide an important service by bringing medicine to remote areas. However, Mercy Corps found that the botequines often failed to meet their customers’ needs. Being tiny independent stores, they don’t have access to reliable supply chains. And they don’t have the long-­‐term stability of businesses that enjoy the backing of a reliable parent organization. A NEW IDEA: COMMUNITY HEALTH STORES From this need arose a new idea: locally owned and operated community health stores built on a microfranchise model. Community health stores make sense. In rural areas, they offer affordable medicine and health products to people who have no other way of obtaining such basics as antibiotics, vitamins and toothpaste. Having access to essential supplies makes a life-­‐or-­‐death difference to poor people. The stores are powerful entities that can improve the wellness of entire communities. The microfranchise approach provides a framework for the social mission of TISA: to increase community access to medicine through a model that’s sustainable. The key is to set up this health resource in a way that will be available and reliable over the long term. Too, microfranchising offers important advantages to store owners. As franchisees they belong to a larger organization, with the attendant benefits – a steady supply stream and consistent pricing. They also receive high-­‐quality training, tools and information to help them set up and run successful businesses. LOOKING FOR STARTUP PARTNERS, FINDING THE LINKED FOUNDATION The Linked Foundation alleviates poverty by promoting and investing in solutions that improve the health and economic self-­‐reliance of women in Latin America. The foundation operates with a team of three and believes that “our philanthropic investments should be considered ‘risk capital’ directed towards initiatives that address a high need and have the potential for high impact.” Mercy Corps helped entrepreneurs in rural Guatemala set up small health stores to serve the people of their communities who had to In 2008, the Linked Foundation was travel long distances for basic medicines and supplies. looking to expand its work on rural health issues in Latin America. The foundation’s interest in market-­‐based solutions led to Mercy Corps. Linked met with Mercy Corps’ Latin America and Social Innovations teams and decided to invest in a business plan to find a groundbreaking, market-­‐based solution to rural poverty. In 2008, Linked and Mercy Corps began field research in Guatemala. 2 THE TISA PROJECT: OUR VISION AND APPROACH Mercy Corps saw an opportunity to improve overall health in rural Guatemala by transforming the botequine system into a social business that could provide reliable access to medication. After additional field trips and assessments, in January 2009 Mercy Corps and Linked signed an agreement to fund a three-­‐year program with the objective of developing a sustainable social business model for improving health through better access to health products in rural Guatemala. Our project had three objectives: • Increase the availability, access and utilization of health products in target communities; • Document the program model, successes and lessons learned for replication; • Advocate the TISA approach broadly within Mercy Corps, to other NGOs and to the local government. LOOKING FOR LOCAL PARTNERS, FINDING FARMACIAS DE LA COMUNIDAD Early in the process we engaged local actors in order to gain access to medicine supply chains. Our team hoped that one of our supplier relationships would show the potential to turn into a long-­‐term partnership that would ensure the sustainability of the program. Farmacias de la Comunidad is Guatemala’s largest pharmaceutical company. It owns a Guatemalan laboratory that produces quality generic pharmaceuticals. And its mission is to serve rural communities. In 2010, Farmacias de la Comunidad was chosen by our TISA team as the sole supplier for the microfranchise network. Our decision was based on the company’s reliability, its high-­‐quality products and its desire to engage in this social enterprise with Mercy Corps. In fact, the company had been looking for a viable way to solve the last-­‐mile challenge (developing or delivering products or services that benefit underserved markets – often, though not exclusively, in rural areas) in the context of a viable business model. When Mercy Corps suggested the partnership, Farmacias de la Comunidad seized the opportunity. Over the course of the project, Mercy Corps worked with Farmacias de la Comunidad to move from a donor-­‐funded model to a commercially operated network. Today, Farmacias de la Comunidad is integrating TISA into its business portfolio and plans to expand the model into a self-­‐sustaining national network. Mercy Corps has now handed over TISA to Farmacias de la Comunidad – a crucial milestone on its path to sustainably providing affordable medicine in underserved rural Guatemala. MICROFRANCHISING ENSURES QUALITY AND REDUCES RISK Under the TISA microfranchise model, independent locally owned rural stores are established by entrepreneurs and initially supported by Mercy Corps. Once handed over to Farmacias de la 3 Comunidad, the commercial partner runs the enterprise. During the three-­‐year pilot phase the stores were tested in northern Guatemala; now they are starting up in the south. Microfranchising is a model that can create sustainable and replicable businesses while ensuring quality control. It removes much of the risk and guesswork that make entrepreneurship so uncertain. Through a local, private financial institution, store owners have access to loans to help start up their businesses; these loans must be repaid within a negotiated timeframe. Owners are offered training in business and financial literacy, product selection, supply chain development, financing and sustainability planning. They also receive ongoing business support. Our comprehensive model aims to ensure that the stores succeed, providing owners with income to support their families and providing communities with the health supplies and care they desperately need. Not only are the stores stocked with products to prevent and treat major illnesses, but store owners are trained to promote better health practices among their customers. AN EXAMPLE OF SHARED VALUE IN ACTION Shared value models aspire to create social and business value simultaneously. Savvy businesses see opportunity at the base of the economic pyramid by providing goods and services that meet the needs and desires of the poor. Often, shared value is realized through relationships between companies and non-­‐profit organizations. A non-­‐profit can reduce the risk for a company by creating a viable business model. The company then has the opportunity to watch, guide, mentor and perhaps provide pilot funding as these ideas are validated. If the approach is proven, the company is more likely to become a partner, investor or purchaser. Our TISA project addresses a classic last-­‐mile sales and distribution The stores provide owners with much-­‐needed income. challenge. Farmacias de la Comunidad would not have been willing, on its own, to put capital at risk to experiment with this way of solving a social challenge in the hopes of gaining business value. That’s why funding from the Linked Foundation, with early project implementation by Mercy Corps, played an essential role: proving the concept and mitigating risk. Our partnership made it possible for Farmacias de la Comunidad to recognize the business value of acquiring and expanding this microfranchise pharmacy model. 4 PROJECT APPROACHES AND PRINCIPLES To achieve its objectives, TISA relied on these implementation approaches and principles: • Build on existing local capacity and relationships: TISA recognized that several local organizations had implemented programs aimed at increasing access to medicine (such as the botequines), and we sought to improve and build upon these models. Strong relationships with communities in the pilot region also enabled TISA to startup quickly, building on local trust in Mercy Corps. • Build the business and health knowledge of store owners: The project developed a curriculum and training module to enable store owners to successfully and responsibly manage their stores and distribute medication. Topics included basic accounting, operations management, financial management, inventory, record-­‐keeping, basic health advice and prescriptions. • Improve access to microfinance: Store owners receive training in business as well as basic health Recognizing that microfranchisees would advice and how to handle prescriptions. require a sustainable source of credit to startup their stores, TISA initially provided financing through Mercy Corps, with a longer-­‐term goal of having external microfinance partners. Now we are working with the private financial entity BanRural to provide loans. THE FIRST YEAR: UNDERSTANDING NEEDS, OPENING STORES The TISA team focused its first-­‐year efforts on operationalizing stores – trying to find out what training, products and financing would be appropriate and whether they could be profitable in rural areas. It was important to understand the buying and selling behaviors of rural Guatemalans. The team started with six stores to understand the basics at the unit level, focusing first on the profitability and success of individual store owners. The project provided microcredit to store owners, through Mercy Corps’ Linked Foundation grant, to fund the startup of individual stores. The team knew that a long-­‐term local financing partner would eventually be necessary. After the team had a solid grasp of how individual stores would operate, they were able to address questions about what a sustainable microfranchise network would require. This next 5 phase looked at geographic expansion options, what type of management structure would work best and how much that network would cost to operate. ADJUSTING THE MODEL AND ESTABLISHING BUSINESS PRACTICES The TISA team was able to rapidly absorb information and adjust its approach, continuously tweaking the model to respond to the context and to make sure long-­‐term sustainability remained a priority. The team regularly reviewed project and sales data and used that information to improve the model. This iterative approach was encouraged by a flexible donor and flexible terms of the project agreement, and by a team Store owners stock approved medicines to treat the most common that was committed to creating the illnesses in their communities. strongest model possible. Before the handover to Farmacias de la Comunidad in 2012, TISA established the following practices: • Store owners paid a one-­‐time membership fee of 500 quetzals (about $63 USD), which helped cover the costs of training materials, branded signs and technical support. • Store owners received a Mercy Corps loan averaging $625, which was repaid over a period of 18 months. The loan helped store owners pay their membership fee, purchase inventory and contribute to the cost of billboards advertising the project. The project was designed to not allow earlier repayment cycles; the idea was that the longer-­‐term financial tie allowed time for the TISA team to work with store owners and ensure they understood the model. • Health stores were placed in owners’ homes (in a separate room with a storefront) to ensure that the community had access to medicine at almost any hour of the day. • Stores stocked medications and health products like toilet paper, soap and toothpaste. While owners were not expressly required to stock certain products, they were provided with a list of approved medications in 22 categories (including painkillers, antibiotics, anti-­‐cold and anti-­‐histamines, anti-­‐inflammatories, anti-­‐fungals, anti-­‐parasites, rehydration salts, family planning products and vitamins), based on the area’s most common illnesses, and were encouraged to carry at least one product in each category. Stores were not allowed to carry cigarettes or alcohol. • The network hired field technicians who each support about 15 store owners. They provide the owners with startup and ongoing business support, link them to financial services and ensure the quality of operations. The technicians report to the TISA manager. 6 CREATING AND HANDING OVER A VIABLE – AND PROFITABLE – SOCIAL ENTERPRISE TISA was squarely focused on developing a social enterprise business model that was both financially sustainable and could be adopted by local organizations. The idea was to incubate the model and then hand it over to a local Guatemalan entity, whether a government organization, an NGO or a private business. National ownership was key. The goal was to develop something that would not need donor funds after the pilot period. Project management was officially transferred from Mercy Corps to Farmacias de la Comunidad in 2012. The company’s growth plans are ambitious: to roll out 500 pharmacies, reaching 450,000 people, over a period of just 26 months. By its own projections, Farmacias de la Comunidad expects to achieve profitability of $11,150 starting in month 24. The company will substantially expand its market, earning margins of about 12%. Profitability is a vital incentive for all players. It establishes the venture as a viable social enterprise and a proven business model, ensuring the long-­‐term sustainability of the concept. Key developments since the handover include the formation of a partner group of private Guatemalan based companies to help cover startup investments and officially launch the business. BanRural has agreed to be a financial partner and provide microcredit at favorable rates. TISA BY THE NUMBERS 2009: Mercy Corps and Linked Foundation agree to fund a three-­‐year program to develop a sustainable social business model for improving health through better access to health products in rural Guatemala. By the end of 2009, six community health stores have opened. 2010: Farmacias de la Comunidad is chosen by TISA team as the sole supplier for the microfranchise network. By the end of 2010, 13 community health stores have opened. 2011: To date, 27 community health stores have opened. 2012: Farmacias de la Comunidad takes on full management responsibility for TISA and opens 15 new stores. 2013: Mercy Corps and Linked have established 50 small health stores that average a monthly profit of nearly $60, increasing store owners’ incomes by 20-­‐30%. The stores provide health products and medicine to nearly 88,000 people. WHAT WE HAVE LEARNED Mercy Corps has broken new ground by successfully designing a social enterprise, proving its viability and transferring management to a suitable local partner in just over three years. The 7 dedication of the TISA team, and its many supporters, were critical to making this achievement possible. Social enterprises like TISA present an opportunity to enhance the impact and the long-­‐term value of Mercy Corps’ work, and are increasingly adopted as a model for driving social change. It is significant that Mercy Corps’ most successful social enterprises to date have emerged from years of thoughtful development programs in targeted sectors. Some of these programs later evolved into sustainable enterprises designed to target persistent social challenges that were observed in the earlier development programs. Mercy Corps donors and stakeholders share our enthusiasm about the success of the TISA project. The transition to private ownership transition is viewed as a significant milestone on the project’s trajectory toward long-­‐term sustainability. SOCIAL ENTERPRISES VS. TRADITIONAL PROGRAMMING: LEARNING DIFFERENT APPROACHES There are fundamental differences between traditional development Juan Tista Toj started a pharmacy in his home through Mercy Corps’ TISA programming and social enterprises. program. Income from the store helps support his six children and makes necessary medicines and supplies available to his community. In traditional development projects, programs are designed, funds are spent, and outcomes are tracked. However, with social enterprises, program managers must scrutinize profit margins and continually adjust the model until goals are achieved. If a project does not achieve its goals, investors lose money and stakeholders lose the opportunity to achieve scale and solve a significant challenge. These differences required steep learning curves by our program team and supporters, some of whom have backgrounds in traditional international development programs rather than social enterprise programs. They welcomed the opportunity to learn and grow – yet another beneficial outcome of the TISA project. GLOSSARY Innovation: Creating or applying new, better, or more effective products, processes, services, technologies or ideas. 8 Social Innovation: new approaches, development models and partnerships that achieve social impact. Social Enterprise: Commercial businesses (typically small to medium-­‐sized) that have a social objective. Shared Value: Policies and operating practices of companies that enable them to develop products, services, and distribution models benefiting those at the bottom of the pyramid, while also supporting their commercial objectives. Last Mile: Models to develop or deliver products or services that benefit underserved markets – often, though not exclusively, in rural areas. For more information: Rae Rosenberg Lyon Director of Foundation Partnerships 503.381.9428 Email: rlyon@hq.mercycorps.org Skype: rae.rosenberg Mercy Corps Global Headquarters 45 SW Ankeny Street Portland, OR 97204 800.292.3355 mercycorps.org All photos: Miguel Samper for Mercy Corps 9