The Future of Work is Standardization
Where there is fragmentation, informality, and a dearth of infrastructure, there are questions about what the path to formality and standardization will look like. One intriguing answer to that question is conversion franchising, where existing stores are converted into a franchise.
In the future of work context, are microenterprises, their owners, and their employees better off as converted franchisees?
This episode is a case study, with mPharma's Gregory Rockson.
0:00 - We begin this episode's exploration with a question - are subsistence farmers better off as employees of a commercial farm? With Twiga Foods' Peter Njonjo.
6:01- What does the path to formalization and standardization look like across African markets and sectors? This episode is a case study of conversion franchising, with mPharma's Gregory Rockson.
We define conversion franchising, with help from Next Billion.
7:31 - mPharma started out as an asset-light platform.
9:38 - How mPharma's pharmacy-in-a-box program, QualityRX, got started.
15:38 - From converting franchises one-by-one to pursuing an M&A strategy to convert by the dozen.
21:15 - Is conversion franchising the future of work? Exploring why the model has worked so well for mPharma and pharmacy retail.
25:10- Gregory's theory of change.
27:12 - A retrospective conversation with Sayo Folawiyo and Justin Norman.
Justin Norman: Back in Season Three of The Flip, in Episode Five, Problem Solving for Fragmented Retail, we spoke to Twiga Food's Co-founder and CEO, Peter Njonjo. Twiga started as a platform, better organizing the retail side of the produce market by aggregating the merchants that sell to consumers, but they saw that the issues impacting food costs and supply existed across the fresh produce value chain.
Peter Njonjo: There was a lot of investment going to the farmer, but no one was trying to figure out what is it that we need to do to get this produce from the farm to retail. Because it's one thing to produce it, but if you produce it and you don't sell it then, effectively all the investments that are going in terms of helping farmers are sub-optimized. So we realized that the opportunity was actually focusing on the downstream side of that equation.
Justin Norman: After focusing on the downstream side for some years, Twiga realized that these issues in Kenya were still constrained by the low productivity at the farm level.
Peter Njonjo: Now because the downstream side was so fragmented, then what you found is that it also had an effect on the upstream side. On the upstream side it meant that most of the production was informal, was low-tech very, little agronomic capability. And when you put all those things together, it's like a self-fulfilling vicious cycle. You have poor market access, poor market access doesn't provide sustainable investment opportunities on the production side, and hence, no investment is then made to solve some of the challenges that you have on the downstream side.
Justin Norman: It's a pretty common story we're seeing in the African context. Platforms start out as asset-light and as they grow, they realize that problems exist elsewhere in the value chain, that depending on the market or the industry or the context, may compel them to take a more high-touch or asset-heavy approach. In our conversation with Peter, he shared that Twiga Foods had leased commercial farmland as a proof of concept for going into commercial farming and taking a higher-touch approach upstream. And it's an investment in production that's only possible on top of Twiga’s platform.
Peter Njonjo: The reason why smallholder farmers existed today in domestic agriculture is because it's the lowest risk way of servicing a highly fragmented, informal retail. As structure of retail changes, then you will have more commercial farms coming up.
Justin Norman: This evolution for Twiga Foods could fundamentally alter the productivity and income generation dynamics of farming.
Peter Njonjo: If you want to solve a smallholder farmer problem, you're solving a problem around sustainable incomes in rural areas. That's essentially what you're doing.
Justin Norman: What I find very intriguing is the impact to smallholder farmers in this context. What Peter was effectively saying is that in order to solve this market fragmentation problem, Kenya needs more commercial farms. And in that context, sustainable incomes in rural areas come not necessarily from helping smallholder farmers grow, but in creating opportunities for subsistence farmers to instead work on commercial farms - to be employees.
Last episode, we explored vertical platforms and their role in helping microenterprises grow. But what happens as we carry this exploration further into the future? How far along the spectrum of touch do these platforms go? Is the future of work platform-enabled employers? What does that path to formalization, standardization, and consolidation look like?
And if we bring this exploration further down to this future of work question, to what extent are the platforms going to simply be the big employers of tomorrow? We'll explore these questions and much more in this episode.
Justin Norman: Before we start, we'd like to thank MFS Africa for their sponsorship of the entirety of season four of The Flip. This season of the future of work sits at the intersection of impact and returns, where we're speaking to entrepreneurs building valuable businesses while simultaneously addressing vital challenges across the continent. It's an approach that's also being taken by one of MFS Africa's investors Admaius Capital Partners, a $250 million private equity fund investing in high-impact sectors driving social and economic transformation across Africa. And I had the opportunity to speak to the fund’s managing partner, Marlon Chigwende, about their investment focus.
Marlon Chigwende: Primarily we're trying to combine two things, which are good commercial returns to our investors, but also a very strong impact and ESG lens, and especially on a continent like ours a lot of the sectors and themes that we look at fall into those buckets. So if you look at our core sectors that we focus on, which are healthcare, education, fintech and FMCG, you can see by the very nature of those sectors and the need and demand for those sectors across the continent, equally, we believe you can make commercial returns and have impact. If you say that you're a Pan-African investor, to have an impact on a Pan-African basis, or certainly in the investments that you're in, typically requires a lot of capital. Now, if you look at those four sectors in particular, if you are writing like we are checks in a sweet spot of say $20 to 50 million, you can actually make a huge difference with that size check in those sectors.
And you know, a little bit of a plug I guess for MFS Africa, which is you look at the impact that some of these businesses have, especially when they've got decent size balance sheets and they're at certain scale or size, this is one of the most impactful ways to help to develop the continent and to make sure that people who have been excluded from a system are included in it. And in terms of dollars at work versus impact to the man on the street fintech is a hugely important sector and space.
Justin Norman: You're listening to The Flip, the podcast exploring contextually relevant stories from entrepreneurs around Africa.
Welcome back to The Flip. I'm your host, Justin Norman.
Today's episode started with a tweet by mPharma’s Co-founder and CEO Gregory Rockson.
So first a definition. This from an article in the publication Next Billion, which I've linked to in the show notes.
Conversion franchising transforms pre-existing, independently-owned businesses into members of a standardized network. Scalability and profitability may be enhanced because potential franchisees already have a physical location, business experience, and regular customers. Not surprisingly, several benefits accrued to a potential franchisor, including streamlined process as compared to starting a new business, lower capital requirements because infrastructure is already built, and shop owners’ local customer knowledge. The franchisee potentially benefits from an increase in income, access to business training, a streamlined distribution network, often including volume discounts on products, and a strong franchisor brand.
So in the context of the evolution of standardization and formalization, and this spectrum of touch we talked about in the opener, conversion franchising represents a particularly intriguing model to explore considering the nature of African markets today, and franchising's potential for more steady incomes.
Gregory Rockson: My name is Gregory Rockson. I'm the Co-founder and CEO of mPharma.
Justin Norman: I wanted to speak to Gregory about that tweet to better understand mPharma's evolution along the standardization and high-touch spectrum, from their beginnings as an asset-light platform to the franchisor they are today.
Gregory Rockson: I always tell people that what we see today was really a series of discovery that began in 2013. What mPharma is today is very different from what we started, even though the vision has always been about doing what is best for patients.
Justin Norman: mPharma started with the focus of closing the information gap that exists between prescribers, pharmacists, and patients.
Gregory Rockson: When we started our work, our goal was to build really an information system by digitizing the prescription notes pad, because our belief then was that the prescription notes pad actually contains some of the most important health data sets, and if we could actually move doctors from writing on a pen and paper to a digital notes pad, then we could begin to actually create an information network that allows us to really build solutions that matter to patients. And so that's how it began.
Justin Norman: And from those beginnings commenced Gregory and mPharma's journey of discovery that led to the conversion franchise model we see today. And as we follow along this journey of discovery, we will see a continual story about the problems caused for patients by the high degree of fragmentation and the lack of standardization in the markets in question.
Gregory Rockson: We could see in our data which drugs patients actually picked up. with drugs were not picked up, and we could ask why. And the why led us to evolve our work into actively taking ownership of the supply chain because we realized that without actually owning the supply chain infrastructure it would be quite hard for these pharmacies and hospitals to be able to guarantee the availability, but also the pricing that patients could pay for because each facility was managing its own supply chain. So we pioneered what the industry is known as vendor-managed inventory, where a third party takes control over the supply of a retailer.
Justin Norman: So the vendor-managed inventory model in the first place is a model aiming to ensure steady availability of drugs, but it didn't solve all of the problems along the value chain.
Gregory Rockson: Now, once we were in the pharmacy, we were now managing the supply chain. That also meant that we were managing the critical revenue assets of these businesses. And that opened our eyes further to two big observations. The first was that with a vendor-managed inventory solution, we were only controlling the pricing up to the shelf level inside the pharmacy, but we did not control the pricing that pharmacies actually charge the patients. They were not really passing on savings to patients. The second observation was then the nature of how the pharmacies actually serve their patients. And what became clear to us was that in the communities that we were working in, those pharmacies were really primary care providers, even if they didn't think of themself as such, we realized that there's this deep-seated trust that we can tap into to reimagine a health system that is more proactive.
Justin Norman: We explored this very topic in greater detail last season in Building a Healthier Africa, Episode Six of Season Three, where, considering that the pharmacy is the first point of care for many Africans, the goal is then to bring more healthcare services and diagnostics to the pharmacies. And here's where mPharma's pharmacy-in-a-box business QualityRX was born.
Gregory Rockson: The first pharmacy in 2018 that we brought into the QualityRX program was a pharmacy in my place of birth, Tema, the town that I was born in, called Fresh Spring. And Fresh Spring when I was growing up used to be, it was like the biggest pharmacy, it was the first attempt to build a pharmacy chain. But then Fresh Spring went downhill because of some internal issues.
Justin Norman: And those internal issues are not uncommon across the continent - difficulty accessing inventory, poor infrastructure, lack of access to capital…
Gregory Rockson: And so Fresh Spring became the first pharmacy that we decided to attempt to manage through our QualityRX program. But it had this one objective: how were we going to make Fresh Spring standard? And that was our aha moment. And we said, actually, let's build more health services. We're going do a free health screening, let's bring doctors to do a free health screening.
Justin Norman: What that means for mPharma is that beyond providing a steady access to drugs and beyond managing the pharmacy's inventory, to provide improved care to patients meant investing in a greater experience. This may include both infrastructure as well as services like health screenings in the pharmacy because it's the first point of care for so many Africans around the continent. And the franchising idea then is born of the opportunity to bring mPharma's resources, access to capital, additional services, operational standards, and most importantly, to leverage the trust of the pharmacists in the community to improve operations for the benefit of the patients and the pharmacists alike.
Gregory Rockson: And that was the beginning of that evolution. Within three months, Fresh Spring had almost three x’d its revenue, and we're like, wow, this actually works. So in 2019 we actually built a team to focus solely on bringing the QualityRX model to more pharmacies, and that's how it actually began from the success with Fresh Spring.
Justin Norman: The added healthcare services were a particularly important part of the QualityRX operating model.
Gregory Rockson: Keeping a customer is always cheaper than acquiring a new customer. And so in retail, what you're always trying to do is to ask a simple question, how do I diversify the reasons that bring people into my store? When we started with our franchise, we knew that the reason why people go to a pharmacy today is because they want to buy medication. Most people go to self-medicate. So that was already one use case. The question is, how do we create more use cases that would enable people to have more reasons to come? Because the more you can diversify the reasons that bring people into your store, the more you can keep them to spend more time with you.
Justin Norman: And this is really important in the context of low diagnostics and high self-medication, and in an environment where consumer trust is paramount.
Gregory Rockson: So what we saw is that when you actually see a physician, you are actually diagnosed properly, which means that you are actually buying things that are more relevant than just buying painkillers and basic stuff. We also saw that that trust, once they get our trust, they bring in more people in their household. So, because you have trust, that when you are spending, at least you're spending because a doctor says that, so you know that I'm not going have to spend more. So we think that is the confidence in the system and the fact that when you have this managed care approach to treatment it just builds more trust and people end up relying and coming back more often.
Justin Norman: This obviously has positive business implications from a same-story revenue perspective as well. Here Gregory's going to reference Mutti pharmacies, which is the consumer brand of the franchises under mPharma.
Gregory Rockson: And what we saw over time is that when people start their care journey in a Mutti pharmacy, at a Mutti doctor’s office, those patients spend two times more than those that go straight to the counter. And when we look at their actual behavior from the return rate, those patients have a higher return rate to the pharmacy than those that just go straight to the counter to self-medicate. And what we saw in the data was that those Mutti doctor offices were contributing 35 percent of the revenues of those Mutti pharmacies. So, you want to better serve your customers by actually helping them diversify the reasons for which customers decide to come and shop at outlets. And if you can do that, you can open up more revenue streams but also create much more stickiness that ensures that you don't have to acquire new customers all the time in order to make that same amount of revenue.
Justin Norman: So the success of the QualityRX program with Fresh Spring in Tema gave mPharma the confidence to pursue the franchise model further, and at scale.
Gregory Rockson: In the QualityRX program, we just go and sign one pharmacy, one pharmacy, one pharmacy. We talk to an individual owner. Most of them have the same characteristics. These are pharmacies that are struggling, that need to rebuild, and we do that with the QualityRX program.
Justin Norman: The next question was whether they could scale up this activity through acquisition.
Gregory Rockson: So in a way I said, wait a minute, actually we are acquiring it, but it's just a giant QualityRX because it's just 17 pharmacies instead of acquiring each individual store. That's what we've done in the past, we are just acquiring them all at once through an acquisition. But the approach to transforming them will be the same playbook for our QualityRX program. And so we felt this could be an attempt to see how you could apply the QualityRX model at scale with now having 17 stores that you have to turn around.
Justin Norman: The 17 stores Gregory is referring to is Haltons, a chain of pharmacies in Kenya, which was once the largest in the country, but had since closed down a considerable amount of unprofitable stores, which saw the chain fall to a distant second in the country. The success of that acquisition and mPharma's ability to turn around stores, much like they did with their original franchise, Fresh Spring, was becoming self-evident.
Gregory Rockson: When we bought Haltons, 25 percent of the stores were at break-even. Today, over 90 percent of the stores are break-even. The business was at a negative almost 50 percent EBITDA margins. It is now down to 10 percent. And we did all of that without actually increasing the number of Haltons stores. So that growth did not come cause we opened more stores. That growth came because we actually just made the existing stores better.
Justin Norman: The Haltons acquisition was in 2019 and laid the foundation on top of which mPharma would enter into new markets. Rather than converting franchises one by one, they'd launch into a new country through inorganic expansion.
Gregory Rockson: Haltons gave us the foundation to launch our franchising work. So based upon that, we created two principles. The first was that if we wanted to go into a new market to launch franchising, it was always easier if we actually started by buying a small pharmacy or pharmacy chain to use that as the foundation for our go-to-market strategy, because it allowed us to one, show to the market what a Mutti pharmacy actually is. It gave us the critical infrastructure and assets and licenses to be able to operate. And step two is, we would normally just look up what is the cost to me acquiring as my go-to entry gives me and the entire team, what's the cost to me then starting up, finding an office space, hiring the team, all that stuff that goes with it? And you have to do the math and whatever is much more effective, in our case, acquiring Haltons was much more cost-effective than doing that. And that's a framework that we've applied in all the other acquisitions as well.
Justin Norman: And the subsequent acquisitions, Vine Pharmacy in Uganda in 2021, and in 2022, the Nigerian chain HealthPlus, has seen mPharma considerably grow its footprint of Mutti pharmacies across the continent.
Gregory Rockson: So today, we have about 605 facilities that we manage and about 120 of them are company owned, and the rest are franchises. And we have over 2,200 people who directly and indirectly work for mPharma across the markets that we work in.
Justin Norman: When we come back, we're going to dig a bit deeper into the conversion franchising model. But before that, here's another word from our sponsor, MFS Africa.
Earlier in the show, we heard from Admaius Capital Partners’ Marlon Chigwende about their investing activities. Marlon and I also spoke specifically about the fund's investment in MFS Africa
Marlon Chigwende: MFS Africa is of the sort of size and scale that is interesting to us. We've known Dare for many, many years. We've been following the ups and downs of the business as he's grown and scaled the business, and we've been looking for an opportunity over time that made sense from their perspective and our perspective. I think secondly, over and above Dare, I think what he's done really well in the last few years, two to three years in particular, he's really strengthened the management team. That's very, very important if you're going to truly be a scale player across the continent. Another attraction of the business, they're in 38 countries, it's a true pan-African footprint, so that's good from a seizing opportunities perspective and pockets of growth, and it's also good from a diversification perspective. So you're looking at things on a truly pan-African basis, that's attractive. And that scale that they've managed to develop, in and of itself, is quite attractive and we think that our capital will help them to grow and develop even more corridors to go and strengthen some of the acquisitions that they've made and continue that growth and development.
I think the 400 million wallets across the continent that they reach, it's just when you take a step back and you think about that, it's really a very powerful statement. That's a truly - if you want to talk about financial inclusion and impact, I think that's an incredible story. And so, the story came together nicely in terms of when you think about what the company MFS is doing and its set of values and what we are looking for in a company. It was a great first investment for this fund for us.
Justin Norman: Now the conversion franchising model has been very successful for mPharma. But could conversion franchising be the future of work? To understand the model's implications more broadly across sectors requires us to dig into the characteristics of the model itself and why it's worked for mPharma and in these markets, in particular.
Gregory Rockson: One of the biggest challenges that retail faces in Africa is one of a lack of trust. So we really work in low-trust environments. Yet fundamentally the backbone of almost any sort of commerce that we see, or trade that we see, has been of the backbone of small businesses. And there are these small businesses that exist in almost any industry, right? In pharmacies, mine was this small, independent pharmacist that is set up by a pharmacist who leaves pharmacy school, and the only job they can have is to create their own pharmacy. And these people are in the community, the community knows them, and they know that if something goes wrong, they know who they walk to.
Justin Norman: It's for this reason that Gregory, like many others, believe small businesses still have an important role to play in the African market context.
Gregory Rockson: And so my belief had been the way we scale retail is really to improve the trust that exists within these small businesses that are the backbone of retail. What conversion franchising does that gives you an asset-light approach to be able to do that by just taking these businesses that exist in that particular sector, try to create standard operating models, standard experiences, standard pricing, and the fact that if I as a consumer see that my local business has this new brand on top of it, it directly connotates that that small business has gone through a change that I should see in the type of service I get. And that for me is what I feel that conversion franchising will do to really scale retail. The next big hotel chain, the next big restaurant chain, I believe, will be built through a convention franchise approach in Africa.
Justin Norman: What's particularly important about the characteristics of these markets, apart from the trust factor, is that they're small and fragmented and don't have high consumer spend. And so this model also allows mPharma to, at scale, grow its business in a way that is truly complimentary to existing small businesses.
Gregory Rockson: We don't have a lot of people with disposable income. The reality of going to open a new pharmacy in that same community is just that I shall spread even more the little spending that the community has instead of actually consolidating the spend of foot traffic into much fewer assets. Opening a new pharmacy doesn't necessarily make the people in the community wealthier. That means that they will spend more than what they will naturally spend. And so it allows you to, one, still create economy of scale by consolidating spend in existing assets in those same communities where I'm trying to divert part of that spend into a new asset where everyone is obviously worse of as a result of that.
Justin Norman: And ultimately it's a model that allows for a greater degree of trust in the system
Gregory Rockson: It's not to take business from them, which a pure e-commerce player could do, or B2B, which is just about product distribution, where the actual customer experience is not really tackled. What conversion franchising allows us to do is actually address what, in my view is the biggest stumbling block in scaling formal retail, which is a lack of trust in the system and in the model.
Justin Norman: And from a jobs and future of work perspective, here's why Gregory is particularly bullish on this model.
Gregory Rockson: So I'll share a story with you. In April, I took the mPharma board to a little pharmacy in the eastern region of Ghana called Willie Kings. And Willie Kings was the oldest pharmacy in that community that had been there for 45 years.
Justin Norman: Despite being around for 45 years, Willie Kings had fallen on some tough times and was on the brink of shutting down until it was converted into an mPharma franchise.
Gregory Rockson: In eight, no almost nine months Willie Kings grew from doing $100 a month to now doing over $4,000 a month in revenue. And so when I took the board to Willie Kings, as we were leaving, the owner stopped me, “I wanted to say thank you.” And I told him why was he thanking me? I mean, he didn't do me any favors. We're in business, you know, his success is my success. He makes more money, I make more money. And he said, “Oh, no, that's not why I'm thanking you. I'm thanking you because my employees are now happy. Why? Because we now have cash flow, they get paid on time. And because they get paid on time, when customers come, they treat them well. And because they treat them well, the patients love the experience they get, so they keep coming back.”
And that for me was a very interesting sort of economic principle. And I think about how our society evolved, today Willie Kings has been able to hire two more people, the foot traffic went up, they couldn't just keep up with what they had. They had to hire two more people. And that, for me was just the transformation. It did not take a big pharmacy opening a new pharmacy, we just did it through Willie Kings.
And that for me is my theory of change, is that conversion franchising allows us to quickly scale our ability to increase employment opportunities because we are able to take existing businesses - that to have a business that has been there for 45 years, you know something. And so for that to just die would be a shame. But if you could revive that, provide them with a capacity to be able to hire more people, then directly or indirectly, we are creating jobs.
Justin Norman: So this is one theory of change - that conversion franchising with pharmacies, in particular, is an especially compelling model in the African context, and that this is one model of what formalization and standardization will look like. Perhaps it's a model that has merit in other sectors too, considering the scope of the infrastructural problems platforms and startups are attempting to solve across the continent.
And that's what I discussed with The Flip’s b-mic Sayo Folawiyo in this episode's retrospective. Take a listen.
Sayo Folawiyo: I think it's hard because you're dealing with highly fragmented markets and you're building a lot of the infrastructure as well as people learning it. I don't think there's anything more interesting about it than the fact that it is highly fragmented and highly informal, that makes it really difficult.
Justin Norman: And then the question for me then is just because it's highly fragmented and informal, and in that context, is conversion franchising, for example, a particularly interesting case study because it can perhaps…
Sayo Folawiyo: It reduces both of those things.
Justin Norman: Yeah. But relative to a big box retailer coming and setting up shops, the reason why that hasn't worked is because of the decentralization and fragmentation and informality in other markets, not South Africa. And then this is a way to move on a spectrum as opposed to, you know, the proverbial leapfrog into regular retail.
Sayo Folawiyo: Sure. It is exactly as you said, right? It's a spectrum. And I don't know that I love the positioning of it as anything more than just moving along the spectrum of formalization, do you know what I mean? Like, yeah, it's what everybody's fucking doing and they all work it out in some form. Like what, what do you do when you start this thing? You say tech-enabled, asset-light. And then you're like, ah. Yo, that shit is not working. Okay. In fact, you know, we will actually make an agent network to go and sign them up because they didn't sign up on the onboarding thing. And then you're like, ah, how do I retain this motherfucker? I don't even know what they're doing. I don't know. They're supposed to send a thing from my thing, but they don't use my thing and that's not tech and da da da. And you're like, ah, yo, maybe I should buy the trucks, you know? Oh, now I have the trucks and I'm tech-enabled. And then, ah, man, when the guy drops the thing at this one and getting these two guys to talk to each other and this one, ah, I'm still losing money from the truck cause they're pilfering it from da da da. Like, maybe I should just actually also buy the store?
Justin Norman: It's the path to formality.
Sayo Folawiyo: Right.
Justin Norman: And you learn along the way that at every stage something's broken, you gotta take over more of it. And that's why it's happening.
Sayo Folawiyo: Exactly. And as you should do as an entrepreneur. You should try and find the cheapest way to achieve the same, to get to that goal. And I think what is happening and what we're finding from doing this stuff is like, Similar to what we were talking about at the beginning with the different verticals, it's like, ah, now maybe I should just do it myself, do you know what I mean? Because it's actually going end up cheaper for me in the long run, or I'm actually still gonna get decent ROI doing it this way. It's going to be better for my customers if I do it this way, et cetera, et cetera. And in different verticals, the level you have to go through that spectrum is going to look different. Some guys will really be able to be asset-light. And it's also wonderful for us to have good examples of things like this so that entrepreneurs working on stuff in this thing, might skip the learning phase, if you know what I mean. So I think it's wonderful for us to talk about it, have it on, I don't want to overstate the like…
Justin Norman: It's just a case study.
Sayo Folawiyo: It's a great case study.
Justin Norman: It's a great case study without an extrapolation of this is how everything, this is how retail is going to…
Sayo Folawiyo: Exactly.
Justin Norman: That's it for this episode of The Flip. If you enjoyed this episode, we'd be very grateful if you considered sharing with a friend or a colleague who you think may enjoy it as well. For more from the flip, you can follow us on social media at @theflipafrica or subscribe to our newsletter on our website, theflip.africa.
Thanks as always for listening, and we'll see you next time.