The following is the full transcript of an interview with Mark Ruiz, the founder of Hapinoy, a franchise of sari-sari stores in the Philippines.  It is a companion piece to an article published on NextBillion.

Develop Economies: How did Hapinoy start? What, in your opinion, was the problem? Why is Hapinoy the right innovation for solving this problem?

Mark Ruiz: Hapinoy started as a fusion of paradigms, ideas, and people. In terms of paradigms, we wanted to fuse social development with the discipline of business. It started a combination of people from social development and the business sector. We wanted representation from a diverse set of relevant backgrounds, including microfinance, NGO’s, government, as well as corporate experience in distribution/marketing/sales/advertising, and entrepreneurship.

There were three fundamental problems we were looking at:

1. The products and services needed by the bottom of the pyramid (BoP) don’t reach them. The operative word is needed – for example, medicine, water, and electricity.
2. The products and services that do reach the BoP end up becoming more expensive due to distribution inefficiency. The poor end up paying more for noodles and shampoo than those who have money!
3. The BoP doesn’t have access to market opportunities, whether it is sari-sari stores looking for financing, new businesses, etc. or microproducers looking for a distribution/market for their products.

There’s a fundamental gap to the BoP. So we ask ourselves – how do we bridge this gap? How do we enable the last mile and bring products, services, and opportunities to where they’re needed the most?

Now tackling this problem could have different approaches. Do you create new infrastructure? Do you set-up new large distribution chains and mechanisms? We thought differently by asking ourselves – is there something that already exists which we can just tap and build upon?

Well, it happens there is something that already exists. Sari-sari stores, the smallest unit of retail in the country due to being such an easy microbusiness to set-up, have literally sprouted in every nook, cranny, and village in the Philippines. In the furthest regions and areas, you’ll find a sari-sari store – in fact there are almost 700,000 of them nationwide. In aggregate, that’s potentially 40% of all retail in the Philippines.

These sari-sari stores have been largely untapped because they’ve mushroomed independently and thus have no unifying system por 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 is no 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.

So the approach is – if we help the Hapinoy Sari-Sari Stores, then we are able to achieve the goal of reaching the BoP – and thus bring products, services, and opportunities to where they’re needed the most.

For us, it’s the right innovation fundamentally because:

1. It’s sustainable because there’s an inherent business model in distribution, retail, production, marketing, and sales
2. It’s low-cost and modular, and thus scalable. Again, there is no need to add new infrastructure.
3. Most importantly, it’s a collaboration with the BoP to help the BoP, wherein everybody has a social and economic benefit, resulting in greater prosperity for all.

DE: What other organizations – for-profit or not-for-profit – influenced the Hapinoy model? Did you take some cues from the private sector (i.e. Coca-Cola or Wal-Mart, or SM)?

Mark Ruiz: In the beginning, we never saw ourselves as a big box retailer – in fact we were quite on the opposite end of the spectrum and rather than becoming a few-big, we would go into the many-small. (For a lengthier explanation, I blogged about this point as well http://ruizmark.com/2010/03/01/a-heritage-of-smallness-21st-century-bigness/)

There are fundamental lessons that we do take from big box retailers – eventual efficiency in the chain, influencing the right product mix, etc, but our initial inspirations were:

1. Microfinancing organizations (CARD) – especially since we are in strong partnership with them and they have already invested in MicroVentures. Dr. Alip founder of CARD is our vice-chairman; mainly because of the intention for poverty alleviation, the model of creating low-cost infrastructure to serve the poor and provide access to opportunities (through microfinancing)
2. Jollibee (the local McDonald’s) – not so much for food, but the branding. Hapinoy means Happy Filipino and we really wanted – from the very beginning – to create a powerful brand that Filipinos can resonate with, as well as something that sends a very positive message out there
3. Convenience Stores – although we would eventually realize that there are fundamental differences; But the inspiration for operations, systems, of discrete smaller stores that are widely distributed is there

DE: What do you see as Hapinoy’s biggest strengths (i.e. it’s ability to be used as a platform for other services, driving down costs for franchisees, increased income and employment for the poor, etc.)?

Mark Ruiz:

1. The Nanays (mother – storeowners) themselves. Hapinoy is working with them – we call them business partners, not beneficiaries – and it is really their entrepreneurial spirit which will make or break the success of the stores
2. From another perspective, we believe it’s fusing social development with the discipline of business that will poise us for scalability and sustainability
3. The innovation of the model itself – of creating the highways to the BoP (made up of these microentrepreneurs), transforming it into a platform for new businesses, which then allows us to bring products, services, and opportunities to the BoP where they’re needed the most.

DE: Where do you see the organization in a few years? What new innovations are you considering (i.e. healthcare hub, pharmacy program, etc.)?

Mark Ruiz:

1. Nationwide presence – to be in every village in the Philippines which is realizable because CARD, being the leading microfinancing institution in the Philippines with 1.3 million borrower-clients, is already there. That being said, Hapinoy is also an open model in the sense that we do work with other MFI’s, Cooperatives, etc so that they can become part of the program. Consider us the Operating System that can be fused in different hardware/computers – you’ll find Linux in Dell, HP, Acer, Asus computers. We can plug-in to multiple organizations.
2. Product diversification – especially branching out into solutions for the BoP e.g. solar, water, healthcare, health and wellness
3. Format expansion – into technology, nutrition, etc. we start small and simple and then go deeper. for example, for healthcare we wanted to start with Step 1 – distributing and retailing over-the-counter medicine first, and then explore higher-order models such as telemedicine, remote diagnostics etc – which is now our next phase.

DE: What key lessons have you learned about microfranchising? What has been successful, and what has been unsuccessful?

Mark Ruiz: We learned that, in the BoP, we have to change our notion of the term microfranchising. A lot of people consider it as just scaling down franchising models as we know it. But there are huge differences in the model once scaled down.

For example, a 7-11 or McDonald’s will look 100% the same everywhere you go. That is not so in microfranchises – we have to be comfortable that this is not a cut-and-dry business-in-a-box that will be cleanly perfectly executed in each node. Also, the people running the franchise are obviously different. The educational levels vary, which affects the training requirements, what can be implemented (e.g. technology, etc). On the business model, there should be very creative ways to generate revenue.

I’d say that the introduction of franchising in terms of systematization will come progressively, and then cap off at around 50% (as opposed to McDonald’s 100%). say for example, we start with financing systems, then 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 this sector.