Hapinoy – Mark Ruiz Retails Sari Sari Happiness to Filipinos 228.0

“The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield,” begins Peter Drucker’s classic 1985 book, Innovation and Entrepreneurship, quoting the French economist J.B. Say.

Thus, Mark Ruiz and the Hapinoy/MicroVentures (MVI) team, all social entrepreneurs, are mining a rich vein for social enterprise in the inefficient supply chain for consumer goods in the Philippines.

Finding, capturing and re-sharing this large vein of value-added is necessary because social enterprises have three bottom lines to attain – profits, equity and sustainability – at the same time.

Being social entrepreneurs, Mark Ruiz and the MVI team are driven by the inner fire and a strong sense of justice described in the previous post on what makes social entrepreneurs tick.

The supply chain for consumer products. The margin between manufacturer and consumer, after taking out direct cost of goods sold, ranges from 30% for commodities, 50% for fast moving consumer goods (FMCG) and 65% for specialty goods.

From my work experience in distribution (J&J) and logistics (ADSIA), taking out normal profits, taxes and marketing and overhead expenses, possibly a maximum of 10% out of the remaining 20% margin is from inefficiency that Filipino consumers are paying for and can be saved with a more efficient business model.

The Hapinoy Way. Hapinoy is one big innovative step – in a very different way from Rags2Riches described in a previous post that creates value-added from creativity – to recover value-added from the inefficient supply chain and re-channeling this value to more productive activities, i.e. more efficient distribution.

In mining the supply chain, at least three business model options or a combination thereof are available:

1. eliminating one step of the distribution channel, say a sub-distributor, between manufacturer and sari-sari store (or substituting for Suy Sing or Ultra Mega), similarly serving as working capital financier as well and earning from volume discounts on consolidated purchases;
2. backward integration into manufacturing of in-store brands popularized by Sainsbury and Tesco decades ago (SM Bonus model in the Philippines); and/or
3. efficient customer response (ECR) through information technology-enabled demand chain management similar to that pioneered by Walmart with P&G a decade ago (Mini-stop model now).

My understanding is that the Hapinoy strategy started with option #1 above and will morph to option #2 as scale increases.

Large community stores are hubs and distribution centers to small sari sari stores located in the community. Price to the consumer is dictated by the local market. For Hapinoy, profits for distribution derive mainly from volume discounts from consolidated purchases delivered to the community stores.

Microfinance tie-up. From a strategy point of view, the genius in the Hapinoy model lies in the tie-up with Card MRI, the largest microfinance enterprise in the country, to finance the working capital requirements of the small and community stores. This is a win-win situation for financier, beneficiary, and the systems integrator (MVI) in the short-term.

Locating the business center at the sari-sari, the Philippines’ brand of mom-and-pop neighborhood store mainly in the suburbs, allows a low capital investment approach at the beginning.

Still, I believe that Hapinoy’s true competitors will dictate that they also compete in option #3 as the feasible locations converge – the final loci of competition – at the intersection of Class C, D, and E communities.

True competition. In the longer-term, direct competition for retail distribution is more from 7-11 and Ministop, that are based in the urban areas, rather than from Suy Sing/Ultra Mega or from SM Hypermart (with the sari sari store owner doing the shopping).

I am inclined to believe that moving toward option #3 is the stronger move, i.e. squeezing cost and time out of the supply chain with integrating technology.

Otherwise, Hapinoy will end up discovering new feasible locations at the fringes for their community stores that 7-11 and Ministop will just follow in and try to out-muscle Hapinoy small stores out.

Moving to option #3, will require new investors with big bucks for investment in this new technology infrastructure that integrates between the supply chain and the point-of-sale, first, at the community store, and later if feasible, to the small stores.

Note: A low-cost, Internet-based system accumulating from each small sari-sari store may be the counter intuitive but cost-effective approach that will yield richer data.

But that is a judgment call that only the systems integrator, MVI, can make. The present medium-term strategy to manufacture in-house brands is easier on the transition than a technology-enabled supply chain that requires loads of capital and fine-tuned scale-up on resources and infra-structure.

All-in-all, the innovation that is clearly visible is in actively applying business approaches to create value and achieving not one but the triple bottom lines – profit, equity and sustainability – at the same time.

Innovative Entrepreneurship. Hapinoy is an exemplar of Schumpeterian entrepreneurship that is based on innovation. It still has some ways to go after a successful start, hypergrowrth will surely follow if Mark Ruiz and the MVI team sequence the next steps right.

It is just right at this stage, to end with Joseph Schumpeter’s function of an entrepreneur from p. 132 of Capitalism, Socialism and Democracy (1942):

“… the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source or supply of materials or a new outlet for products, by reorganizing an industry …”

Mark Ruiz and the MVI team are also examples of Shaw’s unreasonable revolutionist – we need more of them for the Philippines to progress. There is something heroic in choosing more difficult social enterprise – and justice – when Hapinoy could just as well be a straight and easier, for profit business.

In training entrepreneurs through learning-by-doing within Hapinoy systemspace, MVI is contributing to development by institutionalizing entrepreneurship – including the skills and techniques that are required – as one of the true and modern “pre-conditions for take-off” in the countryside!

Note: Please click image for link to Hapinoy website.

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Updated: March 14, 2011. Please extend SYNTHESiST Reach by clicking ‘Like’ on its Facebook page.

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