“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/ Micro Ventures (MVI) team, all social entrepreneurs, are mining a rich vein for social enterprise in the inefficient supply chain for consumer goods in the Philippines.

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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.

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.

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:

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;
backward integration into manufacturing of in-store brands popularized by Sainsbury and Tesco decades ago (SM Bonus model in the Philippines); and/or
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.

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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.