• Can social enterprise alleviate poverty caused by globalization?

ULMS152 International Business Environment

Accompanying Notes for Students

CASE 3: Addressing Poverty through a Global NGO
This case study is about an international NGO (non government organization) that is involved in addressing poverty in the developing world.  The case, titled ‘Mercy

Corps and KeBal Healthy Food Carts: Sustaining and Scaling Up’ written by Carlisle, Lin, Putman and Sporl, looks at how the NGO can support very localized initiatives

to enable local people to begin an enterprise and ensure for themselves stable employment and importantly, a stable form of income.

Take your time to read the case study by Carlisle et al although do not answer the study questions set out on page 12.  Instead use the questions below to respond with

your 400 words.

As you read the case consider why this part of the world suffers from poverty in the way it does, despite it being a country with a high population and strategically

located.  Perhaps you can note some discussion points of your own and think specifically about the following.

•    What problem is being targeted?
•    Is there a failure in the market?
•    Is there any other way to address this problem?
•    In the three or two-tier franchise suggested, can you identify where the risk is?
•    Did Mercy Corps understand the problem properly?
•    Can social enterprise alleviate poverty caused by globalization?
•    From this case can you identify some pros and cons from globalization?

Use some of the readings that you have done for the module to help you relate theories of internationalization and/or globalization to consider the details of the

case.

When you use this for either your 400-word response or for your larger assignment later on be guided by the advice provided by Jennifer and Andrew.

10-106
September 26, 2010
This case was prepared by Erica Carlisle, Chris Lin, Libby Putman, and Emily Sporl (MIT Sloan MBAs, Class of 2010) under
the supervision of lecturer M. Jonathan Lehrich.
Copyright © 2010, Erica Carlisle, Chris Lin, Libby Putman, and Emily Sporl. This work is licensed under the Creative Commons
Attribution-Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit
http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San
Francisco, California, 94105, USA.
Mercy Corps and KeBal Healthy Food Carts: Sustaining
and Scaling Up
Erica Carlisle, Chris Lin, Libby Putman, Emily Sporl
As their car idled in the Jakarta traffic, Usye1 Umayah and her colleague Dini Marhendra were
discussing the future of Kedai Balitaku (KeBal), a pilot program run by the global NGO Mercy
Corps. KeBal sold nutritious food to poor children from street carts. Although the pilot program had
been successful, Usye and Dini needed to transition KeBal from a non-profit, donor-funded pilot to a
self-sustaining, scalable, and independent business. The funding Mercy Corps headquarters had
provided to start up the pilot would be ending in November 2010, just ten months away, and if the
KeBal carts were to remain in business thereafter, they would have to be financially self-sustaining.
Though Usye and Dini, both program managers with Mercy Corps, had successfully set up and
managed community programs, they had little business experience and weren’t sure how to structure
KeBal as a business that could flourish. To help with the effort, Mercy Corps had brought in four
MIT Sloan MBA students from the school’s Global Entrepreneurship Lab (G-Lab) to act as
consultants for three weeks in January 2010.
Besides the funding issue, a retired midwife named Ibu2 Ana was placing additional urgency on Usye
and Dini’s need to identify a sustainable business model for KeBal. Ibu Ana felt strongly that young
children in Jakarta were failing to thrive due to their poor nutrition, and she loved the KeBal
approach. She had a second home in one of the poor neighborhoods in North Jakarta that she was
turning into a center where cooks could prepare healthy food, mothers could get nutrition education,
and trainings could take place—all on her own dime. She even planned to build a playground for
children so they could play while their mothers met with the nutritionist. In light of their
1 Pronounced “Oo-she-ah.”
2 “Ibu” is the Bahasa Indonesia word for “Mrs.”, commonly used to show respect.
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September 26, 2010 2
complementary goals, Usye and Dini recognized the vital role Ibu Ana could play in helping to
transform KeBal, and they knew a business relationship needed to be formalized.
Usye and Dini’s boss, Sean Granville-Ross, the country-level director in Indonesia, believed that
KeBal should maintain ownership of its brand and use a franchise model to formalize the relationship
with Ibu Ana. Given the talent and resources Ibu Ana was prepared to commit, it seemed the best
answer for her situation. Whether it was the best answer for Mercy Corps, or for the children of
Jakarta, was a problem as snarled and intransigent as the traffic jam outside Usye and Dini’s car.
Mercy Corps
Headquartered in Portland, Oregon and Edinburgh, Scotland, Mercy Corps was founded in 1979 to
“alleviate suffering, poverty, and oppression by helping people build secure, productive, and just
communities.”3 Over the course of its 30-year history, Mercy Corps had provided nearly $2 billion in
aid to people in 107 nations. With program offices in over 40 countries, Mercy Corps was one of the
world’s largest NGOs, relying on U.S. and foreign government grants as well as private support to
fund its operations.4
Mercy Corps stressed the importance of social entrepreneurship and thinking creatively in searching
for ways to carry out its mission.5 The NGO’s field office in Jakarta, Indonesia took these two
methods to heart, especially in its approach to solving one of the more pernicious problems plaguing
Jakarta: malnutrition in children under five years of age.
Indonesia and Malnutrition
With a population of 240 million spread over 17,500 islands, Indonesia was the world’s fourth mostpopulous
country and 16th largest in land area.6 According to a United Nations Children’s Fund
(UNICEF) report released in January 2010, one-third of Indonesian children under the age of five –
nearly 8 million in total – suffered from the effects of malnutrition.7 Internationally, Indonesia ranked
fifth in the number of children under five who showed signs of stunted growth, a side effect of
malnutrition during a child’s early developmental years.8 There were many causes of malnutrition in
Indonesia, but poverty, the feeding practices of mothers, and a general decline in breast-feeding were
considered the main culprits.9 As the head of UNICEF’s health and nutrition department in Indonesia
3 2008 Mercy Corps Annual Report, p. 9.
4 Allen S. Grossman and Caroline King, “Mercy Corps: Positioning the Organization to Reach New Heights,” HBS No. 9-307-096, 2008, p. 2; 2008 Mercy
Corps Annual Report, p. 41.
5 Grossman and King, p. 2.
6 CIA World Fact Book, https://www.cia.gov/library/publications/the-world-factbook/geos/id.html.
7 Nurfika Osman, “Indonesia Earns Poor Marks For Child Malnutrition,” The Jakarta Globe, January 25, 2010.
8 “Tracking Progress on Child and Maternal Nutrition,” UNICEF, November 2009.
9 “Indonesia: Child Malnutrition Aggravated by Food, Oil Prices Rise,” IRIN Humanitarian News and Analysis, February 3, 2010,
www.irinnews.org/report.aspx?ReportID=79350.
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September 26, 2010 3
argued, “The lives of 30,000 children could be saved annually if mothers breastfed their babies
exclusively for the first six months.”10 It was estimated that a mere 7% of mothers were doing so.
There were several reasons why mothers quit breastfeeding so early, including lack of education on
the benefits of breastfeeding for the first six months, a dearth of facilities where working mothers
could express milk, and the advertising prowess of formula milk companies.11 Perhaps as a
consequence of the advertising, many Indonesian mothers saw using formula milk as a status symbol,
indicating they were modern mothers.12
Malnutrition was noticeably prevalent in North Jakarta, a section of the city pressed up against the
Java Sea and home to two marine ports. Certain sections of North Jakarta were especially
impoverished, with the average income of workers hovering around 500,000 to 1 million Indonesian
rupiah (IDR) per month ($53 to $106).13 In comparison, Indonesia’s GDP per capita was roughly
twice as much, about $187/month ($2,246 annual).14 In these neighborhoods, mothers tended to
purchase food for their infants and toddlers from the many food cart vendors who roamed the area
selling fried food and sweets. The food provided by these street vendors, though abundant,
convenient, and cheap, was unhealthy and often prepared in unsanitary conditions.
The KeBal Pilot Program
To address Indonesia’s rampant malnutrition, Mercy Corps had created a pilot food cart program with
a menu that catered to children under five. Launched in April 2009, KeBal, or “My Child’s Café” in
Bahasa Indonesian, had three specific goals:
1. Provide nutritious, high-quality food options to children under five while raising community
awareness around nutritional issues.
2. Create employment opportunities for local North Jakartans.
3. Create a profitable, self-sustaining business model that could be spun off from Mercy Corps
and operate on its own.
Initially, four custom KeBal food carts were deployed in various neighborhoods (referred to by their
Indonesian acronym “RW”15) in North Jakarta. With brightly colored pictures of “super kids”
representing four nutritional groups (protein, grains, vegetables, and fruits) painted on the sides of the
cart, speakers that played a musical jingle extolling the virtues of healthy eating, and food displayed
at children’s eye-level, KeBal’s carts were notably different from regular street carts. (See Exhibit 1.)
10 “Indonesia: Child Malnutrition Aggravated by Food, Oil Prices Rise,” IRIN Humanitarian News and Analysis, February 3, 2010,
www.irinnews.org/report.aspx?ReportID=79350.
11 Ibid.
12 Based on interviews with mothers, teachers, midwives, and other healthcare providers in Jakarta, January 2010.
13 Figures collected from primary interviews with North Jakartans, January 2010.
14 World Bank World Development Indicators, 2008.
15 RW is the acronym for Rukun Warga, which is a city sub-district. In Indonesian the letters RW are pronounced “air-way.”
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September 26, 2010 4
Four vendors were recruited to run the carts and sell the KeBal menu in the RWs. In selecting
vendors, Mercy Corps followed several steps. First, they advertised the vendor positions in the RWs
where they believed KeBal would have the most impact. Next, applicants were interviewed and
screened by a committee consisting of Mercy Corps staff, local health center representatives, and
community leaders. While the ideal vendor was someone with an entrepreneurial mindset who was
interested both in making a profit and in the social mission of the KeBal program, Mercy Corps also
wanted to hire people who would benefit most from a better income, namely women who were
supporting families. The vendor recruitment process often included a third step whereby local RW
government officials reviewed the list of potential candidates and provided input on who was well
known in the neighborhood. The entire selection process took two months.
KeBal’s menu, developed by a nutritionist, included rice porridge with chicken and vegetables, fruit
jellies (a homemade gelatin similar to Jell-O, but made with real fruit), meatballs, and baked
macaroni. Because the vendors had to cook menu items from scratch every day, the majority only
sold chicken porridge and fruit jellies due to time constraints. Vendors typically started cooking
around 12:30am so that the food would be ready to sell by 6:00am. They sold food seven days a
week, and during the school year they were open for business from 6:00am to 8:30am, when children
were getting ready for school, and from 3:00pm to 5:00pm, when children were heading home.
Vendors often prepared slightly less food than they thought they could sell because they were not
allowed to reheat or reuse the food. They were allowed to keep all of their profits.
Overall, Mercy Corps was responsible for vendor recruitment, menu development, training and
quality control—Usye and Dini enforced hygiene and food quality standards by visiting each vendor
weekly—and setting menu prices. Vendors, in turn, bought raw ingredients, cooked and sold the food,
managed the food carts (although not required to purchase or lease the food carts, they were
responsible for repairing any damage), and did all bookkeeping.
After six months, Dini and Usye collected and analyzed data from the pilot program. Mercy Corps’
target profit margin for its menu items was between 20% and 30%. Individual vendors tended to sell
approximately 40 to 70 portions of porridge at 2,000 IDR (US$0.20) per serving and 30 to 50 jellies
per day at 1000 IDR (US$0.10) per serving.16 Typically customers bought one to two servings of
porridge and one or two jellies. Each vendor’s total customer base was determined by how far they
could push the food cart during their shift. Exhibit 2 shows average revenues per vendor per month
for June through September 2009, while monthly profitability is shown in Exhibit 3. Exhibit 4 shows
a sample monthly income statement.
16 Amounts based on field data.
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Customers
According to customer interviews and surveys conducted by the G-Lab team and Mercy Corps, the
KeBal pilot program had been very successful in its half year of operation. Among the findings:
• Customers were very loyal. Nearly every customer interviewed bought from a KeBal
vendor multiple times a week. The survey data confirmed that roughly 97% of customers
bought from KeBal at least three times per week.
• Purchases were made based on taste and nutritional value. Mothers liked that KeBal’s
porridges were nutritious and appealing to their children. They recognized the nutritional
value because they were able to see the various food groups in the rice porridge. Customers
valued the quality of the food, as well as the cleanliness of the cart.
• Customers trusted the vendors. Vendors felt that their local knowledge of the area, along
with their personal ties to the neighborhood residents, enabled them to develop strong
relationships with their customers. One vendor, Gunanto, said his previous job had allowed
him to get to know most of the people in the neighborhood, which helped him establish trust
with his customers when he began selling KeBal foods.
• Prices were fair, and maybe even a little low. Mothers generally believed that prices were
fair and competitive with foods of a similar portion size. In fact, most mothers did not dismiss
the possibility of paying higher prices because they believed the KeBal product was superior
in taste and nutritional value to other available porridges.
• Customers desired more menu variety. When asked what they would change about KeBal,
most mothers (70%) requested more menu variety. Customers complained that their children
became bored with the same chicken porridge and fruit jellies day after day.
KeBal’s Business Models
The KeBal pilot program had experimented with a number of business models. In the simplest model,
one person acted as both cook and vendor. While this model was simple and generated ample profits,
it required individuals to be proficient in both cooking and selling. Vendors often could not cook
enough food on their own to satisfy customer demand. A more complex model, the group
cooperative, was made up of four people who shared responsibilities and profits. This group structure
had proven problematic as certain group members inevitably worked harder than others making the
task of sharing profits both difficult and awkward. A third model, the “mini cooking center
partnership,” in which one person prepared food and sold it to a vendor who then sold it to customers,
appeared to be the most effective and efficient model. The cook was able to cook for twice as long,
thereby doubling output. This structure resulted in healthy profits for both the cook and the vendor,
and also allowed for easier scalability.
The partnership model developed when one vendor, Ibu Saripah, discovered that pushing the large
cart through North Jakarta’s narrow, bumpy streets was more than she could physically handle. She
decided to partner with another vendor, Gunanto, and divide up the labor: Ibu Saripah did all of the
cooking and Gunanto, who bought the cooked items from Ibu Saripah, did the selling. Gunanto was
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not refunded for food he could not sell. Because of the division of labor, they could produce enough
to sell both in the mornings and the afternoons, something single vendors were too time constrained
to do. Ibu Saripah charged Gunanto 1,500 IDR (about US$0.16) per portion of chicken porridge and
750 IDR for jellies. Gunanto then sold the chicken porridge for 2,000 IDR and the jellies for 1,000
IDR.17 To keep volumes at a level he could sell, each evening Gunanto told Ibu Saripah the number of
portions he wanted for the next day. Through this partnership, Ibu Saripah and Gunanto doubled their
revenues in four months.
By closely observing KeBal’s cooking and selling process, the G-Lab team had drawn three major
conclusions.
• Cooking was a highly laborious process. The cooks in the pilot worked out of small home
kitchens. Often they prepared food while sitting on the floor due to lack of sufficient counter
space. Cooks lacked basic kitchen equipment and performed many tasks manually. For
example, they grated coconuts by hand and then hand pressed the pulp to make coconut milk.
With only one cook, there was no opportunity for preparing a wider variety of dishes on a
given day since it already took 5-6 hours to prepare porridge and jellies. A centralized kitchen
with a larger work space would lead to more efficient food production and menu variety.
• Vendors made a good profit each month. Although the work was difficult, the vendors and
cooks were able to earn a living wage. One vendor spoke proudly of how he was able to buy
a new cell phone for his wife based on his earnings. Within a few months of startup, Gunanto
and Ibu Saripah, were each able to earn approximately 2 million IDR a month
(~$200/month).
• A larger, centralized cooking center would require high start-up capital. More than 50
million IDR (~$5000) would be required to buy enough equipment to start a larger cooking
center. This would include the cost of renovating an existing kitchen and purchasing cooking
equipment and refrigeration.
The capital needed to start a cooking center appeared out of reach for KeBal until Ibu Ana
volunteered to build the first centralized kitchen in one of her homes. Ibu Ana and her family were
wealthy and had become active in non-profit community work in Indonesia. They wanted to help
mothers and children live healthier lives, and thanks to her health training Ibu Ana knew nutrition was
key for young children. She designed a cooking center with a large kitchen, living quarters for the
staff who would work there, an office for the nutritionist, and a playground for the children.
Construction of the centralized kitchen was already underway by the time the G-Lab team arrived in
Jakarta. From discussions with Ibu Ana and the Mercy Corps KeBal team, the G-Lab team realized
that much of the underlying business relationship between Mercy Corps and Ibu Ana had not been
defined (or in some cases, even discussed). No one was sure who would hire the kitchen staff or how
17 Transfer and selling prices based on field data.
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they would be paid. What would happen, for instance, if Ibu Ana’s staff started cooking food
differently from how the KeBal nutritionist had specified? KeBal’s business model needed to be
defined soon before confusion arose about ownership, management, branding, and other issues.
Comparison Businesses
In addition to interviewing the existing KeBal team, Usye, Dini, and the G-Lab team spoke with a
large number of business owners and franchisees from around Jakarta to get a better sense of how
food businesses were typically structured.
According to the Indonesian Franchise Association (IFA), there were 1,010 franchises in Indonesia:
750 local, 260 foreign.18 Popular though the business model was among Indonesians, the chairman of
the IFA maintained that the greatest challenge for starting a new franchise in Indonesia was finding
true entrepreneurs. Although there were many self-employed people in the country, he believed that
the pool of risk-takers with innovative ideas was relatively small.19
During their interviews, the G-Lab team identified two distinct groups of local franchises,
differentiated by their size and business structure.
Small Franchises
Often family-run and limited in scope, small food “franchises” could be found on most street corners
in Jakarta. Although the type of food sold varied, their business models were similar.
Texas Chicken
Texas Chicken started as a single stand and grew to eight over the course of two years. By limiting
the product to fried chicken and using a simple set-up, Texas Chicken was able to earn a profit of
roughly 1,000 IDR per serving based on a retail price of 4,000 IDR per serving. However, true
operating profit margins were hard to determine as the owner only considered raw material costs (the
cost of food) to calculate profit.
The owner of Texas Chicken relied on two mechanisms to ensure profitability. First, all production
was centralized in one kitchen. The twelve vendors cooked together in the morning and then
transported the food via motorbikes to their various stand locations. This model enabled the owner to
always know how much food was produced. Second, the owner only employed vendors who came
from his home village.
Each vendor was paid a daily salary and given a place to live in return for running a stand. Vendors
did not receive a sales commission, take on any risk for unsold chicken, or formally report their
18 Dian Ariffahmi, “Monthly Turnover in Franchise Sector Hits $398m,” The Jakarta Globe, June 21, 2009.
19 Interview with Anang Sukandar, President of the IFA, January, 2010.
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revenues. Their loyalty, however, was never in question since they were from the same village as the
owner. No one was getting rich in this simple organization built on personal trust, but everyone
earned enough to live on.
Honey Juice
Launched in 2007, Honey Juice sold made-to-order fresh juices throughout Jakarta. Although the
owner’s family members, each of whom received a salary and daily stipend, managed all seven stands
there were two types of franchises available. An investor could buy a franchise for 6 million IDR. In
return for that fee, the franchisee would receive a stand as well as an initial supply of fresh fruit. In
addition, the franchisee would be responsible for a monthly fee of 300,000 IDR. If a franchisee did
not have start-up capital, Honey Juice would provide a start-up package of cart and fruit and would
receive 60% of the franchisees’ profit in exchange. As of early 2010, Honey Juice had not sold any
franchises.
Ibu Dias’ Porridge
The business most similar to KeBal was Ibu Dias’ Porridge. In business since 2001, Ibu Dias’
experience as a health volunteer and her belief that mothers, particularly those living in Jakarta’s
slums, needed a healthier alternative for their children, inspired her to start her business. While her
porridge used safe, healthy ingredients, it lacked some of the ingredients that provided the most
protein and nutrients in the KeBal porridge, like chicken and coconut milk.
Originally a one-woman operation, by 2010 Ibu Dias’ Porridge had grown to ten kitchens (grouped
into two clusters of five each) serving 58 vendors. Instead of mobile street carts, Ibu Dias recruited
vendors who sold from stands in front of their homes. Vendors were carefully vetted to ensure they
had strong ties to their local community and potential customers, that they were located in a high
traffic area, and that the location was not too close to an existing vendor.
Like Texas Chicken, Ibu Dias’ porridge was prepared centrally. Each vendor purchased the porridge
from the kitchen for 1,500 IDR and resold it to consumers at a marked up price of 2,000 IDR.
Centralized kitchens made quality monitoring simpler and ensured consistency across vendors.
Producing in higher volumes also gave Ibu Dias the flexibility to offer more menu variety. Chicken
porridge was offered every day, along with a beef or fish option.
Ibu Dias owned all the kitchens and each cluster of five kitchens was managed by one of her sons.
Because this was a family-run business, the sons did not generate formal financial reports and no
regular profits were sent up to the head office, which was responsible for administration, marketing
and promotion, as well as menu development. Ibu Dias received no salary. If there was an expense at
the headquarters level, her sons helped cover the cost. This informal system allowed Ibu Dias to have
employees dedicated to the success of the business without having to worry about overhead.
However, it also placed all of the demands of raising new capital to start new kitchens on her family.
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Growth of the business was at a standstill as Ibu Dias had reached the end of her resources both in
personnel (she had run out of sons) and capital.
Large Franchises
Although there were many international franchises like McDonald’s, KFC, and others in Indonesia,
there were also several large domestic franchises that were rapidly expanding across the country.
Edam Burger
Started by a self-proclaimed entrepreneur, Edam Burger was the brainchild of Made20 Ngurah
Bagiana. Beginning with just one cart, Made spent six years learning the street cart trade before
expanding. From 1990 to 2003, Made grew the business to 700 carts, and from 2003 to 2010 he had
expanded the business to 4,000 locations, including twelve restaurants. To support these locations, he
had fourteen production centers that were owned by him but run independently.
Unwilling to describe his business as a “franchise,” Made sold “business opportunities” to local
entrepreneurs. For 2.3 million IDR ($250 USD), a new vendor would receive a fully equipped
pushcart and the use of the Edam Burger brand. The cart itself cost around 1.5 million IDR, so in
effect vendors were paying an 800,000 IDR premium for the brand name. However, because he came
from a modest background, Made sometimes waived the signup fee or loaned the money to the
vendor in order to get him started.
As in the small franchises, food production was centralized in facilities that made all of the menu
items. Vendors purchased the food from Edam Burger and resold it at a marked up price. For
instance, a customer would pay 3,000 IDR for a mini burger that would cost the vendor only 1,500
IDR.
Ice Cendol21 Idol
Deddy Rustandi began a series of entrepreneurial food ventures after working for years in larger
corporations. One of these ventures was Ice Cendol Idol. Ice Cendol was a popular drink in Indonesia.
Unlike most franchises which were structured in two layers—one for centralized administration and
food preparation, the other for the individual vendors—Ice Cendol Idol was unusual in being a threelayer
business:
• Layer 1: Deddy and an assistant managed the branding and bulk food purchases. Deddy
purchased processed, packaged, and customized ice cendol mix packages from a food
manufacturer. He invested a significant amount of capital and purchase commitments
(1 million orders) in order to obtain a low per unit cost from the manufacturer.
20 Pronounced “Mah-day.”
21 Pronounced “chen-dol.”
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• Layer 2: Independent distributors purchased the mix packages in bulk from Deddy.
• Layer 3: Vendors purchased the mix packages from the distributors and sold the final Ice
Cendol product to customers. Vendors set their own prices.
The Ice Cendol Idol business had grown to hundreds of vendors within a year.
Options for KeBal
Option 1: The Three-Layer Model
The Mercy Corps KeBal team had a working hypothesis that, like Ice Cendol Idol, the best structure
to get cooking centers up and running quickly—and on a growth trajectory— would be a three-layer
organization with two levels of franchising. The top layer would be the headquarters, which would
own the brand and be responsible for marketing, R&D, and quality control. Revenue would come
from the franchise fees they would charge and royalties they would receive from cooking center
owners. The middle layer would be occupied by independent cooking center owners who would open
and run their own kitchens, hire cooks and prepare the food. A cooking center owner would have two
sources of revenue: food sales to vendors and the franchise fees they would charge vendors. The third
layer would be independent vendors who would purchase the food from cooking centers and sell it to
customers. Their revenue stream would come from food sales. (See Exhibit 5 for a summary of
responsibilities and Exhibit 6 for a list revenues and expenses for each level.)
The Mercy Corps team believed that the biggest advantage to the three-layer model was that cooking
centers would likely get up and running faster by being independently owned. Cooking centers,
according to their rationale, were going to have to be managed by someone, so didn’t it make the
most sense to have those managers be fully invested in the business? Wouldn’t cooking center owners
work harder and more efficiently than mere kitchen managers? Furthermore, having identified Ibu
Ana as a potential asset for the business, the three-layer model seemed the best way to attract and
retain her talent, commitment and resources.
However, the G-Lab team did identify challenges with the three-layer structure that gave the Mercy
Corps Indonesia team some pause. The biggest hurdle involved setting the fee and royalty rates. The
team recognized that the fees and rates needed to be high enough to keep headquarters and the
cooking centers in business, but not so high that vendors and cooking center owners would be
tempted to strike out on their own. This did not appear to be a significant problem from the vendors’
perspective because they were purchasing something from the cooking centers that they could not get
on their own: large quantities of safely prepared and healthy food at a low cost, the KeBal-branded
cart to sell from, and the training necessary to make the business a success. However, how the
cooking center owners would react to the franchise fees was harder to guess. In addition to being
nutritious, what differentiated the KeBal products from the competition was that they were free of
preservatives and non-food-grade additives and were prepared under sanitary conditions. In order to
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safeguard these differentiators, KeBal managers conducted frequent and rigorous quality control
checks on their cooks and vendors. In a three-layer model, headquarters would take on quality control
responsibilities. The big unknown was whether cooking centers would be willing to pay for quality
control. Would they see it as a necessary value-added service to maintain the brand image? Or would
they be tempted to quit the KeBal organization to escape both the fees and the demanding quality
monitoring?
In addition to quality control, headquarters would also be responsible for new product development,
training, and marketing. One of the key marketing channels that had made the pilot successful was
support from government officials and health centers, and the role of the headquarters would be to
further develop and deepen these types of relationships as the business grew. Even if they saw the
quality control as a burden, would cooking centers see enough value in these other services to justify
the amount they would be paying in fees?
Option 2: Two-Layer Model
The G-Lab team also considered whether a simpler two-layer structure would be better for the new
organization. This structure would mirror most of the existing food franchise businesses in Jakarta,
nearly all of which had just one level of franchising.
In a two-layer structure, headquarters, the top layer, would own the cooking centers (as opposed to
franchising them to independent owners) and vendors would occupy the bottom layer. Functionally
the business would run in a similar manner to the three-layer structure: vendors would buy food from
cooking centers and sell it to customers. The primary difference would be that since headquarters
would own the cooking centers, there would be no need to develop a franchise fee/royalty structure
for cooking centers. The cooking centers’ gross profits would be the organization’s gross profits.
This two-layer structure appeared to have several advantages. First, it would be easier to monitor the
cooking centers’ finances; gone would be concerns that cooking centers would underreport revenue to
avoid fees. Second, there would be less risk of cooking centers spinning off on their own and
becoming competitors. Third, management would have more direct control over cooking and would
perhaps be able to make changes to menus, techniques, or processes more easily. In researching U.S.
franchise structures before traveling to Jakarta, the G-Lab team had learned that many franchise
businesses put significant value on having at least a few outlets owned by the central headquarters. It
gives management its own window on market dynamics and a laboratory to test and learn from new
approaches.22
However, the two-layer structure presented a number of challenges. Headquarters would need to raise
more money initially, probably two times what the three-layer model would require, in order to fund
22 Harold Kestenbaum and Adina M. Genn, So You Want to Franchise Your Business (Irvine, CA: Entrepreneur Press, 2008).
MERCY CORPS AND KEBAL HEALTHY FOOD CARTS: SUSTAINING AND SCALING UP
Erica Carlisle, Chris Lin, Libby Putman, Emily Sporl
September 26, 2010 12
start-up costs for both headquarters and new kitchens. Growth would likely be slower since
headquarters would need to raise all the capital to open kitchens themselves rather than using capital
supplied by entrepreneurs who wanted to own cooking centers. Then there was the issue of finding
talent that could manage both a headquarters office and a cooking center, and yet was willing to
accept a low starting salary. The three-layer model addressed this talent issue because cooking center
investors would be focused on their role and would ultimately see the upside from their hard work
and investment in the form of potentially unlimited profits. The two-layer model did not provide the
same potential reward for kitchen managers. And last but not least, it wasn’t clear what the two-layer
model would mean for Ibu Ana.
Conclusion
As the Jakarta traffic began to slowly start up again, Usye asked Dini how she would set up KeBal so
that it would be in a position to move forward, providing more children with nutritious food and more
Jakartans with good business opportunities. Without a solid plan for the next phase, all of the work
they had put in over the last year would be for nothing when November rolled around. As a
community health professional and a mother, Usye just couldn’t bear to think about all the babies and
toddlers who would go back to eating unhealthy and potentially unsafe foods if KeBal were to fail.
Mothers who were regular customers had started telling her and Dini that their children seemed more
alert and were not getting sick as often. Plus, Usye knew that many other teams within Mercy Corps
were watching this project with great interest. Everyone wanted to find ways to build social enterprise
businesses that gave people opportunities while benefiting communities. Had they considered all of
the important issues? What was the best model for KeBal, given all of the nuances of the situation?
Study Questions
1. Why is the three-layer model not prevalent among comparison businesses?
2. Is it possible for each layer of the three-layer model to feel they are getting something of
value from the layer above?
3. What is the best business model to foster quick growth?
4. What factors, if any, should Mercy Corps evaluate as it considers applying for-profit
franchise models to the KeBal organization?
MERCY CORPS AND KEBAL HEALTHY FOOD CARTS: SUSTAINING AND SCALING UP
Erica Carlisle, Chris Lin, Libby Putman, Emily Sporl
September 26, 2010 13
Exhibit 1 KeBal Food Cart
Source: Casewriters.
Exhibit 2 Average Daily Revenue, by Vendor by Month (IDR millions)
Exchange rate: 9,350 IDR = 1 USD.
Note: RW10+Gunanto is the cook-vendor partnership, where the cook sells food to the vendor (Gunanto).
Source: Casewriters.
MERCY CORPS AND KEBAL HEALTHY FOOD CARTS: SUSTAINING AND SCALING UP
Erica Carlisle, Chris Lin, Libby Putman, Emily Sporl
September 26, 2010 14
Exhibit 3 Average Daily Profit, by Vendor by Month (IDR millions)
Exchange rate: 9,350 IDR = 1 USD.
Source: Casewriters.
Exhibit 4 KeBal Vendor RW #2 Monthly Income Statement
Exchange rate: 9,350 IDR = 1 USD.
Source: Casewriters.
In IDR June 2009 July 2009 August 2009
Revenue 2,627,000 2,984,000 2,956,000
COGS 1,548,250 1,587,300 1,674,880
Gross profit 1,078,750 1,396,700 1,281,120
Gross margin 41% 47% 43%
MERCY CORPS AND KEBAL HEALTHY FOOD CARTS: SUSTAINING AND SCALING UP
Erica Carlisle, Chris Lin, Libby Putman, Emily Sporl

The Business Case:

The students were given the following guidance:

For this week’s advance notes, you need to access the following sites:

Preparation

1.  Explore in detail Frigoglass website:

Home


2.  When it is available listen to the Conference call reporting results:
http://www.frigoglass.com/sites/default/files/Conference%20Call%20Invitation_FY11%20Results_EN.pdf
3.  Video with Managing Director:

4.  Additional short more recent video:

Your assessed notes should discuss the following points:

1.  What is the business model(s) for Frigoglass?
2.  What do you see as the major opportunities for this company?  How would you grow it?
3.  What are the major issues you believe have to be overcome?  Where are its potential weaknesses?

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