Supplying Cash-Constrained Retailers : Understanding Shopkeeper Behavior at the Bottom of the Pyramid

Problem definition: As the largest retail channel in the world, nanostores are the source of income for millions of shopkeepers in developing countries. Nanostore shopkeepers order products with different margins from multiple suppliers that visit them at different frequencies. Being cash-constrained, shopkeepers face the challenge of deciding how much of their available cash to invest acquiring products from each supplier and how much to retain to support their families. While an optimal decision can be determined, it is unclear how shopkeepers are trading off different visit frequencies and different product margins in practice. At the same time, suppliers need to decide how often to visit each nanostore, trading off distribution costs and market share.Methodology/results: We conduct an empirical and a behavioral study to explain how suppliers' visit frequency, product margins, and shopkeepers' cash constraints influence shopkeepers' orders. The empirical analysis integrates more than 29 million orders, placed with a multinational company. Results show that adjusting visit frequency causes nanostores to experience a significant discontinuity in their orders, such that reduced order frequency leads to significantly lower orders per unit of time. The behavioral study captures the main features of the nanostore context and, making use of theoretical benchmarks, explores how shopkeepers' ordering decisions are influenced by suppliers' changes in visit frequency and shopkeepers' cash constraints. We show that the level of underordering from high-margin suppliers, with respect to the theoretical benchmark, decreases as their visit frequency decreases. For low-margin suppliers, a reduction in the visit frequency may eliminate the tendency to overorder. Furthermore, we show how shopkeepers limit the exposure to having leftovers, which allows them to keep enough cash to cover family expenses. Finally, we propose a behavioral model to show how and when changes in suppliers’ visit frequency influence shopkeepers' perception of the overordering and underordering cost. Managerial implications: Our findings provide managerial insights for supplying cash-constrained retailers by developing an understanding of how suppliers' visit frequency influences shopkeepers' ordering behavior