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

Abstract

Problem definition: As the largest retail channel in the world, nanostores are the source of income for millions of shopkeepers in developing countries. Being cash constrained, nanostore shopkeepers face the challenge of deciding how much of their available cash to retain to support their families and how much to invest in acquiring products from their suppliers, who visit the nanostore with different frequencies and offer products with different margins. We study how shopkeepers deal with this challenge while seeking to make their nanostores financially sustainable. Methodology/results: We conduct an empirical study to explain how suppliers’ visit frequency influences shopkeepers’ ordering behavior. The study integrates more than 29 million orders placed with a multinational manufacturer. Results show that visit frequency adjustments by the supplier cause nanostores to experience a significant discontinuity in their orders such that reduced order frequency leads to significantly lower orders per unit of time. Building on this insight, we ran two experimental studies that make use of theoretical benchmarks to explore how shopkeepers’ ordering decisions are influenced by supplier visit frequency, product margin, and shopkeepers’ cash constraints. We analyze how and when shopkeepers deviate from the theoretical benchmarks and show how the available budget moderates the relationship between suppliers’ visit frequencies and shopkeepers’ order volumes, normalized by unit of time. Our results give support to the theory of diversification bias and show how this bias might bring additional benefits to suppliers offering low-margin products. Finally, we propose a behavioral model that explains how shopkeepers’ decisions might be driven by their preference toward inventory (i.e., leftover versus shortage aversion) and toward cash (i.e., liquidity preferences). Managerial implications: Our findings suggest that suppliers should deploy high-frequency visits to cash-constrained nanostores regardless of the margin that their products provide for shopkeepers. For low-margin suppliers, this mitigates shopkeepers’ tendencies to reduce the order volume per unit of time following a visit frequency decrease. For high-margin suppliers, high-frequency visits mitigate shopkeepers’ overdiversification bias and liquidity preference. Financial and digital schemes that reduce the need for high-frequency visits may lead to substantial efficiency gains. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0362 .