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

Nanostores are the largest retail channel in the world and the source of income for millions of shopkeepers in developing countries. These shopkeepers interact with multiple suppliers when buying products to satisfy their customers' needs. These interactions create challenges for both the shopkeepers and the suppliers. The cash-constrained shopkeepers must decide how much of their available money to allocate to each supplier and how much to retain to support their families. The suppliers must determine the frequency of store visits to achieve cost-effective operations. We combine empirical and behavioral studies to explain how suppliers' visit frequency, product margins, and shopkeepers' cash availability influence shopkeepers' orders. The empirical analysis integrates more than 29 million shopkeepers' orders, placed with a multinational company. Results show that adjusting visit frequency causes nanostores to experience significant discontinuity in their orders, such that reduced order frequency leads to significantly lower orders. The behavioral studies reveal that with a lesser need for cash for family expenses, shopkeepers increase their orders. Furthermore, shopkeepers assign priority to high-margin products and suppliers that visit more often, whereas they tend to limit high-margin product purchases, to ensure they can obtain low-margin products, especially when those more profitable suppliers visit less frequently. This strategy enables shopkeepers to increase their on-hand cash at the end of the ordering cycle. We show how high visit frequency aligns shopkeepers' and suppliers' interests, and we estimate a structural model to understand shopkeepers' decisions. Our findings provide managerial insights for supplying cash-constrained retailers.