Order-Based Trade Credit and Operational Performance in the Nanostore Retail Channel

Millions of nanostores serve bottom-of-the-pyramid consumers in emerging markets. Their suppliers, Consumer Packaged Goods (CPG) companies, struggle with high operational costs that largely stem from shopkeepers’ liquidity constraints. We empirically investigate whether suppliers can improve operational performance by allowing nanostore shopkeepers to delay order payment by a short period of time. We term this delayed payment alternative "Order-Based Trade Credit" (OBTC) and examine the key trade-off suppliers face when transacting with it. OBTC can create efficiency gains in selling and delivering products to nanostores. However, OBTC is risky, as shopkeepers might default on their credit lines. Leveraging data from a nanostore supplier offering OBTC, we assess the effect of this novel policy on the operational performance of the supplier through a difference-in-differences approach. We find that OBTC leads to substantial gains for nanostore suppliers, across a range of important operational drivers. In addition, we show when the benefits of OBTC compensate the risk suppliers take in providing it.