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. 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 acquiring products from their suppliers, which visit the nanostore with different frequencies and offering products with different margins. We study how shopkeepers deal with this challenge while seeking to make their nanostore financially sustainable. Methodology/results: We conduct an empirical and two experimental studies to explain how suppliers’ visit frequency influences shopkeepers’ ordering behavior. The empirical analysis 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, the experimental studies 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 supplier’s visit frequency and shopkeepers’ order volume, normalized by unit of time. Furthermore, 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 participants decisions are driven by a psychological cost of overordering and by cash-shortage aversion. Managerial implications: Our findings provide managerial insights for suppliers serving retailers that face significant cash constraints.