Supplying to mom and pop: traditional retail channel selection in megacities

Jiwen Ge, Dorothee Honhon, Jan C. Fransoo*, Lei Zhao

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Nanostores are traditional, small independent retailers that are present in large numbers in the megacities of the developing world. CPG Manufacturers can choose to deliver to nanostores either directly - visiting thousands of stores per day - or via wholesalers - saving on distribution cost but forfeiting the direct access to the store owners to develop demand. We study a manufacturer’s channel strategy within a finite time horizon. The channel strategy in emerging markets has both marketing and operational elements which lead to a newly formulated problem with novel characteristics. High costs are involved in nanostore distribution and the difference in wholesale price, logistics cost, product availability and market growth leads to a multi-dimensional problem that is not trivial to analyze. We develop an analytical model to derive the optimal channel policy. We conduct a numerical study with parameters tuned by field data. We develop managerial insights based on our formal results and our numerical analysis. The optimal channel policy structure depends mainly on two channel metrics: the gross profitability, which is the gross margin at a particular moment in time and the growth-adjusted profitability, which includes the growth potential of a particular channel strategy to develop the market and realize future profits. With demand growth over time, we show that, in theoptimal policy, there is at most one switch between the wholesale and direct channel strategies within the time horizon. Depending on the two metrics, it may be optimal to first expand the market using the direct channel and then switch to the wholesale channel to exploit the expanded market. In other cases, it may be optimal to first expand the market slowly using the wholesale channel then switch to the direct channel to benefit from high demand growth. The optimal channel strategy is also dependent on the time horizon, with a longer time horizon leading to a relatively longer use of the direct channel.
Original languageEnglish
JournalManufacturing and Service Operations Management
DOIs
Publication statusE-pub ahead of print - 28 Jan 2020
Externally publishedYes

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