Micro-retailers are vitally important to the economies of developing countries and to consumer packaged goods companies. But their full potential is not being realized. The adoption of digital technologies could help change that. But for that to happen, obstacles must be overcome. Three strategies can address them.
Independently operated micro-retailers that typically serve fewer than 100 households in local communities account for most retail business in developing countries. In Latin America, for example, these “nanostores” account for an estimated 40% to 70% of consumer-packaged goods (CPG) companies’ sales, making it the largest channel in terms of sales volume.
Much of this vast market’s potential is unrealized, however, because these small retailers have failed to embrace digital technology that could boost their performance and profitability. In this article, we offer three practical strategies that would help them harness the benefits of digital technology.
1. Make tech solutions user-friendly.
Digital technologies that could raise the micro-retailer performance bar include mobile apps that deliver more efficient inventory management and payment transactions and enterprise resource planning (ERP) systems that enhance record-keeping and order management.
However, a hurdle to adopting solutions like these is that they are not sufficiently user-friendly for nanostore owners. Studies show that shopkeepers in developing countries lack an understanding of the dashboards and data used by off-the-shelf management systems. One conducted by MIT’s Low Income Firms Transformation (LIFT) Lab (which one of us, Josué, heads) that looked at 4,000 nanostores in Mexico in the fall of 2022 discovered that among the 25% or so shopkeepers who owned point-of-sale (POS) management systems, about 55% preferred to use paper or spreadsheets to track and manage inventory rather than the POS technology. In a study of workshops in Latin America, we found that a possible reason for spurning POS is an inadequate understanding of these systems and their functionality.
The problem can be addressed by making management solutions more accessible.
To help achieve this goal, the LIFT Lab is developing two experiments to analyze how micro-retailer shopkeepers make replenishment decisions and their behavior when using any POS/ERP system for micro firms. Our research is looking at the systems’ interfaces and displays. One experiment, to be conducted online, is targeting 400 participants. A second will validate the results of the first one and be carried out in the field with approximately 500 nanostores in Mexico.
The intention is to use the research results to identify how to improve the accessibility of tech solutions. In addition, we are looking at how chatbots embedded in applications could be used to provide clear and concise explanations of the technology, thereby addressing the knowledge gaps that prevent micro-retailers from using the POS/ERP systems mentioned above.
2. Remove financial barriers.
E-commerce has revolutionized retailing across the globe — but not micro-retail markets. One of the main reasons for missing this wave of digital transformation is that nanostores face punishing financial barriers to adopting e-commerce platforms.
Nanostores already face such barriers in their traditional brick-and-mortar businesses. When big-box stores like Walmart place orders, the goods are first delivered, and the payment is made much later — sometimes between 60 and 120 days later. This extended payment period profoundly affects the cash conversion cycle (i.e., the number of days a business takes to sell its product and recover the money it invested in inventory). Large retailers use beneficial payment terms to move cash or invest it to earn interest and increase sales in their stores before paying back their suppliers. The benefits of this model cannot be underestimated.
In sharp contrast, nanostores are not given the minimum 60 days that big retailers enjoy, according to a study we conducted in Brazil, Colombia, and Mexico. They must pay their suppliers in advance, usually two days before receiving the goods.
In e-commerce markets, these penalties are compounded by the payment demands of platforms such as Uber Eats and Rappi. Accessing such platforms lengthens the cash conversion cycle (i.e., the number of days a business takes to sell its product and recover the money it invested in inventory), even though the profits might be higher in the long term. Most platforms demand that nanostores pay additional commission fees and accept digital payments that increase the time it takes to receive customer payments by up to 30 days.
Large consumer packaged goods (CPG) suppliers and e-commerce platforms can take the first step to remove these barriers by reviewing nanostore payment terms and finding ways to make them less punishing. For example, they could extend payment terms to, say, two weeks instead of insisting on advance payments. We believe such a change would compel nanostores to use the increase in cash availability to explore digital markets, improve tech adoption, and place more product orders, which would benefit suppliers.
3. Capitalize on their pervasiveness.
A critically important component of any e-commerce business model is efficient and timely last-mile delivery. Micro-retailers enjoy an advantage in this area: the ubiquity of their outlets. The challenge is how to harness this advantage and help micro-retailers develop viable e-commerce businesses.
There are an estimated 50 million nanstores in the world. These outlets are dispersed throughout local communities across developing countries, providing a ready-made order-fulfillment network for online purchases.
LIFT Lab is exploring business models that exploit the reachability of nanostore networks in the grocery retail business. For example, the e-commerce fulfillment by local stores concept is inspired by the crowdsourcing Uber model. The idea is to create a mobile app that connects consumers with nanostores. When a consumer orders through the app, the system allocates the order to the nearest nanostore and sets a price and delivery time. Given the number of nanostores available, it is likely that an outlet near the customer can be found. If the selected nanostore accepts the order, it is responsible for delivering the item, often on foot or by bicycle.
Following early development work, including gaining feedback on the concept in workshops with nanostores, we are building a mockup of an app that provides the required functionality and user interface.
Benefits For All
These three strategies do not represent a panacea for overcoming the problems that prevent micro-retailers in emerging economies from capturing the benefits of digital transformation. However, they show that these obstacles can be overcome, and the increased profitability and market growth paybacks of digitalization are available to the entire micro-retailer ecosystem, including large CPG suppliers.