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

Abstract

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 that suppliers face when transacting with it. While OBTC can create efficiency gains when selling and delivering products to nanostores, it is risky, as shopkeepers might default on their credit lines. By 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. Therefore, the benefits of OBTC compensate the risk that suppliers take in financing shopkeepers' inventory under a wide range of scenarios.

Keywords: Retail operations, trade credits, financial constraints, emerging markets, nanostores

JEL Classification: D22, M1, O12