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

Abstract

Problem definition: 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 tradeoff 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. Methodology/results: We leverage data from a nanostore supplier offering OBTC to many of the nanostores it serves over an extended period of time. These data allow us to assess the effect of this novel policy on the operational performance of the supplier through a difference-in-differences approach with nearest-neighbor matching and a control function approach relying on exogenous variation isolated from two instruments. 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. When examining the mechanism underlying this effect, we find that OBTC mitigates shopkeepers’ cash shortage and leads to greater engagement with the supplier’s sales representatives. Investigating the heterogeneity in the effect, we find that nanostores receiving less product relative to others in the sample benefit the most from OBTC. Managerial implications: We provide evidence that OBTC, an interest-free financing scheme for retail microbusinesses in emerging markets, may be economically sustainable despite the associated risks. OBTC has the potential to help narrowing down the financing gap that other schemes, such as microcredits, struggle to close as a result of their reliance on expensive interest rates and taxing requirements on microentrepreneurs.

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

JEL Classification: D22, M1, O12