Improving Agility,Adaptability,Alignment,Accessibility,and Affordability in Nanostore Supply Chains

Abstract

In developing economies, nanostores (i.e., small independent neighborhood stores) in urban and rural areas face different infrastructural, operational, and financial challenges. How can urban nanostores compete with supermarket chains as they enter the market? How can rural nanostores provide more services at affordable prices to sustain their operations? By developing innovative business models enabled by new technologies such as smartphones, mobile payments, and solar panels, we show how urban nanostores can increase the capabilities of agility, adaptability, and alignment in their supply chain to compete, and how rural nanostores can change their operations to improve accessibility (in terms of products/services) and affordability (in terms of price). In addition, we describe some emerging research opportunities for further consideration.

Keywords

nanostores retail innovations AAA supply chains developing economies

Introduction

Great supply chains are cost‐effective and time‐efficient. However, Lee (2004) argued that this is not enough; instead, “top‐performing supply chains possess three very different qualities. First, great supply chains are agile. They react speedily to sudden changes in demand or supply. Second, they adapt over time as market structures and strategies evolve. Third, they align the interests of all the firms in the supply network so that companies optimize the chain's performance when they maximize their interests. Only supply chains that are agile, adaptable, and aligned provide companies with sustainable competitive advantage.”

While Hau Lee's AAA supply chain narratives were based on giants such as 7‐Eleven Japan, Dell, Walmart and Amazon, the underlying concepts of agility, adaptability and alignment are increasingly relevant to supply chains that involves small independent neighborhood stores (known as nanostores). There are over 50 million nanostores operating around the world, and they are transforming their operations through innovative business models enabled by new technologies to compete as major chain stores and online retailers enter the market in various developing countries.

In general, nanostores are small independent retail stores that serve their immediate neighborhood community with essential needs. In the developing world, these nanostores have country‐specific local names: changarro in Mexico, bodega in Peru (and New York), spaza in South Africa, kirana in India, warung in Indonesia, or sari sari in the Philippines. Nanostores constitute the largest channel for selling consumer packaged goods (CPG) in most developing countries: the market share hovers around 50% in Latin America and above 85% in Sub‐Saharan Africa and South Asia (Fransoo et al. 2017). Also, the nanostore channel offers the highest growth potential for CPG manufacturers, especially when the market is saturated in developed economies.

While nanostores are omnipresent in the developing world, they are not well understood in the research literature. As an initial step, Fransoo et al. (2017) developed a comprehensive characterization of the nanostore retail channel through the lens of supply chain operations. From the marketing and sales perspective, nanostores generate demand by using a variety of mechanisms that are different from modern chain stores.

To elaborate, a single nanostore typically serves less than one hundred households within its neighborhood as its core client base. Hence, a shopkeeper has intimate knowledge about each of its core customers, and can influence their customers’ product and brand choices. This kind of business environment is significantly different from the modern retail channel, where product and brand choices are influenced by formal mechanisms such as store merchandising and online/offline advertising.

Besides demand and sales, the supply operations for nanostores are also different. Despite nanostores’ fragmented operations and locations (that are associated with high distribution costs), many large suppliers prefer to supply nanostores directly. For example, the Coca‐Cola bottlers in Mexico serve more than 1.3 million point‐of‐sale locations across the country directly.¹ With the exception of China and a few other countries, most supply chain operations in developing countries are based on cash and informal transactions. This persistent informality leads to opacity, which might be beneficial to stores in the short term (say, through tax avoidance). However, it also creates operational inefficiencies (Sudhir and Talukdar 2015). This is particularly the case when information is hidden from other supply chain partners, or provided in an obfuscated manner.

The financial flow operations in the nanostore channel are also different from what is common in the organized retail channel. Shopkeepers often extend informal credits to their customers to build customer loyalty within the community they serve. However, their suppliers do not offer trade credit; instead, they often insist to be paid with cash immediately upon delivery (Boulaksil and Van Wijk 2018). This asymmetry often creates cash flow problems for many nanostore owners, leading to a high default rate.²

Despite the fact that many nanostores operate in large urban agglomerations due to urbanization, their supply chains are currently not agile, adaptable, and aligned. Because they have been dealing with a stable replenishment and delivery process, receiving a steady assortment of goods over a long period of time, which has allowed shopkeepers to provide subsistence for their families, there is not much incentive for them to make significant changes in the business model. Furthermore, suppliers have deployed highly complex distribution operations that they have attuned to the specific operational characteristics of this channel, and they perceive the costs and risks to change such operations as being too large. However, as more chain stores and online players enter the market, urban nanostores need to improve their agility, adaptability and alignment in order to compete.

In addition to millions of urban nanostores, there are millions of nanostores operating in rural areas serving 3.4 billion countryside dwellers (Mahajan 2016). Rural nanostores face many fundamental challenges: lack of access to electricity, lack of formal transportation systems, and dominance of middlemen throughout the supply chain (Yadav 2015, Zhang et al. 2017). In rural areas, nanostore supply chains operate like local monopolies with loyal customers, thus having little incentive to change. However, the increased accessibility and affordability of key technologies are driving a significant change in these supply chains. In particular, mobile communication technology allows for much easier and detailed data collection and sharing across all nanostores, and solar panel technology provides extended hours with electricity in rural areas. Although competition with the modern retail channel is less prevalent in rural areas, there is local competition among different rural nanostores. As such, rural nanostores need to increase their accessibility and affordability to offer essential goods to rural consumers at the right price.

The intent of this study is twofold. Our first aim is to further increase the awareness of nanostore supply chain operations, as they are not yet well understood in the literature. Second, we highlight how urban nanostores (rural stores) develop innovative business models by leveraging new technologies to improve agility, adaptability and alignment (accessibility and affordability). Knowing that nanostore operations are understudied in the academic operations management literature, we discuss some new research opportunities in this area before concluding.

Nanoretailing

In this section, we first explain how nanostore operations are different from modern chain store operations. Then we discuss some existing research about nanostore operations, which remains nascent.

Characteristics of Nanoretailing

Market. Fransoo et al. (2017) estimate that there are approximately 50 million nanostores operating in different developing countries. There are over 12 million located in India, 6 million in China, and millions of nanostores in other developing countries such as Indonesia, Nigeria, Mexico, etc. The market share captured by nanostores varies across markets, depending on the success of modern retail chain operations, both offline and online. In China, for example, due to widespread adoption of smartphones and mobile payments, giants such as Alibaba, JD.com and Pindoudou have lured many customers to shop online, and organized convenience stores such as FamilyMart, Lawson, and 7‐Eleven have entered many cities, encroaching the market share of the nanostores (Xinhua 2019). with the notable exception of China, the market share captured by nanostores has been relatively stable over the past two decades, even though it can vary across neighboring countries.³

Because the grocery retail market is saturated in developed economies, many modern retail chains ventured into developing countries to compete with nanostores. By considering the underlying competition between nanostores and supermarkets, Jerath et al. (2016) found that, with the entry of the modern channel, the number of nanostores would decrease while their prices would increase. Consequently, surviving nanostores would be better off, even though consumer welfare would deteriorate. However, there is no consistent empirical evidence about these claims.⁴

Operations. Table 1 highlights the main operational characteristics of a nanostore in comparison to a supermarket. For example, due to space and cash constraints (Ge et al. 2020b), nanostores offer a limited number of categories, fewer SKUs, and place smaller order quantities (less than full case load). This small‐scale operations create intense competition among manufacturers for the scarce shelf space in nanostores (Ge et al. 2020a).

Table 1

Main Operating Characteristics of a Nanostore Compared to a Modern Channel Store (adapted from Fransoo et al. (2017))

	Modern channel	Traditional channel
	Supermarket	Nanostore
Functions	Professionals, dispersed	Single store owner‐operator, family
Logistics support	Distribution centers, cross‐docks, 3PL	Direct deliveries
Financial flow	Formal credit, bank transfers	Cash, relationship‐based credit
Line items	Full case packs to store, pallets to retailer DC	Consumer units, mixed case packs
Number of SKUs	Thousands to tens of thousands	Hundreds
Category depth	Half dozen to dozens	Single or double
Consumers per store	Tens of thousands	A few hundred
Technology	Enterprise systems, POS scanning	None, cellphone, smartphone
Marketing Strategy	Brand, advertising, central merchandising	Community, convenience, high‐service

Because each nanostore serves a limited number of customers who reside within the same neighborhood, the store owner can use her intimate knowledge about her clients to influence demand. Regarding supply, main suppliers of nanostores in many developing countries are often manufacturers of the leading brands, along with suppliers of fresh essentials such as bread, cooking oil, and milk. In urban areas, most suppliers choose to supply the nanostores directly, oftentimes visiting tens of thousands of nanostores per week in a large city. For products that are slow‐moving or for less popular brands, manufacturers may choose to work with distributors to improve logistics efficiency (Ge et al. 2020b). In rural areas with very low store density, most manufacturers deliver their products via distributors. For certain goods, such as fruits and vegetables, it is common for shopkeepers to replenish their inventory directly from various wholesale markets.

Challenges. There are three types of challenges that nanostore supply chains in developing countries often face. As shown in Table 2, the challenges of inadequate infrastructure, inefficient operations, and poorly developed financial services limit the scale, the scope, and the efficiency of nanostore supply chains. Also, due to inherent differences between urban and rural areas in developing countries, the infrastructural and operational challenges depend on the location of the nanostores. To overcome these obstacles, we describe how a variety of innovative business models enabled by different technological innovations can improve the scale, the scope, and the efficiency of urban and rural nanostores in sections 3 and 4, respectively. Before we describe these innovative models, we provide a brief review of the emerging research literature on nanostore operations.

Table 2

Challenges, Implications, and Innovations of Nanostores

Challenges	Infrastructural	Operational	Financial
Implications	Urban: In poor parts of cities, cellphone coverage is often poor, especially inside stores. Moreover, data plans tend to be expensive in many developing countries. Consequently, even when mobile app‐based solutions are available, shopkeepers may not have continuous access. Rural: In rural areas of many developing countries, basic infrastructure such as well‐constructed roads, electricity, and telecommunications are lacking, making it difficult for nanostores to operate. Consequently, shopkeepers cannot keep their stores open after the sun sets and cannot sell products that require refrigeration. Also, these stores cannot operate efficiently without easy communications.	Urban: Distribution is fragmented, serving many small stores with multiple shipments. Handling costs are relatively high due to less‐than‐case‐pack order sizes. Finding space for unloading is challenging due to congested streets. Rural: Without electricity, most nanostores cannot operate after sunset, limiting their hours of operation. Also, without formal and efficient distribution channels, nanostore owners need to travel long distances to replenish their stocks, which further reduces their operating hours. Finally, due to their small size, nanostores cannot obtain quantity discounts and the logistics costs are relatively high due to frequent replenishments.	In most instances, nanostores operate on cash and do not have access to formal bank accounts. Even when shopkeepers have savings accounts, they are unable to access other financial services such as loans or lines of credit. Suppliers are reluctant to provide trade credit due to high default risks. Shopkeepers also need a positive cash flow on a day‐to‐day basis as their family's subsistence is dependent on the store's cash flow. Consequently, nanostores can only afford to keep a low level of inventory of a small number of SKUs, leading to frequent stockouts and high logistics cost. In addition, the handling of cash causes operational delays because of counting and missing change, and leads to additional security risks and costs due to large amounts of cash being carried on distribution vehicles.
Innovations	Solar Technology in rural settings. Free wi‐fi in urban settings	Innovative replenishment or logistics models	Innovative financing schemes and cashless transaction technologies, value‐added services

Literature Review

While the nanostore retail channel has received attention in the marketing, economics, and sociology literature since the 1990s, research on supply chain and operations management in this large retail channel remains nascent. Blanco and Fransoo (2013) summarize the main characteristics of nanostore operations and associated logistics based on their field work. They further compile their findings into a book (Fransoo et al. 2017) by documenting the details of nanostore operations and the challenges of distributing goods to these nanostores in different countries through a series of case studies. The supply chain and OM literature on nanostores can be classified into three streams: (a) supply chain operations, (b) trade credit issues; and (c) competition issues.

In the first stream, Zhang et al. (2017) examine the nanostore supply chain motivated by a buying cooperative “Hapinoy” program in the Philippines where nanostores collaborate in collective buying and logistics. In the Hapinoy program, one of the nanostores would act as a wholesaler and as a nanostore, creating cooperation and competition simultaneously. They identify the conditions under which the Hapinoy program is mutually beneficial to all participating nanostores. Gui et al. (2020) further extend the model to consider other collaborative strategies, including non‐profit cooperatives.

Boulaksil and Belkora (2017) examine the choice of a distribution strategy faced by Valencia, a juice producer supplying nanostores in Morocco. In particular, they study whether Valencia should use a “van‐sales” distribution model, in which orders are collected and delivered to the stores from a distribution vehicle during the same visit, or a “pre‐sales” model, in which a pre‐sales agent takes orders during his visits to the stores and a specialized logistics team delivers the orders during the following day. They show that the pre‐sales model improves logistics efficiency for the supplier, and it outperforms the van‐sales model in high‐density urban areas. Ge et al. (2020b) examine two distribution strategies: (a) supply nanostores directly; and (b) supply nanostores indirectly through wholesaler. By examining the underlying trade‐offs associated with the direct supply strategy (i.e., a higher logistics cost in exchange for a stronger relationship with the shopkeepers), they find that the direct supply strategy dominates when the market growth potential and store density are both high. Their results offer a plausible explanation for why many manufacturers adopt the direct supply strategy in densely populated urban areas, and much less to in sparsely populated rural areas.

In the second stream, it is well known that the scale (e.g., inventory) and scope (e.g., product/service assortments) of nanostore operations are hindered by persistent cash constraints. To alleviate the sales and cash flow problems arising from nanostore operations, various researchers explored different approaches. First, Iyer and Palsule‐Desai (2019) study a menu of contracts for the manufacturer to incentivize stockists⁵ in India to exert optimal efforts (which include offering trade credit to nanostores) in order to increase sales for the manufacturer. Boulaksil and Van Wijk (2018) identify conditions under which manufacturers should offer trade credit to nanostores, and show that manufacturers may be better off by offering these credits even in the presence of high default rates.

In the third stream, Jerath et al. (2016) study the competition between nanostores and the modern retail channel. In the same vein, Ge et al. (2020a) study the competition between manufacturers as they seek to capture the scarce shelf space and limited cash of the nanostores. Despite the underlying competition, they find that all manufacturers benefit from each other by selling to nanostores, as they all contribute to a reduction of shopkeepers’ cash constraints through the sales of their products. Interestingly, they model the shopkeeper as a subsistence retailer instead of a profit maximizer.

In summary, the bulk of current OM research about nanostores is primarily based on analytical models, and empirical study is lacking with a few exceptions. For example, there are large‐scale empirical studies examining medical supply chains that involve rural pharmacies. These studies show that a more coordinated distribution is required to ensure availability of essential medication in rural areas (e.g., Vledder et al. 2019). Given the large number of nanostores and the fact that many suppliers deliver their products to these nanostores directly, there are opportunities for OM researchers to conduct empirical studies by using secondary data or by conducting field experiments in the future.

Urban Nanostores: Agility, Adaptability, and Alignment

Recall from Table 2 that nanostores located in urban areas of developing countries face many challenges, including poor or unreliable mobile coverage, inefficient distribution logistics, and lack of access to financial services. To achieve sustainable profitable growth, manufacturers such as Coca‐Cola and e‐commerce giants such as Amazon and Alibaba have developed various innovative mechanisms that can help these nanostores to improve their agility, adaptability and alignment by expanding the scale and scope of their services and by improving their operational efficiencies.

Addressing Operational Challenges: Innovative Logistics Models

Unlike chain store supply chains, the delivery logistics for nanostores in urban areas have several distinctive features. One is their dynamic nature caused by frequent entries and exits of nanostores, as well as changing traffic patterns and regulations (Fransoo et al. 2017). A second distinctive feature is the importance of local knowledge and experience that suppliers’ sales and delivery teams⁶ accumulate over time through their own delivery experience that can be beneficial for making better logistics decisions. Given these two distinctive features, how should suppliers design, plan, and track delivery performance of a supply chain that involves urban nanostores?

Route Planning and Tracking for Nanostore Deliveries: Delivery Dynamics

When managing delivery services, most suppliers use route planning and execution tracking software that often neglects various uncertainties caused by complex traffic patterns, limited parking space and cash‐related effects. The master data of these systems are captured at a given point in time, and then used over a long horizon in order to design daily routes. With historical data, planners need to adjust the routes constantly to better capture reality. Therefore, they spend their time gathering local knowledge and changing routes with informal decision‐making processes. Once new routes are being suggested, suppliers’ delivery teams often ignore recommendations generated by the software; instead they use their local knowledge and intuition. Therefore, route performance is difficult to predict, decision‐making processes are ad hoc, and route tracking becomes a very difficult task.

Delivery Dynamics⁷ has developed a new route planning paradigm based on continuous improvement, that seeks to offer a tailored solution to deal with these challenges (Ratliff 2020). In particular, they leverage smartphone technology and data science to continuously improve data quality. By keeping the master route up to date and comparing it to actual performance, they optimize and monitor delivery performance, sending alerts to both supervisors and customers whenever there is a significant deviation from the routing plan. Hence, the emphasis is much more on improving the planning parameters in the operational process—such as the time spent at the store or the time spent looking for parking—rather than on further refining the “optimal” route based on data that do not reflect either the reality or the improvement potential. Planners can therefore focus on process improvement and the development of more realistic backup plans, while sales and delivery teams can react more effectively to demand changes in order to effectively serve customers. Moreover, the system incorporates the knowledge of close ties between suppliers’ delivery teams and customers into its operations. Having the same team visiting the same store repeatedly can make the time spent at the store (especially nanostore) more productive.

Channel Financing and Supply in India: Unilever's Stockist Model

The massive scale of India's 12‐million strong nanostore environment makes supplying this channel particularly challenging, as rapidly evolving transportation regulations and suboptimal infrastructure make it hard to serve customers in dense areas. As a result, Unilever and other consumer goods manufacturers rely on the deep local knowledge of “stockists” in order to manage the last mile of the supply chain. The stockist model was developed by Unilever eighty years ago (Dannhaeuser 1987), and allows it to serve about 2.4 million nanostores⁸. As explained in Iyer and Palsule‐Desai (2019), Stockists are the entity in the supply chain who deliver to the millions of small shops (i.e., nanostores) that account for over 90% of retail sales in India. The stockist purchases product from the manufacturer, develops retailer interest in carrying the product, solves the logistics problem of delivery to retailers, and manages retail credit and money collection. In return, the stockist is provided assistance by the manufacturer and paid an associated margin that is a percent of the product's retail price. Although the specific arrangements can change, in terms of the actual responsibilities taken over by stockists and contract terms, they are in charge of buying, storing, and delivering products from manufacturers, as well as managing cash collection and credit, within a pre‐defined territory of a few hundred to a few thousand nanostores. They may also take responsibility for the detection of new customers, and for sales, although in some cases manufacturers retain these functions. The trusted relationship between shopkeepers and stockists facilitate the supply chain operations of many products, supporting the growth of nanostore operations and of CPG manufacturers.

Addressing Operational Challenges: Value‐added Services

Nanostores’ omnipresence in emerging markets makes them the perfect partner in order to offer value‐added services to a myriad of communities. These family businesses with long operating hours keep a close contact with their neighborhood, which makes them an interesting channel to develop new business models that require intimate local knowledge and flexibility. How can consolidated tech companies such as Amazon, and CPG manufacturers such as AB InBev and Bimbo, leverage these characteristics in order to offer services for consumers in emerging markets through these nanostores?

Engaging Nanostores to Improve Delivery Efficiency: Amazon's “I Have Space” Program

In India, Amazon developed the “I Have Space” program⁹ that is intended to enable tens of thousands of nanostores to receive, store and deliver packages to consumers. Amazon delivers online customer orders to nanostores, who are in turn responsible for the last mile delivery. The location where the delivery takes place can be the consumer's home or a designated place agreed upon between the customer and a nanostore. Essentially, the “I Have Space” program leverages shopkeepers’ close relationship with the consumers who reside in their neighborhood to facilitate informal coordination for delivery time and location.

This program creates value for all involved parties. For Amazon, it provides a cost‐effective alternative to serve its customers, while leveraging informal connections and local tacit knowledge. For nanostores, this program enables them to generate additional revenue for making deliveries (especially during off‐peak hours) and it offers an opportunity for them to cross‐sell other products. Finally, it enables customers to access Amazon's wide product assortments through their nanostores with the same familiar faces.

Empowering Nanostores to Improve Home Delivery Services: AB InBev

Nanostores in many developing countries have traditionally provided home delivery services. For example, Indian kiranas have long offered this service to customers within their vicinity, coordinating ordering and delivery informally. The wide adoption of smartphones enables a larger reach of home delivery services provided by nanostores. In the Dominican Republic, global beer producer AB InBev has developed Colmapp, a smartphone app that can enable consumers to order beer and other products online. The app allows customers to select their preferred nanostore, from which they can get the products delivered within 30 minutes.¹⁰

While cash on delivery and credit card are accepted as payment methods, AB Inbev has explicitly included the option to pay via informal consumer credit extended by the nanostore, recognizing its importance as a payment method in this channel in order to retain loyal customers. During the Covid‐19 pandemic, AB Inbev has rolled out similar versions of this platform across other countries in Latin America, such as Tienda Cerca in Colombia. These platforms provide basic information to consumers about the store, such as assortments and contact information. Consumers can directly contact shopkeepers through WhatsApp or phone and place their orders from the store of their own choice. By serving these consumers through nanostores, AB InBev can expand its reach and provide additional services to customers. Besides providing the platforms, AB InBev has announced that it will give away thousands of bicycles to support shopkeepers conducting efficient home delivery.¹¹ For AB InBev, these platforms represent a way to allow shopkeepers to compete with the organized retail channel's home delivery services.

Improving Payment Efficiency at Nanostores via Electronic Payment Systems: Bimbo's Red Qiubo

In developing countries, many customers as well as nanostore owners lack access to formal financial services. To overcome this challenge, electronic (or mobile) payment systems can help nanostore owners to grow and to compete. By helping nanostores to accept electronic payments with credit cards, debit cards, and food vouchers in a fast, easy, transparent, and safe manner, shopkeepers can attract more store traffic, offering them efficiency and security in electronic operations, and increased revenue through the sales of value‐added digital services. This fundamental need has motivated Grupo Bimbo, the world's largest baking company, to develop the digital transaction platform Red Qiubo in 2015. Among the 700,000 nanostores in Mexico that carry Bimbo's baked goods, over 70,000 have adopted the Red Qiubo system.

Besides card payments, the system enables stores to offer top‐ups for cellphones and payment of other services to consumers. Offering such value‐added services allows nanostores to continue competing with organized convenience stores such as Oxxo or 7‐Eleven, who have been offering similar services for a number of years. Red Qiubo is beneficial to Bimbo because it enables Bimbo to achieve a higher profit margin by selling through nanostores than through chain stores. Also, when nanostores can accept digital payments, they receive instant cash in their accounts. This digital cash could be used to develop digital payment to suppliers upon delivery, reducing the need for costly cash transactions for the supplier.¹² By using Red Qiubo, shopkeepers benefit from additional sources of revenue due to the value‐added services they can now offer, and increased store traffic. By increasing revenue and by reducing the cash‐to‐cash cycle, the Red Qiubo can help nanostores to increase the sales of Bimbo products, thus allowing Bimbo to reduce its operational costs of handling cash on delivery.

Addressing Cash Flow Challenges

In developing countries, nanostore operations are usually conducted in cash, and trade credits or loans are oftentimes not available to these nanostore owners. As shopkeepers need to replenish their stocks by paying cash upon delivery and recoup the replenishment cost long after the products are sold due to the informal consumer credit provided, they are faced with a very long cash conversion cycle. This long cycle often creates a cash flow problem for nanostore owners to sustain and grow their subsistence business. Furthermore, for suppliers this implies that retailers are under‐ordering, resulting in frequent stockouts. In the absence of financial assistance from traditional institutes such as banks, and the predominant unwillingness of suppliers to provide trade credit due to default risk, can a lender extend loans to nanostore owners by aligning their incentives with manageable financial risks?

Data‐driven Lending Schemes for Nanostores in Asia: Coca‐Cola and Alibaba

We observe some innovative financing schemes that can result in a win–win situation. In the Philippines, knowing the sales history at different sari‐sari stores, Coca‐Cola provides loans to shopkeepers via the STAR loan program for replenishing Coca‐Cola products on credit via an electronic platform (Jenkins et al. 2013). In doing so, there is an incentive for these stores to order and sell more Coca‐Cola, resulting in a win–win situation. In China, nanostores and other small enterprises lack access to financial loans and credits due to their lack of collateral and limited profitability, which hinders their growth. By leveraging the store's payment history via the digital wallets of Alipay or WeChat Pay, Alibaba's and Tencent's online banks can use data analytics to make loan decisions to small business lenders. By September 2018, Alibaba has offered 1.19 trillion yuan in loans to 9.78 million small business lenders (Cheng 2019).

These two examples reveal that traditional lenders (e.g., banks) usually do not have access to information about sales transactions at the nanostores; however, their supply chain partners (vendors such as Coca‐Cola or online platforms such as Alibaba) possess valuable information for evaluating the financial health and payment behavior of the borrower. Therefore, there is a great opportunity for a bank to partner with a key supply chain partner to extend their loan programs to small businesses so that the bank and these small businesses can both grow. For example, HSBC has linked up with Alibaba in March 2020 to gain visibility about the background, historical transactions, and projected future transactions of its merchants in Hong Kong who sell on Alibaba's platform Tmall. With access to accurate and timely data about these merchants, HSBC can afford to offer loans (up to U.S. $500,000) to these merchants quickly without the need for collateral or financial documents (Tang and Yang 2020). In doing so, this form of innovative financing scheme can align incentives among all parties: small businesses, Alibaba, and HSBC can grow together.

Trade Credit Provision and Process Innovation for Nanostores in Latin America and Africa: Tienda Pago and Sokowatch

The cash flow problem hinders a nanostore's operations, because it limits its product assortment and its inventory (Fransoo et al. 2017). Furthermore, it impedes operational efficiencies for suppliers because there is uncertainty about whether or not the storekeeper has cash on hand to pay for the deliveries. Indeed, since store owners are cash constrained and often have to order at least 1 day before the actual delivery, it is common that orders cannot be delivered because of insufficient cash availability upon delivery (Boulaksil and Van Wijk 2018). Most suppliers reserve a buffer in the route planning process so that they will be able to perform additional visits for stores that were unable to pay during previous delivery attempt(s). Beyond that, counting and handling cash in the field are expensive and risky tasks that slow delivery teams down while putting them in danger of robbery. How can suppliers eliminate the adverse effects of cash while ensuring they are able to deliver and get paid without incurring additional risk?

Two interesting companies have developed innovative business models in order to deal with this issue: Tienda Pago and Sokowatch. Tienda Pago, a startup in Latin America that has been working closely with AB InBev in Mexico and Peru, offers a solution that allows shopkeepers to receive a trade credit upon delivery of the goods. This line of credit has been pre‐authorized by Tienda Pago based on the nanostore's historical sales and payments. The store can claim this credit through a mobile app. Once the store claims the immediate credit, Tienda Pago purchases AB InBev's receivable and extends a short‐term credit with a fixed interest rate to the store. Shopkeepers have 1 week to pay back the credit loan at any designated retail location within Tienda Pago's network. Nanostores are thus able to increase their sales by leveraging the credit loan granted by Tienda Pago, and AB InBev can perform cashless transactions with stores at low risk, thus mitigating the adverse effects of handling cash. Tienda Pago benefits from the collaboration by gaining access to historical data to evaluate creditworthiness of different stores, thus reducing the loan defaults, and earning more interests.

Sokowatch is an East‐African startup that acts as a distributor for brands such as P&G and Unilever. They provide trade credit to the stores by leveraging information about their historical sales and payments, which resembles the aforementioned Coca‐Cola STAR program in the Philippines. In addition to the provision of trade credit for shopkeepers, Sokowatch has made a number of innovations to traditional processes in the nanostore channel, including an online system for stores to place their orders via SMS or a mobile app, and same day delivery (instead of the more traditional physical sale in the nanostore followed by next day delivery). By digitizing the order collection process and reducing the time window for delivery, Sokowatch benefits from an improved forecast from shopkeepers on the cash availability they will have at the moment of delivery. This allows Sokowatch to reduce order rejection rates (and hence unproductive visits to the store), which increases the productivity and efficiency of its delivery process. As an additional service, Sokowatch facilitates the delivery of digital food stamps provided by NGOs and governments to undernourished people for purchasing essentials such as rice and cooking oil in the nanostores. This additional service generates store traffic for shopkeepers and can further help address their cash constraints.

Agility, Adaptability, and Alignment

By considering various innovative business models as presented above, we can summarize different innovative mechanisms and relate them to the Triple‐A supply chain as depicted in Table 3.

Table 3

Innovations and the Triple A: Urban Nanostores

Innovation	Examples	Agile	Adaptable	Aligned
Route planning and tracking	Delivery Dynamics	X	X
Channel financing and supply	Stockists	X		X
Value‐added services for consumers	Amazon's I Have Space, Colmapp/Tienda Cerca, Red Qiubo	X	X	X
Leveraging last‐mile information	Delivery Dynamics, Sokowatch	X
Data‐driven lending	Coca‐Cola's STAR, Alibaba's loans to small businesses, Alibaba & HSBC		X	X
Trade credit provision	Sokowatch, Tienda Pago		X	X

As articulated by Lee (2004), agility refers to the ability to respond to sudden changes in demand or supply. In contrast to other routing optimization solutions, Delivery Dynamics focuses its optimization concept primarily on continuously monitoring, responding to, and improving the real‐life status through optimization parameters rather than assuming that existing parameters are not subject to change. Sokowatch furthermore reduces its delivery time such that failed deliveries due to limited availability of cash are less likely, and Amazon's “I Have Space” program leverages local information to improve its last‐mile delivery efficiency. India's stockists are able to respond to sudden changes because they take away a significant part of the financing problem that suppliers would face without the consolidation offered by these stockists. In these business models, smartphone technology is critical both for collecting data and for distributing information to actors in the field.

Adaptability refers to the ability to change over time, to respond to changing market structures and strategies. The continuous improvement concept of Delivery Dynamics allows its clients to respond to such changes as planning parameters are inherently seen as more dynamic, and the optimization deliberately fixes some part of the routing solution. Amazon's “I Have Space” Program, AB InBev's online platforms, and Bimbo's Red Qiubo value‐added services allow nanostores to adapt to changing market structures, as in developing countries online commerce and digital payments are growing. Organized retailers, especially convenience store chains like 7‐Eleven or Oxxo, provide such services. Suppliers are enabling nanostores to level the playing field by assuming these trends. Furthermore, the various data‐driven lending programs, along with various startups that are facilitating trade credit, reduce the nanostores cash flow problems, and allow them to adapt to changing requirements of customers, such as higher expectations on on‐shelf availability, and larger assortments.

Finally, alignment refers to the need that in supply chains the interests of all players are aligned. The lack of transparency in particular has long prevented to provide value‐added services, loans, or trade credit. New online platforms that share information across the different players in the supply chain, helped by the extensive deployment of the smartphone, and—in some countries—by the growth of digital payments allow for interests to be much more aligned. In all examples that we discussed in this respect, additional data allows for redistributing activities and responsibilities across the supply chain such that small businesses can grow, and large suppliers, startups, and even integrated tech companies like Amazon, can benefit.

Rural Nanostores: Accessibility and Affordability

While agility, adaptability and alignment are important attributes for urban nanostores and their suppliers to improve operational efficiencies and grow their business, rural nanostores have to overcome some fundamental challenges that affect their viability. Since they face less competition, and the rural population is declining, their business is at risk and they need to grow their supply chain's operational efficiency to survive. Recall from Table 2 that nanostores located in rural areas are facing many challenges. Because mobile phones are ubiquitous and solar technology is becoming more affordable, these two technologies can enable rural nanostores to gain access to affordable energy, products, and financial services more easily so that they can improve their basic productivity and efficiency. We find mobile and solar technology can enable rural nanostores to gain access to affordable energy, products, and financial services more easily so that they can improve their basic productivity and efficiency.

We now use case examples to describe how mobile and solar technology‐based business model innovations can enable nanostores to improve their operations.

Addressing Infrastructural Challenges: Solar Technology

In India, “off‐the‐grid” communities have no access to ice or electricity. Consequently, these nanostores can only operate during day time and sell products at room temperature, limiting the sales of products such as bottled drinks. This affects both store sales and the sales of their suppliers. How can innovative technologies help these nanostores to overcome the fundamental challenge caused by lack of access to electricity?

Recognizing the fact that, without access to electricity, nanostores limit their sales opportunities. To help these stores and improve the sales and visibility of Coca‐Cola in rural India, Coca‐Cola developed programs to improve nanostore productivity. To enable nanostore owners to gain access to electricity to improve their operations, Coca‐Cola developed the solar‐powered eKOCool chest cooler that enables a store to sell ice‐cold drinks and also operate at night (by charging its solar lanterns). Ultimately, the eKOCool cooler program creates a win‐win‐win solution that aligns everyone's interest: store owners can earn more by operating longer hours, rural customers have access to cold drinks and can charge their mobile phones by tapping into the charging ports provided by eKOCool coolers, and Coca‐Cola can sell more (Coca‐Cola 2013).

Addressing Operational Challenges: Innovative Logistics Models

Digitalization of Nanostore Operations in China: Alibaba's Ling Shou Tong

While giants Alibaba, JD.com, and Pinduoduo dominate the e‐commerce market in China, selling to rural consumers continues to be a challenge because of limited access to Internet and very costly “last mile” delivery. At the same time, underdeveloped logistics (insufficient coverage of delivery networks, poor road conditions and challenging terrain) in rural China make it difficult for these nanostores to replenish their stocks efficiently: the wholesalers/distributors are reluctant to make less‐than‐truckload shipments due to high shipping cost, and nanostores need to wait until their aggregated orders are large enough for a full‐truckload shipment. With Alibaba and nanostores facing similar challenges, can they work together to develop strategies that can align their incentives?

In August 2018, Alibaba worked with nanostore owners in rural China to launch a retail management platform that is called “Ling Shou Tong” (LST) that is intended to help store owners to optimize their retail operations. By installing various scanners, Alibaba can help these stores to collect customer purchasing data and collect customer payments via Alipay. Also, Alibaba can use its cloud computing to analyze the sales data and its logistics businesses to create a digitally connected inventory management system so that these nanostore owners can also use Alibaba's app to replenish their stocks, which are fulfilled by Alibaba and shipped directly from its warehouses, eliminating the need to deal with traditional middlemen (i.e., wholesalers or distributors). In return for this free service, each store needs to share customer purchasing data so that Alibaba can perform sales analytics, and allow it to use their physical storefronts as Alibaba's fulfillment‐and‐delivery centers so that customers can pick up their online orders at these stores. This innovative program can align incentives as nanostores can improve their replenishment operations and attract more store traffic when customers pick up their online orders, and Alibaba can gain access to the rural consumers by overcoming the last mile delivery problem. By September 2019, over 1.3 million nanostores have participated in the Ling Shou Tong Platform, even though there is a concern that Alibaba may end up competing with these stores directly, especially when these stores have to rely on its product selection when replenishing their stocks. While originally started as a rural initiative, the LST program is now also available to urban nanostores, allowing them to make use of Alibaba's efficient urban distribution network. Moreover, Alibaba has been adding additional services to their offering, such as credit and insurance.

Innovative Rural Distribution by Engaging Micro‐entrepreneurs: Coca‐Cola and Unilever

Quite often, rural nanostores in developing countries lack the support of a distribution channel so that it is a big challenge for them to replenish their inventory. However, companies such as Coca‐Cola developed a “hub‐and‐spoke” distribution system by engaging the local micro‐distributors to set up a center in a larger village as a “hub” from which other micro‐distributors can travel to the more remote rural areas as “spokes" to distribute products to nanostores. For example, in East Africa, Coca‐Cola bottlers deliver over $500 million worth of product to 1,800 “manual" distribution hubs operated by 7,500 micro‐distributors. Then these micro‐distributors operate as distribution spokes by using push carts or even bicycles to distribute the product to nanostores, making frequent but small deliveries to these cash‐strapped nanostores. In 2000, Hindustan Unilever, a subsidiary of Unilever in India, started Project Shakti in 50 villages with woman distributors receiving training and stocks of consumer‐packaged goods from Unilever's rural distributor and operate as spokes for distributing Unilever products to nanostores in 6–10 villages (Sodhi and Tang 2011) By 2019, Project Shakti has over 109,100 Shakti woman distributors, distributing Unilever products in 18 states. Also, these woman distributors earn approximately 2000–3000 Rupees per month under a commission‐based model, which doubles their regular income.

Addressing Operational Challenges: Innovative Replenishment Models

Innovative Replenishment Through Supply Chain Re‐engineering: Hapinoy

In rural areas of many developing countries, formal distribution channels are essentially non‐existent and micro‐retailers have to travel long distance to purchase small quantities of their stocks directly from regional wholesalers (Yadav 2015) or from large retailers (Blanco and Fransoo 2013). For example, to obtain supplies of medicines, over 80% of the private drug stores in the rural areas of Tanzania travel on their own to purchase their supplies of medicines directly from key suppliers located in the city (Yadav 2015).

In the Philippines, nanostores (known as sari‐sari stores) sell basic products such as canned foods, cigarettes, cooking oil, salt, and sugar to consumers through a metal barred window of the owner's home. Due to the lack of distribution support in many small towns or villages, it is inconvenient and costly for these nanostores to replenish their stocks. Faced with this challenge, they created an efficient replenishment strategy that is known as the Hapinoy program, jointly developed by sari‐sari store owners and MicroVentures, a for‐profit venture capital firm. Under the Hapinoy program, some existing sari‐sari stores are chosen to become “community stores.” With some financial assistance provided by MicroVentures, each community store operates as a wholesaler by fulfilling orders placed by other participating sari‐sari stores in the neighborhood and simultaneously continues to operate as a nanostore by selling directly to consumers. MicroVentures also provides business training and micro‐loans under the Hapinoy program, earning interest from those micro‐loans. By sourcing from the community store, participating stores can reduce their travel‐related costs. At the same time, by aggregating the orders from the participating stores, the community store can obtain a lower purchasing price (through quantity discounts) from the supplier. By reducing the travel cost (incurred by the community store only) and by reducing the purchasing price, the community store and all participating sari‐sari stores can improve their productivity and reduce their replenishment cost (Zhang et al. 2017).

Addressing Financial Challenges: Innovative Financing Schemes

Innovative Lending by Creating Social Collateral: Grameen Bank

Without collateral and formal credit history, many nanostore owners lack support from traditional financial institutions. Grameen Bank is essentially a social enterprise that intends to enable nanostore owners (or the poor in general) who need a little bit of money to sustain their business operations. To reduce the default risk, founder Mohammad Yunus developed an innovative lending model that has shown great success. To qualify for a loan, any person with assets worth <0.5 acre of land can join a five‐member group of people who are not relatives or family members. Specifically, each member shares responsibility for the loan granted to any other member in the group; that is, all members are responsible to provide the repayment when one of the members is behind.

Initially, Grameen Bank offers loans to only two members of each group. After 2 months, two more members can obtain loans provided the initial loans have been paid back. Because no collateral is involved, the group norms serve as a proxy for “social collateral.” Also, bank representatives conduct regular meetings with representatives of different groups to enable them to share experiences, to develop new skills including managing business operations, and to induce shared responsibility. By using this innovative lending scheme, Grameen Bank has recouped 98% of its loans, which is better than most loans made by regular financial institutions (Sodhi and Tang 2011).

Accessibility and Affordability

By considering the innovative models that have helped nanostores to improve their survival in rural areas, we can summarize these models and relate them to the issue of accessibility and affordability in Table 4.

Table 4

Innovations for Rural Nanostores: Accessibility and Affordability

Innovation	Examples	Accessibility	Affordability
Solar power	Coca‐Cola's eKOCool	X
Store digitalization and e‐commerce‐related fulfillment	Alibaba LST	X	X
Distribution support	"Hub and spoke" by Coca‐Cola and Unilever	X
Development of community stores	Hapinoy program	X	X
Lending with social collateral	Grameen Bank	X

In the context of rural nanostores, accessibility refers to the ability of the store to receive basic services supporting the operations of the store. All innovations discussed in this section provide this accessibility. For instance, the eKOCool chest fridge provides both electricity and cooling, enabling the store to sell cold drinks and to provide electricity‐as‐a‐service to customers who need to charge their cell phones. Alibaba's LST program, Unilever's Project Shakti, and Coca‐Cola's hub‐and‐spoke program provide a cost‐effective distribution service to support frequent replenishment of goods to nanostores in rural areas.

Affordability refers to the ability to offer lower prices to stores and/or consumers. With its Ling Shou Tong program, Alibaba increases the logistics efficiency in distribution, and hence allows nanostores to charge lower retail prices without reducing their profit margins. Furthermore, by aggregating small orders, Alibaba can use its buying power with suppliers to negotiate a lower unit cost for participating nanostores. The Hapinoy program provides similar benefits.

Ultimately, innovations focusing on accessibility and affordability enable rural nanostores to survive and rural consumers to access affordable goods at the same time.

Discussion and Conclusions

Research Implications

The nanoretailing channel is one of the largest retail channels globally, and serves by and large the entire base of the pyramid in developing economies. As such, it is both of importance from a business perspective—as it is a channel where the CPG industry has been realizing growth in the most recent several decades—and from a societal perspective, as it provides manufactured goods at affordable prices to those living at the base of the pyramid, and employment for millions in emerging markets. Studies on the nanostore channel and its operations have started to appear in the Operations Management literature, as discussed in section 2.2. Furthermore, in this study we have illustrated various exciting innovative developments that can enable urban nanostores to develop their Triple A capabilities to compete. Also, we have shown how various innovative models can help rural nanostores to achieve sustainable growth by improving their Double A capabilities.

In terms of future research, there are many avenues for theoretically interesting, relevant, and impactful contributions. The examples above are some of many innovations across the globe, and require further study to gain a deeper understanding. As the institutional environment of nanostores is really different in many dimensions, basic modeling paradigms might very well be different in this retail channel. For instance, many of the shopkeepers are subsistence entrepreneurs, primarily aimed at survival and feeding their family members, rather than long‐run profit maximizers. Furthermore, they operate in a harsher environment (inadequate infrastructure, informality, insecurity, etc.) that hinders their operational efficiency and productivity. Research in this domain must incorporate this operating environment. Some of the early work in this field illustrates this necessity (e.g., Boulaksil and Van Wijk 2018, Ge et al. 2020a,b, Zhang et al. 2017), while Fransoo et al. (2017) provide a more empirical introduction to the characteristics that set this channel apart. Key questions can be formulated from the perspective of manufacturers supplying this channel, from public authorities developing policies to reduce adverse effects such as congestion and bankruptcies, or from a broader perspective such as the UN Sustainable Development Goals.

From the perspective of research methods, most published studies until now have been using stylized models to develop a theoretical and in‐depth understanding. There is plenty of room for this type of research. At the same time, there is also a need to use other research methods such as econometric studies using archival data to explain more complex and intricate relationships. Also, there is opportunity for experimental studies to better understand both shopkeeper behavior (with laboratory experiments and laboratory‐in‐the‐field experiments) and systemic cause‐and‐effect relationships (using Randomized Control Trials and other forms of field experimentation).

Concluding Remarks

Hau Lee argued already in 2004 that great supply chains need to be agile, adaptable, and aligned in order to compete successfully. Since then, he has done extensive work to understand and improve supply chains in the developing world, much of which he summarized with one of us in 2018 (Lee and Tang 2018). In that paper, he also mentions specifically the importance of nanostores in global retail supply chains. Above, we have argued that the global spread of affordable technologies allows new business models to be developed. These business models help to make urban nanostores more agile, adaptable, and aligned, while it improves the accessibility and affordability of the nanostores in the countryside.

Our analysis makes clear that the rural setting is very different from the urban setting. The differences in economic development, along with urbanization in most developing countries, lead to different institutional settings and different competitive landscapes. Most of the current investments by private players, whether startups or large CPG manufacturers, are focusing on the urban setting. There, the nanostores operate in a landscape that is undergoing continual change. Convenience stores such as 7‐Eleven in Asia or Oxxo in Latin America, and hard discounters such as BIM in the Middle East or D1 in Colombia are developing new retail models to compete with the nanostore channel. The recent Covid‐19 crisis will further strengthen the importance of the nanostore channel, as a significant share of middle class consumers have lost their job and part of their wealth.

Footnotes

Acknowledgments

We wish to thank Hau Lee for his numerous contributions to the society at large. Hau Lee has profoundly impacted the discipline of Operations Management over the past four decades in many dimensions. Jan and Chris have been fortunate to directly benefit from his mentorship. Jan Fransoo thanks Hau Lee for hosting him as a young postdoctoral fellow 25 years ago, and for closely collaborating in quite a number of industry‐academia initiatives. It has profoundly impacted Jan's research, specifically how to conduct impactful work while simultaneously generating interesting theoretical insights. Christopher Tang is indebted to Hau Lee for his advice and support throughout his entire career.

Last but not least, we thank many of the innovative companies mentioned in this article for sharing information about their business models, insights, and challenges with us.

1

See (in Spanish): https://www.coca‐colamexico.com.mx/nosotros/presencia‐en‐mexico

2

In Mexico City, Fransoo et al. () report that the annual turnover rate of nanostores is around 25%.

3

For instance, in Latin America, Brazil's modern channel captures 60% of its CPG retail sales, while in neighboring Bolivia the modern channel captures only 20% of the market. Across most countries in Africa, the modern channel is less developed, and nanostores continue to dominate the market with a market share often exceeding 85%. India is the world's largest market for nanostore operations, capturing more than 90% of CPG sales across this vast South‐Asian country.

4

.The findings of Jerath et al. (2016) have been supported by anecdotal claims. For example, in Mexico, modern convenience retailer Oxxo argued that their store openings have forced nanostores to close. However, the data provided by the national statistics agency of Mexico do not support this claim, as it suggests that the number of nanostores has been increasing, albeit in areas different from those where modern channel has flourished (Mora‐Quiñones ).

5

Stockists are informal wholesalers who serve as sales representatives for various manufacturers in India

6

As discussed in § 2, many of these suppliers are manufacturers of large consumer brands. However, other suppliers may be wholesalers or distributors of brands that sell less volume.

7

Delivery Dynamics https://deliverydynamics.com focuses on the digital transformation and continual improvement of last mile delivery systems.

8

See Hindustan Unilever Limited's factsheet: https://www.hul.co.in/Images/hul‐factsheet_tcm1255‐537653_en.pdf

9

See https://www.amazon.in/b?ie=UTF8&node=12410327031

10

For details in Spanish, see: https://www.listindiario.com/economia/2020/05/06/616270/cerveceria‐nacional‐innova‐y‐aporta‐mas‐de‐rd‐100‐mm

11

See (in Spanish): https://www.gmodelo.mx/documentos/BP‐TIENDITA‐CERCA‐COMUNICADO‐ENTREGA‐BICICLETAS‐120620.pdf

12

Such payments to the supplier are conducted through a digital wallet managed by the Red Qiubo solution.

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