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Retail modernization in emerging markets: Strengthening the retail backbone of the economy

As economies become more digitally enabled, Stanford researchers seek to better connect and strengthen the millions of small retailers in an emerging market.
shreya interviewing small business owner
Shreya Kankanhalli speaking with a small business owner in Mexico City.
work, Entrepreneurship, and finance

More than two million small shops and market vendors—las tienditas—form the backbone of Mexico’s retail economy.

These microenterprises drive 55 percent of all retail sales in Mexico, making up 15 percent of the country’s GDP and employing 20 percent of the labor force. A vast majority of these shops remain traditional in terms of their business processes and operations, posing dangers to productivity as they risk getting left behind in a rapidly evolving digital world.

shreya kankanhalli
Shreya Kankanhalli

A recent report by McKinsey on “Latin America’s Missing Middle” discusses this persistent polarization between a few very large companies and a long tail of small, unproductive firms as one driver of sluggish growth in the region. But these traditional business structures have negative consequences for the individual business owner as well, often translating to lower sales and profitability relative to modern competitors.

Beginning in 2017, a team of researchers and local stakeholders, including Mastercard and the World Bank, sought to tackle these fundamental questions of inclusive growth. Can we modernize small-scale retailers? And how does modernization impact business performance?

Two faculty affiliates of the King Center were part of the research group, Stephen J. Anderson and Sridhar Narayanan, partnered with World Bank Lead Economist Leonardo Iacovone and Stanford graduate student Shreya Kankanhalli to spearhead the design of multiple rigorous randomized field experiments focusing on these questions of merchant modernization, beginning in Mexico City.

Small structural changes make a big difference

Over a thousand stores were randomly assigned to receive either no intervention, an intervention focused on modernizing internal business structures focusing on product planning, or an intervention aimed to modernize external business structures, including store branding.

The hypothesis was that traditional external structures—like poor, haphazardly placed signage—negatively impact customers’ shopping experiences while traditional internal structures—like disorganized sales records —can imply poor awareness of demand and product management.

When deciding how the interventions would operate, the research team knew they wanted to “change, not teach.” Instead of focusing on classroom-based trainings that are heavy on theory rather than implementation, they focused on practical, visual, and hands-on changes at the actual tienditas. They challenged the common perception among merchants that improving how a store looks can hurt sales because it would make shoppers assume higher prices, and encouraged tiendita owners to focus more on the customer experience.

The research team worked with the local NGO FUNDES to design a fellowship program for university students called the Mi Asesor (My Advisor) program. For businesses that received the ‘external’ treatment, the student asesors worked closely with business owners to strategically installed more attractive store signages, ensured walls were attractively painted well, and installed working light fixtures where necessary. They also tackled the customer experience with changes to the “engagement strategy” – creating loyalty programs, ensuring all prices were clearly displayed, and that creating price promotions for high-margin or low-rotation products. For businesses that received the ‘internal’ treatment, the student asesors instead worked with business owners to upgrade the internal stock area, as well as to set up manual or digital systems for recording sales, profit margins and managing inventory.

These small changes were highly effective. Internal and external modernization levels rose by 30 and 20 percent, respectively, while business performance also improved. The businesses in the internal and external treatment groups had significantly higher sales indicators, earning approximately $280 to $400 USD more each month, respectively, than businesses that did not receive either intervention. This effect represents an 11% to 17% increase in sales over the no intervention group, who have roughly $2,400 USD in sales each month.

These results can be viewed as the short-term impact of modernization changes, measured six months after the interventions. The research team will return to Mexico City in a year to measure the longer-term impact.

Expanding the scope

No one expects small retailers like Mexico’s tienditas to disappear any time soon. They serve local neighborhood needs and provide value further down the supply chain since they enable multinationals to reach customers in emerging markets.

Existing research on micro-retailers has typically focused on how to integrate them into a formal national business structure. But this research team wanted to explore whether smaller modernization steps are effective, and what smaller actions deliver the largest impacts.

The research has so far shown that it is possible to help traditional retailers modernize their businesses through carefully-designed interventions, which resulted in substantial sales performance improvements. In partnership with the Mastercard Center for Inclusive Growth, the research team is now applying the lessons from Mexico City to understand how specific technological and marketing interventions could nudge adoption and continued usage of payment technology. The team plans to release a second round of findings in the coming year after working with retailers in Guadalajara.

Shreya Kankanhalli is a PhD candidate in quantitative marketing at the Stanford Graduate School of Business. She recently helped lead a group of Stanford students on a Journey of Inquiry research trip to Mexico City.