The Unlikely Success of Nanostore Retailing

Editor’s Note: This article was written by Christopher Mejia-Argueta. For more information on the book and associated research contact the author at [email protected].

Millions of small, family-operated retailers known as nanostores are the main source of consumer packaged goods (CPG) for many consumers in Africa, Asia and Latin America. These mom-and-pop outlets have thrived by offering affordability as well as the right mix of items and convenience, and by gaining the trust of their customers. At the same time, however, the retail model they have created is far from efficient.

Can nanostores survive in the face of competition from large, more efficient retail chains?

A new book, Reaching 50 Million Nanostores: Retail Distribution in Emerging Megacities*, argues that nanostores still have a key role to play in a changing retail landscape. The authors share their views and extensive experience of studying and working with the millions of family-owned small stores in the large metropolitan areas of much of the developing world.

Nanostores operate with less than five employees, and depend on cash transactions and customer relationship-based credit. They sell hundreds of SKUs with at most a couple of options offered per category in smaller, affordable and mixed presentations.

These technically unsophisticated retailers serve a few hundred consumers by offering the right assortment of products, and stores that are conveniently located near to working centers and residential areas.

Nanostores account for more than half of the CPG retail business in developing countries, and have achieved a growth rate of 70% over the last five years according to the consulting firm McKinsey.

In China, nanostores have managed to compete successfully with larger retailers. Nielsen data indicate that supermarket penetration in China (i.e., share of consumers who shop at supermarkets) dropped from 86% in 2002 to 77% in 2009. The major retailer Tesco recently withdrew from the Chinese market; Carrefour and Walmart have had to reconsider their hypermarket strategies in the country. These changes in strategy highlight the difficulties that modern retailers still face in China.

In other countries, nanostores dominate the retail channel. For example, in Morocco, 80% of grocery sales take place in the traditional channel; in India, the share is greater than 95%; in Nigeria and the sub-Saharan Africa region, it accounts for at least 95%; in Latin American countries, it ranges from about 45%.

However, these statistics probably underestimate the market dominance of nanostores. In many countries reliable public data are not available because many mom-and-pop businesses try to evade taxes by withholding information and are part of the informal economy. Hence, these businesses might not show up in government statistics.

The paucity of data makes it difficult for other retailers to understand the nanostore model and use similar methods in their operations. Moreover, the lack of a complete picture of how nanostores operate underscores the uniqueness of a retail model that flourishes in fragmented, densely populated areas, where infrastructure and public transportation services are poor, and consumers have limited purchasing power.

Despite its success, however, the nanostore model is not the most efficient in the retail space. Its reliance on cash creates security risks and trading inefficiencies, and introduces complexity to logistics processes. These flaws along with other disadvantages suggest that nanostores will eventually be driven to extinction by more efficient retail models.

Conversely, there are compelling arguments in favor of the survival of nanostores. They support the subsistence of millions of families, especially the poorest ones. These consumers are spending more on CPG purchases, but still require the credit that nanostore owners offer them.

Importantly, the availability of credit terms also is a key influence on the brand choices of these individuals. In addition, nanostores are often closely integrated with the sales and distribution operations of manufacturers, effectively providing the enterprises with a higher margin than they could earn by selling through modern channels.

Based on these insights as well as the extensive data and case studies reported our book, many experts believe that nanostores are here to stay and are likely to be cornerstones of growth in emerging economies.

If this is the case, manufacturers need to understand and master the complexities of the nanostore retail model. This is no easy task. It is necessary to learn how to customize key processes such as demand generation, order processing, physical distribution, payment collection and the after-sale service.

Customizing requires a careful study and balance between multiple factors that affect the logistics network design. For example, physical distribution depends on how sales, delivery and merchandising activities are connected. The combination of these activities creates options such as on-board sales, presales with direct delivery, presales with deliveries performed by a distributor, and outsourced options that rely on distributors or wholesalers.

Add the need to account for the limited space available in nanostores, limited shopkeeper budgets, and frequent, low-volume deliveries that must compete with rivals' services, and the logistics become even harder.

We believe that nanostores will become increasingly integrated into modern and e-commerce supply chain channels, thanks to continuous technological investments and disruptive business models. They will be driven by four trends: high-performance operations, frictionless retailing, disruptive e-commerce, and corporate social responsibility. Nanostores will help mitigate congestion and pollution, support social programs that improve the health and wellness of low-income consumers, and function as important community hubs.

* Reaching 50 Million Nanostores: Retail Distribution in Emerging Megacities by Jan C. Fransoo, Professor of Operations Management and Logistics, Eindhoven University of Technology, Netherlands, Edgar E. Blanco, Research Affiliate, Center for Transportation and Logistics at MIT, US, and Christopher Mejia-Argueta, Director of the MIT SCALE Network for Latin America). The book discusses nanostore logistics distribution and commercial route-to-market concepts and presents best practices from Latin America, Asia and North Africa. The book is available from Amazon.com.

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