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Practices and Performance of Small Retail Stores in Developing Economies

ABSTRACT
Keywords: retailing, developing countries, small retailer practices, emerging markets, inventory management, retail performance

As multinational corporations have expanded beyond the borders of developed economies and into fast-growing developing regions of the world, they have struggled to understand and manage a retail format that is dominant in many of those economiesthe small retailer. The authors first synthesize existing literature on the phenomenon of small retailing to deliver a macro perspective of this retail format and its evolution. Then, they delve deeper into an urban market in a developing economy and provide an empirical illustration that sheds light on the decision-making processes of the small retailers and their operational performance. This yields a complementary micro perspective of the phenomenon that has been absent in the literature. The analysis provides insights into how firms that enter markets in developing economies can manage and profit from this important but frequently overlooked distribution format. According to the World Bank Development Indicators 2008 report, 107 of 209 world economies are either low-income economies (with an annual gross national income per capita of $905 or less) or lowermiddle-income economies (income per capita between $906 and $3,595). However, these developing economies now produce 41% of the worlds output, and 5 of the 12 largest economies are now in the developing world. Chinas and Indias economies are expected to grow to 22 times their current size by 2050, whereas the United States economy is expected to grow only approximately 2.5 times (Wolfensohn 2006). Developing countries now constitute more than 80% of the worlds population and are predicted to grow from five billion people in 2008 to eight billion people by 2050. With this shift in the geographical focus of growth, multinational companies are attempting to develop economies in Asia, Africa, and South America as profit sources. However, competencies and assumptions that have served the companies well in developed markets cannot necessarily be transplanted into developing markets (White and Absher 2007). Well-documented failures (e.g., that of PepsiCo in Venezuela) demonstrate that managers must build localized knowledge to perform well (Caves 1996; Harvey and Novicevic 2000). A key challenge in consumer markets in developing economies pertains to the last-mile problemthat is, the challenge of getting goods to the final consumer. Big-box stores and other sophisticated, if smaller, retail outlets commonly encountered in developed economies are far from being the dominant retail format in developing economies. Instead, managers often need to work with distribution channels that incorporate numerous small

Tomasz Lenartowicz and Sridhar Balasubramanian

Journal of International Marketing 2009, American Marketing Association Vol. 17, No. 1, 2009, pp. 5890 ISSN 1069-031X (print) 1547-7215 (electronic)

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retailers (Byron 2007; Jayaswal 2007). For example, there are more than two million small, independent mom-and-pop grocery stores in Mexico, Colombia, and Brazil alone (Daz, Lacayo, and Salcedo 2007). The limited infrastructural development of markets and the constraints imposed by limited earning power on the demand side have jointly driven the growth of the small retailer format (Mahajan, Banga, and Gunther 2006). Efficiencies associated with consolidated retail formats are difficult to achieve in developing economies (Frazier, Gill, and Kale 1989; Mentzer and Samli 1981; Neghandi and Prasad 1976; Samiee 1993). On the supply side, the capacity to collect, store, and manage information is limited. On the demand side, poor transportation infrastructure results in low consumer outreach. In addition, zoning requirements are often loosely enforced. In these conditions, small retailing represents the natural adaptation of the supply side in reaching consumers through an intensive spatial dissemination of retail presence. Recently, some consolidated retail formats have been introduced in urban concentrations in developing economies. However, this introduction has not strongly affected the small retail sector (Reardon and Berdegu 2002). For example, in developed economies, the introduction of a Wal-Mart megastore at a specific location can suppress prices and force out smaller stores in the surrounding region (Basker 2005). However, such impacts are muted in developing economies given the differing consumer shopping patterns, high levels of income variance, low levels of disposable income, and weak transportation infrastructure. Therefore, small retailers will likely endure and compete with big-box retailers (DAndrea, Aleman, and Stengel 2006), and managers will need to contend with the small retail format for the foreseeable future (Balachandran 2007; Coe and Wrigley 2007). Small retailers in developing economies arguably constitute the dominant retail format at the global level. Despite this, research focused on this format, especially of an empirical orientation, is sparse (Paddison, Findlay, and Dawson 1990; Samiee 1993). This situation endures, as confirmed by our literature review. By default, research in marketing has mainly focused on developed economies (Steenkamp 2001). In addition, in the absence of electronic data systems, obtaining data on the small retail sector is a daunting task (Ortiz-Buonafina 1992). This paucity of research is disturbing because a robust retail sector in developing economies can drive growth and development (Kaynak and Cavusgil 1982; Kumcu and Kumcu 1987). Against this backdrop, this study contributes to the literature and practice in the following ways: First, apart from some systematic efforts to study channels in developing economies (e.g., Samiee 1993; Wadinambiaratchi 1965), in general, studies in the area offer scattered perspectives. Furthermore, even in research on marketing challenges in these economies (e.g., Appiah-Adu 1997), a focus on small retailers is rare. Adopting a global perspective, we synthesize existing findings to provide a macro perspective of small retailing in developing economies.

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Second, the field lacks insights into the decision making and performance of small retailers. In the absence of databases and sophisticated decision algorithms, these processes will differ sharply from those adopted in developed economies. Without knowledge about these processes, the small retail sector cannot be smoothly integrated into a companys distribution strategy. To provide a micro perspective on these issues, we address the following questions: (1) In environments with poor information infrastructure and few formal decision support systems, what informal modes of reasoning do small retailers employ in their ordering decisions? (2) How do supply-side and operational factors and the quality of decision making together affect retail performance? and (3) How does the performance of small retailers compare with that of advanced stores in developed economies? Specifically, we examine the implications of decision heuristic usage, supply-side factors, and operational factors for retail performance in the context of stocking decisions and inventory management. We demonstrate that even in developing economies, there are key differences in the management of more advanced stores (we refer to these as high-standard stores) and less advanced stores that are typical of small-scale retailing (low-standard stores). Here, the store standard is best interpreted as a surrogate for the level of managerial sophistication associated with the store, which in turn may be reflected in the choice of high-rent locations, the presence of automated inventory systems, and other variables. We employ a mediatormoderator framework, with heuristics mediating between supply-side and operational variables (the inputs) and performance (the output), but with the mediating role being moderated by the store standard. We next present a thematic synthesis of the literature on the small retail sector in developing economies (the macro perspective). Then, to develop the micro perspective, we present an empirical study of the practices and performance of small retailers in an emerging economyspecifically, those located in the So Paulo urban area in Brazil. Finally, we discuss the limitations of our analysis and demarcate areas for further research.

A MACRO PERSPECTIVE OF SMALL RETAILING: SYNTHESIS AND DISCUSSION

At first sight, markets in developing economies can appear to be overwhelmingly complex and unstructured. However, as Mitchell (1966, p. 41) notes, The apparent complexity of (such) social phenomena bespeaks a lack of theoretical concepts available for their analysis. Similarly, Paddison, Findlay, and Dawson (1990) argue that such complexity is more perceived than real. Drawing from both historical and recent literature, we discuss six themes that pertain to small retailing in developing economies. Firms in developed economies carefully decide where to locate retail outlets. Two factors guide this choice: the proximity to vehicular and pedestrian traffic and the absence of competitors. In contrast, small retail outlets in emerging economies often cluster by type. For example, the main street in Padra, India, has been described as comprising nearly 300 retail establishments, with 36 goldsmiths, 35 grain shops, and 25 tailors and an unbroken row of 10 goldsmiths on one side of the street and 7 goldsmiths on the

The Agglomeration of Retail Establishments

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opposite side (Janaki and Sayed 1962). Such agglomeration is frequently encountered to this day (Prahalad 2005). This phenomenon has been frequently documented but insufficiently studied. Reasons advanced to explain the agglomeration include the provision of greater consumer choice at a single location and the fostering of knowledge sharing across collocated business units (Saxenian 1994). However, according to prior research, firms can gain the benefits of agglomeration without sliding into a vicious competition only when they are well differentiated; this is often not the case in developing economies (Fujita and Thisse 1996). With poor transportation infrastructure, agglomeration can help consumers tightly focus their search. However, other forces may be at work here. First, with clustered sellers, attempts to fleece consumers will be quickly detected, discussed, and magnified; this rapidly erodes the offending sellers reputation. Therefore, in the absence of consumer protection mechanisms at the market level, such self-policing can make the consumer feel secure. Second, small retailers may find it prohibitively expensive to advertise their stores, but over time the agglomeration can build a reputation as the default shopping destination. Third, small retailers may build deep customer relationships, to the point that the specific retail outlet, and not the agglomeration, is the shopping destination. Periodic markets support trades that would otherwise not be viable (Hay 1971). In these markets, small retailers rotate between market locations, operating on low overheads and selling goods that are debulked to a surprising degree. Stine (1962, p. 70) advances a succinct rationale for such markets: The consumer, by submitting to the discipline of time, is able to free himself from the discipline of space. Periodic markets can be supported by multiple economic factors and social customs. For example, in Western Nigeria, consumers tendency to attend periodic markets every two or three days resulted from the lack of storage facilities, low cash flow, and the custom of serving soup every third day (Hay and Smith 1980). In a study of periodic markets in China, Rozelle, Benzinger, and Huang (2002) find no evidence of their decline even in developed areas; indeed, they detect more and new periodic market activity in the more urban areas. They argue that periodic markets may strengthen as transportation and communication links are enhanced. Better transportation can stream more consumers into periodic markets, and even as modern transport has reduced the friction of distance, the friction of land and capital has risen, impeding fixed-establishment retailing. Ownership of small retail outlets in developing economies may be concentrated within a nonindigenous ethnic group (Norvell and Morey 1983). Such ethnodominated retailing is often associated with a dendritic spatial structure, in which all lower level centers are tied to a single higher level center in a chain that is entirely vertical without horizontal links (Smith 1974, p. 177). Dendritic structures can arise from the operation of mercantile forces external to the local system (Vance 1970), specifically when a major trading system is located in the coastal areas with subordinate mar-

The Existence of Periodic Markets

Ethnodomination in Small Retailing

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ket centers stretching inland. In this case, foreigners who control the trade and capital may also control the inland retailing system, leading to a dendritic structure. Norvell and Morey (1983) suggest that multinational firms must coopt ethnodominated retail structures by assisting in modernizing their operations. However, Speece (1990) cautions that co-option may be counterproductive because it can further fuel the hostile political climate toward ethnodomination in many economies. Instead, Speece suggests that firms should first carefully analyze the political climate and the evolution of ethnic control in the channels and then consider targeting indigenous channel members for development. Retail outlets in developing economies can become foci for social interactions for the neighborhood (Sim 2000). The socially embedded nature of the neighborhood retailer also enables the formation of trusting relationships. Given that cash is scarce, many times traders must extend credit down to the retail level, and retailers down to final consumers. In the absence of formal contracts and efficient legal machinery, interpersonal knowledge induces trust between parties and enables appropriate action if extended credit is not repaid. In describing commerce in the town of Lukang, Taiwan, DeGlopper (1972) notes that not all postdated checks are considered of equal worth; a checks worth depends on who wrote the check. Likewise, commerce in the slums (favelas) of Rio de Janeiro takes place in tiny neighborhood stores called biroscas. The owner of a typical birosca is well known and locally influential. Even in the absence of a formal contract, the owner of a shack in the favela is liable to lose that property if he or she does not repay the credit extended by the owner of the birosca (Frankenhoff 1967). The retail store may also serve as a social venue within ethnic communities in developed economies. In Hispanic communities in the United States, Kaufman and Hernandez (1991, p. 378) note that bodegas have served as social gathering centers in ethnic neighborhoodsproviding advice on finding a home, buying an automobile, or obtaining employmenttrading such services for store loyalty through a relationship of mutual dependency. Multinational firms entering retail channels in developing economies need to keep in mind the neighborhood stores dual nature commercial and social. Beyond retailing, companies can also consider how they can build other kinds of profitable but socially embedded institutions in developing markets. For example, Indiabased ITC began an initiative to use technology to make rural markets for grains and produce more efficient (Prahalad 2005). Rural farmers in India were challenged by the inefficient and often unfair trading practices in the government-sanctioned procurement markets (mandis). To address their plight, ITC sponsored a system of networked computers that operated out of volunteers homes in a set of villages. Using these computers, farmers would compare prices at the mandis, price movements at global commodity exchanges, and prices offered by ITC at its own collection units. Informed farmers could choose when and where they would sell their grain. By cutting out the intermediary and reducing inefficiency, ITC provided

Social Role of the Neighborhood Small Retail Store

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farmers with access to a more efficient market and better pricesa socially beneficial outcomewhile ensuring that the company received a steady supply of raw material for processinga profitenhancing outcome. Seller-dominated markets are common in developing economies, partly because, historically, supply has been constricted as a result of a combination of infrastructural bottlenecks, inefficient production, and governmental restrictions (Malhotra 1986). In these markets, retailers perceive powerful manufacturers as frequently resorting to coercive strategies instead of more balanced modes of interaction (Kale 1986). This playing field has become more level recently, as the emergence of competing brands has eroded some of the manufacturers power. The entry of competitors can lead to an intense race to lock up reliable distributors and to influence retailers at the local level. For example, Pepsi entered India in 1990 and quickly established itself as a popular brand behind Thums Up, a widely distributed indigenous cola. Coca-Cola reentered India shortly thereafter. Brand awareness of Coca-Cola was high, and its return to the Indian market after its exit in the late 1970s was eagerly awaited. However, when it came to small and medium-sized towns, Coca-Cola found that the distributors with sufficient financial resources and expertise were already stocking either Thums Up or Pepsi. To gain access to distribution, and ultimately the retail outlets, Coca-Cola purchased the Thums Up brand (Balasubramanian and Konana 2009). Likewise, competing manufacturers tend to offer small retailers generous terms to stock and preferentially display their products in the retail storefront. More generally, multinational firms entering developing economies must consider the soft aspects of their relationships with small retailers. When formal contracting takes a backseat, these aspects are instrumental in implementing successful retailing strategies. Developing markets are characterized by numerous retail outlets that can be packed into crowded urban areas or dispersed outlets in rural areas (Alexander and Silva 2002; Mahajan, Banga, and Gunther 2006). Heavy infrastructure, such as the 18-wheel trucks that are commonplace in developed economies, cannot serve these markets efficiently. Many developing economies are now creating economies of scale in manufacturing, but with increasing populations and rapid urbanization, the last-mile problem has become more acute (Balasubramanian and Konana 2009). In this situation, many markets in developing economies are well served by flexible, labor-intensive distribution approaches that are light on infrastructure requirements. Goods in these markets are typically delivered in small vehicles or even on bicycles. The salesperson may visit each small retailer twice a day: once to provide stock and later to collect payments. An important aspect of these markets is that because economies of scale break down at the last mile, large manufacturing units do not necessarily have an advantage in terms of distribution. In contrast, the small-scale manufacturing sector can serve the small retailers with speed and dexterity. For example, a small-scale operation that produces fried

Dependence and Reciprocity Between Channel Members

The Structure of Channels with Small Retailers

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banana chips will typically employ just four to five workers, one in charge of operating the banana cutting machine, one or two in charge of frying and salting the chips in a batch-processing mode, and one or two in charge of packaging and delivery. As Balasubramanian and Konana (2009) note, a faithful application of Adam Smiths principle of the division of labor ensures a high output-toasset ratio for these labor-intensive operations. Furthermore, these small-scale manufacturers can deliver fresh chips to small retailers within a few hours of their being frieda delivery schedule that simply cannot be matched by the more sophisticated national manufacturers. Multinational firms entering developing economies must carefully evaluate the competitive threat posed by the small-scale manufacturing sector. This sector is not a dominant presence in developed countries and thus can easily slip under the radar when evaluating these markets. The six themes discussed here provide a macro perspective of the key issues related to small retailing in developing economies. Notably absent in the literature is an analysis of small retailer decision making and performance. To fill this gap, we next provide a micro perspective of small retailer operations in a specific developing economy. To our knowledge, this study represents a first effort to analyze small retailer performance at an operational level. Our empirical research focuses on the decision-making patterns and performance of small retailers in the So Paulo urban area in Brazil. The first stage of this research is exploratory in nature and investigates small retailers use of simplified decision practices (heuristics); for expository purposes, we refer to this as Study 1. Here, we explore whether and how small retailers use heuristics. We develop this stage using 51 open-ended interviews with small retailers. On the basis of these interviews, we quantitatively explore for the presence of heuristics by analyzing sales and inventory data pertaining to a sample of more than 2500 retail outlets. In the subsequent research stagetermed Study 2we build on the findings of Study 1 to develop and test a formal model to analyze the retail performance on the basis of product-level sales and inventory data. So Paulo has a population of more than 15 million, with a high population density of more than 20,000 people per square mile in some areas. This setting constitutes a typical urban market in a developing economy. The market exhibits unregulated but vigorous competition; low entry barriers in terms of skills and capital; and small-scale, labor-intensive operations. Of the six themes related to retailing in developing economies discussed previously, at least four are evident in So Paulo. In terms of store agglomeration, Jose Paulino Street contains mostly stores that specialize in textiles (Frana 2007), and Teodoro Sampaio Street contains numerous furniture stores (SP Sem Segredos 2008). In terms of periodic markets, So Paulo has 889 feiras livres (grocery markets), which open once a week and employ 11,076 people (Prefeitura de So Paulo 2008). In the context of ethnodomination,

MICRO PERSPECTIVE: AN EMPIRICAL ANALYSIS OF SMALL RETAILER DECISION MAKING AND PERFORMANCE

Study Setting

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the Japanese own almost 100% of pastelarias (dim sum stores; Sampacentro 2004), and the Koreans dominate textile commerce (Frana 2007). Finally, in terms of channel structure, the dominance of small retailers in So Paulo is striking. However, large supermarkets and other stores with more sophisticated management (e.g., gas stations owned by multinational petrochemical firms) coexist with the small retail sector; this permits us to compare these advanced stores with the small retail outlets. The data are based on a distributors records of retail inventory and purchase for all brands in a product category carried by the distributor for 2547 stores (for details, see the Appendix). The data cover a substantial part of the city, with a mix of outlets located in business, downtown, and residential districts. The product is a frequently purchased, consumable convenience good, with a unit consumer price always less than $2. A large fraction of consumers have interpurchase intervals of less than a week, and many consumers purchase in the category on a daily basis. The product category is not knowledge intensive (unlike wines), requires no nurturing (unlike flowers), and can be managed easily with wider assortments. Shelf space is not a major restraining factor for stocking this product.1 Market demand is sensitive to price; therefore, in general, retail performance cannot be evaluated independently of pricing decisions (Smith and Achabal 1998). In the studied product category, because of governmental regulations, the distributor charges the same wholesale price to each retailer for a given brand, and the retailers charge a common (controlled) consumer price. That is, wholesale and retail prices vary across brands but not across retailers for a given brand. Given this control on demand-related effects, the interaction between pricing decisions and performance can be safely ignored, reducing analysis complexity. The data were compiled from the distributors sales force records. The distributor accounts for more than half of the category volume market share for the city. The sales force collects the data, but the office staff reconciles figures frequently, with managers overseeing the process. Sales figures are used for paying commissions and to maintain retail accounts; therefore, the records are carefully maintained. The salespeople typically visit scores of outlets daily, but each outlet is visited exactly once a week. In some outlets, salespeople are afforded direct access to the stocking shelves; otherwise, they vie for the retailers attention along with customers at the front of the shop. The retailer often operates beyond a separating barrier, delivering products, writing up invoices, and accepting payments. The salesperson may need to wait for the retailer to finish serving customers, and often, the retailer may interrupt the dialogue with the salesperson to serve a newly arrived customer. The typical encounter is rushed: Between three and ten minutes are devoted to evaluations of stocking policy. The salesperson can guide stocking decisions, but the influence exercised varies across stores. Most stores are owner operated, and the ownermanager makes stocking decisions. Supplier credit is often extended using the system of postdated checks, but terms vary across stores. Stock returns are discouraged.

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Study 1: An Exploratory Examination of Small Retailer Decision Making

Evidence from the Field on the Use of Heuristics: A Qualitative Investigation. The distributors sales personnel detected that retailers often employed an informal and simplified ordering system. Instead of calculating purchase quantities using sales forecasts and critical inventory levels, the retailers tended to frame orders in terms of last weeks sales. This simple system sped up the sales process, but there were managerial concerns that such rules of thumb were far from optimal and could lead to either excess inventory or frequent stockouts. To confirm the existence of such ordering heuristics and deepen our knowledge of the market, we interviewed 51 small retailers. The key criterion in selecting the sampling frame was to ensure access to the person at the retail outlet who made purchasing decisions. To avoid location bias, the interviews were performed in five different districts of the city. We discovered that the salespersons store visits lasted less than eight minutes on average, confirming the estimate the distributor provided. In 76% of the stores, the owners strongly influenced ordering decisions. In the remaining 24%, the salesperson had some say in the decision, but the owner could always modify or reject those suggestions. Approximately 90% of the interviewed retailers acknowledged that they relied essentially on the previous weeks sales as the basis for their weekly ordering decisions. The following retailers statements provide some qualitative insights into their decision making: Its a logical thing for me; if I sell more, I order more if I sell less, I order less. Its all about stocking in response to what I sold last week. He [the salesperson] just replaces what Im missing in the inventory for the week. We dont do too many inventory calculations; we only focus on the sales figures of last week. We control the inventory and the order, but the salesperson helps out. We dont consider averages; we only consider last weeks sales. We stock double the quantity we sold last week so that we do not run out of inventory. He [the salesperson] makes suggestions, but I make the final decisions. He [the salesperson] does the inventory; I have no control over it. (This retailer has abdicated responsibility to the salesperson.) Overall, we drew the following conclusions from the interviews: (1) The simplified ordering procedures the sales personnel detected were confirmed; (2) the retailers relied heavily on the previous

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periods sales as a basis for their decisions and often framed their stocking decisions in terms of exactly the previous weeks sales or twice the previous weeks sales; (3) retailers retained considerable influence over ordering decisions, though this varied by store; and (4) with the exception of a few larger, more sophisticated stores, the retailers rarely maintained detailed inventory information. Use of Heuristics: Exploratory Data Analysis. The use of heuristics departs from formal inventory management principles, which emphasize the correct balance among the costs of inventory, transaction costs related to ordering, and costs of stockouts. However, implementation of such principles calls for the routinization of transactions according to explicit rules, which requires both automated decision tools (e.g., electronic data recording, processing systems) and familiarity with the techniques of the trained decision analyst (Watson and Buede 1987). Therefore, even if inventory management principles are intuitively understood by the small retailers, they will likely rely on simplifying decision mechanisms in practice. Three questions arise here: First, what are the heuristics retailers apply? Second, can these heuristics be recognized using an ex post view of the retailers decisions? and Third, what are the economic consequences of heuristic usage? The first two questionsexamined in Study 1address the degree and nature of deviation from normative decisions and are important from an information-processing standpoint (e.g., Slovic, Fischoff, and Lichtenstein 1977). The third question involves the economic consequences of heuristic usage and is addressed in Study 2. How can a heuristic be recognized? Kahneman, Slovic, and Tversky (1982) argue that a heuristic-based decision must satisfy three conditions: (1) The judgment is backed by informal and unstructured reasoning, without the use of analytical methods or deliberate calculation; (2) the informal rule or fact is consistent with intuition and common sense; and (3) the rule is applied in the course of regular conduct. To examine whether retailers employ such heuristics, we first note that whereas the active decision variable is the purchase volume, the underlying objective is the management of availabilitythat is, the stock level, which includes both existing inventory and the new stocks received. (The availability of brand j at retailer i at the beginning of week t is represented by aijt; this is the level of carried stock immediately after restocking.) As evidenced in our field research, retailers tended to communicate in units that were multiples of the previous weeks sales when placing orders. To explore this link, we constructed the following ratio (here, sijt 1 represents the previous weeks sales): ijt = (aijt/sijt 1). Reflecting the field studys finding that retailers often framed their purchasing decisions in terms of stocking up to the level of exactly the last periods sales or double the last periods sales, we examined the weekly brand-level sales and inventory data set pertaining to 2547 stores that the distributor made available to us (for a description of the data, see the Appendix). Specifically, we examined a total of 63,379 purchase decisions the retailers made across four weeks for the occurrence of the ratios ijt = 1 and ijt = 2. These

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two heuristics account for 27.3% of the total decisions across the four weeks.2 In particular, 10.6% of the total decisions are accounted for by retailers stocking exactly the previous weeks sales ( = 1), and 16.7% are accounted for by retailers stocking twice the previous weeks sales ( = 2). Our findings feed into other questions: What operational and supplyside factors influence heuristic usage? In turn, how do heuristics affect retail performance? Is it possible to separate the effects of the traditional economic factors (e.g., the scale of retail operation) and the behavioral factors (represented by the use of heuristics) on performance? We investigate these issues next. Conceptual Framework. Thus far, the findings suggest that apart from traditional economic factors, such as labor, capital, and location, behavioral factors related to the nature and quality of decision making may also drive retail performance. The challenge is to develop a framework that meaningfully integrates these economic and behavioral factors. Figure 1 presents the framework we used to analyze performance, which is based on the structureconduct performance approach (Bain 1968). If we take the variables related to the existing market structure and its associated processes as exogenously specified, heuristics can then be considered an aspect of conduct that influences performance. Empirically, this framework can be evaluated from the mediatormoderator perspective discussed in the following sections. The Mediating Effect of Heuristic Usage. We posit that both operational and supply-side factors directly influence performance (see Figure 1). However, performance is also contingent on the quality of decision making. Thus, we propose that the quality of decision making (measured in terms of heuristic usage) mediates the effects of these factors on performance. Therefore, in the spirit of Baron and Kenny (1986, p. 1173), heuristic usage represents the generative mechanism through which the focal independent variable is able to influence the dependent variable of interest. The economic influences would not be entirely mediated through the quality of decision making. For example, an increase in the scale of operations could influence performance independently, apart from its mediated impact through heuristics. Therefore, we

Study 2: An Empirical Examination of Retail Performance

Figure 1. Conceptual Framework


Operational Factors Scale of retail operations Product assortment

Moderating Effect Store standard

Supply-Related Factors Credit terms Sales force influences (control)

Mediating Effect Use of heuristic-based inventory decisions

Performance Turnover

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posit that the operational and supply-side factors should have a two-way effect on performanceone direct and the other mediated through heuristics. Moderating Effect of Store Standard. In developing economies retail environment, some high-standard stores that are more similar to those found in developed economies often coexist with lowstandard stores typical of the small retailers in developing economies (Alexander and Silva 2002). As noted previously, we use the term standard here as a surrogate for the managerial sophistication associated with the store. Thus, we view the store standard as a moderator to reflect the notion that the focal independent variable can be partitioned into subgroups that establish its domains of maximal effectiveness in regard to a given dependent variable (Baron and Kenny 1986, p. 1173). That is, we expect to find variations across stores of different standards in both (1) the direct effects of operational and supply-related factors and (2) the frequency and mediating influence of heuristic usage. The high-standard stores are usually run with a professional outlook and are oriented toward maximizing profits. In contrast, the low-standard stores are small, mostly family owned, run in an informal manner, and oriented more toward economic survival (see Daz, Lacayo, and Salcedo 2007). To develop a formal classification of stores by standard (e.g., Bunn 1993), we conceptualize store location and store type (i.e., line of business) as the relevant dimensions for classification (for a detailed description of the data, see the Appendix). We chose store location as the first classification dimension because location signals retailer commitment and expertise. Superior locations call for higher levels of initial investment and ongoing expenses for rent and upkeep. Location can also determine the quality and quantity of store staff (Kamakura, Lenartowicz, and Ratchford 1996). Thus, entrepreneurs with poor retailing skills and scarce financial resources who operate on a subsistence basis will likely avoid superior locations. The second classification dimension is the store type (which captures the nature of the stores business; see the Appendix). Of the seven types of stores in which the product is soldlunch outlets, restaurants, groceries, newsstands, gas stations, bakeries, and supermarketsthe last three types represent more sophisticated forms of retailing. Gas station stores are owned by or are franchises of global petrochemical firms; therefore, they are managed professionally and with greater accountability. Bakeries are usually large, wellrun establishments that have in-house production facilities and stock convenience products in addition to baked goods. These bakeries typically have small restaurants on their premises, with either full- or self-service seating areas. Some of them belong to local chains and have electronic checkouts and cashiers. Supermarkets are the most sophisticated establishments of the group, with checkout lines and a limited degree of electronic capture of sales and inventory data. On the basis of this information, we classify stores that satisfy the dual dimensions of being well located (i.e., Location = 1, 2) and

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being supermarkets, gas stations, or bakeries as high-standard stores. Likewise, we classify stores that satisfy the dual criteria of being poorly located (Location = 3, 4, and 5) and being lunch outlets, restaurants, groceries, or newsstands as low-standard stores. The stores not included in these two groups are considered intermediate-standard stores. In our data, there were 607 high-, 777 low-, and 1163 intermediate-standard stores. We are particularly interested in the high- and low-standard stores; therefore, we contrast the performance of these two groups and also compare their performance with that of a pooled group with all store types. Note that only 3.6% of intermediate-standard stores were poorly located supermarkets, gas stations, and bakeries, supporting our expectation that these store types have more sophisticated management. To further verify our classification, we examined betweengroup differences. Multivariate analysis of variance and analysis of variance tests revealed that high- and low-standard stores differed significantly in terms of sales volume, brand assortment, inventory level, and distributor credit terms. Although no classification will partition the retailers perfectly, the employed classification is a good surrogate measure of managerial capability. Dependent Variable: Store Performance. The measure of store performance analyzed here is inventory turnover (hereinafter turnover). Turnover indicates the number of times the average inventory on hand has been sold and replaced during a certain period and is a key measure of retail performance (Bowersox and Cooper 1992). Because inventory consumes working capital, maintaining a high turnover is a key factor in retail profitability, especially in cash-constrained situations (Shipp 1985).3 Turnover provides a partial picture of productivity, compared with total factor productivity, which relates the net output of the retailer to total factor inputs, including retail space, labor, capital, and other variables (Good 1984). However, we emphasize turnover here because of (1) its close link to the retailers decision-making processes, (2) our focus on the distributorretailer interface, and (3) the importance of managing inventory in cash-constrained scenarios.4 Effect of Heuristic Usage on Performance. Heuristics represent informal reasoning. When heuristics are used, the distributors sales force can more strongly influence retail decisions than when more precise principles are employed. The salespersons incentives are tuned toward maximizing distributor profits rather than retail profits. Therefore, such influence will likely be applied to push excess stocks on the retailer, so that a wide and deep brand assortment is available and lost sales are minimized. More generally, the use of heuristics also indicates that lower levels of attention and other cognitive resources are being allocated toward the tight management of inventory and the precise estimation of order quantities. Thus: H1: Increased heuristic usage reduces performance. Effects of Scale of Operations on Heuristics and Performance. First, larger stores are potentially exposed to larger magnitudes of financial losses when decisions are approximate rather than accurate. Second, larger stores have greater cash flows and are more likely to invest in and gain from an information-processing infrastructure. Third, larger

Hypotheses

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Tomasz Lenartowicz and Sridhar Balasubramanian

stores are typically multiemployee operations, enabling the owner manager to allocate more time and effort to inventory management activity. Fourth, larger stores are usually run as long-term concerns by owners or managers who are committed to and skilled in retailing. These managers have a greater ability to gather, assimilate, and process the different pieces of information required to yield efficient inventory decisions. In contrast, many of the smaller establishments reflect subsistence-oriented retailing. Thus: H2: As the scale of operations increases, the use of heuristics decreases. Next, we consider the direct influence of the scale of operations on performance. To avoid stockouts and capture shelf space, the salesperson tries to fully stock, or even overstock, the retail shelf space. In contrast, the retailer attempts to stock efficiently so that excess working capital locked up in inventory is released. From a channel power perspective, stores with greater category sales volumes will display lower tolerance to coercion and will more effectively return coercion by patronizing competitors (Bucklin 1973; Frazier, Gill, and Kale 1989). When parties to a relationship are mutually important, they will devote time to joint planning efforts, reduce the coercive elements in their relationship, and develop coordinated behaviors (Frazier and Rody 1991). Similarly, Stern and Reve (1980, p. 58) propose that in marketing channels typified by balanced power relationships, interactions will be predominantly cooperative as long as the balance of strength is preserved. In addition, larger stores are likely to experience more stable, predictable demand than smaller stores. Thus: H3: As the scale of operations increases, performance improves. Effects of Brand Assortment on Heuristics and Performance. First, we consider the influence of the size of the carried brand assortment on heuristic usage. Because ordering decisions are made on a brand-bybrand basis, the costs of precision in decision making increase with the number of carried brands. That is, as the number of brands increases, the demands on the retailers information-processing and cognitive abilities can increase at an even faster rate. Arriving at order quantities for the entire portfolio of carried brands is inherently more complex than a series of independent order quantity decisions for individual brands. Specifically, because orders are placed for multiple brands under some overall budget constraint, the retailer must decompose the overall ordering decision into more readily solvable subproblems for each brand and reintegrate the decisions into a final solution that satisfies the budget constraint (MacGregor and Lichtenstein 1991). Heuristics can reduce this effort. A caveat is that stores with a larger scale of operation are likely to carry more brands. Previously, we argued that an increase in the scale of operations would lower heuristic usage. However, the presence of scale of operations as an explanatory variable accommodates this effect. Consequently, we expect a positive marginal effect of the number of brands on heuristic usage when scale of operations is also included as an explanatory variable. Thus:

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H4: As the number of regularly carried brands increases, the use of heuristics increases at a given level of scale. Second, we consider the direct influence of the size of the carried brand assortment on performance. When stores carry few brands, these brands are the market share leaders, with high sales volumes and predictable demand patterns. A large portfolio is likely to include peripheral brands that will move more slowly off the retail shelves and will likely exhibit less predictable demand patterns. Therefore, it is difficult to achieve a rapid turnover for these brands. In addition, because these brands are not a significant source of cash flows, retailers might pay less attention to the stocking decisions for these brands. In contrast, they would likely employ detailed decision making for major brands, allowing the salesperson more leeway in boosting the inventory for the peripheral brands. Thus: H5: As the number of regularly carried brands increases, performance decreases. Effect of Credit Terms on Heuristics and Turnover. First, we consider the influence of credit terms on heuristic usage. An increase in credit reduces the opportunity costs associated with overstocking. Consequently, better credit terms may reduce the pressure on the retailer to make precise ordering decisions that strike the correct balance between stockouts and overstocks. Thus: H6: As credit terms extended to a retailer improve, the use of heuristics increases. Second, we consider the direct influence of offered credit terms on turnover. Superior credit terms lower the costs of carrying inventory, shifting financial risk back to the distributor. Credit is often employed to achieve the following objectives: (1) to increase the average inventory of the core brands carried so that there are no stockouts and (2) to capture shelf space at the expense of competitors by widening the carried brand assortment. Thus: H7: As credit terms extended to a retailer improve, performance decreases. Control 1: Effect of the Salesperson on Heuristic Usage. Personal differences can influence individual and organizational outcomes related to selling and marketing jobs (Lusch and Serpkenci 1990). The language employed in the communication between the retailers and the salespeople often relies on sparsely elucidated but mutually recognized codes. Indeed, notions of specific quantities are sometimes conveyed using signs of the hand, rather than vocal expression, when the retailer is engaged with customers. Although some salespeople might be satisfied with such informal communication, others could attempt to engage retailers in their sales areas in more complicated computations related to inventory ordering. Accordingly, when analyzing the variation in the use of heuristics across retailers, we include the identity of the salesperson as a control variable. Control 2: Effect of the Salesperson on Performance. In general, the retail outlets in our study are small, scattered, and numerous.

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Therefore, supervisors may find it difficult to impose any uniformity across the selling styles and priorities adopted by salespeople. Instead, as is often the case, the distributor sales force can achieve some degree of outcome- and behavior-based coordination of retailers (e.g., Dwyer, Schurr, and Oh 1987; Jaworski, Stathakopoulos, and Krishnan 1993). At the same time, the sales force is exposed to different motivations from each side. In particular, a specific distributors objectives related to the retail inventory (i.e., pushing large quantities of many brands to capture shelf space) can contradict the retailers objectives (i.e., to achieve the correct balance among the costs of inventory, the likelihood of stockouts, and the maintenance of a portfolio of brands from multiple distributors). Salespeople will have different capacities to withstand these opposing motivations and will arrive at different reconciliations of these motivations. Moreover, the salespeople may be ambiguous about the roles of the relevant role partners (i.e., sales supervisors and retailers; Challagalla and Shervani 1996). Because selling capabilities, ability to withstand pressure, and perceived role ambiguity vary across salespeople, retailers success in asserting their objectives over those of the distributor will also vary across salespeople. Therefore, when analyzing the variation in performance across retailers, we include the identity of the salesperson as a control variable. Thus far, we have hypothesized that operational and supply-side factors influence the use of heuristics and that the use of heuristics itself influences performance. Thus, we further hypothesize the following: H8: Heuristic usage mediates the effects of operational and supply-related factors on performance. As indicated previously, compared with the low-standard stores, the high-standard stores are run by more professional owners (or managers) who employ relatively sophisticated managerial practices and are sharply focused on profit maximization. Accordingly, these owners (or managers) will use heuristics less frequently and will also manage their inputs to yield superior performance outcomes. Building on these and previous arguments, we hypothesize the following: H9: Store standard moderates the effects of operational and supply-related factors on heuristic usage. H10: Store standard moderates the effects of operational and supply-related factors on performance. H11: Store standard moderates the effects of heuristic usage on performance. We provide details about the data and collection methods in the Micro Perspective: An Empirical Analysis of Small Retailer Decision Making and Performance section. Furthermore, the Appendix provides a description of the primary and derived variables in the data. The data include brand inventory levels, purchase quantities, retail location, and other details for 2547 retail stores. The

Mediating and Moderating Effects

Data

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inventory and purchase records cover the same four consecutive weeks across stores. Table 1 shows descriptive statistics and a correlation matrix. The operational factors considered are (1) the scale of operations (measured by the total sales of brands; SALESTOT) and (2) the total number of brands the retailer regularly purchases (BRANDNUM). The supply-side factors considered are (1) the credit the distributor extends to the retailer (the number of days the stores check will be held before being deposited; CREDIT) and (2) the identity of the salesperson serving the retailer (control). A 38-member sales force supplies the retailers, with each retail outlet allocated to one salesperson. Thus, 37 dummies are required to control for the salesperson effects. We measured the performance outcomethat is, inventory turnoveras the ratio of total unit sales over the fourweek period to the average inventory during that period (expressed in percentages). For each store, we defined the mediating variable (HEURISTIC) as the fraction of total brand transactions (across four weeks) that conform to either of the two considered heuristics (see Study 1). We tested H1H7 following the method described by Baron and Kenny (1986) and employed by Broniarczyk, Hoyer, and McAlister (1998). The following four paths or links must be established to demonstrate a mediating effect of heuristic usage (H8): Link 1: Heuristic usage must significantly influence turnover, Link 2: Operational and supply-related factors must have a significant (main) effect on turnover, Link 3: The operational and supply-related factors must significantly influence heuristic usage, and Link 4: The direct effects of operational and supply-related factors on turnover must be significantly reduced when turnover is regressed on these factors plus heuristic usage. The models that correspond to the links are as follows: Link 1: TURNOVER = 1a + 1bHEURISTIC. Link 2: TURNOVER = 2a + 2cSALESTOT + 2dBRANDNUM + 2eCREDIT + 2f1SALESREP1 + + 2f37SALESREP37.

Method

Table 1. Descriptive Statistics and Correlation Matrix (N = 2547)

Variable

Unit
% % Units/week No. of brands Days

M
353.21 17.53 30.12 11.95 2.82

SD
118.2 10.91 28.45 2.91 2.73 1 .36 .12 .23 .01a

Correlation Coefficients
2 3 4

1 Turnover (4-wk.) 2 Heuristic usage 3 Sales volume 4 Assortment 5 Credit terms


aNot

.06 .18 .02a .62 .07 .05

significant at p < .05.

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Tomasz Lenartowicz and Sridhar Balasubramanian

Link 3: HEURISTIC = 3a + 3cSALESTOT + 3dBRANDNUM + 3eCREDIT + 3f1SALESREP1 + + 3f37SALESREP37. Link 4: TURNOVER = 4a + 4bHEURISTIC + 4cSALESTOT + 4dBRANDNUM + 4eCREDIT + 4f1SALESREP1 + + 4f37SALESREP37. We established the moderating effect of the store standard (H9H11) by comparing the differences in the (estimated) links across the high- and low-standard stores. In addition, following Sharma, Durand, and Gur-Aries (1981) work, we created a new ordinal moderator variable to denote store standard and examined its interaction with the predictor and dependent variables (i.e., HEURISTIC and TURNOVER). We estimated the submodels representing the four links across three data groups: the pooled sample, high-standard stores, and low-standard stores. To estimate Links 2, 3, and 4, we used multiple regression with SALESREP (control) expressed as 37 dummy variables. Moderate correlation exists between variables (Table 1), but a check for multicollinearity revealed that the lowest tolerance was .5, which is well above the suggested minimum of .2 (Hamilton 1992). Thus, multicollinearity was not a concern. Figure 2 provides a summary of the hypotheses and empirical results. Table 2 displays the findings. Horizontally, Table 2 reveals the existence and strength of the mediating effect of heuristics, and vertically it reveals the existence, if any, of a moderating effect of the high-standard versus low-standard store groupings. The Link Between Heuristics and Turnover: H1. Although the coefficient for HEURISTIC is negative and significant in all cases, in support of H1, the explained variance of turnover is low for highstandard stores (2.4%) but much higher for low-standard stores (29.3%). This indicates that heuristics are influential in reducing turnover in the low-standard stores but not in the high-standard stores. (The mediating effect of heuristics depends on this link; therefore, this finding suggests that such mediation may be significant in the low-standard stores but not in the high-standard stores.) The Influence of Operational and Supply-Related Factors on Turnover: H3, H5, and H7. Among the Link 2 variables, the coefficients for SALESTOT and BRANDNUM are in the expected directions and are significant across all groups, confirming H3 and H5. A Chow test indicates that these coefficients are significantly higher for low-standard stores; therefore, their turnover is more sensitive to both the scale of operations and the number of brands carried (F = 1850.19, p < .001). These results suggest that (1) low-standard stores are more susceptible to distributor pressure as the scale of their operations decreases and (2) the increased information-processing load associated with a large portfolio of brands is likely to strongly (and negatively) affect their turnover-related performance. The high-standard stores cope with these factors more effectively because of superior management and greater bargaining power. Contrary to expectations (H7), superior credit terms (CREDIT) do not significantly influence turnover in any group. Some introspec-

Findings

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76
Figure 2. Summary of Hypotheses and Results
A. Summary of Hypotheses and Results (H1H7)
Operational Factors
High-standard H3 (+)* Low-standard H3 (+)*

Nature of Decisions

Performance

SALESTOT
High-standard H2 ()* High-standard H5 ()* Low-standard H5 ()* Low-standard H2 ()*

BRANDNUM
High-standard H4 (+)* Low-standard H4 (+)* High-standard H1 ()*a

Supply-Related Factors
High-standard H6 (+)ns

HEURISTIC
Low-standard H6 (+)ns

Low-standard H1 ()*

TURNOVER

CREDIT
High-standard H7 ()ns Low-standard H7 ()ns

SALESREP (control)
Control (+/)*

Control (+/)*

Tomasz Lenartowicz and Sridhar Balasubramanian

*significant at p < .05. nsnot significant at p < .1. aHeuristics significantly reduce turnover in low-standard stores but not in high-standard stores when other variables are included in the regression (e.g., in Link 4).

B. Moderating and Mediating Effects (H8H11)


Operational and Supply-Related Factors Store Standard
H9a H10a H11 (confirmed)

Nature of Decisions

Performance

SALESTOT BRANDNUM
H8b

Heuristic
H8b

Turnover

CREDIT SALESREP (control)

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aModeration

bMediation

not confirmed for CREDIT; confirmed for SALESTOT, BRANDNUM, and SALESREP. not confirmed for CREDIT; confirmed for SALESTOT, BRANDNUM, and SALESREP (for low-standard stores).

Figure 2. Continued

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78
Table 2. The Influence of Heuristics on Performance: Model Estimates
Link 2 (TurnoverExternal Factors) (SE) R2
29.6% 11.487* (2.0) .601 Not reportedb 29.3% 22.76* (1.547) .698 (1.337) Not reportedc 5.992* (.412) 59.9% .104* (.049) 1.081* (.180) .056 (.156) Not reportedc (.176) 1.105* (.180) .082* (.014) .823* (.150) .137 (.131) Not reportedb 50.3% 1.473* (.311) 5.828* (.414) 21.160* (1.567) .614 (1.312) Not reportedb

Link 1 (TurnoverHeuristics) R2
2.4%

Link 3 (HeuristicsExternal Factors) (SE) R2


32.0%

Link 4 (TurnoverHeuristics, External Factors) (SE)


.866 (.588) 1.176* (.185) 12.199* (2.045) .482 (1.753) Not reportedb 61.1%

Variable

(SE)

R2
29.9%

High Standard

HEURISTIC

2.041* (.525)

SALESTOT

BRANDNUM

CREDIT

SALESREP (control)

Low Standard

HEURISTIC

5.18* (.289)

SALESTOT

BRANDNUM

CREDIT

Tomasz Lenartowicz and Sridhar Balasubramanian

SALESREP (control)

Link 1 (TurnoverHeuristics) R2
13.2% 2.01* 16.213* (.876) .304 Not reporteda Not reporteda (.867) .150 (.081) .844* (.081) (.108) .105* (.010) 39% 38.2%

Link 2 (TurnoverExternal Factors) (SE) R2 R2 (SE)

Link 3 (HeuristicsExternal Factors)

Link 4 (TurnoverHeuristics, External Factors) (SE)


.495* (.215) 1.959* (.111) 15.795* (.893) .378 (.867) Not reporteda

Variable

(SE)

R2
39.1%

Pooled

HEURISTIC

3.928* (.200)

SALESTOT

BRANDNUM

CREDIT

Practices and Performance of Small Retail Stores

SALESREP (control)

*Coefficient is significant (p .05). **Coefficient is significant (p .1) (one-sided). aPooled sample: SALESREP 38 corresponds to the base coefficient for all cases. For the pooled sample, 35 of the 37 other zone coefficients significantly differ from the base coefficient for Link 2. For Links 3 and 4, the corresponding figures are 34 of 37 zones and 35 of 37 zones, respectively. See text for more details. bHigh standard: 24 of 37 zone coefficients significantly differ from the base coefficient for Link 2. For Links 3 and 4, the corresponding figures are 9 of 37 zones and 24 of 37 zones, respectively. cLow standard: 29 of 37 zone coefficients significantly differ from the base coefficient for Link 2. For Links 3 and 4, the corresponding figures are 29 of 37 zones and 30 of 37 zones, respectively.

Table 2. Continued

79

tion yields the following intuition: First, an objective of the distributor in extending superior credit terms is to increase the number of brands carried, thereby capturing shelf space and crowding out competitors. These additional brands are of peripheral interest to the retailer compared with the core brands; thus, they would be more sensitive to liquidity constraints and be out of stock more frequently. Consequently, when superior credit leads to an expansion of the brand assortment rather than an increase in the inventory for core brands, turnover may not be reduced substantially. Second, credit may be extended to poorly performing stores to boost performance to acceptable levels or even to ensure that they carry minimal stock. Therefore, greater credit may substantially increase average inventory for these stores. In this case, increased credit is more a symptom of poor store performance than a driver of inventory policies. For Control 2, the effect of the salesperson on performance, we found that the sales force accounts for a significant turnover performance variance in each sample. However, the fraction of turnover variance explained by the salesperson (SALESREP) is 16.9% for high-standard and 35.9% for low-standard stores (expressed as Type III sums of squares). This suggests that the potential for upstream channel members to influence retail operations is greater in low-standard stores. The Influence of Operational and Supply-Related Factors on Heuristic Usage: H2, H4, and H6. The coefficients for Link 3 describe the antecedents of heuristic usage. Therefore, in addition to their relevance to the mediatormoderator analysis, they are of independent interest. In support of H2, in all groups, the scale of operations has a significant and negative influence on heuristic usage. The brand portfolio size significantly and positively influences heuristics usage, in support of H4. A Chow test indicates that the coefficient of BRANDNUM for the low-standard stores is significantly greater than that for the high-standard stores (F = 779.29, p < .001). This suggests that though carrying a wider brand portfolio increases demands on the decision-making processes of both groups of retailers, low-standard retailers react more readily to such situations by adopting simplifying decision heuristics. Contrary to H6, superior credit terms do not significantly increase heuristic usage for any group. This at least partially supports our previous conjecture that credit is more a reflection of (1) existing power balances related to high-standard stores and (2) the distributors support of weak retailers among low-standard stores. To elucidate, in high-standard stores, superior credit terms could be extended to large, efficient retailers that already employ few heuristics; here, superior credit may simply reflect increased retailer power. In contrast, in low-standard stores, credit is extended to boost the performance of weak retailers that frequently use heuristics. These arguments provide a reasonable explanation for the finding that superior credit terms do not engender an increased use of heuristics. For Control 1, the effect of the salesperson on heuristic usage, we found that the sales force influences heuristic usage, but the degree

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of influence varies across the groups. The sales force accounts for 22.2% of the variance in the use of heuristics in high-standard stores, compared with 42.2% of the variance in low-standard stores (expressed as Type III sums of squares). Furthermore, only 9 of 37 salesperson coefficients (SALESREP) are significantly different from an arbitrarily specified base coefficient for high-standard stores, compared with 29 of 37 zones for low-standard stores. Therefore, the sales force has a greater influence on heuristic usage in low-standard stores. In contrast, the high-standard stores operate more independently and with greater automation and sophistication in decision making, thus limiting the influence of the sales force on their purchase decisions. The Mediating Role of Heuristics: H8. We tested whether heuristic usage mediates the relationship between the operational and supplyrelated factors and performance. As discussed previously, an examination of the coefficients for Link 4 can reveal whether heuristics remain significant in the presence of other independent variables. Furthermore, comparing these coefficients with those estimated for Link 2 can shed light on the mediating role of heuristics. We draw the following inferences from Table 2: First, the effects of CREDIT on heuristics and turnover are not significant in all three links, so we do not consider it any further. Second, for highstandard stores, heuristics do not constitute a significant mediator: The coefficients of size (SALESTOT) and assortment (BRANDNUM) do not decrease when we include heuristics in Link 4, and the fraction of variance in turnover explained by the salesperson (SALESREP) remains essentially identical when we include heuristics in the regression (Link 4) (at 16.9%, expressed as Type III sums of squares). In contrast, heuristics play a significant mediating role for the lowstandard stores. The coefficient for heuristics is negative and significant, indicating that heuristics significantly reduce turnover, even in the presence of the other explanatory variables. The coefficient for the scale of operations (SALESTOT) is positive and significant, but it is also slightly reduced from the corresponding estimate for Link 2. This implies that a minimal mediating effect may operate through heuristics on this account. Likewise, the effect of the size of the brand portfolio (BRANDNUM) on turnover is reduced slightly in the presence of heuristics, again suggesting a minimal mediating effect. However, heuristics play a strong mediating role in low-standard stores in the context of the salespersonrelated effects. The fraction of variance in turnover explained by the salesperson (SALESREP) is 35.9% for low-standard stores in Link 2 (expressed as Type III sums of squares), and this reduces substantially to 16.9% when heuristics are included (Link 4). At the coefficient level, for high-standard stores, only 14 of 37 coefficients shrink in magnitude (from Link 2 to Link 4) when heuristics are incorporated: On average, these coefficients are 95% of the magnitude of the Link 2 coefficients. In contrast, for low-standard stores, 32 of 37 coefficients shrink in magnitude when heuristics are incorporated: On average, the salesperson coefficients for Link 4 are 85.2% of the magnitude of the Link 2 coefficients. This is a more substantial shrinkage. Most coefficients remain significant in

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the presence of heuristics, indicating that salespeople exert both a direct and a mediated influence on turnover. Overall, the evidence suggests that heuristics have a significant mediating influence on the turnover of low-standard stores but not of high-standard stores, partially confirming H8. The Moderating Effect of Store Standard: H9H11. A comparison of estimates across the high- and low-standard groups in Table 2 reveals the moderating effect of store standard. First, we consider the differences in the influence of operational and supply-related factors on heuristic usage across store types (Link 2). Chow tests indicate that the magnitude of the coefficients for the scale of operations (SALESTOT) and the size of the brand portfolio (BRANDNUM) is significantly higher for low-standard stores. As noted previously, this suggests that the managers (or owners) of low-standard stores react to information-processing pressures by using heuristics more intensely. Moreover, the sales force accounts for a much greater fraction of variance in heuristics usage for the low-standard stores (42.2%, as opposed to 22.2% for high-standard stores). Therefore, the store standard moderates the effects of operational and supplyside factors in driving the use of heuristics, in support of H9. Second, we consider Link 4. Chow tests show that the coefficients for SALESTOT and BRANDNUM are significantly greater for lowstandard stores. Therefore, the performance of low-standard stores is much more sensitive to the pressures induced by an increase in the scale of operations or in the range of carried brands, in support of H10. Furthermore, when we exclude heuristics, a greater fraction of the variance in turnover is explained by the identity of the salesperson (control variable) for low-standard stores. (For Link 3, 29 of 37 sales zone coefficients for the low-standard stores differ from an arbitrarily specific-based coefficient, compared with 9 of 37 zones for the high-standard stores.) These findings indicate that store standard moderates the effects of operational and supply-side factors on performance, in support of H10. Finally, the HEURISTIC coefficient is not significant for highstandard stores, but it is negative and significant for low-standard ones. Moreover, we found previously that heuristics mediated the effects of operational and supply-related factors on turnover only in low-standard stores. Therefore, store standard moderates the occurrence of heuristics and their impact on performance, in support of H11. To reinforce our findings, we also applied the framework Sharma, Durand, and Gur-Arie (1981) suggest to test for the moderating effect of store standard. The approach involves testing for the main effects of the explanatory variables together with interaction variables represented by the products of the explanatory variables and the proposed moderator variable. In explaining heuristic usage, the interaction terms were significant (indicating a moderating effect) for SALESTOT (p < .1), BRANDNUM (p < .05), and the control variable SALESREP (7 of the 38 interaction terms are significant at p < .05). Likewise, in explaining performance (i.e., turnover), the interaction terms were significant for SALESTOT (p < .05), BRANDNUM (p < .05), the control variable SALESREP (9 of the 38 inter-

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action terms are significant at p < .05), and HEURISTIC (p < .05). Neither the main nor the moderated effect of CREDIT was significant. Overall, these results reinforce the notion that store standard exerts a moderating effect. At a macro level, our synthesis of the literature highlights some key concepts related to small retailing in developing economies. Multinational firm managers must consider these concepts carefully when crafting their entry strategies for developing markets. At a micro level, our empirical findings have specific implications for retailing strategy in developing economies. First, the significant moderating effect of store management sophistication on retail performance suggests that upstream managers will be less effective if they adopt a uniform interaction style across retailers. In particular, the findings indicate that the differences in the operational capabilities of stores affect their ability and willingness to be influenced by the sales force. Managers must accommodate this variation in their distribution and sales force strategy. Second, heuristics reduce the retailers information-processing costs but also allow upstream parties to influence retail decisions. Paradoxically, these parties can benefit from imprecise retail decisions. However, this does not suggest that the upstream manager should encourage heuristic usage; that would reflect a transactionoriented, adversarial approach to the relationship. An alternative would be to engage in a collaborative approach that encourages better decisions. Although upstream influence might wane in the short run, this would build positive beliefs about the distributors credibility and benevolence. Such beliefs ultimately create trusting, mutually beneficial relationships in which problem solving and persuasion are used as conflict resolution mechanisms (Siguaw, Simpson, and Baker 1998). Third, the findings shed new light on the role of credit that upstream channel entities extend to retailers. In developing markets, credit is assumed to play a major role in improving store performance and is a frequent focus of channel conflict. Our findings indicate that credit may have a limited role in the studied market and that levels of extended credit are either reflective of the market power of retailers or contingent on their existing performance. It is possible that upstream channel managers creative and careful use of credit could invigorate its intended role as a driver of retail performance. Fourth, a question that arises at this stage is, How does the performance of the small retailers compare with that of retailers in developed economies? Such comparisons are tempting to draw but must be attempted with caution because retail performance is embedded within the prevalent socioeconomic systems. With this caveat noted, the following comparison illustrates a key argument: In the United States, Berman and Evans (1989) report annualized turnover ratioscomputed as total annual sales to average inventoryof 28.1 for gas stations and 15.8 for grocery stores. Likewise, Diamond and Pintel (1997) report ratios of 21 for gas stations, 18 for grocery stores, and 12 for confectionary stores. For the small retailers in the

DISCUSSION AND CONCLUSIONS


Managerial and Research Implications

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current study, the corresponding ratio across stores is approximately 41. There is at least prima facie evidence that the small retailers generate a higher turnover, though they operate on a much smaller scale and lack automated information-processing capabilities. Labor is inexpensive in developing economies; therefore, the supply chain displays a flexibility that derives from labor-intensive operations. For example, transactions and credit policies with small retailers are micromanaged by the sales force. Even small stores are visited frequently, often by salespeople using threewheelers or even bicycles with mounted carriers. The sales force breaks bulk to provide small stock quantities to retailers. The scattered outlets are unable to harness the benefits of scale, but they can take advantage of these economies of flexibility. Such flexibility is difficult to reproduce at larger scales of operation with greater mechanization and automation. Finally, from a research perspective, our findings suggest that models and methodologies that tightly integrate behavioral and economic perspectives can provide fresh insights. When behavioral issues related to decision-making quality are considered in parallel with economic factors, knowledge about the precise influence of the economic factors is enriched. Our analysis is consistent with the viewpoints that the economic and behavioral aspects to channel theory should be studied in complementary terms (Stern and Reve 1980) and that retailing is a combination of art and science (Samiee 1990). The proffered methodology is also useful in that it can be applied, with due caution and adjustments, to other settings in which the quality of decision making must be considered in parallel with other conventional, economic variables. Although we focused on performance-related issues, the societal benefits of small retailers must not be ignored. Many benefits and costs related to consumers in the retailing context are not easily measured and thus are overlooked (Ingene 1984). A holistic evaluation of small retailers must encompass how they affect the opportunity cost of time, transportation costs, physical effort expended, and information search costs. The spatially disseminated nature of small retailing greatly reduces these costs. Likewise, many small retailers, ranging from the sari-sari stores in the Philippines to the bodegas in Latin America, are integrated into the neighborhood and can help anchor its social fabric. These contributions must not be overshadowed by a clinical analysis of retail performance from a managerial viewpoint. This study has limitations that can be addressed by further research. First, although single-category studies are not uncommon (e.g., Ingene and Brown 1987), data sets covering multiple product categories would permit a more comprehensive evaluation of retail performance. To build a more complete body of knowledge about small retailers in developing economies, further work also could examine their operations and performance in other product category, market, and country settings. In particular, it would be worthwhile to examine how national cultural orientations described in frameworks that Hofstede, Schwartz, and others have developed influence small retailer decision making, retailerdistributor relationships, and, ultimately, performance (e.g., Steenkamp 2001).

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Second, the data do not represent 100% of the product category sold in the market. Therefore, the effects of competitors sales forces on retail stocking decisions pertaining to the studied products are unknown. Third, more sophisticated models of heuristic usage could be tested with data sets that provide longer decision sequences. Finally, a more expansive evaluation of small retailer performance that includes labor and total factor productivity would enable a more authoritative analysis. Small retailers in developing economies have been sparsely studied. We hope that our study will encourage further research in the area. The data set contains the following variables: qijt = Purchase amount of a specific brand (j = 1, , J) by a specific retailer (i = 1, , N) at the beginning of week t (t = 1, 2, 3, 4). vijt = Available starting inventory of brand j at retailer i at the beginning of week t (before restocking). pj = Price to retailer of brand j. This distributor price for a given brand is constant across retailers and across the four weeks. LOCATIONi = Five-point scale for the location of retailer i (1 = excellent, and 5 = very poor).5 TYPEi = Store type (7 categories exist: lunch outlets6 [N = 1487], restaurants [N = 39], groceries7 [N = 302], newsstands8 [N = 70], gas stations [N = 49], bakeries [N = 557], and supermarkets [N = 43]). SALESREPi = Identity of the distributors salesperson associated with retailer i (38 salespeople operate in this market). We use this as a control variable. CREDITi = Number of days of credit extended to retailer i. In addition, the following quantities can be constructed from the basic data: sijt 1 = vijt 1 + qijt 1 vijt = Sales volume of brand j at retailer i for the week (t 1). aijt = vijt + qijt = The availability or stock-up level for brand j at retailer i for the week t (immediately after restocking). BRANDNUMi = The total number of brands carried by a retailer (supplied by the distributor). SALESTOTi = Total sales volume across four weeks for retailer i. 1. Confidentiality agreements forbid the disclosure of the specific identity of the studied product category.

APPENDIX: DESCRIPTION DATA

OF

NOTES

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2. The remaining 72.3% of the decisions fall mainly into two patterns. The first is the outcome of a retailers own calculations, which could incorporate working capital considerations and/or rely on some retailer-specific algorithm. The second is driven by the sales representatives and could take into account the sales forecast, existing inventory, and security inventory to arrive at a decision on the stocking level. 3. Turnover is usually related to margin strategy, type of product, size of store, type of store, and supply frequency. Because all stores in the sample are supplied on a weekly basis and have fixed margins due to price controls, we ignored margin strategy and supply frequency and instead focused on other dimensions of interest. 4. Labor productivity is not a focus of our analysis. Many stores in the sample are owner operated (i.e., input labor is constant). When multiple employees are present, the definition of the relevant labor is unclear. For example, in a supermarket, the total sales output can be related to the total labor; however, for a restaurant or lunch outlet, it may be misleading to consider labor engaged in food preparation as relevant to the sales output for the studied product category. For a detailed discussion of retail labor productivity, see Ingene (1982). 5. LOCATION is an ordinal variable used by the distributor for analysis purposes and captures the potential offered by the stores geographical setting. It is linked to the consumer traffic, so that busy street interactions, central business districts, transportation hubs, prime shopping areas, and other areas with dense, predictable consumer flows are accorded the highest ranking (1). In contrast, the lowest ranking (5) corresponds to a site in the middle of a block of a peripheral district with occasional consumer traffic. 6. Lunch outlets are small, informal establishments that cater to coffee breaks or casual lunches. As a service to customers, these outlets carry a range of convenience goods, usually consumables. The food is served at a large counter where the patrons sit on stools. The served food is limited to sandwiches and a small range of ready-to-go, light meals. Lunch outlets are usually not air-conditioned and, because of the warm climate in So Paulo, feature open, garage-style doors that facilitate ventilation. 7. Grocery stores are small outlets that carry a wide range of food products; however, unlike supermarkets, they usually do not carry either bread or meat products. 8. Newsstands sell newspapers, magazines, tobacco products, and a small assortment of convenience goods.

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THE AUTHORS
Tomasz Lenartowicz is Associate Professor of International Business, Department of Management and International Business, Barry Kaye College of Business, Florida Atlantic University (e-mail: tomlenart@fastmail.net). Sridhar Balasubramanian is Associate Professor of Marketing, Kenan-Flagler Business School, University of North Carolina at Chapel Hill (e-mail: Sridhar_Balasubramanian@ unc.edu).

ACKNOWLEDGMENTS
The authors thank the anonymous JIM reviewers for their advice and encouragement in the development of this article. They gratefully acknowledge research support for this study from the Deans Summer Research Grant in the Barry Kaye College of Business at Florida Atlantic University and the University of North Carolinas Kenan-Flagler Business School. The authors contributed equally to the study.

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