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Nanostores: retail logistics challenges and opportunities in developing markets
Rather than being marginalized by modern supermarket or hypermarket formats, in the developing
world traditional retailing or ‘nanostores’ are flourishing. This provides huge supply chain and logistics
challenges to the manufacturers who want to reach this fragmented and largely urban market.
In a large part of the developing world, consumers’ shopping needs are not met by e-commerce giants
or indeed by superstores, but by what have been termed ‘traditional’ retailers or ‘nanostores’. A
nanostore has been defined by researchers at the MIT Center for Transportation & Logistics as ‘a small,
family-owned outlet operated by fewer than five people located in a densely populated neighborhood’.
Many such stores are run by a family and in some cases may even consist of a handcart rather than
retail premises.
It might be thought that as in the West, ‘mom-and-pop’ stores would be on the decline. However, this is
not the case. The estimated 50 million nanostores are on the increase, fuelled by the development of
megacities occurring as a result of large numbers of people migrating from rural areas in search of
better prospects. It has been estimated that in many developing countries nanostores account for half
of the retail market. As one consulting company stated, ‘Globally, the trade channel mix is becoming
more fragmented as consumers shift toward smaller store formats.’1
Whilst many consumer goods companies recognise the opportunity which distributing their goods
through these channels offers, dealing with a hugely fragmented and technologically undeveloped
customer base has many challenges. These nanostores are not just ‘small supermarkets’ – they have a
completely different set of needs and characteristics as will be examined in this paper.
Nanostores: a large and growing market
Why are nanostores so important to the future supply chain and logistics strategies of the world’s
largest manufacturers? The answer lies in the development in importance of megacities to the global
economy. Presently, the world’s largest 600 cities account for 60% of global GDP, and whilst this is not
expected to change much over the next 5 years or so, the make-up of these cities will. 136 new
emerging market cities will enter the top 600, replacing those from the developed economies. Serving
nanostores in these megacities will become critical to the success of consumer goods manufacturers.
1
https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/nielsen-global-e-commerce-new-retail-report-
april-2015.pdf
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For instance in Bogota, Colombia, 47,000 nanostores serve 10 million consumers and in Beijing, China
60,000 nanostores serve 20 million consumers.
In China as a whole 6.8 million nanostores generate 1 trillion RMB a year whilst in India and SubSaharan Africa more than 90% of retail sales are generated through this format. Even in more mature
parts of the developing world (such as East Asia) they account for more than 40% of sales.
In terms of size, the aggregated revenues of these nanostores would make them amongst the largest
customers for consumer packaged goods (CPG) manufacturers. However, it is not only their scale which
makes them important. The fragmented nature of the market means that manufacturers can make
more money from smaller customers than they can from supermarkets or hypermarkets whose scale
enables them to squeeze suppliers’ margins. One estimate suggests that penetrating the nanostore
market could enable CPG companies to increase sales by 5-15% and increase profit by 10-20%.2
Another positive trend has been an increase in the disposable income of people living in megacities
which has brought many goods – particularly personal care products – within reach of many more
people. This fact has long been identified by a few of the major CPG companies although others are still
scrambling to catch up.
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Coca Cola: 1.2 million points of sale in Mexico and serves 1.3 nanostores in China
Unilever: Delivers ice cream to 10,000 freezers in nanostores in Mexico City
Danone: Serves 40,000 nanostores in Beijing
Unilever: Serves 1.5 million nanostores directly in India
Grupo Bimbo (bakery): Serves 7 million points of sale across Latin America.3
Many of the challenges related to distributing goods to nanostores are caused by the characteristics of
emerging market megacities, not least due to their high urban population density. Whilst cities in
Europe and North America typically have a density of 2,000 to 5,000 people per square km, the average
is much higher in the developing world. For instance, the average density is 30,000 people per square
km, which obviously suggests that in some areas it is likely to be much higher.
The low incomes of the people living in megacities means that the proportion of people owning a car is
also low. This means that stores need to be in close proximity to high population centres. This has been
2
Diaz, Alejandro, Magni, Max, and Poh, Felix. From oxcart to wal-mart: four keys
to reaching emerging-market consumers, October 2012
3
Blanco, Edgar E. and Fransoo, Jan C. Reaching 50 million nanostores: retail distribution in emerging megacities.
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a major inhibitor to the growth of supermarket and hypermarket models which rely heavily on the
consumer being able to transport goods from the store by car.
Megacities often have the characteristic of areas of poverty juxtaposed to areas of relative wealth. In
Bogota, Colombia, for example, areas with an average pay of $100 per month and with 1 store per 150
population, can be located next to areas with an average pay of $1000 per month and with 1 store per
250 people. This obviously make distribution strategies highly challenging.
What are the supply chain challenges?
If consumer good manufacturers are to serve this fragmented customer base, they will need to adopt a
very different logistics strategy to that employed in the developed world. Manufacturers in Europe and
North America are used to supplying full truck loads to centralized retail distribution facilities, which in
turn dispatch full truck loads to large retail premises. This is the complete opposite of the supply chain
structures required to serve thousands of nanostores and the added complexity of this has led many
manufacturers to supply such markets through wholesalers. However, such an approach means that the
manufacturer loses its direct relationship with retailers, and risks losing an understanding of the market
and even the competition for very limited shelf space.
This direct relationship is critical to serving nanostores. In many markets, representatives are employed
by manufacturers to undertake ‘pre-sales’ and ‘on-board’ van sales activities. Pre-sales involves a sales
representative travelling to each store to assess needs and collect orders which are then fulfilled at a
later stage (possibly next day) by a delivery van. ‘On-board’ or ‘van-sales’ combines the pre-sales and
fulfilment at the same time. Both approaches ensure shelf-space for manufacturers’ products but also
involve promotion, order-processing, re-stocking, after-sales support and collection of payments.
The appropriateness of each approach depends on many logistics considerations. One study, looking at
the distribution of orange juice to nanostores in Casablanca, found that the pre-sales method was more
effective but relied on factors such as the distance between stores, the number of stores visited, the
traveling time, the collected orders and time spent in the store. Congestion was a key variable, as was
the difficulty in finding a parking bay4.
4
https://janfransoo.com/2017/10/12/serving-nanostores-by-van-sales-or-pre-sales/
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Size of store
An obvious logistics challenge is the size of the nanostores. Many are no more than 15 sqm in size
(perhaps a converted garage) or indeed could be a street cart. Due to the size of premises and the fact
that they have very low levels of cash to buy products (buying in bulk is out of the question) they rely on
very frequent deliveries. This has an impact on the drop frequencies of carriers which resemble more a
parcels distribution model than modern retail logistics in the developed world: a carrier delivering to
nanostores often has more than a 100 drops per day.
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Cash economies
The majority of these stores lack financial and communications technology (with the exception of
cellphones) which means that most transactions are either cash or credit. The reliance on cash is also
due to the fact that many of these entities don’t formally exist in order to avoid tax and regulations. This
creates problems in terms of the return of Cash on Delivery payments up the supply chain.
Informal credit facilities exist both supplied by the nanostore to regular customers who they know well
(most stores have a maximum of 200 customers and so understand the risk of advancing credit) but also
by suppliers to the nanostore. Although goods are often supplied on a Cash on Delivery basis, the
proprietor may not be able to pay the supplier until the goods are actually sold and so there may be
multiple trips made before the money can be collected – adding significantly to logistics costs. The
movement of cash has obvious security issues, especially given the urban areas in which many of these
stores are located.
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Last mile delivery
Although car ownership levels may be low in many cities, the weak transport infrastructure and a lack of
planning has meant that congestion levels are high. Streets are often narrow and/or steep which means
access for lorries is difficult.
Whilst in developed markets deliveries of full truck loads to large stores are the most frequent type of
distribution, in developing markets there may be 3, 4 or more hand offs of products to ever smaller and
less formal warehousing and transport companies. Final delivery may be made, for example to the
nanostore by a courier on a tricycle.
Research has shown that one of the key problems faced by delivery drivers is parking. This is caused by
the limited availability of parking space as well as the problem of cars parking in dedicated
loading/unloading bays. This means that unnecessary time is wasted by van drivers for each drop,
causing lower productivity. It has been shown that when city administrations enforce the proper use of
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parking spaces, productivity increases and van emissions (caused by vehicles circling trying to find an
unloading bay) decrease. In some cities new apps have been developed to show available parking bays.
New retailer strategies in China
Both of China’s e-retail giants, Alibaba and JD.com, have looked to leverage the attributes of nanostores
in order to fulfil the next stage of their corporate strategy: online to offline (O2O).
Alibaba has targeted the local market through its ‘Ling Shou Tong’ or ‘retail integrated’ programme. The
scheme not only provides stores with basic products, fresh and packaged foods and cigarettes as well as
a make over, but it also integrates them within Alibaba’s technology platform. This provides analytics
and automation which previously had only been available to modern retailers.
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When ordering via the Ling Shou Tong app, the proprietor receives suggestions based on sales
of the most popular items.
Orders are consolidated, so stores need only place one order rather than deal with multiple
suppliers.
Orders for fast moving goods are dispatched from local warehouses on a next day basis whilst
slower moving goods are dispatched on a guaranteed two day service from regional
warehouses.
The programme also provides benefits to CPG companies. The data which is generated and shared by
Alibaba, gives them more visibility of consumer demand and can allow them to tailor specific products
for a market. For instance, Mondelez has used this within its Oreo range of snacks. The relationship
allows nanostores to focus on one of their core competitive advantages which is hyper-localism by
providing them with even more insight into their customers’ buying behaviours.
For larger stores, there is the option to become a Tmall Corner Store which provides them with higher
levels of integration, product selection, a point-of-sales system, LED signage and in-store digital
advertising. Alibaba and the nanostores can also use this partnership to offer other services such as
cellphone data top ups.5
Rival retailer JD.com has followed a slightly different strategy. Alongside its ‘retail-as-a-service’ solution
(similar to Alibaba’s above) it has created a nanostore franchise network which according to
management is expanding at the colossal rate of 1000 stores a week with a target figure of 1000 stores
a day. The plan is to open 1 million stores by 2023, owned and operated by private individuals who
have the opportunity to receive a loan from the company to help with the set up costs. As well as urban
5
https://www.alizila.com/alibaba-gives-dose-new-retail-china-convenience-stores/
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areas, the retailer is looking to push its reach into the undeveloped and under-serviced rural locations.
Although stocking mostly JD.com products, franchises also have the opportunity to stock items from
other retailers. However, there are signs that this aggressive expansion plan has hit problems and that
the roll out is well behind schedule. Part of the reason for this is that the company has struggled to
convince store owners to ditch existing supplier relationships in favour of JD.com’s range, especially in
cities or regions where the retailer has low brand awareness6.
Other innovative tools and solutions are being developed right across the developing world focused on
this growing sector. These include:
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New technology platforms which have the potential to harness the combined power of
thousands of nanostores. BeeQuick in Beijing creates a virtual network of nanostores which
enables buyers to order consumer goods and have them delivered to their homes.
Go Jek – an ‘uber’ for motorcycles in Indonesia works with 400,000 drivers. As well as carrying
passengers on pillions, it also allows nanostores to operate a home delivery service in Jakarta.
Colmapp in Dominican Republic. Bakery product manufacturer Grupo Bimbo equips nanostores
with devices so they can take card payments using government cards.
Conclusion
Nanostores have grown in popularity due to their proximity to large, growing and densely packed
populations within megacities. They are able to reach consumers much more effectively than formal,
modern retail distribution channels and they represent a route to market which cannot be ignored by
the large consumer goods manufacturers.
However, this does not mean that their future is ensured. The development of smartphone technology
will allow increasingly well off consumers (at least in relative terms) access to new platforms which will
allow them even great opportunities to access a wider range of products than can be offered by
nanostores.
Rather than develop large supermarket or hypermarket models in these areas, larger retailers may well
be better advised to ‘leapfrog’ this stage of retail development and build on-demand delivery networks.
After all, if consumers demand proximity, nothing is closer than access to products via the smartphone
in their pocket.
6
https://technode.com/2019/03/11/why-jd-is-tripping-up-in-new-retail-race/
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