Supplying to mom and pop: Traditional retail channel selection in megacities

Nanostores are traditional small independent retailers that are present in large numbers in the megacities of the developing world. In the aggregate, they often represent  the largest sales channel for Consumer Packaged Goods Manufacturers, who can choose to deliver to this channel either directly - visiting tens of thousands of stores per day in a megacity - or via wholesalers - saving on distribution cost but forfeiting the direct access to the store owners to promote their brands and develop demand. We study the decision of the manufacturer whether to deliver directly to the nanostores or whether to use the wholesale channel strategy and characterize the optimal policy. We show that the decision depends on two key characteristics of each channel strategy, namely the gross profitability of the channel strategy, which is based on the gross sales margin and the logistics operating cost and the growth-adjusted profitability of each channel strategy, which also factors in the growth potential of each channel strategy. We apply our model to four regions in the city of Bogota to illustrate its practical relevance and impact.