Modernizing Retailers in an Emerging Market: Investigating Externally-Focused and Internally-Focused Approaches

This paper studies the impact of business modernization on the sales performance of traditional retailers. We define modernization as adopting tangible structures and business practices of organized retail chains (for example, exterior signage with store name and logo, or a database to record product-level information) and adapting these to the practical conditions and constraints of traditional retailers such as small shop size. To address our research question, we implement a randomized field experiment in Mexico City with 1148 traditional retail firms. Our sample is randomized into three groups: 385 firms that we externally modernize in ways that are visible to customers; 383 firms that we internally modernize in ways that are not visible to customers; and 380 firms form a control group. We find a significant and persistent main effect of modernization on sales: firms in both treatment groups increase monthly sales by 15% to 19%, even 24 months after study recruitment. In terms of novel mechanism evidence, we find that externally-modernizing firms improve their store-level branding, while internally-modernizing firms strengthen their product management. These results have important implications for multinational managers who distribute products through traditional retail channels, and for policymakers interested in improving firm performance in the retail sector of emerging markets.