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

Abstract

This article studies the impact of business modernization on the sales performance of traditional retailers in an emerging market. The authors define modernization as the adoption of physical structures and tangible practices of organized retail chains (e.g., exterior signage with store name and logo, a database to record product-level information). To address this research question, they implement a randomized field experiment in Mexico City with 1,148 retailers. The sample is randomized as follows: 385 firms are externally modernized in ways that are visible to customers, 383 firms are internally modernized in ways that are not visible to customers, and 380 firms form a control group. The authors find a significant and persistent main effect of modernization on sales. Firms in both treatment groups increase monthly sales by 15%–19% 24 months after study recruitment. In terms of novel mechanism evidence, externally modernized firms improve their store-level branding, while internally modernized firms strengthen their product management. This article also provides an exploratory analysis to guide policy makers, managerial stakeholders, and retailers on how to modernize for the highest returns. This analysis suggests that it is most useful to modernize a firm’s exterior appearance, customer engagement methods, demand analysis, and stock-ordering processes. Finally, the largest improvements come from the initial few modernizing changes, after which returns are diminishing.