Differences between traditional trade and modern trade

In emerging markets, modern trade is still in the early stages of development, especially in some less developed economies in Africa and Asia. The numerous traditional trade outlets or informal retailers remain the biggest segment in most markets — and the outlet base is often unstable with new shops opening and closing. Servicing traditional trade, provide companies with a range of challenges, and the fragmented nature of these outlets, make it costly and time-consuming.

In the section below, I will look at the definition of modern retail and traditional retail, and what are some of the differences when servicing them.

What is traditional trade?

Traditional trade or informal retail is a complex distribution network of micro- retailers, kiosks, hawkers, stockists, open market traders, wholesalers, and distributors. Traditional trade builds on inter-personal relations between the customers and the retailers. Traditional trade is less organised than modern trade and is more likely to run out of stock or push alternative products to customers.

Traditional retail, also known as mom-and-pops, go by many names such as kirana in India, baqala in the Gulf, sari-sari in the Philippines, duka in East Africa, spaza in South Africa, souk in Ethiopia, and tiendita in Mexico. The World Bank estimates that there are close to 400 million micro, small, and medium enterprises (MSMEs) in emerging economies, with 12 million of these being in India alone. They account for nearly half of all grocery sales in Asia and India.

Traditional retailers are defined as enterprises employing fewer than four individuals, with a monthly turnover of less than $1,500 a month. They are usually independent and stock a limited selection of products or stock-keeping units. They sell products from both fixed locations like shops, as well as non-fixed locations such as roaming street vendors. These shops are usually small, ranging from 25 to 50 square metres.

Traditional trader in Cairo, Egypt

What is modern trade?

Modern trade outlets are chains or groups of businesses. They include larger players such as hypermarkets, supermarket chains and mini-markets. Retail operations are more planned and operations use a more organised approach to inventory management, merchandising and logistics management.

Differences between traditional trade and modern trade

IssueModern TradeTraditional Trade
Profile– Chains with multiple locations with investors run by a trained management team– Mostly one outlet run by an entrepreneur, family or employees
Decision maker-Multiple layer decision-making process that requires time
– Central offices and in some cases individual branches
– One or two decision makers
– Often the owner or manager
Relationship with customers– Limited inter-personal relationships– Focus on inter-personal relations between the customers and retailers
Demand– Consistent demand– More seasonal — stop selling certain products during off-season
Customer base– Large customer base and service areas that could include thousands of customers– Mostly services the neighbourhood and local community
Brand and pack listing– Required and could include lengthy and detailed processes, presentations, and documentation, prior to receiving approval – Not required — negotiate with owner
Product range– Extensive range with thousands of products– Mostly limited range with hundreds of products
Economies of scale– Retailers can absorb costs, often sell products as a loss leader or give promotional discounts to drive purchases– Goods are traded mostly on maximum retail price (MRP)
Out of stocks– Less common with improved inventory management– More common and substitute brands based on availability at wholesale or distributor level
Promotions– Provide ongoing promotions
– Centralised promotion negotiations
– Some promotional prices
– Negotiate promotions with owner or manager
Location– Often in high traffic areas in a strategic location– All locations, but some in congested areas and narrow streets
Financial flow– Long credit cycle & bank transfers– Cash and short credit cycle
– Often provide credit to customers based on relationships
Procurement– Purchase directly for manufacturers
– Mostly centralised procurement
– Require sales teams to provide detailed information e.g. sales, pack contribution, trends
– Mostly procure products though intermediaries, such as distributors and wholesalers
– Purchase for a single store
– Owner or manager makes the procurement decision
Deliver– Scheduled – on-time delivery
– Deliver to specified stores or warehouses
– More flexible on delivery times
– Deliver to individual store
Lead times– Longer but more structured– Shorter to manage cash flow
Merchandising equipment – Require specialised equipment
– Multiple points available to display or cross-promote products
– Placing equipment requires detailed negotiations with multiple stakeholders
– Standard equipment e.g. racks
– Limited space available for equipment placement
– Often use equipment such as coolers to store personal items e.g. milk, butter
Technology– Enterprise point-of-sale (POS) scanning, vendor management inventory (VMI) and electronic data interchange– Mobile phone or smartphone, and limited technology such as personal computers

Traditional retail challenges

Working with small retailers in developing countries poses some difficulties. Below are some concerns to consider when dealing with micro-retailers:

Limited buying power – They have restricted cash flow and purchasing power, often relying on personal savings or borrowing from family members to maintain their cash flow. To manage their cash flow, they prefer to purchase smaller quantities and do not meet the minimum order sizes required by delivery companies.

Poor product visibility and limited space – Shops tend to be poorly lit and have limited shelf space to store and display products, making it challenging to place equipment such as coolers and point of sale materials.

Difficult to introduce new brands – Informal retailers typically stock a limited number of brands per product category, often only two to three. With limited purchasing power, they are reluctant to tie up their cash in slow-moving products. Convincing shopkeepers to purchase additional brands is difficult, especially for new and untested products in the market.

Frequent deliveries required – Many small grocery shops frequently run out of stock and require high-frequency deliveries, sometimes daily. Low volume orders increase the cost per delivery, making it unprofitable to service these outlets.

Hard to reach – Many traditional retailers are located in hard-to-reach areas and congested urban centres, making it difficult for delivery vehicles to enter small, narrow streets. This can delay sales teams and force them to travel on foot to reach the outlets.

Unregistered outlets – Many owners do not register their shops to avoid paying taxes, and the lack of street signage in developing countries makes it difficult for companies to assign them to delivery routes. As a result, micro-retailers are often underserved, leaving the retail base to informal distributors and wholesalers.

Reliance on wholesalers – traditional retailers often rely on wholesalers or distributors to break down bulk into smaller, more affordable quantities. These wholesalers and distributors also provide credit when necessary. Although smaller quantities are more economical, they end up paying higher prices and are often trapped in a credit cycle with one of two wholesalers, making it challenging to shop around for the best deals.

Lack of market insights – Not all traditional retailers are the same. New shop owners often lack the market knowledge to purchase the right product categories and varieties, leading to poor purchase decisions and a low return on investment, tying up their cash.

Advantages of informal retailers

Even taking into account the various challenges and expenses involved, firms are now looking at traditional trade with renewed interest. Although modern trade has been steadily increasing, local corner shops still have a lot to offer and continue to make up the largest share of grocery sales. Informal retailers offer a unique value proposition for their customers, who may not be able to find this value elsewhere. Although they may not be able to compete with modern retailers on price, there are many other areas where they are highly competitive.

Close relationship – Shoppers often complain about the lack of personal service from supermarkets. In contrast, local corner shops generally have long-standing relationships with their customers and have a good understanding of their needs and preferred products. This familiarity also makes it easier for the shopkeeper to extend short-term credit without worrying about non-payment.

Delivery to your doorstep – In many countries, customers can simply place an order over the phone, with no minimum value required for phone orders. These shops are able to deliver even the smallest item right to the customer’s doorstep at no extra cost.

Prime location – Traditional retailers are well placed for small, regular purchases and can sometimes be visited daily. They are often situated along commuter routes and close to customers’ homes, making them convenient even if their prices are higher. This can save customers money on transport costs.

Well-stocked and flexible – Successful shops are usually well-stocked and offer a high proportion of first-tier brands. The shopkeepers are also flexible and responsive to customer requests, and will happily stock new products if asked. Additionally, since these shops often trade seven days a week, including evenings, they are ideal for customers looking to purchase essential goods outside of regular supermarket hours.

In tune with customer preferences – Modern retail practices, such as artificially coloring vegetables or ripening fruits in-store, are not always in line with traditional customer preferences. Small grocers are more attuned to their customers’ needs and avoid these unconventional practices.

Affordable packaging – Traditional retailers often offer smaller, more affordable packaging options for cash-strapped customers, such as small bags of rice or sugar, rather than standard manufacturer packaging.

In developing markets, companies such as Coca-Cola and Unilever have built their distribution networks around traditional retailers, and more and more organisations are developing models to service these traditional traders. Developing a successful business model to service local corner shops can be a competitive advantage and a major driver of growth.

For more information on how to analyse, design, and pilot, a route-to-market model to service micro-retailers, visit our Route-to-Market model page.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.