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Rotman Insights Hub | University of Toronto - Rotman School of Management

Retailers: Ignore impoverished neighbourhoods at your peril

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Leandro Pongeluppe

Discriminatory delivery practices may cause companies to alienate entire neighbourhoods, a new study finds. The research, led by Leandro Pongeluppe — a former Rotman PhD graduate and current assistant professor at the Wharton School — focused on e-commerce service to favelas, or low-income, densely populated neighbourhoods in Brazil.

In the study, Pongeluppe found that e-tailers often make fewer products available to favela residents and charge higher prices for delivery compared to services for those outside of these neighbourhoods.

“I’m comparing people who are across the street from one another, and I saw that [those in favelas] are less served, receive less, and when served, pay more” says Pongeluppe.

In his paper recently published in the Strategic Management Journal, Pongeluppe looked at how 11 international and local e-commerce companies operating in Brazil treated residents of favelas compared to those just metres away. To do this, Pongeluppe used digital bots to simulate online purchase transactions using various zip codes across the country, both in and out of impoverished areas, over the course of 18 weeks.

Despite no physical border or barrier between a favela and its surrounding neighbourhood that would make delivery to the neighbourhood more difficult, on average, a customer inside a favela was charged 45 per cent more for delivery than those across the street, Pongeluppe found. (He even accounted for logistical hurdles, such as large hills, to see if results changed significantly in favelas. They did not.)

Despite the higher price tag, Pongeluppe’s research showed that people inside these neighbourhoods were just as likely to buy the same household items. For example, 97 per cent of favela households owned a TV, 97 per cent had a refrigerator, 85 per cent of residents used smartphones. Additionally, he looked at crime surrounding a subset of favelas in Rio de Janeiro and found that rates of several types of robbery (street, automobile, home, etc.) were comparable to those in surrounding neighbourhoods.

However, while the majority of e-commerce organizations charged higher fees for favela deliveries, those that didn’t were well rewarded. Pongeluppe points to furniture retail chain Casas Bahia as an example.

The company opened physical stores inside of favelas — alongside its e-commerce presence. Consumers were given the ability to see and test products, like a sofa or mattress, in store before purchasing it online. The retailer also offered click-and-collect services, allowing shoppers to save on delivery fees. These initiatives often resulted in an increase in sales from consumers living inside a favela.

“I interviewed some store managers, and they said that stores inside the favelas had 50 per cent higher revenues than the same brand outside the favelas,” Pongeluppe says. “It’s really like accessing a pool of consumers who are being neglected.”

And closer ties to local neighbourhoods don’t have to rely strictly on physical stores. Pongeluppe points to other companies without brick-and-mortar locations that made special effort to attract customers living in favelas, as well as those that made concerted efforts to employ people who live in those areas. In particular, hiring locals gave retailers the benefit of employees with the knowledge of how to perform more efficient deliveries in the neighbourhood and insights into what products were more likely to sell in those areas.

“There are firms, such as Casas Bahia, that combine both of these techniques, and have an equal level of order acceptance and charge significantly lower delivery prices than their competitors,” says Pongeluppe. “And overall, those companies improved their relationship with disenfranchised communities.”

While Pongeluppe looked specifically at Brazil, he says that his research applies globally.

Companies should look at setting up physical stores inside low-income neighbourhoods to better engage with employees and consumers in those areas, Pongeluppe says.

“What we need is a different management mindset that treats the people in impoverished areas as the valuable consumers that they are,” says Pongeluppe. “There’s a lot of opportunity for growth in those areas and there’s a lot of demand because they have more people. I think it’s time for management to pay more attention to these structural and economic inequalities — not only is it the right thing to do, but it can also be beneficial for the business as well.”


Leandro Pongeluppe is an assistant professor at the Wharton School and holds a PhD from the Rotman School of Management.