Like the movie The Matrix, the informal economy is invisible but all around us, like a mist drifting by, hanging around on street corners, covering the townships. It is growing at an urgent organic pace unmatched by the formal sector. Consider that:
• The muti market is worth R2.9bn, employing almost 150 000 people and serving 27-million customers;
• There are more than 100 000 spaza shops (informal fast-moving consumer goods retailers) turning over about R46bn/year, with typical turnover per outlet ranging from R30 000-R200 000 a month;
• There are 500 000 hawkers or table-top vendors earning R1 500-R3 000 each a month in profit;
• There are 50 000 informal food takeaway shops selling everything from the kota burger to vetkoek and shisanyama. The bigger amaplate food trucks can turn over R50 000 a day seven days a week; and
• There are 150 000 hair salons, ranging from home backrooms to colourful corrugated iron structures that sell styling and hair pieces worth millions.
But like The Matrix, this trade and its scale are invisible to us – we don’t see its gleaming corporate headquarters, we don’t recognise its multitudes as they are in a caravan on the side of a road, sitting beside a pile of veggies on a crate or in a little chemist shop under a highway bridge. Yet, in many ways, our economy is being sustained and driven by this sector.
Not only are these outlets and traders paying value added tax on their purchases but they are employing people and bringing in household incomes on a massive scale. In most cases, the average rand circulates more often in a township informal economy than a formal one. Recent Nielsen research shows that 20% of all money spent in SA is spent in informal stores, but most importantly, increasing at 7%/year versus formal stores at 4%.
There are a number of reasons why the informal sector is growing so fast but three factors stand out:
• First is the cost of transport to the formal purchase point, where public transport can cost up to 10% of consumers’ monthly income. Remember also that shoppers must pay the penalty of a second seat for groceries. In recent research, shoppers all included the cost of transport in their grocery budget or calculated the saving on a special with the cost of transport included. This transport cost often negates the cost of the special.
• Second is the improved offering and competitive nature, with great range and pricing. A recent survey Minanawe Marketing was involved in showed that on average, informal retailers are 7% cheaper than formal retailers on a basket of branded groceries. The survey revealed that shopping at an informal retailer could save the consumer between R37 (a 3% discount) and R104 (a 9% discount) on the basket of goods, which would cost R1 179 at a Shoprite in Naledi, Soweto. This saving would increase 5%-11% for the same basket of goods if transport costs were considered. (Source: SBGS price analysis 2016)
• Third is that the informal sector’s offering is generally better adapted to the needs, tastes and lifestyle of their customers. My favourite new phrase is locavore, the sourcing of food locally. This means transactions are not only well suited but often personalised and social vs only financial. Kota shops and corner caravans compete actively with formal takeaway outlets. A typical popular kota outlet in Soweto can sell 2 400 a day, peeling 80 bags of potatoes for chips. Every second street has a kota outlet and the average kota sells at R15 … do the maths.
Minister of Small Business Lindiwe Zulu spoke recently about creating new entrepreneurs in the townships. This is the wrong thinking – there are tens of thousands of entrepreneurs operating in the informal community. What is required is to support them with tailor-made solutions instead of trying to make their enterprises formal. Instead of moving hawkers off the street and into a centralised market, they need storage facilities close to their place of trade.
Owners need support to grow their businesses. Cash flow and not being able to invest in equipment or new outlets limit their growth prospects. Minanawe runs a hugely successful campaign for Parmalat cheese slices in the kota fast-food industry called Parmalat Phuma Pambili. This offers loyal Parmalat cheese slice stockists valuable facilities for catering, equipment and even container stores.
This has contributed to Parmalat retaining an 85% market share despite cheaper competitive entrants. Manufacturers need to explore more direct supply to this sector, shortening distribution chains. Manufacturers who are accustomed to formal distribution and one-stop clients like Shoprite, need to adapt to a large number of smaller traders with different terms and restrictions.
For example, in Tembisa, a large informal wholesaler that turns over about R100 000 a day was told by a large local manufacturer that it could not deliver because he did not have “offloading facilities”.
The informal sector is disrupting traditional formal business models. To participate in this sector, business needs to open its eyes to this different economic world. It should adapt trading terms and business relationships to serve a more fragmented customer base, offering products and solutions that are more relevant and more suited to their shopper patterns and consumer lifestyles.
GG Alcock is CEO of Minanawe Marketing, a specialist informal sector activations business, and author of Third World Child, White Born, Zulu Bred and KasiNomics, African Informal Economies and the People Who Inhabit Them