Foreign nationals in the informal retail sector
20 August 2019
In the wake of the recent attacks on police who were raiding informal traders in Johannesburg’s inner city, the Minister of Small Business Development, Khumbudzo Ntshavheni, responded by saying that South Africa should look to tightening the rules which limit the economic activity of foreign nationals. The Minister referred to such limits in other African countries, such as Ghana where non-citizens or businesses not fully owned by a citizen may not for example hawk or sell goods in a stall in any place, run a beauty salon or barbershop, among a number other economic activities.
Steven Friedman writing about the attacks observed “[i]f people trying to earn a living are treated as a problem, we should not be surprised when they behave like one.” He went on to say that what happened isn’t clear because reporting has not been interested in telling both sides of the story.
This is not the first time a government official in this position has spoken out against foreign informal sector traders. In 2015 the then Minister Lindiwe Zulu stated that “[f]oreigners need to understand that they are here as a courtesy ... They cannot barricade themselves in and not share their practices with local business owners.”
The spaza shop sector may shed light on some important facts concerning South African and foreign owned spaza shops. Views like the Ministers’ above may very well do nothing more than hinder our economy and stoke up xenophobia.
A study undertaken in 2010, lead by Dr. Andrew Charman of the Sustainable Livelihoods Foundation, looked at the rise of Somali-run spaza shops in Delft, Cape Town. It found that foreign owned shops were cheaper and better stocked, thereby capturing the market from the existing stores. This resulted in a major shift in ownership of spaza shops to foreign nationals. The significant finding was that the business strategy and scale of operations of foreign-run shops outmanoeuvred the micro-scale ‘survivalist’ approach of South African spaza shops. The important difference was the role of social networks for the foreign shops, which provided for:
- cheap labour
- enforcement of contractual agreements by elders
- strategic investment to establish Somali stronghold areas
- group purchasing to provide economies of scale
- facilitating micro financing.
South African shopkeepers on the other hand operated within weak social networks, often limited to immediate family members. Unable to compete, the South African run spaza shops in Delft either closed or started alternative activities, such as the sale of alcohol or takeaway food.
However, prior to the arrival of savvy foreign spaza shop owners and not long after the fall of apartheid, something much larger, more established and local began to enter into the township areas; the formal retailers – Shoprite, Pick n’Pay, Spar, etc. In 2010 GG Alcock (CEO of Minanawe Marketing, a specialist informal sector activations business) correctly predicted that this would kill off the incumbent South African owned spaza shops, which would become nothing more than emergency shops.
South African owned spaza shops at the time were expensive and had little stock, but were close to their customers compared to the large retailers (before their arrival). From 2002 onwards, after the large retailers did their damage, the foreigners stepped in. They had a low cost of entry and would rent the shop from a South African, who was relieved to receive R2500 to R5000 a month for his/her defunct spaza. It also happened at a time when social grants were growing at a dramatic rate, resulting in a lot more money suddenly entering the lowest income groups.
The new foreign owners provided the spark that the informal retail sector needed in order to compete with the large retailers. A 2016 survey by Minanawe Marketing showed that a basket of branded goods from an informal retailer was on average 7% cheaper, and could save the consumer between R37 to R104 on a basket of goods costing R1 179 at Shoprite in Naledi, Soweto. The savings would increase 5% to 10% for the same basket if transport costs were considered, as the shopper would not have to incur the R20 for the round trip. If a shopper were to shop at only formal purchase points, this could cost 10% of his/her monthly income, and is one of the reasons why in recent years the money spent in informal stores has increases at a rate of 7% per year versus formal stores’ 4%. Therefore, the real losers, thanks to foreign informal traders, are the formal retailers, and the winner is the consumer.
A 2017 study by Unisa’s Bureau of Market Research estimated that 300 000 jobs are created by the spaza economy and contributes R9 billion to the economy per annum. So if the Minister of Small Business Development, KhumbudzoNtshavheni, was objective about the conflict that exists between local and foreign informal sector business owners, perhaps she would look at ways to help the South African informal sector become more competitive. This, rather than scoring cheap political points that will ultimately harm our struggling economy, destroy livelihoods as happened again in Soweto last week, or even cause the death of some foreign nationals who may fall victim to xenophobic mobs.
There are a number of ways that the government could help the South African informal retail traders become more competitive:
- First, government could regulate the retail grocery trade in the townships in a way that ensures that informal businesses which become large enough to formalise do so. Those large enough to negotiate price discounts and merchandising from producers, to employ staff and to accumulate business assets should start to formalise – whether they are run by foreigners or South Africans. It might mean having to relocate to the high street in compliance with municipal by-laws, registering staff, paying minimum wages, submitting VAT and income tax returns, etc. The smaller more survivalist business could remain less regulated and, given their niche location and lower overheads, could sustain a modest competitive advantage.
- Second, foreign spaza shop owners lay-out more capital – R45 000 compared to R1 500 to R5 000 by South Africans. With regard to this, a recent FinMark Trust study showed that there is inadequate knowledge among small business owners of the benefit of credit. Access to and knowledge about formal micro credit will help narrow this capital lay out gap.
- Lastly, more business skills training must be provided by government and other bodies suited to do so. This would include the DTI, the Department of Small Business Development, local business chambers, and the Wholesale and Retail Sector Education and Training Authority.
By Charles Collocott, Researcher, HSF, 20 August 2019
Charman A.J.E. and Piper L.E. (2012) Xenophobia, Criminality and Violent Entrepreneurship: Violence against Somali Shopkeepers in Delft South, Cape Town, South Africa. South African Review of Sociology 43
 Op cit note 4.