Formal retailers moving into townships

Easier to be a landlord than to compete

“Two factors have led to the downfall of SA-owned shops: the introduction of the mall and foreignowned spazas”

— CLIFORD DUBE

Diepsloot, a densely populated settlement on the edge of northern Johannesburg, just a few minutes away from the wealthy suburbs of Dainfern and Fourways, is a hive of activity where small enterprise appears to be thriving. Every third or fourth home has been turned into a small shop, offering bread, milk, crisps and other household goods. But beneath the veneer of a vibrant informal economy lies a cut-throat industry where only the cheapest survive.

The retail sector in one of SA’s poorest settlements is apparently seen by most of its residents as the easiest route to earning extra income. The barriers to entry are low and, depending on the availability of space, existing structures (RDP homes or shacks) can easily be converted into informal shops.

But over the past three to five years Diepsloot’s informal retail sector, once dominated by SA-owned micro enterprises, commonly referred to as spaza shops, has come under pressure from new competition. From the formal side, retail giants such as Shoprite have entered the market at the newly built mall. They have already made inroads into what was once a thriving sector. In addition, foreign-owned shops run by, among others, Pakistani nationals, have entered the market, driving down prices through bulk-buying syndicates. They have also displaced local shop owners by offering to buy or rent their shops or turning their homes into shops.

Diepsloot’s informal traders’ association chairman, Cliford Dube, says: “Two factors have led to the downfall of SA-owned shops: the introduction of the mall, and foreign-owned spazas. On the one hand when the mall was introduced customers preferred to get their shopping [groceries] at Shoprite and other stores, because they were cheaper. But when the Somalis, Pakistanis and Ethiopians also began opening shops inside the township, they sold goods at an even cheaper price.

“The foreign nationals have come into Diepsloot and completely changed the way spaza shops are run. They started by approaching SA house owners, offering to pay them up to R2000/month in rent so that they could erect a structure in their homes and begin selling,” says Dube.

Amir Iqbal, a Pakistani national who has been in SA for four years, pays R1200/month in rent in exchange for the use of the property to sell, among other things, bread, cooking oil and flour to the Diepsloot residents. The shop is manned by three Pakistani nationals who he says are his younger brothers. The trend among the foreign-owned shops visited by the FM was to employ other foreign nationals (like Waheed Ahmed, a Somali) to help manage the business. This, says Dube, is because South Africans refuse to work under similar conditions (long hours, sleeping in the shop and little pay). Locals tell the FM that the foreign nationals are illegal and are reluctant to complain about exploitation to the authorities.

Iqbal says he believes foreigners have been successful in Diepsloot because they don’t charge exorbitant prices, unlike their SA counterparts. “You see the problem with the locals is that they buy something for R10 and then want to sell it for R18. That’s not how you treat poor people. If I buy for R10, I’ll charge R11. I buy cheap so I can sell cheap, and make money.”

It’s a view Dube shares. “These guys are smart. I know of one Pakistani who owns more than 100 stores in different townships. Their strategy is to buy in bulk and negotiate discounts with the suppliers. When they buy, they do it as a group, which allows them to charge cheaper prices. South Africans don’t do that, they buy as individuals, which makes their goods very expensive, especially when you factor in the cost of transport. At times the foreign-owned stores can be cheaper than the malls. But, of course, the quality is not the same.”

In 2007, Diepsloot Mall, the township’s only formal retail offering, opened its doors, boasting anchor tenants such as Shoprite, Pep Stores and Absa

Despite the mall’s popularity, not many small to medium-sized Diepsloot businesses rent space within it. Instead, naturalised South Africans of Chinese and Somali origin form part of the secondtier tenants. Says Mzolisi Mbikwana, Diepsloot Mall’s centre manager: “The Chinese dominate the clothing sector; if you exclude the Pep store, there are three Chinese tenants selling clothes — Blue Star, Red Power and Mr Cheng’s Fashion In the electronics space, Somalis tend to dominate because of their skills as technicians.”

Most of the goods sold at these stores are imported. On the electronics side, limited store guarantees are offered which, says Mbikwana, has resulted in a few complaints. Jack Huang, store manager of Red Power, employs a few locals, unlike his Somali counterparts, but when asked what proportion of his goods is imported, he admits “almost 90%”.

For those informal traders who don’t have a physical structure from which to sell, life is a constant battle with the authorities. Dube says the metro police harass the informal traders who can be found trading within metres of the mall. “Those businesses are not in demarcated zones where they can sell their goods. When the metro police raid their shops, they confiscate the items and issue fines — the value of which exceeds the goods confiscated, which hampers growth.”

Most of these informal traders sell not to make a few extra rand but to sustain their families.

The situation in Diepsloot mirrors in many ways what is occurring in other townships, where the competition for the lower LSM market is tough — especially where the informal sector trades near the formal sector and the presence of foreign nationals is growing, according to Dirk Prinsloo, head of market research firm Urban Studies. “It’s a market based on price,” says Prinsloo, and those who try to enter face an uphill battle.

The impact of malls, combined with aggressive pricing strategies from new immigrants, has changed the face of the informal retail market.

The outlook for the SA spaza shop owner is bleak. Unlike their foreign counterparts who borrow money from within their communities, they have difficulty getting access to finance for expansion. Also, SA shop owners tend to see each other as competitors, so there’s a reluctance to develop partnerships for bulk buying purposes.

Yet somehow a new form of entrepreneur is coming to the fore. Having been beaten on quality by the malls and price by the foreign-owned shops, South Africans are becoming informal landlords, renting their RDP homes or shacks as shops, hoping to attract the highest foreign bidder.

Source: Financial Mail