/ 16 October 2021

A bigger slice of the pie: Retailers find ways to cash in on township economy

Mall Construction In Qwa Qwa Free State Photo Delwyn Verasamy
If you build it, they will come: Mall construction in QwaQwa. Big retailers have been growing their presence in township malls for a couple of decades; now they are trying out smaller formats too. (Delwyn Verasamy/M&G)

The largely informal billion-rand South African township economy is much sought-after, with formal-sector retailers all vying for a share of the pie. 

Not only have malls been erected in townships in a bid to formalise the economy, but retailers are also trying to find more ways to cash in on this resource. 

Shoprite and Mr Price, for example, have shipping-container stores in townships. These fit in perfectly with other informal traders, who sell from similar containers or from their homes; meanwhile Pick n Pay is putting money into spaza shops, effectively making them franchises. 

A 2016 report by consumer-behaviour monitor Nielsen South Africa found that the informal or independent retail-trade sector boasted R46-billion in annual sales, with more than nine-million households shopping in traditional trade stores. 

According to the report, traditional trade stores are brick and mortar outlets with a fixed location (which excludes hawkers and tabletops) that are informal and independently owned. 

The billions of rand in sales going to informal traders is the reason formal-sector retailers have developed specific and direct investment strategies to acquire a share in the lucrative township economy. 

Economist Eddie Rakabe told the Mail & Guardian that formal-sector retailers compete directly with informal traders when they venture into townships, whether independently or as tenants in malls. 

“They [formal sector retailers] compete with informal traders not only on price, but on volume. So, instead of going to Mama Mazibuko to buy one tomato, [shoppers] go to a big store and get a big pack of tomatoes at a cheaper price,” Rakabe said. 

Shoprite was one of the first major retailers to move into the township space, when it opened its first supermarket in Dobsonville, Soweto in 1995. Since then, the retailer has always had a presence in townships. 

It accelerated this with the launch of Shoprite Usave in 2001. Usave has small-format stores that offer a limited range of basic foods at low prices to lower-income consumers.

This was still not enough for Shoprite: its Usave stores felt the effect of consumers choosing to buy from informal traders closer to home, so it launched the Usave ekasi model (made from shipping containers) in 2019, effectively capturing the market and keeping up with competitor Pick n Pay, which, in 2016, launched its spaza innovative modernisation programme

In that programme, Pick n Pay partners with local spaza owners and upgrades their stores, which are then managed under the Pick n Pay brand.

“Pick n Pay’s store programme … is helping a small number of independent store owners compete more effectively and serve their local customers better. They remain independently owned stores and this will continue to be the case in the future,” a Pick n Pay representative told the M&G. 

In 2020, Mr Price announced that it was testing smaller-format stores in a bid to get closer to where its shoppers live. The new stores are built in containers, just like Shoprite’s. 

Matthew Warriner, Mr Price’s head of investor relations and corporate communications, told the M&G: “Mr Price’s investment into the township economy is already well established through our many stores already based in townships — these stores are a key trading node for us and will continue to be a part of our future.” 

Rakabe said: “Mr Price is moving out of the expensive rental space in shopping malls and going to find empty spaces in the townships, but the prices of [its] items don’t change, even though the operational costs have gone down. It’s almost like an exploitative system.”

“[Retailers] don’t have a customer’s conscience to understand that what they are doing is actually killing Mam’Khumalo who is selling clothes across the street,” Rakabe added.  

Supermarket dominance 

Pick n Pay’s 2021 integrated annual report said that the country’s total grocery retail market had an estimated value of R900-billion in 2021, with about 60% of the market considered formal and the remaining 40% informal. 

According to the report, the four large retailers — Pick n Pay, Shoprite, Spar and Woolworths — account for about 50% of sales in the grocery retail market. Pick n Pay estimated that it has an almost 10% share of the total market, and about 16% of the formal market. No mention was made of the percentage of Pick n Pay’s share of the informal market. 

The 2021 South African Township Marketing Report found that spaza shops contribute 5.2% to South Africa’s GDP, employing 2.6-million people.

Bulelani Balabala, founder of Township Entrepreneurs Alliance, in the report, said the township economy should be regulated because the arrival of malls in the space had destroyed a lot of small players. 

“[Regulation] would have protected the market and let the malls know that to participate in this [local] market they should have opened up spaces in the malls for these outlets to operate, thus fostering growth,” said Balabala. 

Rakabe echoed this, saying independent traders are feeling the pinch from retailers who just want more market share. 

“Independent traders are suffering and this is why the market should be regulated, especially in terms of transformation … the pie needs to be shared,” Rakabe said. 

Exclusive lease agreements 

Exclusive lease agreements are a contributing factor to the dominance of retailers. They prohibit rivals from setting up shop in the same mall, a practice that has recently been judged as anti-competitive by the Competition Commission. Both Shoprite and Pick n Pay have agreed to the end the use of such agreements. 

For Rakabe, the decision by the commission to end the use of exclusive lease agreements is a little too late to have an effect, because formal-sector retailers have crowded out smaller independent traders almost everywhere. 

“You won’t be able to open a butchery where Shoprite operates; you are not going to survive if you are a small retailer. They know it will be very difficult for you to compete with them and they will lower their prices so they can exclude you from the market,” Rakabe said . 

The Competition Commission released its report into competition dynamics of South Africa’s grocery retail market in 2019. It found that big retailers’ expansion into the township is partly to blame for the failure of spaza shops and independent retailers.

“It’s just greed. They already have a market share of about 50% and they still want to penetrate even more through these containers,” Rakabe said. 

He added that retailers protect their market “jealously”, making it is difficult to infiltrate as an informal trader or as a small business. “But they have the guts to use their power of the pocket by establishing those containers in the name of investing in the township,” Rakabe said. 

Anathi Madubela is an Adamela Trust business reporter at the M&G.