South Africa’s informal economy has evolved significantly over time and today, is regarded as a hotbed of opportunity for innovative entrepreneurs and a fast growing market.
A recent research report by GG Alcock, titled ‘kasinomics’, revealed that the informal sector is not only sizeable, it is also structured and fairly complex. The report found that back-room rental earnings currently total at least R20 billion annually, while informal haircare establishments are valued at an accumulative R10bn a year. Likewise, the fast food informal sector has grown to a value of around R90bn a year.
According to a recent study by Mastercard, 60% of the people who start an informal business in South Africa do so because they are unable to find formal employment and have no alternative source of income. The report also found that many of these business owners belong to marginalised groups such as women, youth and previously disadvantaged individuals. The symbolic spaza shop has become somewhat of a national institution, with many informal sales people relying solely on the income they generate from street-side stores.
In findings such as these, we see the centrality of entrepreneurship within the South African business ecosystem. Small businesses are more than just a source of livelihood, many also play an important role in social and community upliftment as well as personal empowerment.
In recent history, the informal sector was dominated by the exchange of cash. However, with the expansion of the sector, more informal businesses are moving into the realm of digital payments. Today, it is not uncommon to see fast food vendors, clothing stands and township-based businesses accepting electronic payment methods driven by companies such as Yoco. For institutions such as Mastercard, this move away from the “cash economy” signals the beginning of a move towards greater financial inclusion.
Convenience and safety are two of the factors that Mastercard believes to be behind the transition towards a cashless sector. Developments such as these have highlighted the prominence of the informal sector as an industry to watch as it evolves along with the unique needs and demands of society. Some of the most successful small businesses in the sector include butcheries, fashion and design labels, restaurants, street food vendors, coffee stands and professional services.
These are just two of the most promising types of informal businesses that will most likely continue to see consistent growth and expansion as the sector evolves.
Tourism-related small businesses
In previous years, foreign visitors to South Africa may have been overly captivated by our country’s natural resources, landmarks and high-end tourist destinations. More recently, however, visitors to South Africa have become increasingly interested in getting a taste of what life is like in the townships across the country that millions of citizens call home. The popularity of “real tourism” in South African townships has surged as travellers seek to move beyond traditional tourist attractions and delve into the real heart and soul of the nation.
This has inspired many creative entrepreneurs to start their own tourism-related small businesses. In Soweto, for example, these types of establishments abound and are revered for their ability to showcase South Africa in a way that is authentic and that captures the energy of the townships. These tours provide an enriching and educational experience, allowing visitors to witness resilience, celebrate creativity, and experience the vibrant spirit of these communities.
These tours also often include an educational component that provides visitors with an overview of the area’s history as well as exposure to the cultural nuances that many have come to know and love. Similar tours of this kind take place in South American cities like Rio de Janeiro, where tourists can embark on walking tours through the streets and alleys of the sprawling favelas. There are multiple opportunities that exist within this sub-sector.
The business of beauty
South Africa also has a thriving beauty industry. More specifically, its hair and nail industries have seen significant growth over the past decade, with many informal salons springing up in townships and rural areas or even operating on a mobile basis.
One estimate puts the number of these salons at around 34 000, although due to the fact that data on hair establishments in the informal sector is lacking, this figure is most likely much larger. According to a Euromonitor report, haircare is one of the fastest growing categories of products sold in South Africa, with sales climbing by almost 40% between 2010 and 2015. Likewise, the market for beauty services such as nails is also growing at a phenomenal rate.
A visit to a township like Khayelitsha will reveal just how popular micro salons have become. Many of these businesses operate out of containers that have been transformed into shopfronts. Informal sector businesses now have a golden opportunity to tap into this trend and establish themselves not only as service providers but as bastions of South African culture.
A report by the Central University of Technology in the Free State has identified hair salons, in particular, as being one of the most important contributors to economic growth in the province. The expanding informal beauty sector is definitely one to keep an eye on over the next few years as demand for these services increases and their establishment in townships and rural areas makes it all the more convenient and accessible.
Ben Bierman is the managing director of Business Partners.
BUSINESS REPORT