The three JSE-listed companies taking on South Africa’s R1 trillion hidden economy

Over the past few years, an increasing number of formal sector players have been attempting to penetrate South Africa’s booming informal market.

This market, which has an estimated value of R750 billion and R1 trillion, is notoriously difficult to enter and succeed in. Barriers to entry have only become higher as competition intensifies.

However, some companies have not only been able to penetrate but also see wild success in the informal market.

In a recent interview with Daily Investor, informal economy expert and ‘Kasinomics’ author GG Alcock explained what has set these companies apart from the ones that failed.

Firstly, he explained that the companies that tend to perform well in this market have made it a point to ensure they understand it first.

“The starting point is really that they have to make understanding this market part of their DNA,” he said.

He explained that all the companies that have been successful in this market have put in the legwork and gone to great lengths to gather data and truly understand the market.

“It’s really about understanding, and it’s not a case of getting a research report, you’ve got to go there and walk the streets and understand these places,” he said.

“It’s really about how do you, at an executive level – not just hiring a research report – are getting to know who your customer is and what that space is like.”

Alcock explained that it is crucial for companies to get rid of the misconceptions they may have about the market regarding massive unemployment, inequality and crime. 

“Of course, it’s all there, but it’s overstated and you need to see beyond the headlines and understand that space,” he said.

Secondly, he said there is a hesitancy from companies to fully commit to entering the market, and a half-hearted attempt will not lead to success.

“I think that often, businesses are not prepared to innovate, to make it part of their DNA, to really commit to a program in the space,” he said.

In this regard, Alcock believes companies should follow the approach of Silicon Valley tech start-ups – “fail fast and fail forward”.

Attempts to enter the informal market will not work if companies enter the market with a short-term vision and expectations of short-term returns. He said this will inevitably lead to disappointment when things are slow to start,

“I think that many businesses started it, and then they just don’t get it going, and then they kind of retreat, but they were never really invested in it for the long term,” he said.

This is why it is important to build a feedback loop, which will allow companies to course-correct where needed as they receive constant feedback on their approach.

This goed hand-in-hand with the next problem Alcock identified, which is that not enough companies think about how they can add value to the market they are trying to enter.

He explained that the most successful companies in the informal market are those that have established a reciprocal relationship with their customers, where both parties benefit from the company being there.

“It’s about how do you create value, how do you create loyalty and relationships with the people in that space,” he said.

Major players in South Africa’s informal market

Alcock identified three listed companies that have understood what is needed to succeed in South Africa’s informal market and reaped the rewards.

Firstly, he noted that Capitec has been highly successful with its more recent entrance into the informal economy with its business banking offering. 

This is because the bank used its access to a vast amount of data, derived from its nearly 25 million customers, to its advantage to better understand the market.

He said Capitec also understood the need to create reciprocal value with its services by offering, for example, some of the lowest merchant fees on the market.

Secondly, Alcock pointed to Pepkor’s success in the informal market as a good example of a formal sector player understanding what the informal market needs and how to provide that.

While many may associate Pepkor with its low-cost clothing stores, and these are prevalent in the informal sector, Alcock said the retail giant’s services extend far beyond that.

For example, Pepkor’s PAXI delivery service, which allows for PEP-to-PEP deliveries, has seen significant uptake in the informal market.

Similarly, Pepkor’s fintech subsidiary, Flash, which provides digital transaction services and payment solutions, has been highly successful in the informal market.

With the rise of larger houses and growing property values in South Africa’s townships, Pepkor’s PEP Home business has also been increasing in popularity.

One of Pepkor’s biggest successes in the informal market has been its FoneYam offering, which provides a good example of a company understanding its market.

Pepkor has managed to become the biggest seller of phones and SIM cards in South Africa, aided by its presence in the country’s informal market.

Alcock explained that FoneYam developed a clever financing plan that allows customers to finance a cellphone even if they do not have a traditional payslip, as is often the case in the informal market.

The third company Alcock highlighted was Shoprite, which has been a player in the sector through its Cash & Carry stores and Usave since 2001.

Usave, in particular, has shown strong growth as South Africans hunt for value. In Shoprite’s latest annual results for the 2024 financial year, its Shoprite and Usave brands increased sales by 10.7%, expanding the group’s reach into underserved communities.

In that year, the retailer opened 22 Usave stores and ended the year with 463 stores, including 44 Usave eKasi box stores across the country.

Alcock also identified several other unlisted companies that have performed well in the informal market, including soft drink company Twizza, furniture manufacturer PG Bison, Roots Butchery and fintech company iKhokha.