South Africa’s hidden R750 billion economy under siege

South Africa’s informal economy, particularly small-scale retailers such as spaza shops, is increasingly coming under regulatory scrutiny. 

So far, this scrutiny has resulted in declining sales in the R750 billion informal economy, putting traders under pressure and impacting the livelihoods of millions of South Africans. 

This is according to research done by Trade Intelligence in collaboration with Yebo Fresh to analyse the impact of new spaza shop regulations on the informal economy. 

Spaza shops are the lifeblood of South Africa’s townships, providing essential goods and services to millions in areas underserved by formal retail. 

Tshego Modise, senior analyst at Trade Intelligence, said these small, informal stores offer unmatched accessibility. They often operate long hours and sell products in affordable, smaller quantities. 

However, recent government efforts to regulate spaza shops have sparked debate and put the informal economy under pressure. 

While the intention to improve food safety through formalising the sector is commendable, there are major questions about its effectiveness and potential unintended consequences.

President Cyril Ramaphosa has extended the registration deadline for spaza shops and food handling outlets to 28 February 2025 as it has proven far more complex than initially expected. 

The government regulates spaza shops to ensure public health and safety, combat foodborne illnesses, and formalise the informal economy. 

These regulations will enforce hygiene standards, promote fair competition, protect consumers and address critical issues such as waste management and environmental health. 

However, one of its major focuses is illegal practices like fronting, where a South African registers a business on behalf of an undocumented foreigner, and undocumented immigration.

By requiring spaza shop owners to comply with laws such as the Immigration Act of 2002, the government seeks to create a safer business environment that benefits local communities. 

Foreign nationals operating spaza shops must possess valid documentation, such as a business visa, asylum permit, or permanent residency, and fronting is criminalised.

Registration requirements include certified copies of the owner’s ID, proof of residence and a business name reservation certificate. 

Health and safety compliance, such as obtaining a health certificate and a municipal trading license, is also mandatory. 

The reality of implementing the regulations often diverges significantly from their intended outcomes, raising questions about their practicality.

One of the primary challenges is the opening of extortion opportunities. For instance, the demand for title deeds as proof of business location excludes many shop owners, particularly foreign nationals. 

This has led to local citizens registering businesses on behalf of foreigners, fostering corruption. 

Transferring or using a title deed improperly may create disputes over property ownership. In some cases, the foreign trader might falsely claim ownership, leading to lengthy legal battles. 

In addition, initiatives like the National Cleanup Campaign address waste disposal practices, but their impact remains limited without sustained enforcement and public cooperation. 

Another critical issue brought to Modise’s attention is that inspectors are often inadequately trained, focusing only on superficial compliance issues like expired stock rather than addressing deeper concerns such as overall business practices. 

This superficial enforcement allows non-compliant shops to continue operating, undermining the credibility of the regulatory framework. 

Moreover, enforcement efforts are often sporadic, as observed by GG Alcock, an informal economy expert, during township visits. While high-profile raids and shutdowns occur, many spaza shops close temporarily during raids and reopen shortly afterwards.

Modise said that the impracticality of certain requirements, coupled with inadequate enforcement and capacity, has created a system that can and might be circumvented or ignored. 

The enforcement of new spaza shop regulations has also been uneven, with concerns that foreign traders, particularly Somali and Ethiopian entrepreneurs, are being targeted under the guise of consumer protection. 

These traders have outcompeted local shop owners through lower prices, efficient supply chains, and extended hours. Removing them does not guarantee that South African entrepreneurs will fill the gap. 

Structural challenges like limited access to bulk-buying discounts, financial support, and crime risks persist. 

Additionally, foreign-owned spaza shops contribute an estimated R25 billion annually in rent, benefiting South African landlords.

The spaza shop registration announcement in late 2024 caused uncertainty, leading traders to delay restocking and consumers to adjust their shopping habits. 

As a result, it disrupted sales patterns, as indicated by the sell-out data collected by Yebo Fresh.

Spaza shop national sales experienced a notable decline from October to November, with those in Gauteng particularly impacted. This was followed by a gradual recovery into December. 

While the disruption was noticeable, experts largely agree that the impact will be short-term, with retailers and consumers expected to adapt over time.