South Africa’s hidden economy booming

South Africa’s informal retail market continues to show strong growth, despite growing competition from formal retailers and increased regulatory supervision. 

The growth in this market has consistently outpaced that of its formal partner and the broader economy, making it highly attractive to established businesses looking to expand. 

This sector is dominated by spaza shops, which are the lifeblood of South African townships as they provide essential goods and services to millions in areas underserved by formal retail. 

In particular, it absorbs South Africa’s large unemployed population, providing many with additional income and a basic livelihood.

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.

Large, formal retailers, such as Shoprite, have spent immense resources to enter this market and compete with spaza shops. 

Shoprite’s Usave brand has expanded rapidly into the informal economy, while its Cash & Carry offering remains dominant in wholesaling to informal traders. 

Trade Intelligence estimates the market to supply spaza shops and independent wholesalers to be worth R259 billion. 

New data from the research firm revealed some shifts in South Africa’s retail landscape, with discount and eCommerce formats outperforming other channels in 2024. 

Despite easing inflation, South African shoppers remain under economic pressure, leading to increased cross-channel behaviour and format diversification among major retailers.

 According to Trade Intelligence’s latest modelling, total retail sales grew by 6.9% in 2024, with performance supported by footprint expansion in the corporate retail sector and interest rate cuts. 

Withdrawals under the country’s two-pot retirement system also boosted sales, with many using the money to purchase basic goods. 

Despite rapid corporate expansion, the informal retail sector remains a significant player in South Africa’s retail environment, Trade Intelligence said.  

It reported 5.2% growth in the informal space in 2024, with proximity and convenience continuing to drive shopper loyalty.  

Spaza shops and township outlets have retained relevance, particularly for small, frequent shopping missions and cash-based shoppers. 

Spaza shops under siege

South Africa’s informal retail sector faces rising regulatory and infrastructure challenges, as well as increasing competition from the corporates, which may affect growth in the medium term.

Recent efforts by the government to regulate spaza shops more intensely have put informal retailers under pressure, with Trade Intelligence’s data pointing to a sales decline earlier this year when the scrutiny was most intense. 

The government’s intention is to improve food safety through formalising the sector, but there are major questions about its effectiveness and potential unintended consequences.

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.

Modise said that while this is commendable, the reality of implementing these regulations is often very different from the reality of the outcomes. 

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.