The R1 trillion hidden giant in South Africa

Despite a recent uptick in interest in South Africa’s informal economy, many still underestimate the market’s breadth and width.

Informal economy expert and ‘Kasinomics’ author GG Alcock estimates the value of the informal economy to be between R750 billion and R1 trillion.

In an interview with Daily Investor, Alcock explained that the biggest misconception about the informal economy is that all the businesses in this market are “hand-to-mouth”, subsistence-based.

While there are several businesses like this in the informal economy, he said, there are also numerous booming businesses that operate at a far larger scale than many may think.

Alcock explained that this is why it is essential for companies looking to enter this market to understand both the breadth and depth of the informal market.

“We don’t recognise the formal sector by its smallest ingredients. We recognise that you have micro, small, medium, and then larger businesses, and exactly the same applies in this space,” he said. 

“The problem is that the visual from our car window is a hawker sitting on the street corner. We haven’t gotten out of our car and walked into the township that’s doing big business because we haven’t actually walked the street.”

At the presentation of Capitec’s latest interim results, the bank explained that 52% of South Africa’s population live in townships and rural areas.

Capitec estimated that there are around around 9 million people active in the country’s informal sector. This is based on data from the bank’s nearly 25 million clients.

Alcock explained that the businesses in the informal market typically mirror those seen in the formal market, but operate slightly differently.

“They may be invisible to many people, but basically, the entire formal sector economy is represented in this space,” he said.

He noted that it is important to distinguish between businesses run by a sole proprietor and more substantial businesses that employ people and have existed for many years. The latter category includes many businesses that have been around for over a decade.

In addition, similar to the formal economy, certain sectors and subsectors of the informal market are currently booming.

Booming businesses

Alcock outlined some of the subsectors and businesses that are currently performing very well in the informal economy.

While many see spaza shops as the prime example of an informal economy business, Alcock explained that these businesses do not tend to perform as well.

This is because the margins for any retail business, whether formal or informal, are normally very thin. 

In South Africa, the spaza shop industry is also highly competitive, with many players looking for a slice of the market. Competition in this space has also increased significantly with the entry of formal market players like Shoprite’s Usave.

However, one subsector that’s performing very well and can be highly lucrative in the informal sector is the fast-food industry.

Alcock said this is true across a range of different foods, with him having seen everything from vetkoek to ‘chicken dust’ and shisanyamas.

“That’s a very lucrative sector and a lot of people do very well out of it. It’s dominated by South Africans, whereas the spaza sector is dominated by foreigners,” he explained.

Similarly, Alcock noted the rise in baking services in South Africa’s townships, highlighting one business he has worked with that bakes between 1,200 and 6,000 loaves of bread a day.

These baked goods are sold to spaza shops and hawkers, with many bakeries having their own vehicles to transport their products to customers.

Another sector performing well in the informal market is beauty services, which covers anything from hair-related services to nail salons.

Withing this subsector, Alcock said it is important to distinguish between larger, standalone businesses with physical infrastructure like a salon, which tend to perform very well, as opposed to a single stylist offering services from their homes or the side of the road.

Another industry Alcock highlighted is so-called “backroom rentals” or “micro rentals”, which, while not a traditional business, serves as a form of income for many township residents.

“Backroom rental is a massive business sector, and almost certainly the vast majority of township homes will be renting out between 3 and 6 rooms,” he said. 

“But then you have people who are actually running businesses there who’ve built stand-alone properties.”

These business owners often demolished the houses that were there to build new ones or extended existing homes, sometimes to properties as large as three-storeys with 15 to 25 units. 

Alcock explained that many townships have a significant housing shortage, making these businesses very popular and potentially highly lucrative.

This has also led to a rise in services like construction and home renovation, which encompasses anything from mattress manufacturers, kitchen refurbishers, and house constructors. Alcock said this industry is prevalent in both rural and urban areas of South Africa.

Another booming industry is the automotive sector, which includes services like panel beaters and mechanics.

He said this industry has become increasingly lucrative alongside the rise of vehicle ownership among township residents.

Internet cafes have also boomed in recent years, with many operating as business centres where students, in particular, can access computers, the internet, printers, and photocopying services.

Township residents also use these cafes to file their tax returns or apply for grants like the unemployment insurance fund.