How big is South Africa’s township economy?

 ·21 Jun 2022

Standard Bank is the latest company to tout the potential of South Africa’s township economy, joining many corporates, particularly in the banking, grocery retail and telecoms sectors.

Small businesses operating in historically designated townships on the periphery of the country’s developed urban economy are as much a part of our economy as large national companies or home-grown multinationals operating out of Sandton, the lender said.

Simone Cooper, head of business clients at Standard Bank, believes that township enterprises are the missing link required to get South Africa onto a higher and more inclusive growth path.

“South Africa’s small business sector is critically important because they can unlock growth, inclusion and long-term social stability – everything that has been eluding South Africa for so long. Far from being peripheral, small businesses are central to building the economy and society we all want,” said Cooper.

In May, MTN South Africa said it would ramp up its investment in Gauteng to the tune of R2.2 billion to meet increasing demand, while the group said it would also extend its reach into township areas, to fuel growth and boost participation in the digital economy. This includes several digital wallet solutions.

A diverse, vibrant and growing small business segment drives the growth, broad-based employment and innovation that expands inclusion, builds general prosperity and maintains social stability, said Cooper.

“Given the very large role small businesses play in employment and GDP growth around the world, if South Africans are puzzled by lacklustre growth and the inability of our economy to provide employment, we need look no further than how we support, develop and include our small – and especially our small periphery or township business segments – in the formal economy,” the business lead said.

South Africa’s small business segment is characterised by a divide between more formal urban enterprises located closer to developed business and financial hubs – and less formal peri-urban or peripheral enterprises located in townships, informal settlements or among rural communities.

Standard Bank said it has developed a range of solutions designed to bridge the distance between small and peripheral township enterprises and the formal economy.

Most of these revolve around addressing informality – by, for example, assisting small emerging enterprises with formal business registration, building adequate payment channels, and developing business capabilities by providing access to technology and advice.

In one example, Standard Bank said it partnered with a township-based fresh produce aggregator, Spinach King, growing the small business into a multi-award-winning company supplying more than 150 retail stores, including Spar group, Pick N Pay, Wellness Warehouse and various delis in the Western Cape, Gauteng and KZN.

The lender said it also supported spinach King build its own branches in Khayelitsha and Phillipi while developing its own central production plants in Cape Town and Johannesburg.

How big is the township economy?

Financial services company, Investec says that an estimated 17% of the country’s total employment is through the informal economy or so-called township economy.

“Informal businesses operate within a multitude of industries and offer goods and services that meet various social and economic needs within township communities. Retail dominates the informal township economy, with spaza shops, fast food outlets, bakeries, shebeens and hawkers.

“Additional businesses include backroom rentals, minibus taxi operators, mechanics and panel beaters, metal fabricators, childcare services, barbers and hair salons among others,” it said.

And while informal businesses contribute a growing chunk to GDP (6% in 2017), many do not pay tax, although they do pay VAT on their purchases. Many informal operators simply earn below the income tax threshold legislated by the South African Revenue Service.

“Typical earnings for informal sector employees are less than half those in the formal sector. According to Stats SA, the median income of workers in the informal sector is about R2,000 per month, compared to R4,300 in the formal sector. Self-employed workers, particularly men, earned more – R6,700 per month, on average.”

South Africa is said to have in excess of 500 townships, of which Soweto, in Johannesburg, is the largest with in excess of 1.3 million residents. It is followed by Tembisa in Kempton Park, with around half a million residents, and Katlehong in Germiston, with more than 400,000 residents.

FNB has said in the past that with as much as half of South Africa’s urban population living in townships, the ecosystem supporting these communities warrants significantly greater focus from the banking sector.

Statistics show that there are around 30-40 businesses per 1,000 people in townships. FNB estimates that this translates into around 800,000 to one million businesses. The majority of these are survivalist businesses, with around 300,000 representing entities employing three or more people, the lender said, although prior to the pandemic.

Consumer pie

The 2021 South African Township Marketing Report published by RogerWilco, found that spaza shops contribute as much as 5.2% to South Africa’s GDP, employing 2.6 million people. That would put the expanded economy of these informal convenience shops at around R600 million in constant GDP numbers.

The report notes that these shops are under pressure from big retailers.

Pick n Pay noted in an annual report in December 20021, that the country’s food and grocery sector comprises a modern formal sector and a large informal sector. The total market had an estimated value of R900 billion in 2021, with approximately 60% of the market considered formal and around 40% informal.

The formal South African food and grocery market is highly competitive. Four large retailers, including our Group, account for approximately 50% of sales. With a turnover of R900 billion from its South African segment in FY21, Pick n Pay estimated that it has an almost 10% share of the total market and around 16% of the formal market.

The scale of retail businesses in townships varies dramatically, according to Reuters, citing FirstRand. The lender reportedly found that the scale of the unbanked businesses is much larger than it thought.

It found far bigger cash-only wholesalers than anticipated, with some achieving turnover as high as R40 million, Reuters said. “Even very small township shops typically turn over R2 million a year,” it said.

“A larger and more robust small business segment in South Africa will dramatically increase employment, enabling more South Africans to support themselves and their families. The result will be fewer people relying on the national government for welfare grants and other social services. A thriving small business sector will broaden the tax base and increase national revenue,” said Standard Bank.

“All this will free the government to focus funding on maintaining and expanding the social and economic infrastructure to drive growth and expand inclusion.”

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