South Africa’s informal economy is becoming a giant

It’s the woman selling chicken feet and mealies at the side of the road. The man offering windscreen licence holders at your car window. The backyard landlord collecting rent. It’s the home baker supplying cakes to a neighbourhood store in the suburbs — and renting out a spare room. Cumulatively, we’re talking about billions of rand flowing through the system.

This is the informal economy — underestimated but undeniably significant. While official figures suggest it contributes about 6%-10% of South Africa’s GDP, many economists and business operators argue the contribution is far greater. However, the estimates vary, as by definition the activity is hard to measure.

For years, township markets were largely overlooked by major retailers. Today, they’re a strategic focus. Companies such as Shoprite, Capitec and Pep Stores, and mall operators such as Vukile and Exemplar REITail, have long recognised the informal sector’s role in driving retail growth. Fast-moving consumer goods (FMCG) companies and grocery retailers are launching new products and expanding into townships and rural areas.

It’s a cash-dominated economy, largely operating outside the tax-collecting net of the South African Revenue Service (Sars), apart from VAT. Yet its scale is huge. The spaza shop economy alone is estimated at between R150bn and R200bn a year, with more than 100,000 outlets operating nationwide.

Many offer community credit — systems of lending or borrowing that are rooted in local trust and relationships rather than traditional banking. And they serve as the primary retail channel for millions.

The informal economy can support the formal economy by sustaining demand and growing entrepreneurs. At the same time, it doesn’t carry the same tax and compliance costs and there is weaker labour protection.

According to the Futureworld Market & Customer Report (July 2024), the total retail sector — valued at R2.274-trillion in 2023 — is projected to grow at a compound annual growth rate (CAGR) of 6.4% to 2027.

While the formal grocery market accounts for about two-thirds of this, the informal market, though at times unstructured and difficult to measure, is estimated to be worth between R276bn and R376bn.

South Africa has a low penetration of discount retailers compared with more mature markets. This is attributed in part to the dominance of informal trade, slower urbanisation and a concentrated formal retail sector with high barriers to entry. 

A 2023 study by Accenture and the Gordon Institute of Business Science (Gibs) found that informal retail — including spaza shops — accounts for roughly 30% of South Africa’s total retail market, and as much as 40%-50% of grocery sales in township communities.

Backyard rentals — estimated to be a R30bn market annually — and the vast taxi industry are further examples of the informal economy’s weight. 

Trade Intelligence valued the informal FMCG trade at R207bn by the end of 2024. Many people buy groceries from traders in townships and rural outlets. And while most traders source from wholesalers, many also buy directly from retailers.

There is a blurring of boundaries between retailers and wholesalers, driven largely by digital innovation and shifting consumer dynamics. 

Andrea Slabber, insights lead at Trade Intelligence, says there are very few pure wholesalers left. Most are hybrids. Shoprite, for example, has expanded its Shoprite Cash & Carry format into traditional wholesale territory, while wholesalers are moving into retail. Many spaza operators have evolved into mini-wholesalers, competing head-on with large players.

While Shoprite’s acquisition of Massmart’s Cash & Carry and Cambridge stores has strengthened its wholesale play, corporate-owned stores lack the flexibility of independent traders. They can offer set specials, delivery within a 50km radius and even credit based on buying behaviour, but they don’t allow the same one-on-one dealmaking that defines the independent sector.

 “Independent trade relies on negotiating and leveraging relationships, and you’ll never be able to strike a deal with a corporate group in the same way,” says Slabber.

Where a spaza is a “hole-in-the-wall” convenience store, normally in townships and often run from a roadside shack or a person’s home, a spaza store (bigger ones are referred to as a spazarette or superette) is larger and more structured, offering a supermarket-style experience within the informal retail ecosystem.

Most of these spaza stores are operated by immigrants (especially Somali, Ethiopian, Bangladeshi and Pakistani traders). They’re strategically located near homes, schools, taxi ranks and industrial zones, making them accessible; they offer convenience at reduced transport costs. Many offer interest-free credit to trusted community members (“gogos and moms”).

Tumelo Chaka, a consumer behaviour expert at Gibs, says the informal economy is expanding rapidly and that it’s significantly larger than current estimates suggest. He refers to data from the UCT Liberty Institute’s Majority Report, which shows that since about 2012, the informal market has grown by more than 2-million active consumers. In that time, the market has tripled in size, and its spending power has tripled as well, now in excess of R400bn a year.

“The reality is that we operate in a sachet economy,” says Chaka, “where consumers buy only what they need to get through today.” Spaza shops purchase goods in bulk and then repackage them into smaller portions for resale. 

He adds that keeping a portion of the economy informal is essential for survival in many communities. “Spaza shop owners provide billions of rand in credit for customers — something formal businesses simply can’t match. If a local mother asks for R500 credit, they’ll give it because they know where she lives.” 

Technology is rapidly accelerating the sector’s growth. Digital platforms including SnapScan, Yoco and eWallet have enabled small traders to accept payments without formal banking. Informal logistics solutions help get products into consumers’ hands quickly and affordably.

These transport, storage and delivery systems operate outside formal, structured logistics companies. They can be anything from motorbike couriers used for last-mile delivery, or owners of bakkies transporting goods for a fee, to home garages or back rooms, or containers used as micro-warehouses. 

Informal traders — from spaza shops to street hawkers — are key retail channels for FMCG producers such as Coca-Cola, SAB and Unilever. They allow formal businesses to reach township and rural markets.

Gerrie Fourie, who recently retired as CEO of Capitec, sparked debate when he questioned the accuracy of official unemployment statistics, arguing that they fail to account for the scale of activity in the informal economy.

Fourie suggested that widespread entrepreneurial activity in this sector, which is mainly in cash, should be measured more accurately so that it can be understood and developed.

Property owners say the informal economy is far more dynamic and substantial than official data suggests. Jason McCormick, CEO of Exemplar REITail — a listed property trust focused on township and rural shopping centres — says traditional economic measures significantly underestimate the scale of activity.

While township malls are largely owned and managed by listed property funds, they tap into informal purchasing power — and the official stats (GDP, employment, household income surveys) don’t always reflect the true scale of that spending power.

According to McCormick, spending in Exemplar’s core market areas continues to rise well beyond the rate of population growth or social grant increases. Turnover at grocery anchors and fashion retailers has outpaced inflation for years — except during Covid. But the most striking recent trend, he notes, has been the sharp growth in fast-food sales, with increases well into double digits.

Discretionary spending on items such as fast food and fashion — both highly sensitive to economic stress — has been surging, often growing four to five times the inflation rate in township malls, largely buoyed by money made in the informal sector.

“This isn’t driven by increases in formal employment or wages,” says McCormick. “It’s people hustling — finding ways to earn and choosing to reward themselves. It might not be extravagant consumption, but the consistent year-on-year growth is telling.”

He says he’s been challenging economists to come up with a better measure of money in townships, “because none of the current readings makes any sense when overlaid against what we see in our portfolio of township malls, most notably the growth in spending”.

McCormick attributes much of the company’s recent success to the vitality of the informal economy, estimating that there is 27% more cash circulating in these areas than official models suggest. That’s based on the fact that township businesses operate outside the view of Sars and all the revenue (without what would normally be 27% company tax) is recycled in the township economy, leading to a greater multiplier effect.

Another major growth driver is the huge rural-to-urban migration. This has led to a boom in semi-formal housing, particularly backyard rentals, or amaroomi. This densification means township populations are growing faster than anywhere else in the country. He also says social grants, while providing a stable base for spending in these areas, are not driving the growth that they are seeing.

McCormick recalls how limited the retail landscape used to be. Early township malls were basic, anchored by one essential supermarket such as Score, with Pep, Scott’s and Selecta Shoe the dominant fashion retailers. Convincing banks and national retailers to enter these markets was nearly impossible.

“We had to ‘buy’ Standard Bank with a R1-a-year lease to get our first bank tenant at Jane Furse Plaza [part of the Sekhukhune district in Limpopo] in 1996.

“The buoyancy of the informal economy is certainly playing its part in the continued strength of trade across our portfolio, but it’s not the full picture,” says McCormick. “There is a huge cash economy in the townships and there is no doubt that this informal economy is playing its part in driving our growth. Much of the informal economy trading is centred on spaza shop owners selling convenient groceries and ‘kasi kos’ [street food] — with none of the clothing, footwear, health-care or financial services that make up the bulk of our tenant mixes.”

More than 85% of their space is occupied by national retail brands, selling goods that township dwellers would otherwise have to travel into the urban areas to buy — multiple taxi stops and often a R50-R100 round trip away.

National retailers have changed their view about heading into townships.

Take Leratong City Mall, under development in Kagiso on the West Rand. It will include three supermarkets, two butchers, nine banks, and more than 50 fashion retailers — from Pep to Woolworths. It will also house 14 quick-service restaurants, including three sit-downs and three drive-throughs. This latter development is a remarkable shift from the past, when car ownership in townships was too low to support such formats.

“Now, car ownership is changing the way that we design shopping centres in the same way as smartphone penetration into this market shifted our marketing strategies,” says McCormick.

Vukile Property Fund MD Itumeleng Mothibeli says the company’s township and rural retail portfolio has consistently outperformed its urban and inner-city commuter portfolios over the past five years — in trading density, rental growth and low vacancies.

He believes the township economy is expanding faster than other segments and plays a more substantial role than official estimates suggest.

“The official national unemployment figures are about 33%, and potentially over 60% in townships — yet these are the areas where our centres are thriving. How do you reconcile that?” he asks.

Mothibeli points to Vukile’s Retail Academy as one example. The initiative identifies promising entrepreneurs operating informally in townships and supports their transition into formal retail spaces. Over the past three years, the programme has integrated 18 businesses into malls in Soweto, Randburg and Daveyton.

“These entrepreneurs aren’t captured in unemployment statistics. They’re not in formal jobs, and they’re not job-seeking either. But they are running real businesses, often from their living rooms or back rooms, and we’ve helped bring them into the mall environment,” he says.

These businesses include a printing shop, a bakery, a clothing store and a restaurant. “They are adding value, producing goods, and serving real demand,” says Mothibeli, adding that much of the economic activity in townships is underpinned by social grants, with nearly half the population receiving some form of support.

“If you understand your customers — and you’re not just sitting in Sandton or Rosebank, removed from other communities — there’s always room for you to provide services. You just have to meet people where they are,” he says.

There is a vast economy out there driven by entrepreneurs and hustlers. The challenge isn’t to formalise them, but to find ways to recognise and integrate them into the broader economy 

—  GG Alcock

GG Alcock, author of  KasiNomics and a consultant on the township economy, says much of the informal sector is widely misunderstood. Contrary to popular belief, it’s not inherently unstructured, unsophisticated or low-income.

Alcock says this sector, often referred to as the “shadow economy”, includes businesses of all sizes — from a vendor selling vetkoek on the street or a woman making cupcakes at home, to a township bakery churning out 12,000 loaves a day and distributing them via a fleet of 14 bakkies. The average property in a township has built and can rent out three back rooms, but there are also landlords renting out 30 to 40 back rooms at R2,500-R3,000 a room, he says.

Alcock says there is a rapid increase in sophistication. Many businesses in informal spaces now have bank accounts, financial managers and benefit from digitisation. Some remain completely informal, trading in cash from a cardboard box on the side of the road.

While the majority don’t pay income tax, many do pay VAT on goods. “Roughly 20% of the informal economy is VAT-registered,” says Alcock. The taxi industry alone, with about 250,000 vehicles, is worth an estimated R50bn annually and contributes tax significantly through fuel levies.

At the recent South African Shopping Centre Conference, Alcock highlighted how shifts in consumer behaviour are being driven by the informal economy. He says informal businesses have created jobs more effectively than formal micro, small and medium enterprises.

He challenges the way South Africa measures economic participation. “Real unemployment is much lower than official figures suggest. There is a vast economy out there driven by entrepreneurs and hustlers. The challenge isn’t to formalise them, but to find ways to recognise and integrate them into the broader economy.”

Too often, he adds, society equates work with a payslip. “We fail to recognise non-payslip incomes, simply because there’s no formal money trail. Yet this is where much of South Africa’s economic energy lies.”

Manufacturers see the potential. Tiger Brands’ expansion into the township economy (largely informal) is gaining swift traction and the group expects to be present in more than 100,000 stores by the end of this year.

The Shoprite Group sells to the informal retail segment through multiple channels. Usave, its limited-assortment discounter, serves end consumers, while the Cash & Carry division caters to wholesalers and spaza shops, offering bulk products at competitive prices with free delivery within 50km, easing logistics for informal traders.

CEO Pieter Engelbrecht has pointed out the hyper-localised nature of informal trade. “They price by time of day, they offer credit. They’re embedded in the community — they know where you live, so you’re not going to run away. It’s a completely different value proposition.”

Pick n Pay’s Boxer has become the growth engine for the retailer. Boxer has launched a pilot project in KwaZulu-Natal focused on supporting the informal sector by creating an online store for traders and spaza store owners, giving them the ability to order quickly, pay and then collect bulk purchases from their nearest Boxer.

We don’t see the informal market as a competitor. We have a number of spaza shops and traders that come into our stores and are our customers 

—  Marek Masojada

In Boxer’s first results as a listed entity, CEO Marek Masojada said: “We don’t see the informal market as a competitor. We have a number of spaza shops and traders that come into our stores and are our customers.” He has emphasised that Boxer focuses on value-led, discount retail aimed at lower- to middle-income consumers. These are often the same communities where informal economic operators operate.

Pepkor’s Flash business supports about 167,000 informal traders. Through Flash, these traders facilitate mobile sales of airtime, electricity vouchers, bill payments and social grant payouts. In the fourth quarter of 2024, Pepkor reported that fintech revenue jumped 35% to R3.8bn, underscoring the contribution of digital services targeted at informal market customers. And for the year ended September 2024, fintech revenue surged 26.8% to R12.7bn, indicating how informal economy participation is accelerating growth. 

Ben Longman, MD of international research firm Trendtype, says South Africa’s informal market is expanding — but quantifying its growth relative to the formal sector remains difficult. “It’s very hard to measure,” he says, “but there’s a strong possibility that traditional trade — South Africa’s informal retail sector — is growing faster than modern trade, including established supermarket chains.” 

Dawie Roodt, chief economist at The Efficient Group, believes South Africa’s informal economy is at least twice as large as official estimates suggest.

“People aren’t starving on the streets to any great extent — if they were, we’d be seeing much higher levels of social unrest,” he says. “There’s a huge rental economy that isn’t captured in formal data, and we’re seeing growth in the money supply that doesn’t fully align with official employment or GDP numbers.” 

However, Roodt says Stats SA uses correct methods and internationally accepted formulas. “They’re doing things by the book. But most economic indicators are estimates. Very few data points, such as interest rates or the exchange rate, are ‘hard’ numbers. Measures such as GDP growth, inflation or unemployment are based on theoretical models and agreed-upon methodologies, which doesn’t mean it’s right for that particular country.”

 He notes that some informal activity does show up in official stats, particularly through the interface with the formal sector. “If a trader buys a packet of chips from Makro, that’s recorded. But the margin they add when reselling it — the value they create — isn’t captured. They pay VAT on the goods they purchase, but not on the value-add from their own operations.”

Rather than seeing the informal sector as competing with formal retail, Roodt sees a symbiotic relationship. “These sectors amplify one another. I don’t think there’s real competition between them.”

Many people don’t want to register their businesses. Red tape makes it a mission to do so, and some don’t want to pay tax. Roodt says the informal economy spans a wide range of activity.

“There’s an entire layer of online freelancers doing remote work — some for international companies — completely off the local radar. And the huge informal rental market in the townships — including backyard units and Airbnbs — that’s simply not reflected in the stats.”   

Can, or should, the informal economy be formalised? The state’s administrative weaknesses are a liability in many areas. In this case, it would seem that the government does not have the capacity to intervene — and maybe that’s a good thing.