South Africa’s informal food sector makes up at least 40% of the food market, meaning that informal trading contributes notably to the economy, while providing consumers with easy access to food staples.
The informal food sector is valued at about R404 billion, compared with the formal food sector, which holds the other 60% of the market. Collectively the market is worth R1.02 trillion.
This is according to information presented by Pick n Pay and calculations by Moneyweb.
Economist at Efficient Group, Dawie Roodt says the informal food sector is mostly comprised of small unregistered businesses that sell grocery products. These are the spaza shops, home businesses and street vendors around South Africa. It’s the man selling fruit on the sidewalk, or the homemade biscuit business trading through the kitchen window.
The informal food market is seen to be beneficial to both the consumer and trader, and to the economy.
Roodt says the relative size of the sector comes as no surprise and is gaining importance, particularly as the economy has come under pressure in recent years. When people don’t see much hope in finding a formal job, they resort to opening their own, smaller businesses. The informal food sector is important as it plays a role in job creation.
He adds that people or entrepreneurs looking to open a small business lean towards food businesses because of the “nature of food”. Everybody eats, he adds.
Mike Schüssler, chief economist at Economists.co.za concurs that the informal food sector is important since it offers exactly what people need, cheap food that’s near them.
For the majority of South Africa’s poverty-stricken population, the informal food sector offers both affordability and accessibility, when it comes to food.
Schüssler says people are becoming more aware and seeing the convenience of buying bread or milk from nearby businesses instead of going to the supermarket.
And according to Roodt, the informal food sector is probably cheaper than similar foods in the formal sector.
According to the slide below, Shoprite has the largest slice of the pie when it comes to formal food businesses and Woolworths Food takes the smallest at 3%.
South African food market shares
The trader, who operates in the informal environment does not generally comply with the stringent requirements and “hassles” that formal businesses have to operate in.
Roodt says it’s possible to keep costs down because the requirements are lower and rent in some cases is non-existent since they do not operate in formal business premises. On the other hand, informal business traders do not have the economies of scale that help the large, formal players keep their costs down.
Roodt says, people trading in the informal food sector operate within both urban and rural communities, but may be more prevalent in rural communities.
Tax and the informal sector
Since businesses operating in the informal sector have not been registered officially, it becomes hard to record transactions and claim taxes says Roodt. However, if the items are bought from a wholesaler it is likely that value added tax (VAT) has already been imposed.
The lines between an informal and formal trader are thin, because often the first stock is bought from a formal business or wholesaler, but sold within their own premises or informally.
Roodt says the informal and formal markets co-exist. There is some trade that takes place between the sectors, however he notes that the final sale to the consumer, would necessarily form part of informal trade.
Schüssler adds that therefore, the informal trader is not escaping tax entirely, since items get taxed at every step of the production line. He adds that indirect taxes can also be imposed on fuel when traders transport their goods.
What next for the informal sector?
While the economy takes on a more upward trend, Roodt says that the informal food market will gradually form part of the formal sector. “This is a natural process as the economy becomes more sophisticated.”