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Entrepreneurs vs Survivalists: Somali and South African Spaza Shop Business Practices in Delft South, Cape Town Rory Liedeman & Laurence Piper Urban.

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Presentation on theme: "Entrepreneurs vs Survivalists: Somali and South African Spaza Shop Business Practices in Delft South, Cape Town Rory Liedeman & Laurence Piper Urban."— Presentation transcript:

1 Entrepreneurs vs Survivalists: Somali and South African Spaza Shop Business Practices in Delft South, Cape Town Rory Liedeman & Laurence Piper Urban Informality and Migrant Entrepreneurship in South African Cities, 9-11 February

2 Research Goal To establish whether the advent of foreign run spaza businesses was due to a particular ‘entrepreneurial’ business model. To understand ‘the forces’ responsible for supporting this model. Essentially a case study of how social networks enable entrepreneurialism amongst Somali but not South African traders in Delft South, Cape Town.

3 Background 2011 Sustainable Livelihoods Foundation (SLF) conducted a larger study mapping and interviewing Spazas in Delft and 8 other sites in CCT, JHB and DBN Emergent findings from this research included the rise of Somali-run shops in Delft, with market success linked to competition on price etc; perception that Somali operated mor eentreprenurial ways than local ‘survivalists’ (Charman et la 2011) Notably, economic competition cited as one of the main reasons behind xenophobic attacks in Cape Town (Bseiso 2006, Ndenze 2006a, b). This project seeks to explore in more qualitative detail these alleged differences in business practices to answer the question, why are Somali spaza shops more successful in Delft? SLF through its Formalising Informal Micro-Enterprises (FIME) project has been conducting informal economy research in various parts of South Africa since 2010 (on-going). Delft South was the original site of FIME project and in this first phase a detailed business survey was conducted between Dec 2010 and May 2011, from the findings Charman, Petersen and Piper (2012) report that of the 818 micro-enterprises identified during this research, 179 (or 22%) of businesses were spaza shops. My research focused primarily on South African and Somali owned spaza shops, as this previous study indicates that these are the two major groups of spaza operators in the area. Ligthelm 2005 estimated the spaza trade accounts for about 2.7% of total retail trade in South Africa, equating to approximately R8 billion. Other unconfirmed reports have suggested that there are more than 100,000 spaza enterprises in South Africa with a collective turnover of R7 billion (Spaza News, 2011). Claims have often been made in public forums and the media that the xenophobic violence and conflict seen in 2006 and was especially due to foreigners taking over or dominating spaza business in Cape Town through price competition. Very little is know in the literature about who the business owners are, how spaza shops are established or how the business operates.

4 Three key research questions
Is there indeed a shift in spaza ownership from South African to Somali shopkeepers in Delft? What are the key business practices and can we speak of two distinct models? What is the significance of social networks and associated business culture to business practices?

5 Site Description and Demographics
Delft South is a mixed race working class suburb located on the Cape Flats in the Western Cape of around people Approximately 60% of the working age population is unemployed The high street or ‘main road’ and residential areas host a variety of businesses No shopping malls in Delft South. Spaza shops satisfy an important business service. Established in the mid-1990s, it was initially set up as a social housing project, the area has since expanded into a much larger settlement of about households and has estimated population of about 50,000 people (Seekings, et al. 2010). Nationalities currently working and living in the area include individuals from the horn of Africa, West and Central Africa, as well as India and other parts of Asia. The majority of the population is South African and is comprised of ‘coloured’ (Afrikaans speaking) and black (predominantly isiXhosa speaking) peoples. …with a monthly income per capita a little over R700 per month (for South African residents). These range from car wash services to food retail, spaza shops, hair salons, taverns, restaurants, game-shops and much more. Spaza shops are ubiquitous - Due to the lack of ‘cheaper’ formal shops, and the high demand for basic groceries and other daily necessities.

6 Spaza shops are second most common businesses
Spaza shops found on almost every corner, intersection and in every street Other informal business includes: Street traders (sweets, chips and vetkoek to school goers and pedestrians) Green grocers (commonly known as Fruit and Veg traders) Barber shops and hair salons Pool and arcade entertainment Taverns and shebeens

7 Methodology Primarily an ‘in-depth ethnographic approach’. Some survey work too. Methods and tools include: In-depth interviews and oral histories of journeys into South Africa (cumulative note taking and observation = 2-3 hours for each of the 13 individual case studies) Dictaphone (when allowed) Field diary, informal conversations observations Global Positioning System, mapping of spaza landscape Somali interpreter, crucial to establishing rapport and legitimacy Strength of the method lies in use and implementation of both these approaches: 1) Ethnographic approach focused on detailed interviewing in a particular geographical area with a set number of case studies (13 accounts documented): - Certain issues cannot be easily investigated through survey work: descriptive data around individual journeys in SA, and business histories, links to social and or business networks and so on. - Immersing oneself in a particular geographical area/case study site, amongst a set number of respondents, allows for establishment of strong rapport and a sense of familiarity between researcher and respondents. - In-depth interviews and documentation of oral histories took approximately 2 and 3 hours to complete (per case study). 2) SLF’s FIME methodology employed GPS and survey tools which was particularly useful for mapping ownership trends and change.

8 Explain legend: According to this map the case study area located in the southern most part of Delft South was one of the most densely populated in terms of spaza business. 179 spazas found during FIME showing a relative balance in ownership distribution between South Africans (89) and foreign national businessmen (90). Of the 90 foreign owned businesses 80 (or 89%) were Somali run.

9 Explain legend: A closer look at the case study area shows that in May 2011 there was a total of 30 spaza businesses with 17 (or 57%) owned by South Africans and 13 (or 43%) by foreign nationals, of these 11 (or 84%) were Somali run while the other two were owned by a Bangladeshi and Congolese. 13 Months later (by June 2012 – time when fieldwork was being conducted), the spaza landscape in this part of Delft South undergoes a major transformation in terms of who owns spaza business.

10 Findings for research question 1: A major shift in spaza ownership and market share has been observed between May 2011 and June 2012 (ie after the SLF survey). 12 South African spazas closed – only 5 remain open (decrease from 57% market share to 22%) Ownership of foreign spazas increase from 13 to 18 – a total market share gain of 31% With a 23% decrease in the total number of (30 to 23), the market share of foreign spaza businesses increased from 43% to 78% in 13 months i.e. 18 spazas now foreign owned

11 1) Explain legend 2) Anecdotal reports suggest: shift in ownership & market share has occurred in ‘greater delft’ area (Eindhoven, Voorbrug, Leiden, The Hague and Suburban) 3) Emphasise: Spaza market appears to be closed to new less resourced South African entrants.

12 1) Explain legend 2) At the helm of this change is the numerically dominant Somali spaza operator. Emphasize blue dots = Somalis i.e. 17 of the 18 (or 94%) foreign run businesses in the case study area.

13 Findings for research question 2: The change in ownership and market share was a direct result of the emergence, and use of a new, and more sophisticated business model Evidence of a contrast between a ‘survivalist’ model (slow organic businesses of South Africans) and a large scale ‘entrepreneurial’ model (multiple partnerships and large investment by Somali spaza operators) ‘Entrepreneurial’ model is primarily based upon being price competitive, made possible through collective investment, procurement and distribution networks. The research operationalized the concept of ‘business models’ by exploring 5 major categories of the business.

14 Operationalising Business Models
Detailed documentation of : spaza establishment process (including ownership, contracts/agreements, labour and employment), capital investment stock procurement behaviour business operation (operating times, banking etc.) mobile distribution to spaza shops (access to transport and spaza product distribution networks) Key notes on Establishing Business: family business vs spaza partnerships SA = classify spaza as a ‘family business’ that does extend beyond immediate family unit (spouse and or offspring) . There was no need or want for this because the work was merely being done to either supplement poor income, as a temporary measure and or as a means to keep the household going in a context of high unemployment. Businesses often started off small growing organically over extended period of time. Initially, SA’s did not see their efforts to survive as investing in a business and said they would not have described themselves as business owners when they first started. Barriers to entry were low when they first started businesses. Like South Africans, one of the major reasons cited by Somali operators, for getting involved in doing spaza business, was because of the relative ease with which one could enter into the spaza trade in places like Delft South. But it was easy for very different reasons: for young Somali males between the ages of 20 and 33, a strong influencing factor attracting them to the spaza sector = the business utilizes and exploits important social, business and kinship networks accessible in ‘strongholds’ i.e. places like Delft , Bellville, Elsies River, Parow in WC and Mayfair in JHB and even parts of Kwa-Mashu in KZN where (Sophie Oldfield points out – Valhalla Park) growing ‘immigrant neighbourhood communities’ exist and a provide ‘a sense of security’. Somalis – From the outset, Somalis see the opportunity to do spaza work as an opportunity to invest in a business. Of the 7 Somali operators only 1 described himself as being the sole owner or ‘the boss’ of his ‘own’ business, participants often described themselves as being in ‘spaza partnerships’ with other Somali businessmen. - Dual partnerships (2 owners) were the most common type of ownership found in the sample where each partner owned 50% of the business; though in one case the ownership split was said to be 15% to 85% (minority Issa clan) and in another 33% (two men one female in Hanover Park). - These partnerships were based on verbal contracts and agreements. No lawyers were used. - All the foreign national participants (Bangladeshi included) have experienced at least one spaza business partnership in the time they have been doing spaza work in South Africa. - None of the South African respondents had ever engaged in spaza business partnerships with ‘others’ or ‘outsiders’. The model of Somali spaza business partnership differs from the South African concept of a family business in a number of ways. Access to Somali partnerships is not automatic, but rests on specific criteria: Being Somali / clan member / relative or friend is key – but you are still required to: Show Commitment or the ability ‘to show ambition’ to do spaza business, having a good reputation on the street and in the spaza business Investment or being able to prove one’s worth mainly through supplying cash for business – but also through non-cash investments such as bringing stock into the partnership / negotiating a suitable place for business / providing a structure within which the business is conducted / or providing cheap or non-remunerated labour Agreement to partake in equal profit sharing process: the right to lay claim to an equal share in the business and receive tangible profits for initial investment made (example: 3 partners each giving R10000 or a contribution to same value such as a container / stock turned into R44000 over a 6 month period though the sale of a spaza shipping container – total partnership cost R30 000, each made 4k pr0fit per month x 6 and shop sold for 60k. Increase capital for new business ventures).

15 One example: Somali capital investments into spaza business
Key Notes on “Investment”, “Stock procurement”, “Business Operation” & “Distribution” Capital Investments: 4 of the 5 South Africans began with small cash investments (3 longstanding business owners used well under R1000 with 1 spending R1500), purchasing low volumes of sellable products, such as fruit & veg, chips, ice-cream lollies / ‘suckers’ and soft-drinks, which they knew would sell quickly and would not go to waste. Only one South African spent in excess of R25000 starting the business, but he was a new entrant having only been around for about 3 months (spaza context differs to the other 3), he also owned two other established businesses (taxi Delft and Bellville schools and spaza shebeen in Khayelitsha) and easier access to large amounts of cash to start the Delft spaza business. Most South Africans found it difficult to place a value on their business. Somali operators in the sample reported that to start a spaza business required a lot more start-up capital than the investments South Africans were able to make. To start a successful spaza shop depended upon a number of factors, the following is usually researched, observed and discussed early on during the negotiating of agreement phase: the kind of structure where one was planning to do business in Location – did it have ‘good feet’ (traffic) / wa it well supported by residents the physical state of the business (if one was purchasing an existing business) whether or not an existing business was purchased with stock included. It it would require between: R5000 and R15000 to establish a successful spaza business in a zinc shack and, R20000 and R40000 to do this in a shipping container or in an existing spaza building. In addition, to build a new spaza shop, as an extension to someone’s house or as a free standing building, would mean a substantial investment of between R60000 and R Note - these investments did not include the additional cost of rent paid to South African homeowners or cost of what and elec. Stock procurement: Research identified supply channels where the spaza operator purchased either alone, within a ‘partnership network’ or in ‘stock purchasing network’ with owners they were not in business with (mostly Somali clan members, relatives, close friends). In some instances, a combination of these methods was available to participants. 5 Somalis reported purchasing through ‘partnership networks’ and felt that this was the primary means used to stock the business. At least 6 different Somali procurement networks were active in the case study area at the time of research. All South Africans and one isolated Somali operator (e.g. Issa minority clan) other hand, did not have additional business partners to rely on nor were they able to share the cost of stock within a ‘purchasing network’. Business Operations: Operating hours - projected over a period of one year, and assuming that South Africans also traded seven days a week as Somalis did, Somali operators in the sample would still be trading an additional 728 hours, or 12.5% more than their South African counterparts. This is the equivalent of an additional 30 days trading per year. Re-stocking of products - Somalis also purchased once during the week and not on weekends like SA’s as they felt the shop needed to be stocked over the that busy time of the week. South Africans stocked up between 2 and 3 times per week as they did not have capital to purchase in bulk and also had to cater for going to mass, funerals, and family time such as school sports events etc. New spaza related business: Rise of new entrepreneurial spaza related business through fulfilling demands in the spaza trade and exploiting business niches in ‘transport business’ and mobile ‘shop to shop’ sale of ‘well priced spaza products’. Somali participants reported the existence of up to 20 ‘Somali Agents’ / mobile distributors in the case study area and as much as 50 in the greater Delft area – other nationalities include.. Only 1 SA owner (Tinkies – longstanding spaza) had a link to 2 mobile distributors (‘Somali and Pakistani agents’), shop was barely surviving, bought much of his stock via credit offered by agents. SA’s sceptical of credit offered by foreign mobile distributors

16 Findings relevant to research question 3: The social networks that South African and Somali spaza owners can access is key to these differences in business practices in Delft South. Most South African spaza operators limit their ability to grow the spaza network and access ‘social capital’, as the business is not entrusted to others beyond ‘immediate’ family ties. Extended family rarely counts. In the case of Somali operators, social and business networks, exist and are active in all of the 5 major classifications of spaza business. Assistance is therefore present and available from the outset Most Somali operators are able grow their spaza networks through both immediate and extended family consisting of clan members and close friends.

17 The study demonstrates:
How the socially richer and clan-based social networks of Somali shopkeepers enable a more entrepreneurial business model, whereas South Africans rely on a network limited to the immediate family and approach the spaza business as a supplementary livelihoods strategy. The research also provides new insights into the strategic use of both formality and informality by foreign business people (e.g. banking, rental agreements, business agreements) the significance of spatiality to the spaza economy through the concepts of ‘strongholds’ and ‘neighbourhood economies’; and previously unseen forms of spaza related business, principally around the mobile distribution of spaza stock to retailers in Delft. Banking – how Somalis choose not too utilise formal banking options and that the uncertain nature of their refugee/asylum ‘status’ is sometimes used as excuse not to do so. Agreements within Somali business partnerships = no formal contracts used as strong network of elders etc. enforce agreements it, however, when it comes to agreements with non-Somali SA home owners (re lease/rental) proper written contracts involving lawyers (usually based in the Bellville) is seen as way to protect spaza owners an their business.

18 South African vs. Somali : stock
1) The inside of South African spaza shop, poorly stocked shelves are common amongst the group. The owner had spent a lot of money applying for a liquor license to supply beer (off sales) as a coping mechanism for the spaza’s decline. He also relies on credit from two Somali and one Pakistani distributor to keep the spaza alive. 2) The inside of a Somali spaza shipping container business. Note how well the shelves & fridge has been stocked. The operator did not own a vehicle but had access to ‘stock transportation’ and ‘mobile distribution’ networks run by kin and friends also operating in the spaza trade.

19 Participant 50mSom02 offloading spaza products to a Somali shop in Delft South. Owns a spaza shop in Elsies River and is also a partner of another spaza business based in Gugulethu. The transportation business generates an additional R5000 per month.

20 Mobile Distribution: Popular ‘value pack sausage’ and pies (background) sold by Somali, Pakistani, Burundi, Malawi and Egyptian agents.

21 ‘High top’ canopies are popular as they provide additional spaza to stock spaza products. They are widely used in the trade by individuals in ‘stock transportation’ and ‘mobile distribution’ networks.

22 Contraband cigarettes are key factor in the success of many foreign run spaza shops. The existence of the 50c ‘loose stick’ is ubiquitous in the Delft area Also known as ‘grey market’ cigarettes or ‘B-stock, the ability to purchase high volumes of this item requires a large network and connection to the right individuals, as well as the ability to distribute to retailers and other customers and large amounts of cash. Most Somali shops I have encountered are connected to at least one or two other shops and have all these requirements. South Africans do not easily access this lucrative world cigarette smuggling. The purchasing of contraband cigarettes not only increases cash-flow quickly bit also allows one to decrease prices on other products, including other mainstream tobacco products, as a way to lure customers to the shop door/window. Image: R for 40 cases of R2750 per case and R55 per carton, I know of Somalis that would sell for R10 mark up i.e. R3500 per case meaning R for 40 cases and a quick R profit. The person supplying and selling to would be purchasing for about R40 to R45 per carton.

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