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conveiencestores

Sector Spotlight: Convenience Stores

From spaza shops to franchises and 24-7 forecourt stores, the South African convenience store sector has something to offer aspiring entrepreneurs with a range of budgets and experience.

Facts & figures

  • Grocery retail accounts for around 55% of overall retail sales in South Africa (co.za)
  • Growth in grocery retail has been driven by spaza shops – an ‘informal’ South African convenience store usually run from home (co.za)
  • Convenience retail is growing by 13% annually, whereas the retail market as a whole is growing by only 8% (com)
  • There are more than 3,000 forecourt convenience stores within the 5,000 service stations across South Africa (com)
  • In 1993 consumers shopped at an average of 2.1 grocery stores – this rose to 4.9 a decade later and that figure has surely risen since (Urban Studies

Brief overview

Over the last 40 years, spaza shops have been the backbone of South Africa’s township economy. These humble, shack-like buildings, often run by residents as an informal business, are the bedrock of many communities.

Some historians see spaza shops as a by-product of racial segregation policies enforced during apartheid. During the mid-70s the government made attempts to suppress black African businesses. However, in this case, this suppression only led to garage-based entrepreneurship.

These makeshift retail spaces present a stark contrast to the consumer developments seen today, with increasing numbers of shopping malls contributing to South Africa’s formal economy.

However, it is estimated that 300,000 jobs are still created through the spaza sector, which contributes R9 billion to the economy annually, according to UNISA’s Bureau of Market Research (BMR).

However, forecourt convenience stores are leading the way in retail growth, with a 15% market share. Growing forecourt retail sales in recent decades can be credited to rising higher disposable incomes.

Many of the main fuel retailers have added a ‘c-store concept’, offering more than basics like cigarettes and soft drinks. These stores also offer higher value services such as pre-paid electricity, airtime, coffee and fast-food.

Franchise options

Many budding convenience store operators looking to run a ‘formal’ retail business choose the franchise route.

To find which franchise brand is right for you, you must first decide on which type of convenience store you prefer to run. For example, you may think that alcohol represents a lucrative option, or you may prefer a forecourt store.

Locations can range from a petrol station-cum-convenience store on the highway to a local shop in the centre of town.

But be aware that if you opt to run a forecourt store, opening hours are likely to be longer, with many businesses operating 24/7. On the plus side, that means decent revenues are generated at all hours of the day and demand is fairly steady and robust.

Woolworths pioneered the franchise model of teaming up with fuel retailers to offer a reduced range of convenience items at Engen forecourts, primarily in Gauteng, Western Cape and KwaZulu-Natal.

Woolworths Food Stops offer a fresher, more convenient food selection compared to, for example, Pick n Pay, which focuses on groceries and daily essentials. Pick n Pay is one of the fastest-growing supermarket groups in the country, with 283 owner-managed franchise stores.

The SPAR Group, meanwhile, operates six distribution centres, supplying goods to almost 800 SPAR stores throughout South Africa.

There are countless benefits to buying a franchise rather than opening your own independent store. As a franchisee, you will follow a tried-and-tested business system and franchisors offer ongoing training, operational support and mentoring.

Previous experience of running businesses may boost your chances of a successful franchise application, though retail experience isn’t necessarily a must.

There are also negatives to buying a franchise: you have less freedom to call the shots and if you decide to one day sell your franchise, your buyer must be approved by the franchisor.

Independent traders

For entrepreneurs looking to run their own convenience store with fewer start-up costs, setting up a spaza shop is the best route into the trade. Despite modern retailers outweighing spazas in terms of growth, these traditional retailers still have a big part to play in South Africa’s retail economy.

It is important to note that a small, family-run enterprise is unlikely to generate a big profit, whereas a large, partnership-run spaza store, with start-up capital between R20,000 and R60,000, can be surprisingly lucrative and in the future sold as a going concern.

South African-owned spaza shops are less competitive than foreign-run stores, according to a study by the Informal Economy of Township Spaza Shops.  Foreign spaza shop owners typically have more capital than their South African counterparts, footing an average investment of R45,000 compared to the R1,500-R5,000 that native entrepreneurs invest.

Although this business opportunity allows you to work from home, you must have enough space to stock products in bulk. Space-constrained shop owners who are forced to purchase goods in smaller quantities tend to have to pay a higher price.

Customer service is a top priority when running your own spaza. This will give you a competitive edge over the larger supermarket chains.

Setting up a spaza shop is a great way to break into the retail industry and work from home.

Another way into the sector is buying an established convenience store. This negates all the hassle of fitting out premises, securing liquor and other licences and getting planning permission for a new store.

Food and grocery retail is one of the top contributors to revenue growth within the sector, accounting for 55%.

Business requirements

In order set up a convenience store in South Africa, you must obtain relevant licenses, permits and insurance. You will need to apply for a trading licence if your convenience store makes or sells food that can be eaten inside the store or as a takeaway; if you sell perishable food such as milk and bread; or if your spaza has an entertainment area with slot machines, snooker tables, etc.

If you plan to sell liquor, you must apply for a liquor license. It is advisable to check local, state, and federal guidelines to ensure that our store complies with all business regulations.

Once your spaza or convenience store is up and running, you will need shelving, possibly fridges (if you sell fresh food) and signage and branding.

Given the country’s high crime rate, it is also wise to install security measures such as burglar bars, CCTV and perhaps – in a particularly high crime area – a security screen between staff and customers to prevent theft and protect staff.

Ensure that you get business insurance, as this will cover your losses if you are victim to theft or an armed robbery and legal costs if an employee is hurt during the course of their work.

Challenges facing the sector

Small independent traders are facing many challenges in the convenience store and retail sector: changing shopping habits; the battle against branded retailers; and the rise of foreign retail giants like Walmart.

Although global chains can win customers over with promotions and intensive advertising campaigns, there is also scope for independent traders to offer their customers perks and discounts. Loyalty cards are a great way to keep your regular shoppers happy.

You could also branch out into producing your own branded produce, such as homemade breads or confectionery.

Arguably the biggest challenge for independent traders is combating the aggressive pricing strategies used by large supermarkets, along with ever-expanding product lines that stretch across numerous product categories. However, buy a franchise and you too can benefit from national advertising campaigns, bulk-buying discounts and a recognised brand.

Support

Securing business grants and loans is a difficult process for spaza shop owners, with many banks refusing to fund the informal retail sector. However, there have been campaigns urging the Department of Small Business Development (DSBD) to make funding available to the spaza business community.

The DSBD is a government department dedicated to accelerating entrepreneurship and the growth of sustainable, competitive small businesses.

Click here to find out more about getting a business loan or grant in South Africa.

If you are planning to invest in a franchise-operated convenience store, it is worth comparing each company’s support and training policies. Some franchisors may offer more support than others, and will take into consideration your current level of knowledge and business acumen.



Krystena Griffin

About the author

Krystena Griffin writes for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other industry publications.

@Be_TheBoss

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