The retail sector has been trending the past week, following OK Zimbabwe’s financial. OK Zimbabwe released its financial results and things are not looking good. It seems like the retail sector is under siege. The informal sector seems to be gaining an edge over the formal retail sector posing a significant viability threat to formal retail business.
Tuck shops that have mushroomed everywhere seem to be enjoying a competitive advantage; offering cheaper alternatives which has seen a mass consumer migration to the small retail shops.
OK Zimbabwe Chairperson Herbert Nkala said, revenue for the year grew by 33.3% to ZWL311.3 billion from ZWL233.6 billion in the comparative period. In historical cost terms, revenue grew by 327.6% to ZWL260.5 billion from ZWL60.9 billion. Volumes for the year declined by 7.7% over the comparative period owing to local currency liquidity shortages and depressed consumer spending power.
The informal sector continued to expand at the expense of the formal retail sector as a result of exchange rate distortions in the market. He said profit after tax decreased by 36.0% to ZWL5.2 billion (Last year: ZWL8.1 billion) whilst in historical cost terms, the profit after tax increased by 111.7% to ZWL5.1 billion (Last year: ZWL2.4 billion
What does the informal sector look like?
Pricing
While larger supermarkets have of late been relatively well stocked, customers prefer to buy products from tuck shops which offer competitive prices compared to supermarkets. In a large supermarket, you will have to part with $4.50 dollars for a bottle of local cooking oil which costs 3 dollars in a tuck shop around the corner.
This is largely because these Tuckshops exclusively transact in US dollars and are exempted from tax obligations. Conversely, larger supermarkets are legally bound to adopt the official exchange rate, which is usually lower than the black-market rate. Furthermore, supermarkets are subjected to tax, rates, and other regulatory fees which are not applicable to tuck shops.
Branch placement
The other reason for the mass migration of shoppers from formal to tuckshops is the location of these shops. The informal retail outlets are so conveniently located. They are in the backyards; they are in the neighbor’s house and at bus/kombi termini.
A study noted that these informal food retail outlets are spread out across all the wards, including within residential areas. Such location is important as it provides the most convenient location for the poor to access food, given that they have limited time and access to transportation to travel far for purchases. The location allows consumers to access food outside of traditional business hours, as some of these stores open early and close late.
This is something the formal retail shops are lagging on. Their branches are located far from the people. For a company as Big as OK to have only 61 branches and expect to compete with these tuckshops, is stretching it.
Suppliers jumping ship.
Not only are consumers shunning formal retail, but suppliers have also joined the bandwagon. Retail sales volumes plummeted, with key suppliers shortening their trading terms with formal retailers. For a sector that relies heavily on consistent volumes, this was a severe blow. Where did the goods go? You bet it’s the same goods that are flooding the street corners.
Can we entirely blame the informal sector for the dip in volumes and business woes in the retail industry?
I don’t think so. There are other factors in play.
Competition from cheap imports
The economic crisis, which caused high inflation, currency depreciation, foreign exchange shortages, and low consumer confidence in Zimbabwe, and made the imported products cheaper and more attractive.
To ease economic pressure and shortage of basic commodities, from as far back as one can recall, the government has always resorted to lifting the import duties and licenses on some basic commodities, such as cooking oil, sugar, maize meal, milk powder, and soap, to make them more affordable and accessible to consumers.
This just helped formalize what had already been happening for years, from the 2008 economic meltdown. Zimbos have always been importing, smuggling rather, basic commodities from neighboring countries. Of late, we even have a name for the smugglers/ importer, runner. These guys can bring anything from South Africa for you and it will still be cheaper than local retail shops.
The runners charge a service fee of not more than 10 percent of the purchased goods and this will still be cheaper than buying locally.
Statistics say South Africa is as Zimbabwe’s primary source of imports, contributing 37.6 percent of the total. China, Singapore, India, and Zambia followed accounting for 19.2 percent, 16.7 percent, 3.7 percent, and 3 percent respectively.
At the height of hyperinflation in May 2008, Zimbabwe froze customs duty on a range of commodities for four years.
So importation has become our culture and the retail sector is feeling the pressure.
Poor currency performance.
OK Zimbabwe noted that, in the formal market, suppliers faced a delicate balancing act when indexing ZWL prices to foreign currency price pegs. Many opted to raise prices to safeguard their margins, leading to a rise in the costs of goods and services. This, in turn, put a strain on consumer disposable incomes – with fewer dollars to go around, Zimbabweans had to spend sparingly.
The biggest question now is what needs to be done.
If you can’t beat them, join them. Should retailers innovate around the tuckshop model? South African township economy is a billion-dollar economy and formal-sector retailers, saw it fit to tap into that. When they were faced with stiff competition from spaza shops, South African businesses started opening shops that looked and operated like their competition.
Retailers wanted to cash in on this billion-dollar resource. Shoprite and Mr Price, for example, have shipping container stores in townships. These fit in perfectly with other informal traders, who sell from similar containers or from their homes; meanwhile Pick n Pay is putting money into spaza shops, effectively making them franchises.
Shoprite decided to have smaller, more capital-efficient store formats across all its supermarket brands. While the traditional Shoprite stores are between 2,500m² and 5,000m², the “Shoprite Mini” stores are around 1,250m² to 1,800m². These smaller Shoprite supermarkets as well as the Usave eKasi stores, which are built-in containers, have already “established viability and continue to scale”, a spokesperson said at the time.
These small-format stores offer a limited range of basic foods at everyday low prices to lower-income consumers and are often located in previously underserved communities in South Africa. Maybe it’s high time the local retailers do the same and follow their consumers, agility and adaptability are needed if formal retail is to remain viable.
After all, that’s what the Zimbabwean government is telling them to do.
“And there was a big retailer. Who went all out last week complaining. But how do you complain about a tuck shop which is paying five times more per square meter rent and does not have access to credit.”, said the treasury permsec George Guvamatanga, before telling them to innovate.
Should Zimbabwe reign in the informal sector?
Should the government of Zimbabwe clamp down on informal retailers to protect formal retailers?
Retailers have called on the government to create a level playing field to enable the formal retailer to survive through policy intervention. They called on the government to tame the informal sector for them to remain viable.
So, far the Zimbabwean Government has committed to addressing some distortions in the retail supply chain where manufacturers are directly supplying goods to informal traders and retailers as this is distorting the value chain.
So despite which school of thought one belongs to, everyone agrees that something needs to be done to avert a crisis in this essential sector.
