BMR reports high business failure in Soweto

Prof André Ligthelm of BMR shows in his report that these businesses show relatively high mortality rates, with almost half closing their doors during the past three years. During the same period, only a limited number of new start-ups were identified, implying that the small business stock outside newly established shopping malls is declining.

Malls expand

Until recently, township areas were dominated mainly by small, mostly informal, businesses offering basic products and services. These businesses were located mainly in small business centres and on residential sites. The rapid increase in consumer expenditure by residents in township areas during the past decade, together with the fact that the overwhelming majority of township dwellers (83% in the case of Soweto, for example), expressed no intention of moving out of their townships, created substantial market potential in these areas.

This has resulted in a drastic change in township retail structures. Large shopping malls have been developed, or are under construction or in the planning phase in almost all township areas with sizeable population numbers. This development has resulted in heightened competition for small township businesses with a potential risk of considerable consumer expenditure displacement away from them to national chains and franchise businesses in the new shopping complexes.

Results

Against this background, 38.3% of small businesses closed their doors one year after establishing the shopping complexes in Soweto. This percentage stood at 47.6% after two years. Even taking into account the establishment of new businesses outside the shopping malls, the small business stock declined by 40.7% during the 2007 to 2009 period.

The highest stability was evident among small businesses operating from ‘old' business centres where 36.4% closed their doors followed by a mortality of 57.5% among home-based businesses eg spaza and tuck shops. (Street vendors were excluded from the study.)

Survival edge

Prof Ligthelm identified prominent differences between businesses who survived and those who closed down. Successful businesses appear to be:

• Older;
  
• Established based on a business opportunity (rather than instigated by unemployment);
  
• Characterised by the full-time involvement of the owner (s)
  
• More likely to be incorporated, a franchise or a multi-owned institution;
  
• Operate in a permanent brick structure;
  
• Have access to several municipal amenities;
  
• Larger in terms of employment and turnover;
  
• Implement typical entrepreneurial practices.

This suggests that the impact of shopping mall development on small business survival cannot be explained one dimensionally, purely attributing the decline to shopping mall development. The same business sector, namely grocery and general dealers, that shows the highest level of mortality from 2007 to 2009, also remains the most important business sector among the survivalists businesses - almost half of the businesses were still in operation in 2009.

Entrepreneur skills create success

The results of the three surveys clearly confirm a strong representation of entrepreneurial skills in the businesses still in operation relative to those that closed their doors. The examination of entrepreneurial-oriented practices shows that owners of successful businesses implemented substantially more entrepreneurial initiatives than those that ceased to exist. This is particularly true for businesses established in ‘old' shopping centres. They are more sophisticated and formalised (a sign of entrepreneurial conduct) but more subject to competition from the new shopping malls than is the case with home-based businesses.

A further aspect of the role of entrepreneurship in business survival emanates from the analysis of the perceived impact of the shopping malls on small businesses. The mortality rate among small businesses that failed to discount the heightened level of competition was considerably higher than among businesses that adjusted their business strategies to the changed competitive environment.

Entrepreneurial initiatives such as updating business and operation plans, formulating marketing policies and regularly analysing the competitive environment resulted in the adjustment of strategies such as changing/limiting the product range and reducing employment - ultimately aimed at ensuring business sustainability.

The full report of 65 pages entitled Small Business Dynamics In Soweto: A Longitudinal Analysis (Research Report no 386) is available from the BMR.