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A survey has pinpointed what makes small township businesses grow, and what causes many of them to fail. It seems a spirit of entrepreneurship is key.
SOWETAN Chris Lebese works with his hands, moulding raw clay into colourful pottery that people are proud to show off in their homes. Candle holders, vases and pots form part of his catalogue and each shows the level of precision he puts into his work.

 

Chris Lebese busy working on a pottery pieceChris Lebese busy working on a pottery pieceLebese has been working as a potter for 10 years and left his career in the hotel industry to pursue it. “I love art and what I’m doing; it is passion driving me more than anything else,” he says. He feels positive about the future of his business, Pitseng Arts and Craft, and even foresees expansion.
 

According to a recent research study conducted by the Centre for Small Business Development (CSBD) and Business Leadership South Africa, Lebese’s business has a 50 percent chance of survival. The centre is housed at the University of Johannesburg’s Soweto Campus.

The study found that small informal businesses in Joburg’s townships had high failure rates and that only half of these organisations were operating from their original premises. It also found that business survival was particularly low among street vendors – hawkers – and home-based companies.

Approximately 50 small and medium-sized enterprises participated in the survey, selected because they had been in operation since 1994. The sample included businesses in Soweto, Alexandra, Tembisa and Sebokeng and the objective was to investigate the factors that caused the success or failure of small enterprises over the period from 1994 to 2011.

“Until recently, township areas were dominated mainly by small, mostly informal, businesses offering basic products and services,” says Dr Esther Njiro, a researcher at the CSBD. “[They] were located mainly in small business centres and on residential sites or operated as street vendors at major transport intersections.

“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 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,” she says.

Soweto Empowerment Zone
Despite the seemingly high failure rate the survey found, companies such as Pitseng illustrate that success is possible. There have, of course, been struggles, but Lebese feels that things have taken a turn for the better, especially since his move into a proper workshop at the Soweto Empowerment Zone (SEZ) four months ago.

 

The SEZ: a business incubatorThe SEZ: a small business incubatorThe SEZ is an initiative by the City of Joburg’s department of economic development to create a sustainable black economic empowerment business hub in Soweto. Lebese has been in talks with the department for over two years, he says, with the negotiations coming to fruition when he was granted a workspace.
 

“I still need a cash injection, but I think I’m going to go far,” he explains. Next on his agenda is the Decorex trade show in Midrand from 5 to 9 August, which he hopes will yield sales and contacts, and plans to exhibit at international trade shows.

He is also looking into collaborating with the hotel industry and wants to supply his wares to Lifestyle in Randpark Ridge.

It doesn’t end there either; he is also planning to set up a stall on Vilakazi Street. “Soweto is a centre of attraction,” he says. These avenues are the way forward for the expansion of his business, and once he is able to grow, he will involve women in its running and “give them a feeling of ownership”.

Pitseng Arts and Craft is not the only business making good on the opportunities brought by the SEZ.

Councillor Thabo Nkhasi has been involved with the zone since 2007 and explains that his role is to “make sure communities benefit from the project”. Already there are a few projects operating from the site, the biggest of which is Secopa, the Seed Container Park.

Secopa
It has been based at the SEZ premises for the past two months. Secopa uses a cycle to create employment: identify those who are unemployed but have a skill; bring them into the company and evaluate their skill level for three months; form a business plan and submit it to the Secopa board of trustees; if the business plan is satisfactory, Secopa helps set up the business by providing a container from which to work.

Then, the new business owner pays back the Secopa Trust over five years, after which time they can take their container and operate independently.

A T-shirt printing company has been working under Secopa for the past two months. “We are still trying to attract a market for the products, which includes government departments as well as the private sector.”

More businesses are expected to move on to the SEZ premises, which also has a training room for basic computer knowledge and a factory that produces PVC pipes for RDP houses and developments as well as companies such as Eskom. These additional businesses will move in within the next month, Nkhasi says.

Expansion
In addition, the survey also revealed that there were sustainable levels of growth in the companies that were still operational.

 

Councillor Thabo NkhesiCouncillor Thabo Nkhasi is making sure communities benefit from the SEZOf those surveyed, 62 percent reported an increase in revenue and 18 percent said they were “very profitable”; approximately 68 percent predicted an increase in their income and 75 percent felt that they would still be operating in the next year.
 

Only four percent of the survey’s respondents said their business suffered from a cash flow problem, while 10 percent believed their revenue would decline and 12 percent predicted their business would fail because of the competitive nature of the market.

Differences between the companies that succeeded and those that failed were identified, and Njiro found that the disparities between these businesses was major.

The results of the research survey indicate that successful businesses appear to be older; are established because of a lucrative opportunity, rather than instigated by unemployment; are characterised by the full-time involvement of the owner; are more likely to be incorporated, a franchise or a multi-owned institution; operate in a permanent brick structure; are likely to have access to several amenities; appear to be the larger firms in terms of employment and turnover; and, above all, implement typical entrepreneurial practices.

“It is interesting to note that the business sector, namely food and beverages and hair salons, shows the highest level of mortality and remains the most important sector among the survivalists businesses,” Njiro says.

About 26 percent of food and beverage-type businesses had folded, while 12 percent of hair salons had had to put down their scissors.

Business parks
There are a number of challenges that make survival difficult for township businesses, namely that only half of the small and medium-sized enterprises are registered for VAT as two-thirds of them operate from home. Consequently, municipalities have not provided for the development of business parks or infrastructure such as business hubs and centres.

There are also factors at play which prevent businesses from expanding and attaining better levels of success. Njiro identifies these as competition, offering the same product or service, crime, financial constraints, and expensive input material. Bad weather is also pinpointed as a prominent barrier to higher levels of success.

But the biggest factor determining whether small companies survive and even flourish, Njiro says, is the amount of entrepreneurial skill. The survey showed conclusively that owners of successful businesses implemented many more entrepreneurial initiatives than those that failed.

“They show entrepreneurial conduct and are more subject to competition from the shopping malls than is the case with home-based businesses and street vendors,” she says.

“Entrepreneurial initiatives such as updating business and operation plans, budgeting, formulating marketing policies and regularly analysing the competitive environment can result in the adjustment of strategies, such as changing or limiting the product range and reducing employment, thus ensuring business sustainability.”

The SEZ aims to pass on this entrepreneurial spirit to the business owners with whom they work, and with some luck and plenty of hard work, the next survey of small businesses in townships will show a growing level of success and prosperity.

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