Small business lessons I learned from Somalis

Piracy, terrorism and tears. The world view of Somalia, as a Somali friend of mine likes to joke. Hollywood’s portray hasn’t helped ­­–from militia dragging American soldiers through the dusty streets of Mogadishu in Black Hawk Down, to a courageous captain ­­­­­­pleading with pirates for the safety of his crew in Captain Phillips. Yes, the country and its people get a bad rap. But there’s a lot to learn from the community ­­ — especially in small business.

Somalis diaspora

With Somalia ravaged by civil war in the 1990s, thousands fled the country to make new homes in the United States, Canada, Sweden, UAE and South Africa. Many started businesses­­–some were thriving.

In the United States, Minnesotans can attest to their business skills ­­­­­­­­– despite facing many difficulties when they arrived in the state. The city is home to many small firms, ranging from money-transfer, clothing and jewellery shops. Somalis even have their own strip malls. Minnesotan Ilhan Omar became the first Somali-American elected to Congress. Her public war of words with President Trump has garnered much attention.

Somalis in Africa

Many Somalis also moved south to neighbouring Kenya and South Africa—where they became embedded in small retail society. In Johannesburg’s “Little Mogadishu,” Somali entrepreneurs sell everything from underwear to internet services — all at low prices.

The Western Cape in South Africa has a growing Somali population, and it’s estimated that 5,000 Somalis live and trade in the Bellville central business district. They have on average, outperformed traditional local traders — creating a blueprint for small business success.

Somali culture drives success

Culture is the cornerstone of Somali business success. The community operates in strong social networks, where trust plays a significant part when accessing business capital. In social circles, loans are made interest free according to Islamic law — often without contracts.

The community works together and supports one another financially. When natural disasters or social unrest affect individuals, members are ready to provide a helping hand where needed. They often give job opportunities to new arrivals, still finding their feet. In some cases, they might even offer shares in their business to hard-working countrymen.

Reinvestment of capital and spreading of risks

They have a high appetite for risk and willingness to work anywhere. Somali entrepreneurs focus on busy areas to maximize traffic — but often trade in the more dangerous places such as informal settlements.

They spread risks through investing in several small businesses — often co-owned by a number of investors. They view their shops as a long term investment and look to grow their capital collectively. If the price is right, they are willing to sell their businesses to a local investor.

Shop around for the best deals

Somalis are willing to travel for deals. They carefully study the wholesale trade and make price comparisons to find the best deals. Traders often source their products from several wholesalers, as Vanya Gastrow’s research from the University of the Witwatersrand indicates. It allows them to tap into special offers, not always available in their immediate neighbourhood. They focus on building relationships with store managers, which assists them in staying informed about specials and bulk discounts on offer.

Affordable packaging

Shop owners pride themselves on their value offerings. They understand the financial difficulties their low-end customers face daily and tailor their product packaging accordingly. They offer more affordable small packed sizes to their cash-strapped shopper, such as a small plastic bag of rice or sugar, rather than a standard bag or box provided by manufacturers.

High turnover and grocery hampers

Shopkeepers often sell fast-moving products at a loss, to create foot-traffic and to maximise turnover. Grocery hampers are also a Somali speciality — combining essential household items such as sugar, oil and maize in a discounted package. It’s particularly popular during the festive season such as Christmas or Eid when shoppers are searching for deals.

Trade long hours

Trading hours are long, providing further convenience to working customers who often have to travel long distances to get to the workplace.

Selective with credit

Somali entrepreneurs are willing to give credit to needy shoppers in their area — but are skilful in managing bad debt, and refusing customers that are high-risk.

Limit out of stocks and stock a range of products

Consumers support their shops as they stock a broad range of products and rarely run out of products. Research has shown that they invest substantially more in their businesses than local traders. According to Rory Liederman from the University of the Western Cape, Somali start-ups spend on average five times more in their shops, than local spazas in South Africa.

Local traders might resent them for their competitive nature, but customers applaud them for their low prices and the value they provide.

Local businesses have limited support

In contrast with Somali entrepreneurs, local small retailers operate in weaker social networks. For start-up capital and cash flow, they often tap into personal savings or reach out to family members — but lack a larger community for financial support and help. They follow a more survivalist business mindset. They often don’t choose entrepreneurship but are pushed into it, due to a scarcity of jobs.

Cash flow limits bulk purchases

Local small retailers often have insufficient cash flow for inventory. They are often forced to buy from wholesalers that break-bulk and sell smaller package sizes — limiting their ability to make bulk purchases and tap into volume savings.

Poor market knowledge

Local shopkeepers often lack the right market knowledge to buy fast-moving products and make poor buying decisions. Slow-moving items on the shelves tie-up their money, resulting in a lower return and less profit.

Stuck in a credit-trap

Poor cash flow also forces local small retailers into costly and abusive wholesale relationships. They are often stuck in a credit-trap with one of two wholesalers — making shopping around for the best deals difficult.

Local retailers struggle to compete with foreign-owned shops, has fuelled resentment in the community. They have often accused Somali entrepreneurs of dubious business practices. The Somali community has often been singled out, but is not alone in the conquest for small retail dominance in Africa.

Increase in small foreign retailers

Some African countries have seen a significant increase in the number of foreigners setting up shop. South Africa, in particular, has seen more arrivals from Ethiopia, Eritrea, Bangladesh and China.

Locals often accuse foreigners of crossing the border illegally or paying corrupt officials bribes to gain entry. An Ethiopian friend told me his fellow countrymen could give you the exact price to “grease the wheels” of bureaucracy at the South African border.

Research has shown that foreign-owned groceries create lots of jobs and employ mostly locals. But small locally-owned grocery numbers are dwindling — creating tension.

South Africa, in particular, has suffered from xenophobic attacks that first started in 2008, and flared up more recently. Lindiwe Zulu, South Africa’s Minister of Small Business Development, made headlines when she said foreigners need to share business ideas with local entrepreneurs.

The Somali Association South Africa (SASA) is paying close attention, and in the past has run joined workshops with NGOs, focused on transferring business skills and creating cultural awareness. But, replicating success remains much harder.

A few years back, I ran a small grocery research project in Mombasa, Kenya — a city well accustomed to Somali traders. Local Kenyan traders could describe in great detail the strategies and tactics used by their Somali competitors in their dukas. Several local traders collaborated and tried to start bulk-buying and risk pooling strategies — but with limited success.

As one local Mombasa duka owner put it to me, “we know what they do, but it’s difficult, as trust is in short supply in this neighbourhood.”

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