An investigation into the mortality rate of small businesses, with particular reference to fuel retailers within the Republic of South Africa.

Abstract

The impact of change and transformation on small businesses has compelled them to face a multitude of new challenges. The successful application of the selected strategies depends largely on an understanding of the predisposing and prevailing business dynamics and variables that impacts on their profitability, continued sustainability and future growth. There is increased attention that is focused on the turnover factor of small business in South Africa and this gives added need for extensive qualitative and quantitative analysis. International experience suggests that small businesses are a pervasive feature of the economic landscape in the developed world. The intensity and growing proportions of small business failure in South Africa is alarming. The problem not only presents management with new dilemmas, but also presents a challenge to researchers who are faced with the task of identifying through rational and scientifically valid processes, the underlying causes of the high failure rate amongst small businesses. Previous studies suggest that government regulations and franchised business have proven to be successful due to the infrastructure support offered by the franchisor. Since retail service station dealers operate within a highly regulated industry and within a franchised environment, this study examines the reasons for failure and success within the Retail Fuel Industry sector in South Africa. It was anticipated that there are a number of factors that influence success and failure from both within and outside the control of the fuel entrepreneur. While some researchers have identified gender, education levels and age as critical success factors, others suggested that management factors and occupational experience are key drivers. The fuel retail industry is regulated and seeks to reward efficiency through a retail fuel margin. This study provides new insights and important clues concerning the failure amongst fuel retailers. The closure of the business did not result in the physical disappearance of the establishment but rather in a transfer to new ownership. The purpose of this study is to conduct a more in-depth and comprehensive qualitative research using the case study methodology, which will investigate the causal factors that lead to the high mortality rate of fuel retailers in South Africa. The non-fuel aspect of the business comprises the shops and quick service restaurants and presents another dynamic to fuel retailing. This was investigated to fully address the research question. The case study analysis also attempted to quantify the level of support that franchisees received. There was sufficient evidence from the research findings to nullify the rival proposition that success and failure of fuel retailers was only a function of sales and volume. The case study evidence supported the research proposition that the reasons for failure and success were due to factors other than size. The 47% per annum failure rate recorded in the study was attributed to a number of factors from both within and outside the control of the fuel entrepreneur. While gender, education levels and age were not found to be critical success factors, the ability to manage the key components of target costs was critical. The management of manpower costs and the efficient application thereof was found to be the most significant variable in the cost build up and differentiated successful and failed retailers. There was also evidence of substantial imposed costs from both the regulatory environment and the franchisor. The monthly adjustment of fuel prices had an impact on working capital and generally resulted in net stock price losses. Both these variables were not factored into the calculation of the retail fuel margin resulting in the understating of the true costs. The loose regulatory environment also marginalised the fuel retailer. It was found that the oil companies optimised their fuel delivery regimes at the expense of the small business owner through the automatic replenishment system of wet stocks, controlled through a central ordering system. While, wet stock control mechanism was in place for the fuel business, the non-fuel business received limited support for stock and shrinkage management. The case study evidence also supported the retailers view on the inadequate level of business support and training. This was an important finding and such poor orientation negatively influenced the quality of the due diligence checks and business valuation. In many cases, the budgeting was optimistic with little or no recourse for remedial action leading to eventual failure. Statistical analysis indicated that the two groups differed significantly with regard to the mean difference between Shop sales and Budgeted Shop sales. It appears that in the case of the success group that the shop sales mean was much higher than budgeted mean, while in the case of the failure group the mean was lower than budgeted mean. Failure to achieve the shop budgets did contribute to failure. Important recommendations are made based on the case study findings. This includes the establishment of a central training unit, an industry valuation model and a more relevant regulatory regime aimed at removing the imbalances between the oil company and the retailer in terms of delivery and payment methodology.