British companies are legally obliged to pay workers the new National Living Wage as of April 1.
This is great for the worker, but Julia Dawson and her team at Credit Suisse warned a few months ago that certain industries will be hit hard by the rise in salary costs — travel, leisure, and retail.
These industries tend to rely on a network of branches staffed by low-level and low-paid employees. Any rise to the minimum wage would have a big knock-on effect for operating costs.
Considering the British Chambers of Commerce — which represents thousands of businesses across Britain, which employ around 5 million workers — criticised the National Living Wage by saying it “will apply a ratchet effect to all companies’ pay bills, and sits alongside a raft of other high employment-related costs,” it’s worth revisiting what Dawson and her team at Credit Suisse had to say in November last year.
In July, UK Chancellor George Osborne said the government would scrap the National Minimum Wage — £6.50 an hour for workers — for a new “National Living Wage” of £7.20 an hour for workers over the age of 25. It comes into force next April and by 2020, the National Living Wage should rise to £9.
The National Living Wage is intended to make sure people are paid enough to have a “normal” standard of living. For example, a full-time waitress should be able to live off her low wages and afford rent, food, transport, and bills without having to take a second job or an exceptional amount of extra hours.
Dawson and the rest of the Credit Suisse analysts said this change “may have a bigger impact than companies have signalled so far.” In other words, businesses were either being too cautious or too optimistic about how the increase in costs is going to affect them.
The below chart shows Credit Suisse’s estimates as to just how badly the bank thinks earnings at some of Britain’s biggest travel, leisure, and retail companies could be affected by the new wages.
In retail, Poundland’s earnings could take a huge 10.9% hit this year, while in Travel & Leisure bookmaker Ladbrokes could face a 5.9% fall in 2016. These shops rely on a network of High Street branches staffed by low paid workers.
Companies in these sectors have either waged war against the government over National Living Wage, while others have already boosted wages so the rise in costs doesn’t come as an absolute shock to its balance sheet.
Whitbread, the owner of Costa Coffee, warned investors in October that the National Living Wage will cost the group as much as £20 million ($31 million) a year. A month earlier, massive budget pub chain Wetherspoons launched a scathing attack on the government for introducing the National Living Wage.
Wetherspoons chairman Tim Martin said in the group’s results at the time:
By pushing up the cost of wages by a large factor, the government is inevitably putting financial pressure on pubs, many of which have already closed. This financial pressure will be felt most strongly in areas which are less affluent, since the price differential in those areas between pubs and supermarkets is far more important to customers.
He isn’t wrong about financial pressure. Take a look at Credit Suisse’s charts showing the impact on profits:
And Credit Suisse think Martin could have a point about pubs facing closure amid supermarket pressure too. Analysts highlighted that while some retailers may pass on increased staffing costs to customers, it is unlikely that supermarkets, such as Sainsbury’s or Tesco, will do this because they are already under great pressure to keep costs low for the consumer due to the price war.
However, low cost grocer upstaged every single other supermarket in Britain in September last year by massively hiking its pay for its employees. It even implemented it earlier that it was legally obliged to — in October.
“Lidl UK was incredibly proud to be the first British supermarket to implement the recommendations of the Living Wage Foundation, introducing the real Living Wage from October 2015,” said Lidl UK in a statement sent to Business Insider.
“Since then, our employees have received a minimum of £8.25 per hour nationally across England, Scotland and Wales and £9.40 per hour in London — a figure well above the National Living Wage — making a genuine difference to over 50% of our 19,000 employees — across all age brackets – and representing an average annual wage increase of £1,200.”
But every single large corporation that relies on low-paid workers in Britain will be hit by rising costs from the wage increases. It’s great news for workers but expect companies to raise the cost of goods to try and cover their own costs and protect profits.