One of the UK's biggest pub chains is blaming an increase in the minimum wage for its falling margins

JD Wetherspoon — the budget pub chain with more than 1,000 locations across Britain — released a trading statement on Wednesday morning, and investors are not at all happy with what it says.

At the market open, shares in the FTSE250-listed Wetherspoon tanked by almost 13%, as investors reacted to a mixed bag in the company’s trading update. At 9:20 a.m. GMT (4:20 a.m. ET), shares have recovered a little, and are down around 7.3% to £6.25 ($8.84) each.

On the face of it, things don’t look too bad. Like-for-like sales increased by 3.3% in the 12 weeks to January 17th, with total sales up 6.3%.

But what’s scaring investors this morning is a second drop in the company’s operating margin in two trading updates. The company said that it expects its operating margin to fall by 1.1 percentage points to 6.3%, blaming an increase in the cost of wages between October 2014 and August 2015 of 13%. In Wednesday’s update, Martin — who named Wetherspoon after a teacher who told him he’d amount to nothing — said that “increased labour costs will be an important factor in the outcome for this financial year.”

Increasing labour costs and falling margins have been a bit of a theme for Wetherspoon over the past year or so. The company, particularly chairman and founder Tim Martin, is not happy about the new National Living Wage being introduced by the government, which it says, is pushing up costs, and hitting margins.
From April, the National Living Wage, which, from April, will force all employers to pay staff at least £7.20 ($10.18) per hour, a £0.70 ($0.99) bump on the current minimum wage. Pub chains like Wetherspoon rely on low-paid staff, often youngsters, to keep costs low and maximise profits.

In September, Martin said: “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.”

He also blames taxes:

“As we have previously stated, we believe that pubs are taxed excessively and that the government would create more jobs and receive higher levels of overall revenue, if it were to create tax equality among supermarkets, pubs and restaurants.”

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