George Osbourne’s hike of the minimum wage will hit food retailers the hardest, with the Big Four UK grocers’ profits coming under particular pressure, according to a new report by Moody’s.
The move to increase a new living wage from £6.50 to £9 by 2020 could lead Tesco, Morrison, Asda and Sainsbury’s to rethink their strategy of putting more people on shop floors, accelerate the closure of unprofitable stores, speed up the shift to “dark stores”, increase the number of under 25 year olds on the pay roll and reduce staff benefits, the ratings agency warned.
Overall the minimum wage will rise by about 44% by April 2020 increasing the pay of six million of the UK’s 31 million workers.
The retail sector is one of the UK’s largest employers of low-paid workers, with the big four supermarkets accounting for a total of about 750,000 workers. After the purchase of supplies, labour costs are the largest item for most retailers, comprising between 9% and 15% of sales.
Food chains will be squeezed harder than most as, although they generate more sales per employee than most other retailers, they are more vulnerable to wage-cost inflation as the low-margin nature of the industry means relatively little profit is generated per staff member, Moody’s said.
A 5% increase in labour costs in 2017 would wipe off 7% and 10% from the earnings of Tesco and Morrisons if the companies did not take any preventative measures, the report added.
“The plan to increase the UK living wage has the potential to erode retailers’ profits, if they are unable to adapt their operating systems and cost structures,” added Sven Reinke, a senior analyst at Moody’s and author of the report.
The discount sector of the market, including Iceland, Aldi and Lidl, would be less affected than the more traditional rivals as their business models are less labour intensive and stores are smaller, Reinke said.
Moody’s does not expect any short-term rating impact for retailers as the first increase in pay to £7.20 in 2016 would have “minimal credit impact” with time to adapt strategies and cost structures in the next 12-18 months before more substantial wage increases begin.
Reinke predicted most retailers would sufficiently mitigate higher employee costs by improving staff efficiency, accelerating automation and, to some degree, lowering staff levels.
In particular, supermarkets might have to “rethink their strategy” of putting more people on shop floors, despite the increase coming as the big four have cut swathes of more highly paid middle-manager jobs from head offices and stores.
Reduce employee benefits, such as discount cards and pension entitlements, could also help offset the impact of higher wages. However, Reinke said he did not believe this was a “substantial” solution as it jeopardized staff morale and the ability to retain talent.