Increases in staff costs to sales ratio across the retail sector have been accelerating as the national living wage starts to bite.

Staff efficiency remains a hot topic in the retail sector as announcements of job cuts have continued apace.

Just last week Sainsbury’s announced that it was axing 2,000 roles as it reduces its cost base, and it has not been the only retailer to make such a move this year.

One of the ways in which a retailer’s operational efficiency can be judged is through its staff costs to sales ratio.

This figure measures how efficient a retailer is by expressing its overall wage bill as a percentage of sales, with a lower proportion indicating a more efficient operation.

Retailers with the lowest staff costs to sales ratio
RetailerLowest staff costs as a % of sales
Conviviality 5.6
Gear4music 7.9
Asos 8.5
N Brown 9.0
Game Digital 10.6
Dixons Carphone 11.0
Sainsbury’s 11.0
Ao.com 11.4
Mothercare 11.7
Morrisons 11.8

Wage pressures lowest for online retailers

Looking at the 10 listed retailers that are judged to be the most efficient, there is a large prevalence of online retailers, with Gear4music and Asos coming in second and third place respectively.

Pureplays of course have a distinct advantage over bricks and mortar retailers as they don’t require staff to run stores.

However, the ratio has in fact been on the rise for many online retailers in recent years, including Ocado and Ao.com, which is likely to reflect increased investment in new tech roles.

Conviviality tops the table, but it is different to the other retailers in that its store network is mainly operated on a franchise basis, which won’t be included in its payroll.

RetailerHighest staff costs as a % of sales
Hotel Chocolat 27.1
Topps Tiles 25.0
Card Factory 24.7
Shoe Zone 22.7
French Connection 22.2
Bonmarche 21.8
Carpetright 21.8
Pets at Home 21.8
Moss Bros 20.3
Halfords 20.1

High staff costs may reflect vertical integration

The table with the least efficient listed retailers also needs to be viewed with caution.

For instance, Hotel Chocolat appears to face the highest pressure in terms of its staff costs, but this is actually a vertically integrated business that manufactures its own chocolate and also runs a hotel in St Lucia.

Card Factory is a similar story in that it designs and produces its own product offer.

The retailer’s staff costs to sales ratio of close to a quarter may seem like a significant burden, but this couldn’t be further from the truth – Card Factory is in fact one of the most profitable UK retailers that Retail Week Prospect tracks.

Retailers that provide high service levels such as Topps Tiles and Moss Bros also understandably face higher staff costs.

Growth in average ratio across the sector accelerates

The average staff costs to sales ratio across all listed retailers underlines the pressures that the sector has faced in recent years.

This figure increased by 30 basis points to 15.9% this year, whereas growth in the two previous years had been around the 20% mark.

A clear link to the national living wage can be made – the vast majority of retailers tracked for this research reported data that covered at least nine months after this was implemented in April 2016.

But further pressure can be expected as the apprenticeship levy has come into effect from April this year.

This new scheme raises a levy of 0.5% of an organisation’s annual pay bill, which has added a degree of urgency to retailers’ attempts to curb their wage bill.

Improvements in staff costs can have direct impact on bottom line

The number of job cuts that retailers are making might dominate the headlines, but often these initiatives are the result of finding new, more efficient, ways to work.

For instance, in the grocery sector various retailers have stripped out a layer of middle management, with lower paid staff now undertaking their tasks.

Automation and new technology are also helping to transform the ways in which retailers operate and can help reduce the headcount.

The attractions are clear though as any improvements to the staff costs to sales ratio can have a big impact on the bottom line.

To illustrate this: a 5% reduction in Tesco’s UK wage bill of close to £5bn could have boosted its UK operating profit by £240m last year, lifting its operating margin from 1.8% to 2.4%.

In practice though retailers will need to strike a balance, as the benefits of reduced staff costs could be outweighed by losing customers that have a negative customer experience.

Methodology

The figures are based on the latest set of accounts for publicly-owned retailers in the UK as of October 2017. Where possible, figures relating to a retailer’s UK operations have been used.

The analysis was based on data compiled by Retail Week Prospect, an intelligence service offering insight and analysis on the UK’s leading retailers.