Forget the weather, the hot topic for retail is the living wage. Since the Government announced the surprise measure, reaction has been varied.
Ikea has pledged to pay up and above Chancellor George Osborne’s new minimum wage, Costa Coffee this week revealed it will be forced to raise prices, while analysts predict that the introduction of the increase in wages could hit retailers as hard as the arrival of the internet.
One thing’s for certain, you can bet talk on the subject has been feverish in boardrooms.
Will retailers take the hit themselves or pass it onto their customers?
With its half-year results published this morning, retailers may have turned to Next to find out what the bellwether of the retail industry may be thinking when it comes to the increase in staff wages. This morning the Lord Wolfson-run group became the first retailer to publicly spell out a detailed review of the impact of the living wage, which will increase to £7.20 an hour next April and to £9.35 by 2020 - on its business.
Next’s current wage costs
Next said it shells out £600m a year in UK wages, representing 15% of its sales. With a current starter rate of £7.04, the retailer described the increase in April to £7.20 an hour as “manageable”. It believes the cost of implementing the living wage next year will be in the region of £2m.
The impact of the living wage
However, Next indicated the additonal rises in the living wage - as it increases to £9.35 an hour in 2020 - will have more of an impact on its business, estimating that it will cost the retailer £27m per annum. Within this figure, the company said that £11m relates to the wages that will be paid to staff while £16m will relate to the “knock-on effect of maintaining wage differentials for supervisors, junior managers and other more skilled or demanding roles within the business”.
Like Costa Coffee, Next believes that customers will have to help share the brunt of the costs, with prices set to increase by 1% as a result of the living wage (it added that prices will rise an additional 5% over the period because of wage inflation). It adds that this small price hike is unlikely to have much of an impact on the “trading performance of the business”. Next adds that it hopes to “compensate for some wage inflation through increased productivity measures throughout the business”.
The retailer says that as long as the living wage is linked to 60% of the median wage, the “burden is manageable”.
Where the uncertainty lies
However, Next flags up that there could be issues if the median wage inflation is lower than the forecast 4.5% per year. “In order for the LWP to hit £9 per hour in 2020, inflation in the median wage needs to be 3.5%. If, however, wage inflation runs below 3.5% then achieving £9 in 2020 may be problematic, as it would mean raising the LWP above 60% of the median wage.” The retailer warned: “Such a move would mean that maintaining reasonable wage differentials would be likely to move the median level itself, creating a potentially harmful inflationary loop.”
We’re in it together
Next sets out that this new miniumum wage for employees who are 25 and above, will impact all businesses – in and out of the retail – equally. “It is therefore unlikely to affect the competitiveness of any individual business” – in other words, the hike in wages will create a level playing field. “Additional wage costs are likely to be similar for most clothing retailers, so any resulting price rises should be comparable across the industry.”