Retailers have plenty to digest after George Osborne’s Budget this week. How will changes to the living wage and Sunday trading affect them?

George Osborne

A surprise move to significantly boost the minimum wage for over-25s caught most retailers off guard. On top of that, the Chancellor unveiled well-trailed plans to tear up the rules around Sunday trading. However there was no further major news on business rates.

Living Wage

The ‘living wage’, as it has been branded by Osborne, will mean employers must pay at least £7.20 an hour for those over 25 from next April. This is expected to rise to around £9.35 by 2020.

The move is predicted to increase the annual pay for around 6 million of the 31 million workers in the UK.

But what will be the impact on retail?

On the face of it, plenty of businesses will face a hefty rise in their wage bill. But analysts suggest the industry will not be as heavily affected as other sectors, such as leisure and hospitality.

“For most retailers, the introduction of a national living wage next year will not prove much of a threat to forecasts in our view, perhaps a slight headwind at worst,” says Peel Hunt analyst John Stevenson.

He adds: “Big ticket commission-led staff will not be affected, young fashion will fall under the age limits and most retailers offer average rates above the £7.20 level.” 

According to the British Retail Consortium, the median wages for hourly paid workers in the retail industry currently stand at £7.30 an hour.

Barclays analyst Christodoulos Chaviaras says: “Management teams we talked to are generally calm.”  Of the high street retailers Barclays covers – including Marks & Spencer, Dixons and Zara – the “majority” already pay above the minimum wage.

“In our view the cost increases will be very much smaller than one may think,” says Chaviaras.   

Exposure to higher wage bills

Some retailers, however, will be more exposed than others when it comes to their wage bill.

In grocery, for example, three quarters of Sainsbury’s staff are 25 or over. Its current basic rate of pay is £7.08, which it points out is “considerably above the minimum wage” of £6.50.

“It does not move the needle for supermarkets. Wage inflation is just another form of inflation”

Bruno Monteyne, Bernstein

However it is understood that Sainsbury’s is “comfortable” with the rise to a minimum of £7.20 by next April. 

Its rival Tesco also says it is “supportive” of Osborne’s living wage.

Bernstein analyst Bruno Monteyne told Retail Week: “It does not move the needle for supermarkets. Wage inflation is just another form of inflation.”

Instead of talking about low paid jobs, grocers have been keen to talk up the benefits packages they offer. A Sainsbury spokeswoman says: “We give colleagues a broad package of benefits which include a pension, life insurance, paid breaks, annual bonus and a discount card.”

Tesco says its benefits include a 10% colleague discount, shares scheme and pension.

Fashion could be even less impacted, due to the greater proportion of young people that work in the sector. For example, 70% of SuperGroup’s staff are under 25 so will remain under the minimum wage rules.

In other sectors, Stevenson suggests that Card Factory, Halfords and Sports Direct could be affected, although points out that a significant number of staff will also be under 25.

As well as few retailers being significantly impacted in terms of costs, the ‘living wage’ could actually bring benefits.

Not only will it put more money in people’s pockets, which could feed through into retailer’s tills, according to the BRC’s director general Helen Dickinson, the government’s move has provided certainty for the industry. “It puts some clarity over the direction of travel for 2020,” she says.

“Most retailers have been talking about reinventing the role of the store, but very few of them have made much progress. This might be a prompt”

David Oliver, PriceWaterhouseCoopers

The living wage may also give retailers an excuse to re-focus their efforts on their online business. PwC retail consultant David Oliver says: “Most retailers have been talking about reinventing the role of the store because of digital, but very few of them have made much progress in that.

“This might be a prompt and the tactical response would be to take more labour hours out of stores and to employ more under-25s who they won’t have to pay the living wage to. That will be the first response for a lot of retailers.”

Sunday trading hours shake-up

Meanwhile, there has also been a mixed reaction to the Sunday trading changes, which will give power to councils and mayors to decide if big stores – above 3,015 sq ft – can open beyond the current six-hour limit.

Waitrose boss Mark Price says he could see a “commercial opportunity”, while McColl’s chief executive James Lancaster argues: “From our perspective these changes will not see an increase in wider retail sales but lead to inconsistency and confusion for businesses and shoppers.”

Conlumino analyst Joseph Robinson suggests it could be a “double-edged sword” for grocers.

“These changes will not see an increase in wider retail sales but lead to inconsistency and confusion for businesses and shoppers”

James Lancaster, McColl’s

“While it is welcome news that grocers will be able to extend the current Sunday six hour window…an extension of Sunday trading hours will spread out spend more thinly across the day, and the increased operational costs will have a negative impact on profitability.”

In terms of winners, Robinson says it is likely to be the discounters, and Asda and Morrisons, “the two retailers among the Big Four that are most reliant on larger supermarkets”.

Robinsons adds: “The main losers here will undoubtedly be smaller stores and independents, with these changes compounding the impact of the rise in multiples’ convenience estates over the last decade.”

“Moreover, it is highly likely that these changes will have an impact on the grocers’ burgeoning convenience estates, with increased competition from rivals’ – and their own – larger stores, and by opening up the Sunday market further for the likes of Aldi and Lidl.”

But Peel Hunt’s Stevenson suggested the impact would be minimal. “A relaxation of Sunday trading laws is unlikely to make a significant difference to retail profitability, in our view. While we believe consumers will embrace longer shopping hours, we see this as largely substitutional.”

The one piece of news all retailers will be toasting will be the cut in corporation tax to 19% in 2017 and 18% in 2020. “A positive outcome for the sector,” says Stevenson.