Retail chiefs fear revealing true impact of living wage, according to Morgan Stanley

Analysts at Morgan Stanley predict the living wage will have as big an impact on the retail sector as the advent of the internet and will considerably hit profit margins.

An analysis on the impact of the introduction of the living wage, which will increase to £7.20 an hour next April and to £9 by 2020, found that it could lower industry EBIT margins by 400 basis points by 2020.

One of the hardest-hit retailers will be Home Retail because its “profitability is currently so depressed” and it lacks an international operation, according to Morgan Stanley.

A Home Retail spokesman said: “We already pay above the minimum wage. We will be budgeting to take account of the changes to the National Living Wage over the transition period.”

Retailers including Kingfisher and Dixons Carphone will have the impact of the living wage “significantly diluted” because of their operations in Continental Europe.  

Toeing the line

Although retail execs have been publicly supportive of the move to the living wage, Morgan Stanley analyst Geoff Rudd argues this is more a product of necessity than honesty.

The Morgan Stanley note said: “Were the chief executive of a big retailer, whose own remuneration is detailed in its annual report, to come out against [the living wage] it could attract considerable adverse publicity that might not only upset the company’s employees, but also potentially impact sales performance.”

While Morgan Stanley concedes retailers may be able to absorb the initial pay rise with cuts to staff benefits, it does not believe there are further opportunities for retailers to mitigate the jump to £9.

Absorb or pass on?

The Entertainer boss Gary Grant told Retail Week there is “no doubt the living wage will have an impact on our bottom line, but it is not going to happen in this financial year”.

He added: “We will fully embrace it because we value our staff. It is not just a case of saying we are going to put our prices up – we are trading in a very competitive market so we have to look at efficiencies.”

Grant said the retailer was already looking at how it could make efficiencies across its systems, distribution network and merchandising.

This week, Costa Coffee-owner Whitbread warned that the higher wage would force it to raise its prices.