Pay rise a sobering prospect for certain sectors

A bar tender serves a cocktail. The licensed trade is scared that higher salaries will add a punishing burden to an already embattled sector. Photograph: Jane Barlow

George Osborne’s bombshell £9 national living wage by the end of this parliament was hailed as the masterstroke of last week’s Budget, wrongfooting the opposition parties and much of the general public with its audacity. But, as the dust settles on the Chancellor’s coup de théâtre, it is clear much of the retail, leisure and hospitality industries, in particular, are chastened by its potential implications.

A disproportionate part of their costbase tends to be labour costs, and the step-change from the current minimum wage of £6.50 an hour for those aged 21 and over is seen as piling new pressures on businesses. It will increase the pay of 2.7 million workers aged 25 or over to £7.20 an hour from next April, with a further 3.3 million expected to benefit.

And there are worries that Osborne’s bid to steal the clothes of Labour and the Liberal Democrats by helping the lower-paid will backfire because many smaller businesses may buckle under the extra financial burden.

James Lowman, chief executive of the Association of Convenience Stores, claims it will have a “devastating impact” on thousands of his members. The British Independent Retailers Association warns many stores will need to “either cut hours, or jobs, or both”. Furthermore, there is a risk that businesses may respond by cutting back on employee benefits, such as staff discounts and bonuses, or pass the costs on to customers in higher prices.

Within hours of the announcement, director general of the CBI, John Cridland, said: “To increase the minimum wage on average by 6 per cent a year in this parliament is quite a gamble for businesses, which will struggle to leverage the productivity to pay for it.”

City analysts say they estimate that the new living wage, which helped deflect attention from the well-flagged £12 billion of welfare benefit cuts ushered in by the Budget, mainly hitting people under 25, could add between 1 and 2 per cent to payroll costs. “It is undoubtedly placing further pressure on profit and loss accounts across the retail industry in particular,” says Darren Shirley, retail specialist at broker Shore Capital. “It is widely acknowledged that for most retailers labour is their biggest single cost.”

Jonathan Pritchard, an analyst with Peel Hunt, says: “We think the impact could depend on the sub-sectors. For instance, there are far more younger staff in clothing companies like JD Sports and Superdry compared with a generally older staff in the big supermarkets. But payroll costs will certainly be impacted.”

Not all retailers are pessimistic, however. Mark Neale, founder and chief executive of the fast-growing Mountain Warehouse clothing chain, says his business employs a “substantial number” of staff earning the minimum wage. “The Chancellor’s decision creates a level playing field that allows retailers such as Mountain Warehouse to increase the wages we pay without disadvantaging us relative to our competitors,” says Neale.

John Bason, finance director of Associated British Foods, is also sanguine. “The living wage will increase our Primark wage bill, but it is something we can live with. We are also working out the numbers because the living wage will apply to those over 25 and, obviously, like most retailers, we have many staff under that age,” he says.

This has been an overlooked aspect of Osborne’s proposal – that it will make taking on 18 to 24-year-olds, whose unemployment rate is about triple the national average, more attractive to businesses. But the silver lining retail industry executives will be hoping for is that extra payroll burdens will be offset by greater sales as people have more money in their pockets. “You cannot measure the impact of people having more cash. Will it get recycled into business’s top-line sales?” one said. “But one thing is for sure. Osborne’s move will have a tidal effect. Everyone will be impacted to some extent.”

Another sector that largely uses labour at or near the current minimum wage is the pubs industry. Its economic pressures are well known, with about one in six British pubs putting the shutters up since 2004 as the sector has been hit by the smoking ban, an extended economic downturn and rising utility bills.

Tim Martin, founder-owner of pubs group JD Wetherspoon, whose hundreds of pubs include scores of outlets in Scotland, says the National Living Wage was “quite unexpected”, but that “everyone with a conscience wants to do the best for their staff”.

Even so, Martin admits the Chancellor’s initiative exacerbates the VAT disadvantage he has compared with the supermarkets. “The danger is that it adds to the pressures,” he observes. “It’s a transfer of costs from the state to businesses which employ large numbers of people. The core of the issue for pubs is that about 25 per cent of the cost of a pint is wages. In supermarkets it’s a tiny fraction of that. It [the living wage] risks putting a lot of pressure on pubs, particularly outside central, built-up areas such as central Glasgow and central Edinburgh.”

Further clouding the future picture for the high street is the relaxation of retail trading hours on Sundays, also confirmed in the Budget. This will devolve the decision to local mayors and councils in England and Wales (there is no legal restriction on Sunday trading north of the Border). While some big guns welcome the idea, including Marc Bolland, chief executive at Marks & Spencer, others have expressed concerns about the costs for large stores of opening for more than six extra hours and the possible souring of relations with staff.