The past week has brought an eclectic range of responses to the minimum wage increase from the consumer sector. Tim Martin, the outspoken founder and chairman of pub chain JD Wetherspoon, complained in the company's annual results that the ruling would exaggerate supermarkets' price advantage over pub groups. His logic - that wages account for a higher share of the selling price of a pub pint than a supermarket one - was sound. But Mr Martin has dedicated so many previous statements to rants about the tax differential between supermarkets and pubs that his latest tirade was all too easy to ignore. It was also notable that he boasted about raising Wetherspoon's minimum hourly rate for staff, but failed to disclose what this minimum actually was.
Meanwhile, Whitbread - owner of Costa Coffee and Premier Inn - said the "substantial cost increase" due to the living wage would be mitigated "over time with a combination of productivity improvements, boosted by investment in systems and training, efficiency savings and some selective price increases." Management promised further details alongside half-year results next month.
But the most thoughtful response came from Next. The retailer spent three pages of its half-year results explaining why the legislation would cost £27m a year. Interestingly, the bulk of the cost increase will come not from raising wages for its lowest-paid employees, but from the "knock-on effect of maintaining wage differentials for supervisors, junior managers and other more skilled or demanding roles within the business".
Still, the company needs to raise prices by just 1 per cent over the four years to 2020 to absorb £27m in extra staffing costs. As a result, management believes "the burden is manageable" - as long, that is, as the minimum wage is pegged at no more than 60 per cent of the median wage.
There's a political risk here. In his July Budget, Mr Osborne said he had set the minimum wage "to reach £9 by 2020". That figure is based on 4.5 per cent annual growth in general wages, against which the minimum wage is pegged - an optimistic assumption given the current deflationary environment. If wage inflation disappoints, but the chancellor still feels obliged to keep his catchy £9 target in a general election year, he would have to raise the peg beyond 60 per cent. "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," worries Next. This most well-regarded of management teams is not above politicking; it just does it in a more subtle way than Wetherspoon's Mr Martin.
Outsourcers, which offer cleaning, security and similar 'support services' to businesses and government departments, are more exposed than retailers because staff costs account for a bigger share of total costs - as much as 59 per cent for Serco, according to research by Liberum Capital. Interserve has come out with the fullest reaction to the new minimum wage so far, warning that it will increase costs by £10m-£15m for its UK support services division, only some of which can be recovered through contract renegotiations.
Liberum thinks Mitie is the most exposed of all the outsourcers because its staffing costs are so low - just £16,400 an employee (Interserve: £24,200). This was one reason for our recent sell tip (281p, 27 Aug 2015). Because companies are no longer obliged to issue quarterly updates, we will have to wait until November before hearing what Mitie itself has to say.
As for the wider economic impact, one argument we should not believe is that lower-earners will have more money in their pocket when the new minimum wage comes into force next April. An analysis by the Institute for Fiscal Studies estimates consumers' gains from higher wages at £4bn, some of which will flow back to the exchequer in taxes. Meanwhile, the government is cutting £12.5bn from the welfare bill. Investors might do well to think less about the minimum wage and more about which businesses are exposed to low-income UK consumers.
