As of Friday 1 April 2016, the national living wage (NLW) was launched alongside the minimum wage policy in Britain. Many companies have publicly applauded the change, but most of them are faced with rising costs as a result, and will be forced to find a way to protect margins and profits. If you're working, and aged 25 or over and not in the first year of an apprenticeship, you are legally entitled to at least £7.20 per hour. That's an extra 50p per hour than the minimum wage and the government has said it's committed to increasing this basic level every year. By 2020, it's thought the NLW will be worth close to £9 an hour. Those aged 24 and under will remain under the national minimum wage, which usually rises in October across existing age categories.
It's not an insignificant number of employees who will be affected. The Economist believes nearly 1.8m people will be paid more in 2016, and this will rise to nearly 3m by 2020. Overall, the total rise in employers' wage costs could reach £4bn. It's the government's belief that companies will be able to shoulder these costs, and even encourage them to invest more in the workforce to ensure the higher wages are money well spent. Better training, resources and support should all lead to higher levels of productivity, after all.
Others worry that it will always be a company's top priority to squeeze the most out of the workforce for the minimum amount of money. A report published by The Financial Times revealed many businesses had tried shifting workers onto flexible work contracts while cutting bonuses, overtime schemes and other perks in order to mitigate rising wage costs. It's thought retailers such as B&Q - which is owned by Kingfisher (KGF) - and Tesco (TSCO) have all cut some premium payments or other benefits in recent months, while raising base pay. Another possibility is that companies could label employees as 'apprentices' or 'self-employed' to get around pay rises. Another scenario is that unemployment rises because employers reduce climbing overheads by trimming their employee numbers.
A common tactic appears to be passing the cost onto consumers via price hikes. This is a controversial strategy in a world plagued by high levels of competition and, in the case of some sectors such as food retailing, widespread price deflation. This is more applicable to the consumer industries, of course, and the only sector likely to lose out is in the public realm, where prices are often set by local government and therefore remain fairly inflexible.
From the investor's point of view, there are a few things to be wary about. First, certain sectors are bound to be hit harder by the new legislation than others. The hospitality and retail industries account for 46.5 per cent of all minimum wage jobs, while smaller companies employ just over a third of the adult workforce, but more than half of Britain's minimum wage workers. But analysts at N+1 Singer are also looking on the bright side. If people are paid more, they often spend more and the retail and hospitality sectors should receive a sales boost as a result. There are also nuances to be found in the sectors argument. For example, discount retailers could struggle the most to find room in margins to offset the cost, while online retailers aren't likely to be significantly affected at all.
The broker also points out that the contraction in valuation metrics across the retail and leisure sectors has left certain stocks with potential for a re-rating this year. One we agree with analysts on is bicycle retailer Halfords (HFD). A change in top management and a short period of weakness in cycling sales has been met with a sharp slump in the share price. But the group performed resiliently in the third quarter and analysts reckon the shares' forward PE ratio of just 12 leaves plenty of room for future upside. On the leisure side, we also both agree on the future for Cineworld's (CINE) shares. Sure, the film slate for 2016 doesn't look as compelling as last year, but the group is expanding rapidly in eastern Europe, a region that has been increasingly capable of offsetting lower admission numbers in the UK. A forward PE ratio of 17 doesn't look too demanding, either.
In conclusion, the introduction of new wage legislation is an experiment for Britain's public companies and investors should watch closely to see how management teams deal with this new challenge.
