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Hospitality and the living wage

New wage floor will be welcomed by low-paid workers but the impact on the hospitality sector could be significant
September 24, 2015

The national living wage (NLW) might have been a political victory for the Conservatives, but businesses footing the bill have since been fighting a torrent of questions about how they will cope.

And keenly in the crosshairs of investors' curiosity about survival strategies has been the hospitality industry, notably pubs and restaurants, where a decent proportion of costs are staff wages. The forthright JD Wetherspoon chairman, Tim Martin, claimed in the chain's recent results that pub wages are equal to 30 per cent of sales. This means, he therefore claims, that the NLW will "inevitably [put] financial pressure on pubs". He goes further by adding that the likely price increases to cope with the rise in wages will be felt mostly in less affluent areas and so add to the existing "serious problems of empty shops and dereliction" in these areas.

The NLW will mandate a £7.20 an hour wage for workers aged 25 and above from April. Those aged 24 and under will remain under the national minimum wage, which usually rises in October across its existing bands (eg, 18-20, under 18).

A detailed analysis by the Resolution Foundation think-tank believes the rises are affordable for UK plc, but it acknowledged that 46 per cent of all those affected - equivalent to 2.7m people - work in just three industries: wholesale and retail, hospitality and support services. Indeed, in hospitality, the body said, nearly every second employee (48 per cent) will be impacted, meaning "by far the biggest [wage bill increase] is expected to be in hospitality", with a "3.4 percentage point increase in its wage bill by 2020... twice that of any other industry".

 

 

Steady as she goes

Many companies have, predictably, been on the defensive so far in statements since Mr Osborne's emergency Budget. Costa Coffee and Premier Inn-owner Whitbread (WTB) said it was "developing plans" to deal with the NLW and would mitigate the "substantial cost increase" through productivity improvements, efficiency savings and "some selective price increases". Mitchells & Butlers (MAB), which employs more than 42,000 people, said the move "will have an impact on our cost base" and added it was "assessing a wide range of options to mitigate the impact".

Pub company Marston's (MARS) said the NLW was only "modestly greater" than its expected wage costs. Management said it had predicted increases above the rate of inflation and with the lower rate of corporation tax from 2017 it therefore felt it could digest the increased wage costs. At a recent press event, management also highlighted that corporation tax was falling, meaning this would mitigate the rising wage impact to some degree.

Pubs and hotels group Adnams (ADB) said it had "restructured elements" of its pay arrangements recently, including "moving lower paid staff towards receipt of the living wage", adding that hotel staff had been the biggest beneficiaries. This appears to suggest it still has work to do.

But companies will soon have to finalise exactly what they are doing and communicate it to the market, especially given the disproportionate impact highlighted by the Resolution Foundation report.

Martin Couchman, deputy chief executive of the British Hospitality Association (BHA), said he "agreed with everything" in the report, adding that if the £9.35 rate in 2020 is reached "that is 7 per cent compound [growth] a year" for wages in the hospitality sector.

"Two-thirds of the workforce is over 25," he said. "A very high proportion are not on the living wage or more, so it will be very expensive." The cost could also be even greater if companies have to maintain differentials between pay levels. If the lowest paid are getting nearly the same as those on the rung above them, the latter's pay may also need to rise.

Another "worrying thing" Mr Couchman highlighted was the move by credit rating agency Moody's after the emergency Budget to warn about the industry's ability to cope with the wage rises.

 

Life aids

On a macroeconomic level, inflation is relatively benign at the moment, which means the cost of food and drink is not rising strongly. This is something Restaurant Group (RTN) chief executive Danny Breithaupt mentioned at the time of its latest results. The low cost of food helped margins rise at the group and this could be a trend that persists given expectations for inflation to remain low, due to factors such as the low oil price.

Elsewhere, the chancellor did throw employers one bone in the form of reduced and falling corporation tax - it is set to reach 18 per cent in 2020, which the Treasury claims will help more than 1m businesses.

But there is hope more can be done. Mr Couchman said the BHA had been running a campaign - supported by members including Merlin Entertainments (MERL) - to cut the level of VAT on tourism-based attractions to 5 per cent. He suggested that, while a cut in VAT would initially hit Treasury coffers, the competitiveness of UK tourism would mean the sector would be boosted and likely pay more in tax.

 

 

Given its focus on low prices, JD Wetherspoon could be one of the companies hit hardest by the NLW

 

Expert's view: Clear plan needed

The National Living Wage is an ambitious - and welcome - move on low pay from the government. Six million workers are in line to see a pay rise because of the policy. Despite the inevitable business backlash, in most industries the additional wage costs are modest and companies should adapt relatively easily to the higher wage floor.

But it's clear that it will be more challenging in the lowest-paying sectors, such as hospitality. We estimate that in 2020 nearly half of all hospitality workers will receive a pay rise, including both those currently earning less than the NLW and workers further up the ladder as companies choose to retain pay differentials between roles. With more than 600,000 workers potentially affected, we'd expect the wage bill across the sector to increase by 3.4 per cent.

The big unknown is how employers will react. After the introduction of the national minimum wage, there's evidence that prices rose faster in fast-food restaurants and canteens than other, less-affected sectors. Some will take a hit to their profits. In smaller companies, owners may choose to work longer hours themselves and reduce the number of hours worked by staff. Employers may also compress pay grades, with more employees on the same pay level. The consequences of this for progression are more troubling.

But a higher wage floor can also reduce staff turnover, thereby lowering recruitment expenditure. And research suggests that some employers may have increased productivity in response to higher wages. This is the big win government should be targeting.

A bold move like this needs a clear plan for implementation so it's crucial that the government engage with the hospitality industry to identify ways that productivity could be boosted to ensure the NLW is a success.

Conor D'Arcy, Resolution Foundation policy analyst