- Hospitality hit hardest by living wage hike
- Site expansion key to profit growth
JD Wetherspoon (JDW) chairman Tim Martin took the opportunity to advance his crusade against supermarkets in the group’s latest trading update.
His primary complaint – which he has made since 2010 if not earlier – is the price differential between a pint purchased in Tesco (TSCO) or Sainsbury’s (SBRY) and one served in his establishments. This is important given his pub group is competing with off-trade sales as much as other venues, and higher labour costs will widenthis divide.
If labour costs increase by 10 per cent – as they will when the national living wage goes up to £11.44 an hour in April – supermarkets will have to increase the price of a pint by just 1p, from an average of around £1, Martin estimates, making labour costs 10p a pint. But in a pub that sells pints at £4.50 each, labour costs are around £1.35 – meaning proprietors will have to boost the price of a beer by 13.5p to keep up.
“At the same time, pubs pay far higher VAT and business rates than supermarkets, further exacerbating the price disparity,” the Wetherspoons chair added. Martin has never been shy about making political interventions on behalf of his business, but he’s not the only one concerned about rising wage bills.
Alex Baldock, the chief executive of electricals retailer Curry’s (CURY), claimed late last year that a simultaneous hike in both business rates and the national living wage “shows how little the government appears to understand or care” about retail.
Between the pandemic and the subsequent inflationary spiral, investors in both retail and hospitality have had a trying few years. Now, if Martin and Baldock are to be believed, government policy could further limit growth in these already-strained sectors. But recent analysis by Panmure Gordon shows that cost pressures will not be felt equally by all businesses.
At cafe-bar chain Loungers (LGRS), wages already represent 47.3 per cent of total operating costs – the highest ratio of any consumer group in its coverage. At Wetherspoons, 40 per cent of operating costs go to paying salaries. Mitchells & Butlers (MAB) and Fuller Smith & Turner (FSTA) both noted higher wages in recent updates, but also highlighted expansion plans. "Looking forward, while we face significant rises in the national living wage and business rates, we have exciting plans in place to grow the business," said Fuller Smith & Turner chief executive Simon Emeny.
Meanwhile, the retailer most exposed to increased staff costs is Games Workshop (GAW), with pay accounting for just over 39 per cent of the group’s operating costs. At Curry’s, by comparison, this number is 9.9 per cent. Games Workshop aside, the figures are confirmation, were it needed, that hospitality businesses are the most exposed to wage rises.
“You’re going to see the whole industry having to increase prices in April to offset wage inflation. The problem a lot of pubs will have is that consumers will not want to pay eight or nine pounds for a pint of beer,” said Panmure analyst Alex Chatterton.
In this environment, the operators best placed to pass on price increases are the ones already perceived to offer good value for money, or those that have built up significant customer loyalty. “ “A company like Greggs (GRG), which is a kind of British icon, should also be able to weather the storm better than a casual dining chain where you’re paying £20 for a burger. It’s a completely different price point.”
Greggs itself said higher wages could mean more spent on sausage rolls. "Wage inflation remains, although higher rates of pay across the economy will also provide support to consumer incomes," the company said.
Expansion plans – or a lack thereof – are also an indicator of how management teams rate their chances in the current climate. Greggs expects to open between 140 and 160 new shops in the current financial year, while Loungers is accelerating its site opening programme and expects to add 34 new locations in the same period. By contrast, Curry’s has closed some 24 stores in the UK and Ireland over the past three years and is currently completing the disposal of its Greek business.
“There are a dwindling number of operators that are financially willing and able to expand their estates,” said Mark Irvine-Fortescue, a consumer-sector analyst at Stifel. “If you can spread fixed costs over a growing business, then companies can still grow profits. But generating like-for-like profits across the same numbers of pubs, restaurants or cafes looks pretty hard in this environment.”
Although the likes of Loungers look particularly exposed to rising wages, this won’t automatically result in falling revenue and profit figures. With its reputation for providing good-value food and drink, Wetherspoons isn’t likely to be hit hardest either. While there’s no doubt that cost pressures are a drag on retail and hospitality growth, savvy operators should be able to defy the gloom.
