- Hospitality pressures
- Changes to the gig economy
June’s sweltering weather coincided with news of a hot labour market. Official data published this month shows that wage growth is still strong, particularly in areas such as business services and manufacturing. Between February and April, average UK pay climbed by 7.2 per cent year on year – ahead of consensus forecasts – partly influenced by an increase in the national living wage.
Meanwhile, the UK’s unemployment rate edged up by just a tenth of a percentage point to 3.8 per cent, meaning it remains close to a record low.
The tightness of the labour market is alarming economists. “At a time when inflation is far too high, the goal is to cool activity sufficiently to ease demand and thereby price pressures – with returning wage growth closer to productivity growth an important intermediate step,” said Investec economics commentator Sandra Horsfield. “The scorecard in this respect is disappointing.”
One sector that should be feeling chipper, however, is recruitment. Higher wages mean higher fees and – in theory – a shortage of workers should drive demand for headhunting skills. In reality, though, recruiters are out of favour. Shares in PageGroup (PAGE), Hays (HAS), SThree (STEM) and Staffline (STAF) have fallen by between 9 and 20 per cent since the start of the year, and the groups have flagged “ongoing challenging market conditions”.
Robert Walters (RWA) has had the roughest ride so far, however. This month, it warned that profits for 2023 would be “significantly lower” than the market expected, causing shares to tumble by 15 per cent. They are down by 24 per cent since January.
While candidate shortages and wage inflation remain “solid”, Robert Walters said candidate confidence is low and companies are dithering over hiring decisions. As such, net fee income in April and May was down by 10 per cent year on year.
SThree – which fills white-collar jobs in science, technology, engineering and finance – has been somewhat protected by its focus on “flexible talent”. Contract work generates about 80 per cent of group fees, and achieved “modest” growth in the first half of 2023. However, gross profit still dipped by 2 per cent in the period, driven by a 19 per cent decline in permanent fees, and analysts have lowered their forecasts accordingly.
A decline in the number of unfilled jobs in the UK goes some way to explaining the gloom. For a while, rising wages have grabbed the headlines and vacancies have been quietly falling since October.
The Office for National Statistics (ONS) said that this “reflects uncertainty across industries, as survey respondents continue to cite economic pressures as a factor in holding back on recruitment”.
The unusual conditions are making recruiters jumpy, and while the job market is moving towards stasis, this is not the case in boardrooms. Steve Ingham was replaced by Nick Kirk as PageGroup’s chief executive on 1 January, after 16 years in the job. Not long after, Toby Fowlston replaced Robert Walters, who founded his namesake firm in 1985, and Hays started looking for a replacement for Alistair Cox, who is stepping down after 15 years at the helm.
“Their departures, or announcements of their plans, do seem to be coinciding with a marked downturn in their charges’ fortunes,” said AJ Bell investment director Russ Mould.
There has also been a flurry of buybacks in recent months, in a bid to prop up share prices. In May, Robert Walters announced plans to repurchase up to £10mn of shares by September. Meanwhile, PageGroup spent £276mn buying back shares in 2022, and Hays extended its buyback scheme in February of this year. Given the poorer outlook, investors may be questioning whether this is a wise use of cash.
Adding to the problem are recruiters’ own people costs. During the post-pandemic boom, thousands of new consultants were taken on, but now business has slowed down they are proving burdensome. Robert Walters said “appropriate cost reduction is central to the management of the current short-term pressure” but said it would protect its “strategic core to ensure we can fully benefit from future growth opportunities as they arise”.
Analysts at Investec were encouraged by this, and said that the group’s share price represented a “good entry point for those willing to be patient and ride out what is, in our view, a dysfunctional, nonsensical market paradigm”. The labour market may have more surprises up its sleeve, however.
More over-50s behind the bar
Vacancy numbers may be falling, but certain sectors are still feeling the strain from labour shortages as they adapt to a new post-Brexit employment landscape.
The hospitality sector has been among the worst-hit by a lack of workers. According to the Office for National Statistics (ONS), there were 127,000 accommodation and food service vacancies between March and May this year. Numbers have fallen from the highs seen in the spring and summer of 2022, but the latest figure is still 30 per cent up on the same period in 2019.
A fall in EU migration and older people leaving the workforce has meant that companies are having to look to different pools of workers to plug the labour gap. Pub operator Fuller, Smith & Turner (FSTA) has taken the approach of bringing in more pint pullers at both ends of the working-age spectrum. It is also recruiting more people with intellectual disabilities as part of its bid to keep up with demand after having to shorten opening hours last summer due to a lack of workers.
But it is unclear whether employing more over-50s is a long-term solution. The latest quarterly data from the ONS showed that in January to March this year, the economic inactivity rate amongst 50 to 64-year-olds rose, while the overall decrease in inactivity was driven by those aged 16 to 24.
In the retail space, the situation is more positive: vacancies are at pre-pandemic levels, and there are indications that wage growth has driven consumer spending higher.
Next (NXT) said this week that better-than-expected trading in the first seven weeks of its second quarter had been helped by increases in consumer real incomes in April. “We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards,” said management.
Investec analysts said Next’s update was "positive for all clothing retailers", highlighting Primark owner Associated British Foods (ABF), boohoo (BOO), Asos (ASC), Marks and Spencer (MKS) and JD Sports (JD).
However, retail and hospitality margins will remain under pressure from wage growth amongst their own staff, given that the Low Pay Commission expects the national living wage to rise by 7.1 per cent in 2024.
Gig worker rights
Alongside the higher wages being paid to contracted workers, those doing gig economy work for companies such as Deliveroo (ROO) and Just Eat (JET) could be in line for more stable income thanks to government intervention.
The European Council said last week that it would negotiate with the European Parliament to “help millions of gig workers gain access to employment rights”. Under the Council’s proposals, workers at companies that put a limit on the amount of money they can receive, restrict their ability to turn down work, and have rules around their clothing and conduct, would be legally assumed to be employees rather than self-employed.
Swedish minister for working life, Paulina Brandberg, said that “the gig economy has brought many benefits to our lives, but this must not come at the expense of workers’ rights”.
There has also been action across the Atlantic. New York Mayor Eric Adams recently announced the implementation of a minimum wage of $17.96 (£14) an hour for gig economy delivery workers in the Big Apple. This was not greeted positively by Uber Eats, which accused the city of “lying to delivery workers”.
Numis analysts argued that “Deliveroo is the clear winner [from the two policy developments, compared with Just Eat],” given that it doesn’t operate in North America, and because the broker thinks the European Council stance validates its ‘logistics’ business model.
The delivery workforce in the UK is still self-employed, unlike Uber (US:UBER) drivers, for example, and the focus is still on cutting jobs rather than finding workers. Earlier this year, Just Eat got rid of 1,700 couriers it had hired as part of a "worker model" experiment.
For Just Eat, the analysts “fear [the NYC move] may only increase the competitive intensity in the near term as the importance of scale rises”, while the EU policy trajectory “likely results in increased competitive intensity in Just Eat’s key profit pools”.
Just Eat’s shares have lost 40 per cent of their value in the year to date as order numbers have contracted, and the consensus forecast for its loss per share for this year is up 40 per cent to €2.32 (£2) a share. The outlook for Deliveroo is rosier: Analysts have dropped their forecasts for Deliveroo's loss per share for this year from 5.6p in January to 3.2p as of this week, while its share price is up 18 per cent in the year to date.
