Once again, with the living wage, the government has shown a naïve lack of real-world understanding about how policies actually translate into practice, writes Dan Murphy, partner at management consultant Kurt Salmon.
As with the Sunday trading proposals earlier this year, if politicians had actually bothered to ask retailers what they thought, they would have realised their policies would harm employee/employer relationships and lead to both internal and external criticism.
UK retailers are under such a variety of pressures – price pressure from the discounters, margin pressures as a result of rising costs, huge investments in ecommerce and in particular servicing home delivery, increases in business rates, and so on – they were never simply going to be able to absorb the minimum wage hikes without taking mitigating action elsewhere. To expect them to swallow a significant increase in wage costs without something giving was unrealistic in the extreme.
“Any increases in costs usually drop straight to the bottom line”
A recent British Retail Consortium report examined the pressures on UK retailers and concluded that our big retailers face cost increases of between £1bn and £3bn over the next five years, which is likely to lead to 900,000 fewer jobs in retail by 2020. Retailers have very high levels of operational leverage, so any increases in costs usually drop straight to the bottom line.
Some of our European retail cousins, such as Spanish retailer Mercadona, manage to offer wages as much as 20% higher than the national minimum scale, yet still maintain above-average levels of profitability. UK retailers could learn lessons from the Mercadonas of this world, but the trouble is, they are under so much pressure that they rarely have the time to consider best practice in other countries. They are desperately trying to keep their heads above water.
An understandable knee-jerk reaction to managing higher operating costs would be to cut staff, but this would have a knock-on effect on sales and, with the latest unemployment figures showing an increase, retailers will be anxious not to add to the 1.7 million unemployed.
Rather, retailers should look at changing their staff labour and operating models to increase productivity. We know from store productivity projects we have carried out that this could improve profitability by 12%-15%, so the higher running costs can be absorbed without losing staff.
Dan Murphy is partner at management consultant Kurt Salmon