Labour costs and fair pay deals should not alarm investors
As another Labour day came and went, investors might think about workers — or at least, their effect on the bottom line of listed firms. Businesses have been responding to the largest minimum wage hike in history to $17.70 this year. The Government has indicated it will increase to $20 from April 2021.
Add to this the somewhat stalled threat of Fair Pay Agreements, which would see minimum pay set across entire industries, and it’s easy to see cause for concern.
Restaurant Brands highlighted the effect of increased labour costs in its first-half results this month. Earnings before interest tax depreciation and amortisation at its local Pizza Hut unit of 100 stores, fell from 7.1 per cent of sales to 2.1 per cent of sales compared with the same half last year.
Jarden analysts Andrew Steele and Lily Zhuang said in a note that while the first half result was better than expected, it was tempered by wage pressures.
The company’s star division, KFC, which had margins of 21.6 per cent, has told the market it won’t be able to maintain this level due to wages.
Technology is often assumed to be a fix for rising pay but it is early days and chief executive Russel Creedy says having customers order their chicken through electronic kiosks doesn’t yet mean a reduction in staff.
Instead, those till operators are now likely to be found on the restaurant floor in a concierge-type role, improving service. But as Restaurant Brands prepares to spend $100 million for a US beachhead to continue geographical diversification, it looks well balanced to combat wage inflation.
Fortunately for KFC investors, any progress on Fair Pay Agreements won’t double down the impact of rising employee costs.
The reality is wages are relatively high already, so they are unlikely to be impacted further by these agreements. Restaurant Brands already pays an average wage of $21, although it’s probably worth pointing out if Creedy worked a 40-hour week his pay would be $500 an hour. That’s ignoring what he gets in shares.
The work has already been done by the unions. Fair Pay Agreements are targeted at industries where union membership is low, with the working group on the issue highlighting areas where workers are paid less than $20 per hour.
Should the Government get a move on with FPAs, it would appear SkyCity is directly exposed because security workers and cleaners are likely to be among the first to sign up.
But the casino operator has committed to a minimum wage of $20 per hour, a year earlier than the Government target. It also continues to look for tech to help, replacing security staff with cameras and bringing in more electronic tables for games like roulette.
So while the business lobby agitates about the threat of FPAs, there is little for SkyCity investors to fear on that front — the casino already has a significant union presence lifting wages. Union leaders will say they don’t need FPAs, Government is doing their work for them.
Reporting requirements for listed firms mean unions can much more easily point out perceived unfairness because they know exactly how much profit the company makes and what top executives earn.
Supermarket workers are the other group expected to sign up for FPAs, as NZ has 15,600 operators and cashiers, 91 per cent of whom are paid less than $20 an hour.
But the reporting structures of the major players — Woolworths-owned Countdown and the north and south Foodstuffs co-operatives — make it hard to work out their wage bills.
Investors might want to consider the impact of the aged-care pay equity deal that in 2017 saw workers on the then minimum wage of $15.75 per hour move to at least $19 per hour, a 21 per cent pay rise.
While the aged-care sector warned of a $500m hit for the industry the sky hasn’t fallen yet, although state subsidies make it hard to tell.
Reviewing the annual reports of Oceania Healthcare and Metlifecare shows low single-digit per cent increases in wages as a per cent of revenue in the past three years. This is after you strip out the paper gains these companies book from property valuation rises. Ryman Healthcare, the other major NZX-listed retirement village operator, doesn’t separate out wage costs in its annual report.
NZX minnow Green Cross Health has been vocal about the pay equity deal’s challenges for its community health unit but it still lifted net profit in the March 2019 year.
Rising wages do impact firms but not all companies are created equal. The smaller business owner might beware of fair pay but the blue-chip investor should not.