Grocers’ living wage headache
THE true impact of the living wage on Britain’s embattled retailers was laid bare in analysis by research firm Moody’s.
The grocers will be the most affected and predictions contained in the study gave investors in the three biggest listed supermarkets food for thought.
Morrisons fell 1.4p to 182.5p while Tesco was up 1.05p to 215.7p. Sainsbury’s made a 4.1p gain to finish at 264.9p.
In the Budget, George Osborne unveiled the National Living Wage with an ultimate aim to force employers to pay at least £9 an hour to workers over the age of 25, by 2020.
The first step will see workers over the age of 25 receive £7.20 from next April.
This means the minimum wage will rise by around 44pc by April 2020 and will increase the pay of 6m of the UK’s 31m workers.
Labour is the second-largest cost after the purchase of the items retailers sell.
Wages make up between 9pc and 15pc as a percentage of sales.
Sven Reinke, an analyst at Moody’s, wrote: ‘The plan for further annual increases to a target of more than £9 by 2020 has the potential to meaningfully erode profits if retailers are unable to adapt their operating systems and cost structures.’
This is not good news for the already troubled retail sector. Shoppers have fled to the discounters such as Aldi, Lidl, and Poundland (up 1.1p to 337.2p) and have changed their shopping habits.
Most are ordering items online and making more frequent shopping trips closer to home. The report also suggested supermarkets may close stores or hire staff below the age of 25.
The retail sector is one of the UK’s largest employers of low-paid workers. The food retail sector in general is more labour-intense than fashion and clothing retail.
For example, the ‘Big Four’ grocers Tesco, Morrisons, Sainsbury’s and Asda together employ approximately 750,000 workers.
According to the British Retail Consortium, the median hourly wage in the retail industry is £7.30.
For Tesco and Morrisons a 5pc increase in labour costs in 2017, if the firms do not attempt to offset the rise, would lower their operating profit by around 7pc and 10pc, respectively.
This is not good news for the two firms that have lost market share, seen sales slump and have new management attempting to turn their businesses around.
But it was the miners who dragged down the FTSE 100 index of leading stocks which fell 0.41pc or 27.41 points to 6696.28.
Fears of a slowdown in demand for com- modities from the key Chinese market dragged down the biggest mining stocks.
Antofagasta fell 13.5p to 567p and Glencore was down 3p to 208p as copper and metals prices dropped.
Another big faller was Holiday Inn owner InterContinental Hotels Group down 45p to 2698p after investors digested the denial that it had held merger talks with rival Starwood. The stock had shot up yesterday on the back of speculation in the Financial Times which has now been denied.
Cruise ship operator Carnival saw its shares jump 5.2pc or 176p to 3552p after its rival Royal Caribbean increased its annual profit forecast.
Shares in JD Sports rose 58.5p to an alltime high of 805p after the retailer, which sells sports fashion popular with youths, lifted its profit forecasts. Shoppers snapping up exclusive Nike and Adidas trainers will fuel a 10pc increase in the £110m profit target it had expected. Chairman Peter Cowgill said: ‘ We now anticipate that the headline profit before tax for the current year will be approximately 10pc ahead of the current consensus market expectations.’
However he did say that the profit margin had been hit by a currency weakness with the euro, but Kate Calvert, an analyst at broker Investec, said: ‘An unscheduled trading update shows the group is firmly ahead of plan.’
She said that it will also benefit from diversifying into womenswear and own-label.
In the smaller caps, Chime, the PR firm created by Baroness Thatcher’s former adviser Lord Bell, rose 15.75p to 361p after it agreed to a £374m takeover by Sir Martin Sorrell’s marketing and advertising giant WPP and US buyout firm Providence Equity Partners.
Chime, which owns a raft of PR agencies as well as a specialist sports marketing business called CSM, which is chaired by former Olympian Lord Coe, said the group will be sold at 365p a share.
The deal was a 33pc premium to the share price on July 29, the day before talks over the sale were announced.
Chime’s existing management team is to remain with the firm and the deal is expected to be completed by the end of the year. ÷ EMIRATES National Oil Company’s £1.7bn bid for the remainder of Dragon Oil has won the backing of 30pc of minority shareholders. ENOC, which already owned 54pc, has offered £1.7bn to buy the rest, which values the whole group at £3.7bn. The deadline for the offer has now been extended until August 28 but the bid has prompted a row between shareholders. Dragon’s shares rose 11p to 733p.