The food and drink sector set to pay for the Chancellor’s generosity to workers
By: Justin Wright Date: 22 October 2015
Category: Food and drink
George Osborne’s Budget announcement of a new ‘National Living Wage’ (NLW) to replace the National Minimum Wage (NMW)– and the news that it will rise steadily towards £9 an hour by 2020 – will be good news for low-paid workers in the food and drink industry. However, what does it mean for small producers, how will it affect investment decisions, and how can businesses mitigate the inevitable consequences for profitability?
The Chancellor’s ‘moral’ argument that the taxpayer should not be subsidising low-paying employers is a useful smokescreen, but the move will transfer a considerable burden onto businesses in our sector. And whilst some of these will be offset by savings in corporation tax and increases in the National Insurance Employment Allowance, these measures will not be put in place until after the NLW comes into effect (from April 2016, the NLW will be £7.20 an hour, compared with the current NMW of £6.50).
All of this comes at a time when employers are facing increased pension costs, squeezed margins and greater competition.
The government will argue that these measures are counter-balanced by a permanent Annual Investment Allowance of £200,000 and decreased corporation tax rates, but this assumes that hard-pressed businesses will have cash available for investment, and that they will be able to make a profit – both less likely with wage costs set to spiral (and all at a time of more or less zero inflation).
For food and drink producers, the opportunities to increase income by raising prices is very limited indeed, with a market dominated by powerful retailers, who are unwilling to absorb the extra costs or pass them on to their own customers.
Businesses in the sector will undoubtedly have to look at their cost base: reviewing how effectively to utilise their human resource, boosting productivity, and taking a long, hard look at their position in the marketplace and how their individual products are performing.
On a more positive note, as Annual Investment Allowances become permanent, capital planning can be done with greater certainty. As staff costs rise, there could well be a shift in balance between how tasks are undertaken. Investment in machinery to make the business more efficient becomes more attractive, and such mechanisation can also help improve the output per head.
This human productivity improvement is the key to business survival. We must hope that low-paid workers will be motivated by receiving the NLW, will become more engaged and hence work harder. Employers cannot afford for that not to happen. Now is the time for producers to examine their management style to see if they are really getting the most out of their staff.
Of course, there will also be scope to cut costs to compensate for the increased wage bill. Bonuses and overtime could suffer, and discretionary costs such as training and advertising might also face the chop. But these are important factors in the success of any business, and these could be false economies if they lead to falling sales or decreasing productivity.
Like it or not, the National Living Wage is coming, and it will, over the years, have a cumulative effect on profitability. It represents a burden the food and drink sector could well do without – but it just might provide the spur to boosting productivity which UK plc so badly needs.