Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Retailers and the Budget - counting the cost of the Living Wage

Retailers are starting to report on how they'll manage the introduction of George Osborne's Living Wage. Here we look at what the Living Wage means for retailers and emerging thoughts on the impact.

Budgets often come and go with little effect on retailers – as an ex-store manager, the biggest impact of many a budget was on the team who used to change the prices instore. My team dreaded a change in tobacco duty given the associated fiddly task of changing the price tickets on all the cigarettes.

However this year was markedly different, especially with the introduction of a living wage. Reaction has been consistent to its introduction – great for retail workers (at least in the short term), bad for business. The Guardian’s headline that the Living Wage could “devastate small retailers and push up prices” pretty much sums up the general mood: James Timpson (of Timpsons) tweeted it “is fantastic for colleagues. My worry is that it will lead to significant inflation. I don't see how it can't.”

So what can retailers do about the, up to, 25% pay increase for those at the lower end of the payscale? Let’s look at five options, going from the less desirable to the more likely.

Backed in to a corner

Retailers could look to protect their margins by trying to offset the increase with the corporation tax decrease (as B&M is doing). Equally, they could raise prices to protect margin. However consider the marketplace: food price deflation driven by price wars between retailers is helping keep inflation at 0%. Against this backdrop, increasing prices to protect your balance sheet is not a palatable option – yet those with little opportunity or experience in process improvement or business change may have little option.

Giving with one hand, but taking with the other

Internally, retailers could look at overall staff packages through offsetting an increase in pay with a reduction in pension contributions, or staff discount (offered by many retailers). At a time when retention is harder than ever in retail there would be a first-mover advantage in raising pay (IKEA have announced they will adopt the full wage by April 2016, and Sainsbury’s are implementing the April ’16 Living Wage this year). Yet there is equally a potential downside in swapping benefits for pay as cited by Sainsbury’s Chief Executive Mike Coupe: “I could take you to a room where there’d be a riot if we took away the discount card and increased base salary instead”.

Pushing for productivity

More likely to happen, is a further drive for automation and operational efficiency. Expect to see retailers really examine their operating model, productivity, process and customer patterns. Tighter labour and staff scheduling through flexible working arrangements and more part-time opportunities could help. We often work with retailers on this very subject, finding opportunities to reduce the overall cost base whilst also contributing to year-on-year sales increase.

Target your efforts

Equally, we may also see a greater focus on ‘value-add’ and service focused roles. These may be less affected by the Living Wage as they may already be higher paid or commission based; they also tend to have greater margin potential and lower scope for automation. Driving sales here through great customer experience and engagement could improve margin and offset the wage increase elsewhere in the shop.

Looking to the future

Could technology help? Would multichannel solutions help to drive additional value from the workforce? Opportunities such as instore fulfilment for online orders would increase the value derived from instore labour; location services could help better understand shopper behaviour and inform labour scheduling; Internet of Things, grids and devices could reduce manual check processes or drive replenishment accuracy and productivity.
The clock is ticking, retailers will need to act – those who drag their feet could see their best colleagues go to the competition. The fleet-of-foot will use it to find real opportunities to improve efficiency and use to set up their stores in a digital customer-centric fashion; the hasty will chop payroll and suffer the consequences of understaffed stores and poor service at a time where competition is everywhere.  One thing is for certain, doing nothing isn’t an option.

About the author

Nick Hoenig
Nick Hoenig
Nick is a Senior Consultant with experience in retail, change management and strategy and business planning. He has deep industry experience managing change programmes, building and executing strategies for large business divisions and leading big operational teams.

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