25 September 2015 | Graeme Davies
Much has been made of the Conservative government's attempt to take advantage of the enfeebled state of the Labour opposition by moving to plant its flag in the centre ground of British politics. And no policy embodies this more than the introduction of a 'living wage'.
The summer Budget saw George Osborne introduce plans to ramp up the minimum wage for over-25s to a living wage with the first increase from the current £6.70 to £7.20 an hour in April, planned to be a staging post on the way to £9 an hour by the end of this Parliament in 2020. There are many reasons for doing this, partly to improve the lot of the worst-paid, but also to make working more attractive to those whose benefits are being squeezed.
But for businesses whose operations are labour-intensive, the living wage threatens to pose significant challenges. Some argue that it will create more loyal workforces and reduce turnover of staff, but it will also pose challenges to profit margins as wage bills look set to soar.
Indeed, business groups such as the Confederation of British Industry have described the move as a 'gamble' that could harm the UK employment market with those offering care services in particular likely to have to pass on costs to government clients. And recruitment company Manpower waded into the debate earlier this month by saying the move was likely to hamper job creation.
With a 7.5 per cent wage rise for those on the lowest wages baked in for 2015, companies are going to have to look hard at areas of their businesses where they can make commensurate savings, or look to pass on the additional cost to their own customers. Interserve reckons it will see its wage bill rise by between £10 million and £15 million next year - the news sent its shares tumbling recently. The company reckons 10,000 of the 15,000 it employs in the UK will see their wages leap, and margins will suffer as a result. Mears Group estimates its extra costs at £5 million, or 10 per cent of profits.
The problem for many FM firms is that such is the rivalry in the sector they could struggle to pass on such costs to customers and will have to take a margin hit. Outside the FM sector, Whitbread, which runs coffee shops, hotels and restaurants, also admitted it will take a significant hit from the living wage - but it vowed to pass on costs to customers. Retailer Next devoted a significant portion of its results to discussing the effect that the living wage could have on its business and margins.
With the dual effect of wages rising sharply ahead of the prevailing rate of inflation and prices also potentially rising to cover such costs, the government's initiative could have the effect of reawakening inflation. Coupled with the fact that commodity prices, oil in particular, cannot stay this low, we could see inflation creeping back, which may allow FMs with inflation-linked contracts to recoup some of the extra costs. It could also pave the way for the Bank of England to set in train interest rate 'normalisation', although what that really means now after six years of near-zero interest rates is difficult to quantify.
Essentially, while the living wage is to be welcomed, it will bring big challenges for the FM sector for several years to come.
Graeme Davies writes for Investors Chronicle