The National Living Wage that was introduced in the UK on 1st April constituted a seismic shift in the retail landscape. Amongst other industries that employ low-wage workers, retail stands out because of its highly competitive nature and often tight profit margins. In this article, we will cover two areas: 1) ways in which we will be challenged by the National Living Wage (hereafter NLW) 2) what we as retailers can do to mitigate the negative effects these challenges might introduce.

Before we look in more detail at what can be done, let’s establish exactly what has changed. The Department for Business Innovation & Skills lists the following description of NLW:

“From 1 April 2016, the government introduced a new mandatory national living wage (NLW) for workers aged 25 and above, initially set at £7.20 – a rise of 50p relative to the current National Minimum Wage (NMW) rate… The adult NMW rate is currently £6.70. This will continue to apply for those aged 21 to 24.”

The government has also set a further target of incrementally increasing the NLW to £9.00 an hour by 2020.


How will this challenge us?

Challenges will vary a great deal based on individual circumstances. However, there are some common factors that most retailers will experience:

  • Pay differentials. 1/3 of low-wage workers employed in UK retail are below the age of 25. However, the NLW does not apply to these employees. Thus, we will need to act to mitigate the effects of the pay differential amongst low-wage employees.
  • Wage squeezing. Higher performing, higher paid workers now see their wages are sometimes equal to those of employees who have received an increase via NLW. They would reasonably expect to see their wages rise in equally to recognise their responsibilities/skills.
  • Motivation. Businesses will naturally try to offset the increased costs of the above by reducing staff benefits. Some staff will accept these changes easily and others will not.

Chief Economist for the Chartered Institute of Personnel Mark Beatson has this to say on the NLW:

“Simply making low-paid labour more expensive is not the answer and the Government shouldn’t be surprised if some employers choose easier options, such as reducing hours, chipping away at other benefits or making a less generous pay award the next time pay is reviewed,”

Additionally, Brexit has introduced another layer of uncertainty that will increase economic pressures on retailers and decrease consumer confidence.

Symbol of scales is made of stones on the cliff

What can we do to mitigate the effects?

We have identified four main areas that retailers can focus on in order to address the challenges caused by the NLW.

1. Calculate the effect on your business

Reports compiled by the Centre for Retail Research suggest that in the first year retailers can expect to pay over £1million more in wages for low-paid workers over 25. However, these calculations recognise that figures will vary widely based on hours worked and percentage of employees working part time. Because of the varying factors in retail operating costs, it will be important to conduct a thorough review of your wage-structures.


2. Review organisational structures, particularly focusing on cross-channel integration

The increased cost from the NLW will prompt retailers to fast-track omni-channel projects to ensure the talent at their disposal is used efficiently. This is not a surprise as we know there are significant productivity gains to be made in breaking down inter-departmental silos.

Examining your general operation efficiency is also beneficial at this stage. This is an optimal time to review all your business processes to ensure they are lean and labour efficient.


3. Review your technology platform

New retail technology tools are being unveiled at pace. Rising costs might seem like a reason to reduce investments in experimental technology; however, a clear understanding of what is on the market and worth investing in is paramount to maintaining the competitive edge in difficult times.

Tools already exist that can give you an edge in operational efficiency. For example, Vision Critical is a customer feedback mechanism already in use at Asda that helps to better target product investment to cater to your customers.  Another example is Beekeeper, an app that can be used to keep in contact with employees that are not set up with email addresses like shop floor staff.  Effective use of tools like these can provide significant cost savings. We would also suggest keeping apprised of technologies that can reduce your labour burden e.g. self service machines.


4. Invest based on your findings

Acting to cut costs based on limited information is never a good idea. Avoid this by thoroughly following the first three steps in this process. Reviewing your organisation and technology platform will no doubt suggest many changes of varying significance.

As we develop strategies to fund this cost increase in the midst of economic uncertainty exacerbated by Brexit, we will also need to think carefully about the macro economic importance of keeping employment levels up to fuel consumer spending. With pressures on balance sheets from all quarters, thorough and careful economic planning is essential.

Now more than ever, you need to ensure you have the direction, tools and investment required for success.