Rise of National Living Wage not all gloom and doom for retailers

Since 1 April 2016, workers 25 and above must be paid £7.20 an hour (up from £6.50) in a series of gradual increases culminating with a National Living Wage of £9 an hour by 2020. The change is likely to be very popular with the affected 1.3 million workers but what does it mean for retailers and, more importantly, how can retailers implement the change positively? 

Which wage is which?

It would be easy to confuse the National Minimum Wage (NMW) with the National Living Wage (NLW). The NMW is the minimum wage an employer must legally pay an employee between the ages of 21 and 24. The exact NMW varies depending on the age of the workers and whether they are apprentices, and it will not be affected by the decision. The NLW is also a legal requirement but only affects workers 25 and over, who are not apprentices.

UK wage rates

 Minimum wage 21-24Minimum wage 25+
(‘National living wage’)
Is it law?YesYes
Which age group is covered?21 and older25 and older
How is it set?Negotiated settlement based on recommendations from business and trade unionsA % of median income currently at 55% it aims to reach 60% of medium income by 2020
Is there a London WeightingNo London WeightingNo London Weighting

Source: Living Wage Foundation

How does the new National Living Wage affect retailers?

There’s no denying an increase in wages is an extra challenge for UK retailers. Food giant Tesco, for example, estimates the first hike to £7.20 an hour will mean a total wage increase of almost 11%. But the Federation of Small Businesses believes it is those at the lower end of the pay scale, particularly in the “hospitality, retail and social care sectors” that will be the most affected.

Possible negative impacts on employers and workers alike have been the main focus of media outlets as the new NLW is being implemented. Among that list are possible job cuts ranging from the 60,000 predicted by The Office for Budget Responsibility all the way to the more dramatic 900,000 estimated by the British Retail Consortium, which factors in the apprenticeship to be implemented in 2017. Other consequences include reduced staff hours and cuts in benefits (e.g. pensions, employee discounts, free meals) or bonuses.

While there is also some worry that a higher NLW could spell higher prices for consumers, as employers try to recoup their profits, industry experts believe this is unlikely, as retailers “simply can’t afford to pass on any costs to customers without damaging brand loyalty.”

However, the impact of the new NLW is not all gloom and doom for retailers as there are many possible benefits associated with a better-paid workforce.

Looking on the bright side

As Sven Reinke, an analyst at the credit rating agency Moody explains, ultimately the higher NLW puts more money in the pockets of consumers and retailers could benefit as a consequence.

A better-paid workforce also tends to be a happier workforce. An independent study commissioned by the Living Wage Foundation looked at the consequences of a higher living wage in London. The results show that 80% of employers who implemented the Living Wage advocated by the organisation (£9.40) reported a higher quality of work and a drop in absenteeism by almost 25%.

This is confirmed by the Living Wage for Families Campaign, which found that a better wage leads to increased employee recruitment and retention, healthier communities and increased spending by employees locally.

Luxury retailer and manufacturer Burberry, who has earned full accreditation from the Foundation, embraces this philosophy. “We believe that all our employees should be treated fairly and in accordance with our ethical trading guidelines and pay is a significant part of that,” says CEO Christopher Bailey.

In marketing terms, being a more ethical employer can be a strong selling point for retailers, as it can become a hallmark of their brand and overall image. Employees are also the ones who interact with customers daily, thus making sure they feel appreciated is in the employer’s best interest. “They are the face of your company brand. It’s important that they believe in your company, so they can do a great job in making your customers happy. After all, a happy customer is a repeat customer,” explains Andre Lavoie, CEO of employment agency ClearCompany.

So it’s pretty clear that there are many benefits to a better-paid workforce but how can retailers, especially smaller ones, make the necessary changes that ensure both satisfied employees and their survival?

Thinking creatively

Following the announcement of the new NLW, the British Retail Consortium has been looking for solutions to “give retailers the flexibility needed to implement the Living Wage in a way that helps retail businesses and their workforce thrive.” They are advocating a review of current business rates, which it believes puts a “disproportionate burden on retail,” argues Chief Executive, Helen Dickinson.

According to The Retail Bulletin’s analysis, the new NLW also “brings with it an opportunity to introduce changes that deliver long term efficiencies.” Many experts agree the increase will ultimately require improvements in productivity. Since employers already paying the voluntary living wage have seen a link between higher pay and higher productivity “thanks to better motivated and more loyal staff,” the two seem to go hand in hand.

This is confirmed by a study conducted in the US to try to understand how giant warehouse retailer Costco remains profitable despite paying its employees 40% more than its rival Sam’s Club (part of the Wal-Mart empire). Costco’s presence in the top 5 best employers in the US every year is a great boon to its brand and image and a direct consequence of the way it pays its employees. But to remain profitable in light of higher wages, the retailer is “constantly looking for ways to increase efficiency” and can always count on a highly productive workforce, concludes the study.

While the new National Living Wage may cause some concerns initially, many experts believe it presents an opportunity for the retail sector to be more creative.  The benefits of a better-paid workforce are undeniable. Rather than focusing on the cost of wages, which leads to viewing employees as a burden, retailers need to focus on their potential to perform more productively and as representatives of the brand. Taking advantage of what happier workers have to offer should more than offset the cost of a higher NLW in the long run.