Operators and commentators tell M&C what impact they think yesterday’s Budget announcements, including the introduction of a National Living Wage, will have on the sector.
Peter Borg-Neal, chief executive of Oakman Inns, said: “My first reaction is to say that I will be very disappointed if the main focus for our sector is the introduction of the compulsory Living Wage. Certainly, it will be a potential own goal, in image terms, if the industry responds with dreary negativity about these changes at a time when people like Keith Knowles and his Perceptions Group are trying to lift our image as an attractive place to work in. From an Oakman Inns perspective we have already taken the decision to ensure that everyone who has been through the first few stages of our ‘Oakmanology’ training with us will be earning £7.85 per hour or more. Therefore, this rebadging of the minimum wage will have no cost impact on us. Furthermore, the Living Wage in combination with the rise in the lower tax threshold means that younger workers across the country will have a little more disposal income – which it is great news for our sector.
“The other positive highlights are the reduction in Corporation Tax rates and the increased investment allowances. I am also relieved that the changes in Entrepreneur Relief will not effect business founders - who after all are the people who take the upfront risk.
“So what disappoints me? Well, I think any sensible analysis of the way business is taxed in the UK would indicate that SMEs are still bearing a disproportionate tax burden compared to multinational companies who are able to move profits offshore. Most real growth in the economy is generated by SMEs and we deserve the oxygen of a lighter tax relief. I would like to see George Osborne, who increasingly impresses as Chancellor, deliver some radical changes in this area over the course of this Parliament. I am attending a business briefing with Mr Osborne at the London Stock Exchange today and I will be making this very point.
“One thing that I am a little worried about is the changes to taxation on acquired goodwill. At first glance this appears to have the potential to negatively impact on M&A activity.
“But all in all we, as a sector, should be a little bit relieved and a little bit pleased with this budget.”
Analyst Jamie Rollo, of Morgan Stanley, said: “The UK Government’s surprise introduction of a £9 National Living Wage (NLW) by 2020, 34% above 2015’s £6.70 national minimum wage, could have a material impact on a sector where labour costs average 25% of sales and operating margins average 10%. We see the largest hit at UK managed pub companies, bookmakers, tour operators, and hoteliers, with a potential impact range of 4- 21% to PBT just for the step-up in 2016. While there could be a commensurate demand offset from higher disposable income, the simultaneous proposals to reduce welfare spending mean UK household income will effectively be little changed, meaning the NLW will feel like a straight tax on UK employers.
“Labour cost is the largest operating cost for most quoted leisure and hospitality operators, particularly the managed pub, betting, travel and hotel companies. For the companies under our coverage labour averages 24% of total sales, with the majority of this coming from employees on or just above the minimum wage. Many operators have low profit margins (10% is the sector average, with a spread of 4-44%), so with most companies having wage costs in excess of their profits, small changes in the NLW can have a big impact on profits. For example, Wetherspoon is close to a 100% UK pub operator, has EBIT margins of just 7%, and staff costs of 23% of sales.”
Douglas Jack, of Numis, said it had been a mixed Budget for the sector.
He said: “It should indirectly encourage higher revenues through raising disposable income, and reduce the corporation tax rate.
“Overall, we expect to cut PBT forecasts for 2016E (with year-ends after March) and 2017E for companies with managed operations to reflect the proposed 9% increase in the National Minimum Wage (NMW) from £6.50 now (£6.70 in October) to the new National Living Wage for over 25s at £7.20 in April 2016. This should then rise at a 5.7% CAGR to at least £9.00 in 2020.
“The impact will be influenced by the share of managed pub employees that are a) over 25, and b) over 25 and currently on the NMW. We would expect the majority of employees on the NMW to be under 25, with exposure to the NMW being even lower in London. However, we have to expect many employees who do not benefit directly from this legislation to still benefit from pay differentials being maintained.”
James Baer, managing director of Amber Taverns, said: “This is an unexpected and political announcement, long term it is manageable as long as the economy remains on track but I have to say London centric in its inception rather than Northern Powerhouse Friendly .
“If the welfare benefits cap is lower in the regions than in London then the same surely holds true for living / minimum wage ?
“Overall though Osborne has helped the industry big time with his actions on beer duty and the escalator so we have to hope this continues.”
Andre Blais, founder of Bodean’s, said: “£7.20 is fair and is still well below most other key European countries. I think labour cost in the UK is affordable for businesses. £9.00 by 2020 should be well in line with inflationary increasing costs. Our problem is the quality of resources for basic minimum wage. It is becoming more difficult to train non-primary English speaking employees.”
“The demand for high quality staff in our sector is ever so high but very little up take on low minimum wage, hence why we have few British of origin staff working in catering these days.”
Mark Robson, managing director of Red Mist Leisure, said: “In terms of the living wage I suspect the general feeling will be negative but I actually think this is quite a sensible policy. The majority of our staff who are over 25 hold responsible positions so are paid above this rate already. I don’t see it being a major problem although it will no doubt costs us a few extra pennies.
I am more disappointed that the Annual Investment Allowance were only increased to £200k rather than the £500k that they are this year. That will affect us more and given we can claim this in two separate companies this could cost us £120k / annum in lost savings against corporation tax write off.”
Andrew Lennox, managing director of Koh Thai Tapas, said: “At KTT we welcome the increase in minimum wage by 2020. Over the last year we have been actively looking at ways to take the whole company to the “Living Wage”. The cost are of course massive to the restaurant industry and will take some thought, thankfully however we are ahead of the curve here and having been working toward this ultimate goal for some time. Exciting times ahead.”
Kate Nicholls, chief executive of the Association of Licensed Retailers, said the Chancellor’s talk of the need to create more jobs and giving employers greater powers to invest was encouraging.
She said: ”Licensed hospitality has shown how much investment in communities and people it can deliver over recent years and we need to make sure that this can be sustained, not undermined, if we are to play our part in delivering the additional jobs and apprenticeships the Chancellor wants.
“For that reason, we need to make sure that the Government takes into account legitimate business concerns in future discussions regarding the new National Living Wage – and crucially how it will relate to the NMW for younger workers. We need a thoughtful approach that will take into account the amount our workers take home, their total earnings and benefits such as pensions not just the headline hourly rate. We also need some sensitivity surrounding the timetable for introduction, with wage rounds currently planned around April.
“The Chancellor acknowledged that the change would hit employment in certain sectors and we would urge him to go further and faster in introducing changes to National Insurance Contributions for small businesses and in cutting corporation tax. It will be critical for the timings of the changes to be aligned and restricting these changes only to the Employment Allowance will limit the impact. We would like to see the abolition of jobs taxes extended from under 21s to under-25s.
“The Chancellor is right, the best way to help the lower paid workers is to allow them to keep more of the money they earn and the changes announced to Personal Allowance are set to put an extra £900 per year in the pockets of our workforce and consumers. Measures such as these have the dual effect of aiding both businesses and staff and we urge the Government to bear this in mind when he comes to consult on the National Living Wage. Having a higher hourly rate benefits no one if it is at the expense of a job.
“Finally, the Chancellor spoke of the need to increase training and create more jobs across the economy. Pubs doubled the number of apprenticeship starts last year and crucially all our training results in a real job at the end of it. We need to reduce the red tape surrounding apprenticeships and putting employers in the driving seat and rewarding those who invest in training through the PAYE regime is good news and something we have been campaigning on for some time. It is encouraging to see these acknowledged as vital areas for investment.
“The Government is clearly eager to provide businesses with a platform in which to invest. The key going forward must be that any increased costs are proportionate, sustainable and take into account the wider costs of doing business.”
Brigid Simmonds, chief executive of the British Beer & Pub Association, said: “There are some very welcome measures for beer and pub businesses, with the cut in Corporation Tax, reductions in the cost of Employers National Insurance, and the rise in the Annual Investment Allowance.
“Some of the measures, such as the Living Wage and reductions in tax credits, will have a knock-on effect on the cost of employment for pubs, so the tax cuts announced today are a welcome and necessary balancing measure.
“As well as the tax cuts announced, we will be looking to see that the Government continues to support brewing and pubs in other parts of the tax system, such as through future action on business rates and further cuts in beer duty, which are a big help to pubs.”
