How To Absorb The Impact of the National Living Wage in retail and catering

According to the British Retail Constitution, costs in the British retail industry grew by 33.8% in the decade 2004 - 2014, whilst consumer spending grew by only 2%.

Productivity, as measured by output per hour worked, has fallen as a result of this gap and the focus of this fall is in the low wage sector of the economy.

In a report issued this week by The Institute for Public Polling Research, it is claimed that the Chancellor's introduction of the National Living Wage (NLW) would add further to costs without delivering a boost to productivity.

At present, the sectors falling behind in productivity include retail, leisure, hotels and food.

Source: IPPR / Image Daily Telegraph

I'd like to share the data with you and present a case history from my own experience to show how the IPPR's conclusion can be avoided.

Overall, workers in low-wage sectors are 30% less productive than the rest of the UK economy. International comparisons are even more striking;

Source: IPPR / Image Daily Telegraph

In Belgium and Holland, low-wage workers are 50% and 40% more productive than their UK counterparts and the average for the countries shown was a 30% disparity.

Nor do the results show recent shortcomings. Over the last 40 years, Britain has lagged behind its European neighbours with only Belgium coming close in recent times.

The government's view is that productivity will be enhanced by increasing the NLW as it will encourage businesses to invest in productivity - enhancing technology and training.

There will be scope for technologies improving output in already high productivity areas such as manufacturing but far less so in retail and catering . Companies here are far more likely to raise prices, cut costs, reduce perks and cut back on training. 

Tim Martin, the founder of JD Wetherspoon, has been scathing in his criticism of the NLW and points to a labour cost percentage of 30% and growing. There have been several 'name-and-shame' articles in the press, reporting many popular catering chains reducing perks and overtime pay as a result of the NLW.

The challenge with the restaurant business is that labour is not truly a 'variable' cost, like food and beverage supply. These impact on the gross margin and if the number of guests falls or rises so the supply falls or rises, keeping the margin fairly steady. 

There is a minimum staffing requirement for front and back-of-house, thus creating a 'fixed' element. Typically, at off-peak times, the staff present are under employed, an outcome reflected in a high labour percentage. At busy times, staff numbers are increased to cope with demand but this by no means translates into truly 'variable' costs as it is impossible to have a fraction of a waiter. It's all or nothing.

There is a number of forecasting aids around and indeed Business Blueprints developed one for the Spur Steak & Grill chain where, through a programme called 'Tipi', the restaurants' labour percentage was in the mid-twenties, significantly less than Wetherspoons, Pizza Express, Gourmet Burger Kitchen and even Nando's.

The Tipi Programme™ forecast sales on an hour-by-hour basis and provided the restaurant general manager with a budget based on the staff hours needed to serve the forecast number of guests.

In that business, if the minimum wage rate increased, it was theoretically inevitable that the labour percentage would increase if there were no means to improve the productivity of waiting staff. Reducing their number would have upset guests. The only other routes were to increase prices or cut costs elsewhere, perhaps by reducing portion sizes or using inferior ingredients - none of these cost-cutting measures appealed. 

Plus, and an important plus, productivity is not naturally constant across kitchen and waiting staff members, although the payment to each does not reflect the range of productivities. 

I am sure that many of you will have made two consecutive trips to the same restaurant. Same menu, same decor, same food quality, same prices, same ambience but one was a joy and the other, a disaster.

A different waiter or even the same one having a 'bad hair day' can make the difference between the two events - one high productivity, one low, but the cost to the business is identical. 

The range of productivities does, however, present an opportunity in that by raising the skills of the poorer performers the average level of productivity rises.

Spur was able to achieve this through Business Blueprints' Magic Programme™ and, despite bi-annual hikes in minimum pay rates, the labour percentage remained steady at 25%, without price increases.

The technique applied took the form of five weekly one-hour modules with waiting and kitchen staff.

Half of the session was devoted to a re-cap on one of the Magic modules (listening, body language, memory enhancement etc.) covered in their induction training and the remainder focused on a practical topic such as listing customers' names, check-back technique and tips for spotting guests needing service.

The second half was made more effective by using one of the 'star' performers to lead the group as this moved the session from theoretical to practical and achievable. 

The essence of 'Magic' is the creation and promotion of self-belief, which leads people to tackle tasks that previously they would not have believed possible.

By instilling this belief and harnessing it to examples of their peers successfully completing demanding tasks, the team embraced novel techniques and delivered enhanced productivities.

If you'd like to learn more about Magic™ please give me a call on 07774 137721 - or, you can download Part 1 of Magic for Mall for free.