Cumulative impact of the living wage, and how to solve it

The reason most restaurant companies don’t reduce labour costs, is because most restaurant companies don’t reduce labour costs 

With the planned rise in the living wage of 9.7% to £11.44/hour next year, we will witness a cumulative increase in labour costs of 93% since 2010.

This should be seen against an increase in retail price inflation over the same period of “only“ 51.6%.

So wage cost increases have almost doubled those of retail price index increases!

Back in 2010, the minimum wage for most employees was £5.93. With the new £11.44 rate, we have the 93% increase.

According to the Bank of England, goods costing £10 in 2010 now cost £14.76, a 47.6% increase and, with inflation for next year forecast at 4%, a cumulative rate of increase of 51.6% in 2024.

For many restaurant businesses, labour has overtaken food and liquor as the biggest single cost component and with the latest hike this will increase significantly.

To give this some context, the value of restaurant sales in the UK has grown to c.£70B, a 47% increase since 2010.

With labour costs outstripping these by a factor of two, labour, as a percentage of sales based on the living wage increases alone, has grown dramatically.

Upward pressure on these costs is aggravated by labour shortages due in large part to Brexit’s impact on immigration from Europe. The staff shortages are felt most among highly skilled personnel for whom the living wage rates do not apply. Hence, my statistics understate the inflationary effect of labour cost increases.

But for the time being, let’s focus on the living wage impact with this example, based on a restaurant with a turnover of £500,000 and a 25% labour percentage in 2010;

Impact on labour percentage

	2010	2023	VAR%
Sales p.a. (£k)	500	735	+47%
Labour p.a. (£k)	125	241	+93%
Labour percentage	25% →	33%

Hey presto!

A labour percentage increase to 33%, unless staffing levels were reduced significantly.

It really doesn’t matter if the labour percentage was 30% back in 2010. With the impact of living wage increases the percentage would still be eight percentage points higher than 2010.

To demonstrate that these numbers are real, I have abstracted data from the 2022 published accounts of two hospitality chains-one with a number of pub and restaurant brands and the other a multiple pizza restaurant operator.

Pubs/ Restaurants.
Turnover £2.2B, Labour cost £0.76B, percentage, 34%

Pizza.
Turnover £340 MM, Labour cost £127 MM, percentage 37%

The Office of Budgetary Responsibility is forecasting a decline in disposable income in the next two years of approximately 3%. As the historic elasticity of restaurant demand is 1, this means that there will be a fall in the number of meals sold of the same order.

So, the pressure this will put on the top line will compound the impact of these high labour costs on the bottom line.

But it doesn’t have to be like this…

Following a career in what was then known as GrandMet Retail, where I was marketing director (and won a Catey!), I set up the research-led marketing consultancy, Business Blueprints.

We have advised many companies in hospitality and shopping centres in the UK and Europe over the last 30 years. During that time we developed a new labour management model we called TiPi. short for “Team Planning“.

We applied this to an eight strong steakhouse chain and over eight years, consistently delivered labour percentages around 25%.

Aware that this result is well below the industry norm, I have tried to interest several hospitality companies with my TiPi model, to no avail.

Their rationale for turning me down flat is that their  labour costs were in line with “industry averages“ and, as their  operating model could not be seen to be broken, it did not require a fix……

Hence my headline claim that companies didn’t seek to reduce their labour costs because other companies hadn’t sought to reduce their labour costs.

I am by nature an optimist and the accelerating impact of labour cost pressure in future will, I feel sure, lead to my phone ringing off the hook.

As you just read, there are literally millions up for grabs if people are prepared to ignore “industry averages“ and seek a true competitive edge.