ALMR response to Low Pay Commission questions 2017 on minimum wage About you 1. Please provide some information about yourself or your organisation. If possible, include relevant details about your location, the occupation or sector you are involved in, your workforce if you are an employer (including number of NMW/NLW workers), and anything else you think is relevant. The ALMR is the leading organsiation representing the eating and drinking out sector. Our members own and operate 90% of all managed, licensed pubs, restaurants, bars and nightclubs. Two-thirds of our members are small independent companies operating 50 outlets of fewer under their own branding, but our membership also includes some of the largest high street operators including: JD Wetherspoon, Casual Dining Group and Carluccio s, with well-known branded outlets such as: All Bar One, Slug & Lettuce, TGI Fridays, Wahaca, Wagamama and Harvester. The trade association is based in London but represents businesses that operate across the whole of the UK. The sector generates 63bn in turnover, an increase of 37% since 2010. Further, it contributes 32bn GVA, which is 63% higher than 2010), it pays a third of turnover in taxes and invests 4.4bn in our high streets and local communities each year. Eating and drinking out businesses directly employ 1.6 million jobs, growth of 18% since 2010, and now creates 1 in 7 of all new jobs across the whole economy. People are at the heart of this sector and are critical to the ongoing success of the sector. Impact of the National Living Wage and National Minimum Wage 2. What has been the impact of the NLW since April 2016? The rate was set at 7.20 in 2016 and rose to 7.50 on 1 April 2017. Our critical interest is views or data on the initial effects on employment, hours and earnings. The first clear impact is that it has increased costs for businesses and raised wage levels for those on and above the NLW and NMW. This is particularly true in the hospitality sector where a relatively high proportion of employees are paid at these levels. It is important to understand the importance of payroll for the eating and drinking out sector. As a consumer-facing industry people are incredibly important to the delivery of its product. This is why the sector is such an important provider of employment across the economy and across all geographical areas. It is also reflected in the relative importance of payroll costs to the sector. The ALMR Benchmarking Survey 2017 shows once again that payroll is the highest cost pressure on the sector. The latest data (12 months to September 2016, so only incorporating 6 months of NLW) shows that payroll has hit 27.9% of turnover compared to just 17% when the Minimum Wage Act was introduced. This figure is now well over half of operating costs, which stand at 51.5% across the sector, itself a record high. The increase in share of turnover was relatively minimal in 2016 at 0.1 percentage points. This can be explained by the fact that turnover itself grew (though relatively slowly), the limited time period in which the NLW applied and changing of working practices. The latter is highlighted by the fact that casual dining and food-led outlets saw larger increases, where there is potentially more limited scope to change working practices, than community-led pubs, where an operator can Tel: 020 8579 2080 www.almr.org.uk 1
perhaps work longer hours themselves to compensate for increasing wage costs. The expectation is that increases in the NLW will continue to transform working practices and this could be at the cost of jobs in the sector. ONS data backs up the earlier assertion about the growth in jobs in the eating and drinking out sector in recent years. The chart below highlights the surge in jobs delivered by the broader accommodation and food service activity sector, particularly from 2012 onwards. The last six months has seen this jobs growth plateau as wider economic conditions and a drop off in consumer confidence begins to hit the sector. The impact of employment costs is likely to also be having an impact on the slowing of additional jobs. The sector is proud of its status as a major employer and driver of economic recovery but if costs continue to rise there is likely to be an impact in terms of additional recruitment, In its benchmarking survey, the ALMR asked members for their reaction to the introduction of the NLW in terms of price increases. This is displayed in the chart below and gives some important insight into its impact, on both business and consumers. Overall around 85% of operators chose to Tel: 020 8579 2080 www.almr.org.uk 2
absorb more than half of the cost increase from the NLW, protecting consumers from seeing too much of an increase on their bill. This includes nearly 4 in 10 who absorbed the entire cost. This trend will be interesting to follow, to see whether this was a one-off hit in margins that operators were willing to accept in a transitionary year, or whether such a fall in margins is sustained in future years. If it is the latter it will have a fundamental impact on the way that eating and drinking out businesses operate in the future, including on employment patterns. The ALMR s employment survey asked its members about a number of measures that they might have taken as a result of the introduction of the NLW/increases in the NMW. These are summarised in the table below. It is worth noting that this is a different survey to the one quoted above with a different sample size but the views on price changes are broadly consistent. As would be expected the NLW/NMW changes have led to increases in basic pay rates, but also increases in pay for more experienced and more senior staff in the majority of instances. This is clearly contributing towards the higher than average pay rates seen in this sector. Tel: 020 8579 2080 www.almr.org.uk 3
The next most reported consequence of the increases seen in April 2016 was a decrease in profits, with this being reported by nearly half of respondents, a reflection of those that had absorbed the wage increases as reported in the benchmarking survey. As above, it is not clear whether these margins and profits will be recovered or whether this is a permanent drop in profitability in the sector which could have longer-term impacts. Just over 4 in 10 have reported that they have increased prices to consumers, feeding into consumer price inflation, and potentially making the eating and drinking out sector less attractive. The measure of consumer demand for the sector will be another important barometer of the impact of introduction of the NLW. A number of respondents have reported various other changes, such as changes to business practices and reduced overall benefits packages for employees to deal with the NLW cost increase. The first year of the NLW has clearly had an impact on the eating and drinking out sector, though largely in ways that were expected, even if the reductions in margins and profitability are greater than expected. It was always envisaged that the first year would of the NLW would be tough but not insurmountable. Concern is increasingly about the path to the politically-determined 2020 target of 60% of median earnings. Clearly, businesses cannot continue to cut margins and profitability that would be unsustainable. Businesses are going to have to consider how they deal with the 2017 increase and subsequent changes. The picture remains very uncertain and it is not clear how much more businesses in this sector can take without serious negative economic consequences. This is why we believe the LPC needs to act with caution when setting the 2018 NLW and NMW rates. 3. To what extent has the NLW particularly affected certain occupations or industries, types of firms (small, large etc), regions or groups (for example women, ethnic minorities, migrant workers etc)? The National Living Wage has disproportionately affected the hospitality sector, as it was largely predicted to do. The sector offers positive career progression opportunities but the nature of many of its occupations mean that they can be at the lower-end of the pay scale, including many at National Living Wage levels. Roles in kitchens and behind the bar tend to be where the biggest costs have been experienced, but this also extends to ancillary staff, such as cleaners. This is reflective of a sector that offers a gateway into employment for many people. The age profile of employees is weighted towards young people and it frequently offers part-time opportunities for those that are sharing their time with other activities, such as studying or caring for their family. Overall there has not been a particular difference between large and small employers, it affects the businesses the same, almost regardless of size. The biggest difference we have picked up from our members is around regionality. Wage levels were already higher in London and the South East prior to the introduction of the NLW, and so there has been less of an impact. The further north one travels the more the impact tends to bite. 21-24 year olds 4. What has been the effect of the minimum wage and the NLW on workers aged 21-24, particularly their employment prospects? Tel: 020 8579 2080 www.almr.org.uk 4
Our members have not relayed any specific information on the impact of the NLW on 21-24 year olds. The sector is a major employer of this age group, 25% of employees falling into this bracket according to our member survey. 5. To what extent are employers using the 21-24 Year Old Rate (set at 7.05 since 1 April 2017)? There is a mixed picture in relation to the application of the minimum rate for 21-24 year olds. According to our survey around 77% of businesses do use the national minimum wage rate, with a significant minority of nearly a quarter starting pay above this level. Amongst those that do pay the minimum wage it is assumed that many earn above this rate, depending on experience and seniority. Young people (16-20 year olds) and apprentices 6. What has been the effect of the minimum wage(s) on young people (aged 16-20), particularly their employment prospects? There has been no discernible impact on this age group as far as we can tell. Clearly they provide a less expensive form of labour at minimum wage levels but this is counterbalanced by other factors, and the need to avoid age discrimination. Our survey indicated about 21% of the sector workforce fall into this category. The sector is committed to developing its workforce and apprenticeships have been an effective way of doing this in the past. The hospitality sector has a very impressive record in the provision of apprenticeships. Hospitality and catering remains one of the most popular apprenticeship routes with an average of over 30,000 starts per year across the last six years. 7. What has been the effect of the Apprentice Rate on pay, provision and take-up of places, and training volume and quality? The minimum rate for apprenticeships is hardly used by any operators in this sector, with the vast majority paying in excess of this. However, some respondents do indicate that they are still paying hourly rates that are close to this level so any significant increase in the minimum rate could have a negative impact on the take-up of apprentices. The market seems to be adjusting to an appropriate pay level for these training employees that ensures that they can live reasonably, whilst gaining an education and work experience. 8. What has been the impact of the Apprenticeship Levy and the new funding model (introduced in April 2017 in England)? It does feel too early to say what the impact of the Levy has been for the eating and drinking out sector. The months ahead of the implementation of the Levy has seen a great deal of planning as businesses adjust their training and people strategies to maximise the use of the Levy. Most operators are viewing it as a tax but are keen to recoup as much value as they can from it. We have seen evidence of operators converting their existing training schemes into an apprenticeship format so that it is eligible for the funding, which has been an administrative burden without any clear benefit to employer or employee. However, on the other hand it has caused some businesses to improve their training offer so there will be some benefits from this. We intend to gather more information on this in our next survey. Tel: 020 8579 2080 www.almr.org.uk 5
Economic Outlook 9. What are your views on the outlook for the UK economy, including employment and unemployment levels for the period to April 2020, focusing on the next 18 months? There are some concerning signs for the overall UK economy, with confidence dipping and an anticipated drop in consumer spending. The referendum vote in June 2016 has brought about some immediate problems, with increased inflation and concerns about ongoing access to labour, whilst creating opportunities through increased inbound tourism. Any uncertainty that remains is likely to be detrimental to businesses, particularly those that use imported goods and have a significant EU workforce, such as eating and drinking out. In particular the GDP growth rate for Q1 2017 is concerning. The drop to 0.2% growth suggests stagnant real-terms growth and the risk of recession in the foreseeable future. At the Spring Budget the Office of Budget Responsibility (OBR) suggested that GDP per capita would be 1.3% in 2017, falling to 0.9% in 2018. Taken at face value this suggests very low levels of growth, however, there is consensus that the economic outlook has deteriorated further and growth is likely to be nonexistent. Caution needs to be shown when considering extra costs on business to avoid overburdening businesses. The GfK consumer confidence index measure is also showing some worrying trends. The UK consumer is feeling increasingly concerned about the future, with the measure dropping to -10 in June 2017. While this is an improvement on the early 2010s it does show a relatively sharp decline since 2015. For the hospitality sector, which is dependent on discretionary consumer spend, this is a disturbing development, and one that needs to be monitored closely. A downturn in consumer confidence could lead to a drop off in hospitality spend that could seriously damage businesses in the sector, and their employees. The increase in inflation that has been widely reported is also concerning, leading to higher costs for businesses, particularly in this sector. This is largely driven by imported costs as a result of the fall in the value of sterling but is also a reflection of Government policies, including business rates increases, higher excise duty hikes and the higher costs of employing people through the NLW/NMW, the apprenticeship levy and auto-enrolment pensions, amongst others. 10. What is the broad economic outlook for your sector? Are there any significant changes, for example around tax or regulations, which are having an impact? The eating and drinking out sector has shown strong growth in recent years but this appears to have slowed slightly. The ALMR benchmarking survey shows turnover growth slowing from 3.1% in the year to September 2015 to 1.1% in September 2016. This is in a market where costs have continued to grow, particularly from a legislative perspective, and now top 50% for the first time in the 11 years that the ALMR has been collecting this data. We are therefore extremely cautious about the outlook for the sector in the next 18 months. There are a number of changes that are causing greater pressure on the sector. Though the sector has adapted relatively well to the first year of the NLW we foresee employment costs continuing to weigh heavily on operators, with payroll costs likely to increase significantly. The sector is keen to be Tel: 020 8579 2080 www.almr.org.uk 6
seen as attractive employer and therefore wants to pay competitive rates but with low margins and a strong dependence on people as the basis for providing hospitality this is a real issue. The business rates revaluation that came into force from April 2017 has had a very negative impact on pubs, restaurants and bars. This is the only sector that has seen increases in rateable values in every region of the country. Tens of thousands of businesses will already be seeing very big increases in their rates bills and this could potentially be fatal to those businesses. A number of mitigating measures were introduced to partially cushion the blow in the first year but as these drop away the problem is going to get even worse. It is imperative that Government takes action to support the sector otherwise many jobs will be at risk. Increases in alcohol excise duty at the Spring Budget further increased input costs to the sector. The high forecast inflation rate resulted in increases of nearly 4% across all alcohol products. This is on top of food-price inflation caused by the weak Pound and other factors that has now topped 9%. Margins are being squeezed to an unprecedented level leading many operators to question the viability of their businesses, or costs are being passed on with some resultant drop-off in trade. There is much that Government can be doing to alleviate some of these issues and we will be working with the relevant departments to ensure that these are understood. In the meantime, we believe the LPC should be aware of the unprecedented set of pressures the sector faces. 11. What has been your experience of wage growth and inflation in the last year and what do you forecast for the next couple of years? Wage growth in the sector has appeared stronger than is implied by official statistics. The prevalence of NLW/NMW employees means that the rate is a key driver of price increases. Our view is that the sector has seen pay increases of close to 4% in hourly rates over the past year. This is well above the overall pay increase seen in the wider economy, given as around 2% by the ONS to summer 2017. This is largely driven by the 12% increase in the NLW between October 2015 and April 2017. This has obviously boosted the wage rates of those directly affected (those on the NLW aged 25 and above) but also the wider workforce. As we have already seen the under-25s have benefited from the NLW increase, as have those who earn at a rate higher than the NLW through differentials. We anticipate that wage growth in our sector will continue to increase ahead of the average UK rate by a couple of percentage points. This will continue to be driven by increases in the NLW/NMW. We expect wage rate growth in this sector to outpace the measured rate of inflation, meaning staff are better off in real terms, also benefiting from the increase in the income tax threshold. It is also likely that wage rate increases will exceed sales growth in the sector, and with payroll reaching nearly 30% of turnover, this is going to lead to price increases or a fall in profitability. 12. What is your assessment of the effects of the UK s decision to leave the EU, since the referendum in June 2016 and in the future? Has it or will it affect you? We have referenced this in some of the earlier questions about the overall economic outlook. Here we will address some of the specific issues that we believe the sector will face. To date the most significant impacts have been in relation to cost-price inflation of imported goods, uncertainty for staff leading to difficulties with retention and a relatively buoyant tourist market that has stimulated demand in the hospitality sector. There has undoubtedly been an effect on the sector and this will continue into the future. Tel: 020 8579 2080 www.almr.org.uk 7
As mentioned previously cost-price inflation has been significant for the whole economy but particularly for the hospitality sector, leading to higher prices and reduced margins. Analysis 1 by CGA Prestige shows that foodservice price inflation had increased to 9.0% by May 2017. There are numerous reasons for the increase, including specific product issues, but the main driver is certainly the drop in the value in sterling as a result of the referendum result. There is a hope that some of this inflation may drop out of the system eventually but it is likely to remain for the next 12 months at least. Staffing is another area severely impacted by the referendum result. The ongoing uncertainty around the rights of EU nationals has meant that operators are struggling to retain existing employees, even those that have been employed for some time. There is also some evidence that there are fewer EU nationals coming to the UK looking for employment. This is adding to recruitment costs and also putting upwards pressure on wages, particularly in larger metropolitan areas. The upside of the fall in the value of sterling does seem to be an uptick in visits from overseas. VisitBritain analysis of the International Passenger Survey data shows that in the year to April 2017 overseas visitors were up by 11%, with spend up 14%. This is likely to be feeding into stronger growth in the eating and drinking out sector than the domestic sector could deliver. It is not clear how long or stable this growth is likely to be. The issues outlined above remain a cloud over the sector, even with a boost from international tourism. The sector has outlined to Government its priorities for a post-brexit settlement. In the short-term it is vital that the rights of EU nationals present in the UK on the referendum data are given the right to remain. There also needs to be certainty about what the future right to work in the UK would look like. We believe that it is critical that the sector is able to access overseas labour in able to ensure that it is able to fully deliver for its customers and the UK economy. In the meantime, the sector is working hard to develop its UK workforce, particularly through the apprenticeship regime but also through wider sector training. The sector is working with the Department for Work and Pensions (DWP) to see how it can support the longer-term unemployed and vulnerable members of society. The Government also needs to ensure that there is an efficient system for trade of goods once Brexit takes place. Firstly, this means ensuring that the logistical movement of goods is unaffected. It should also mean zero-tariff trade in food and drink products between the UK and the EU. In the medium-term this should also mean a focus from the UK Government on striking trade deals around the world that prioritise removing trade barriers on food and drink products. The ALMR will continue to engage with the relevant Government departments to ensure the needs of the eating and drinking out sector are delivered. Accommodation offset 13. What are your views on the accommodation offset? To what extent is it protecting low-paid workers? What difference, if any, have faster increases in the rate since 2013 made to the provision of accommodation? The accommodation offset is an important instrument that supports employers in providing affordable living arrangements for their employees, particularly the lowest paid. We believe this 1 http://www.cgapeach.co.uk/peach-report/2017/6/27/foodservice-price-inflation-climbs-to-90-in-may-2017 Tel: 020 8579 2080 www.almr.org.uk 8
provides substantial protection for lower-paid workers. Our evidence suggests that the provision of accommodation in this sector is increasing and this is closely linked to increases in the level of the offset. Further increases would be welcome. Future rates of the NLW and other minimum wages 14. What are your views on future rates of the minimum wage (the current structure covers workers aged 25 and over, 16-17 year olds, 18-20 year olds, 21-24 year olds, apprentices, and the accommodation offset)? It is clear that there are turbulent times ahead for the UK economy and specifically for the eating and drinking out sector. The macro-level picture is characterised by slowing levels of GDP, declining consumer confidence, rising cost-price inflation and considerable uncertainty about Brexit. Our view is that there is going to be very limited economic growth in the UK through 2017/18 and for the next few years (see question 9 for further details). In terms of the eating and drinking out sector the trends outlined above are exacerbated by increased costs incurred in recent years, and particularly from April 2017. These have been outlined in question 10 but include the business rates revaluation, a 3.9% alcohol excise duty increase, the introduction of the Apprenticeship Levy and of course further increases in the NLW. The sector also faces a more acute issue in terms of EU nationals than other sectors due to the relatively high number working in pubs, bars, restaurants and clubs. Our view is therefore that the LPC should show caution and restraint when looking to set the minimum wage levels for each band. The minimum wage rate for those aged 25 and over has already increased by 12% in two years, well ahead of inflation and average earnings, and boosted by a reduction in income tax through an increase in the threshold at which this is paid. The increasing costs that the eating and drinking out sector faces means that any significant increase in the NLW will continue to bite into margins and potentially the viability of many businesses. Having an increased NLW is only worthwhile if there are businesses that are trading and able to employ people. The great risk of a higher NLW is a rise in unemployment, which does not benefit anyone. As shown in chart x around 37% of businesses in the sector fully absorbed the cost of the increase in the NLW introduced in 2016, with a further 49% absorbing up to half. Only around 14% of companies therefore felt able to pass on more than half of the additional cost imposed upon them. This is concerning in the long-term as margins are eroded and businesses become weakened, particularly in a highly competitive market. The natural response will be to look at productivity savings and reducing the overall headcount, a step that hospitality businesses are generally loathed to do. Compliance and enforcement 15. What issues are there with compliance with the minimum wage? Has the NLW affected compliance and enforcement? Are there any other trends, for example in particular sectors or among particular groups? The main issues that have been experienced in the hospitality sector around compliance have tended to be technical, particularly around what in-kind products can contribute towards the NLW. This has been the main factor in published decisions against operators. The NLW has inevitably increased the number of employees and employers covered by minimum wage regulations so this is Tel: 020 8579 2080 www.almr.org.uk 9
likely to have caused some issues, though most of these are likely to be teething issues for those businesses that were paying well above the previous national minimum wage but were subsequently covered by the legislation. The vast majority of employers understand the NLW and ensure that the legislation is fully complied with. It is important that employers that make genuine mistakes in the application of the NLW are given the opportunity to rectify this and ensure ongoing compliance. 16. What more could be done to improve compliance? What more could be done to encourage or enable underpaid workers to make a complaint via the formal channels? The measures that Government has taken to date to promote the NLW, including developing guidance and highlighting non-compliance, has put the NLW and NMW front of mind for employers. The naming and shaming mechanism has been effective in making sure that employers are alert to the risks of non-compliance, though in some circumstances we believe it has punished innocent mistakes. We therefore do not believe that additional measures are needed at this time to improve compliance. We would support Government measures to promote complaint measures via the formal channels. Tel: 020 8579 2080 www.almr.org.uk 10