Credit: Nik Frey

Tesco's Dave Lewis warns of retail's 'lethal cocktail'

Rising business rates and the National Living Wage are coming at the wrong time for the sector, but should the government give supermarkets a break?

by Adam Gale
Last Updated: 11 Apr 2016

Retailers face £14bn in extra costs over the next five years as a result of rising business rates and the introduction of the National Living Wage, according to Tesco chief executive Dave Lewis. On its own, the sector could perhaps handle them, but combined with the margin-gutting price war they form a ‘potentially lethal cocktail’. Think orange juice, Crème de Menthe and cream in a warm plastic cup. Yuck.

‘The impact of the retail sector on our wider economy is absolutely massive. We need to be careful we don't lose or damage some of that almost by accident,’ Lewis said at the CBI conference yesterday. He took particular issue with the way business rates had risen ‘quietly but dramatically’ over the last few years to three times the OECD average.

‘Business rates have hit £8bn for retail. That’s over a quarter of the bill and significantly more than any other sector. That’s an enormous pressure. Shops have closed. Businesses lost. Jobs sacrificed,’ he said, adding that Tesco’s own bill had risen 35% since 2010. Of course, that might also have something to do with all those Terry Leahy era Tesco Express stores in prime high street locations, but that’s by the by.

As for the National Living Wage, which will require employers to pay £7.20 an hour to over 25s from next year, Lewis defended the company’s record and said there was a pressure to raise wages at the expense of employee benefits. ‘We need a fuller debate aimed at doing the right thing for the people in our industry without imposing more cost.’

The message is clear. Government policy is inadvertently hurting retailers, so it’s up to the government to make up for it, or at least consult with the sector before making decisions that affect it. Otherwise, it could be jobs on the line.

He has a point. Online retailers already have cost advantages without bricks and mortar stores being burdened with higher taxes (Tesco pays 2.3 times more in business rates than it does in corporation tax, Lewis said).

Yes, every industry has to operate under conditions that can change dramatically, and some of those changes will come from on high. That’s the way of the world. But in this case, the changes are disproportionately hitting an industry that’s already reeling from its own internal turmoil.

Lewis said margins have fallen from 5% to 2% as Aldi and Lidl disrupt the supermarket sector, leading to significantly lower operating profits, steep reported losses from property impairments and lower investment.

Business rates have risen for a reason - to counteract cuts in central government funding for local authorities. Whether that’s the right thing to do is clearly a matter of political debate. But if businesses fear significant and fairly sudden changes to their environment as a result of national politics, they won’t risk investing – which isn’t good for anyone, except of course Aldi, Lidl and Amazon.  

Tesco meanwhile is trundling on, selling assets to shore up its balance sheet while it tries to slow the slide in market share and cut costs. It slashed over £200m off its expenses over the six months to the end of August, compared to the same period last year, and Lewis has said it’s on track to make that £400m by the time his efficiency drive is complete.

But, as presumably a hefty chunk of the £14bn in extra costs that he prophesied for the sector will fall on Tesco’s shoulders, that may not be enough.

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