Credit: Whitbread Plc

Whitbread prepares for 'substantial cost increase' from living wage

Shares fall despite an 11% rise in sales at the firm behind Premier Inn and Costa coffee.

by Adam Gale
Last Updated: 20 Oct 2015

Coffee shop, hotel and restaurant company Whitbread is like the elder brother in the parable of the prodigal son. It does everything it’s supposed to do, only to be met with apparent indifference (in this case, by investors on results days). Despite reporting an 11.1% rise in sales (3.3% like-for-like) for the 11 weeks to August 13, Whitbread’s share price fell 2.8% to 4,579p by lunchtime.

The cause for today’s unrest might be a short phrase nestled in comments by outgoing boss Andy Harrison, concerning the new National Living Wage (the NLW or, effectively, the new over-25 minimum wage), which comes into force next April.

‘We shall mitigate this substantial cost increase over time with a combination of productivity improvements, boosted by investment in systems and training, efficiency savings and some selective price increases,’ Harrison said (our italics).

Cue argument about whether raising the minimum wage is ultimately good for the economy or not. On the one hand you have the government and grandees like MT founder Lord Heseltine, who said in December that increasing the minimum wage would cut tax bills and lead to much needed productivity growth.

On the other, there’s the likes of ex-Sainsbury’s boss and new member of the private equity club Justin King, who said firms would simply respond by cutting jobs. He’s backed up by a report from recruitment agency Manpower today, which said the NLW was ‘sending shockwaves’ through the labour market.

Aside from causing apprehension about new hires among the 2,101 employers Manpower surveyed, the new wage could lead to unintended age-related distortions. ‘We anticipate that some employers may look to mitigate the extra costs by taking on more younger or self-employed workers, who are not entitled to the National Living Wage,’ said Manpower MD James Hick.

This doesn’t really come as a surprise, though, and nor should the fact that a firm employing 45,000 people, many of them on the minimum wage, should say it will raise prices when that wage increases by 6%.

The real question will be to what extent greater spending power among low-paid workers will mitigate the cost burden on employers by lifting demand in the wider economy, and thereby sales. The answer, both to this and to the question of how the burden is spread between owners (profits), consumers (prices) and workers (jobs), will presumably vary greatly between industries.

For now, Whitbread’s investors remain nervous, though that could equally be the result of lacklustre restaurant performance outside greater London, which held the rapidly expanding Premier Inn and Costa chains back somewhat.

Incoming boss Alison Brittain won’t be too worried in either case. Most bosses would kill for year-on-year revenue growth of over 10% while still making a healthy profit (£488m pre-tax last year, on £2.6bn revenues) - and that’s showing no sign of slowing down.

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