UK Retailers Axe Low-Skilled Workers as Higher Wage Bills Bite

Britain’s low-wage workers are due a pay rise next month but not all of them are celebrating. As the new minimum wage takes effect, the country’s biggest retailers are finding inventive ways of making do with fewer employees, in what economists call a sign of the potential pitfalls of the UK’s attempt — mirrored in many US cities — to favor the working poor.

At least 3,700 shop workers have been made redundant from leading UK store chains this year, although some companies are adding jobs in frontline roles even as layers of management are peeled away.

Publicly, at least, the retailers insist the cuts are geared towards serving customers better, rather than saving cash.

At John Lewis, the UK department store, and its upmarket supermarket chain, cafeterias will soon serve pre-prepared meals trucked in from central kitchens rather than made on-site. The group says the change will better “meet the dietary requirements of customers” — but will also contribute to the loss of 387 jobs.

At J Sainsbury, one of the UK’s biggest grocers, “price controllers” will no longer patrol the aisles in search of misplaced product labels, the kind of mishap that executives say is rarer now they rely less on weekly promotions.

Rival supermarket Tesco is abolishing the position of deputy manager in its smaller stores, asking lower-paid staff to pick up the slack. Tracey Clements, managing director of the chain’s convenience business, told colleagues the change would help “run . . . stores more simply, while also improving our customers’ experience”.

But in private, retail executives concede that sharp increases in the minimum wage have lent urgency to their efforts to use workers more efficiently, by investing in technology that makes many low-skilled jobs obsolete.

“On a personal level, we all want to pay our workers more,” said a top executive at one large retailer that has recently announced redundancies. “But there’s going to be unintended consequences from what the government is doing. Automation that used to be too expensive is now cheaper than the people it can replace.”

Beginning next month, over-25s in the UK must be paid £7.50 an hour. That is 12 per cent more than the lowest-paid received in 2015, when then-chancellor George Osborne announced a series of increases to lift the hourly rate to £9 in 2020.

Retailers will bear the brunt. British shops employ about 1.7m people on wages close to the legal minimum, according to the British Retail Consortium, an industry lobby group; most are succumbing to the pressure to pay more. At Tesco’s UK arm, a 12 per cent increase in the £4bn salary bill would have all but wiped out last year’s £505m operating profit at the country’s biggest private-sector employer.

The higher wage costs come at a time when UK retailers are also contending with an increase in property taxes and import costs that are rising as sterling falls.

“A lot of the firms are absorbing the cost at the moment by lowering their profits or maybe increasing prices,” said Matthew Whittaker, chief economist at the Resolution Foundation, a think-tank that focuses on low-wage work.

“They don’t have to make an immediate knee jerk reaction in the way that you would in a downturn. But over time they’ll think a bit more about their structure and their business model. If you look at

[the government’s projections], there is an expectation that employment does fall.”

When Britain introduced a minimum wage in 1999, it charged the Low Pay Commission with setting the floor as high as possible without causing jobs to disappear.

Mr. Osborne set the commissioners a different brief. “The government is saying, ‘There are jobs that are too low paid for us to want them in our economy’ ”, explains Mr. Whittaker. “It’s a deliberate policy. You have to assume they’re comfortable with it.”

The challenge facing British retailers sounds familiar to Jacob Vigdor, an economist in Seattle, one of several big US cities to vote through big minimum wage increases. The mandatory pay rise goes beyond moves by Walmart and other large chains to lift their pay rates nationwide.

“You can see people finding ways to get by with less staffing,” he said, recalling the long queues that appeared at his favorite tea shop last year, when the minimum wage increased to $13, compared with just over $9 in 2014, and one of the two counter assistants was fired.

Across the city, Mr. Vigdor reckons the number of jobs fell 2 per cent in the first year of the experiment with a higher minimum wage, although more workers may now be paid off the books.

The wage floor has since been lifted again, to $15 (a little over £12) for the largest employers.

Retailers across the developed world have been culling their workforces through in-store innovations, such as self-checkout machines and “display-ready” boxes that alleviate the tedium of stacking shelves.

Amazon is taking that idea to extremes in a town center concept store that has no queues and no checkouts but automatically tracks customers’ purchases as they carry them out of the door.

More traditional shops are cutting costs wherever they can. Many are moving more staff into centralized facilities that are easier to automate and benefit from economies of scale.

Greggs, a UK town center bakery chain, is closing some of its smaller bakeries and turning those that remain into high-tech plants adapted to particular products, such as doughnuts or sausage rolls.

At John Lewis, which has centralized its call centers as well as its kitchens, “profound changes are coming down the track”, Charlie Mayfield, chairman, said. “There are 3,000 fewer partners [than] this time last year, [and] probably we’ll see a continual gradual decline. The [remaining] jobs will be better ones.”

For now, at least, internet shopping is creating jobs in warehouses and delivery services, even as it threatens the livelihoods of people who work in traditional stores.

But much of the work falls to “contractors”, who are paid piece rates under carefully drafted legal arrangements that put them beyond the reach of minimum wage laws.

Retail executives say the effect on their hiring plans will ultimately depend on whether consumers are willing to bear the cost of increased wage rates, or whether they take their custom to cheaper operators that make do with fewer staff.

“It doesn’t necessarily feed through to a business like ours because if you’re successful you will employ more people,” said Mike Coupe, chief executive of Sainsbury’s.

Others are less fortunate. Mr. Vigdor started buying loose-leaf tea online when the queues at his local store became too long. “And then a few months later I did go back,” he said. “But the shop had closed.”

Source: Financial Times Mark Vandevelde | March 22, 2017