Since the delivery of the new UK Government’s Autumn Budget, many reports have highlighted the impact the changes to the National Insurance Contribution (NIC) will have on businesses. £25bn of the additional £40bn in tax will be delivered from three changes: an increase in NIC from 13.8% to 15%, the lowering of the threshold for paying NIC from £9,100 to £5,000, and the increase to the National Living Wage and National Minimum Wage.
Who will be impacted?
The sectors most vulnerable to the impacts are those reliant on large workforces, with a significant proportion of entry-level or lower-paid jobs, such as hospitality, retail, and care. The British Retail Consortium estimates that the retail sector alone will incur £2.5bn in costs overall, accounting for 10% of the total budget impact. Retail is the largest private sector employer in the UK, providing 3 million jobs and 2.7 million in the supply chain.
Businesses in all these sectors have already calculated that this will add £millions to the cost base. Major care provider Dimensions estimates the increase will cost them £5.9m in the first year alone and the rise in National Living Wage an extra £10.2m. In hospitality, JD Wetherspoon anticipates a £60m increase, while Fuller’s has been forced to halve investment from £60m to £30m to account for the costs. The highest figures come from retail; Tesco estimates an extra £250m a year, M&S an extra £180m, and Sainsbury’s an extra £140m.
These figures are significant as a standalone context, but they add to the existing list of cost pressures and competing priorities many businesses face, creating a perfect storm that calls for action. In addition to the NIC and wage pressures, changes to business rates (and the related cost pressures in the supply chain as they, too, experience higher labour costs) join the rising costs of materials, supply disruptions, shortages, pressure to invest in innovation and digital, and the sustainability agenda.
These pressures, alongside existing economic and geopolitical pressures, are forcing leadership teams to reconsider operational budgets, investments, commitments, and expected profits. The risk is that decisions to survive the short term overshadow or inhibit longer-term productivity and growth.
So, how can businesses protect themselves from these additional cost pressures?
Looking at the discretionary spend category within the FTSE 350 (Ref: Proxima State of Spend Report), which includes most hospitality and retail businesses, labour costs account for about 24% of revenues, and third-party suppliers 76%. The pain of labour-related cost increases will hit that 24% directly and indirectly on that 76% (as a proportion of total supply costs). This also shows the importance of managing external supplier costs in maintaining margin. Statistically, EBITDA will take a hit on increased labour costs. However, a 10% reduction in non-labour costs could produce, on average, a 30% boost to EBITDA.
From a labour perspective, businesses in retail, hospitality, and care that are able to will seek to reduce their exposure to direct labor costs. This could mean reconfiguring their labour profile, changing their staffing levels, and opting for part-time or temporary workers in the short term to help them remain under thresholds. Many businesses will slow wage increases or adjust compensation strategies at all salary points to cater for NI increases and increases in compensation to workers on the National Minimum Wage, whereby employers are bound by the statutory annual wage increases. In more extreme cases, we could see job cuts and complete outsourcing of responsibilities as an initial reaction, as businesses seek to create the headroom and then build back.
In seeking to navigate the cost increase challenges more broadly, we will see businesses focus more broadly on margin, where this is done at pace it will often mean negotiating hard and fast with suppliers, many of whom are also feeling the impacts. Perfect storm number two! This type of approach will yield short-term dividends, but at what cost? Businesses should seek to understand the corresponding impact of these changes on their own suppliers, as well as the broader impacts of cuts on growth and profitability. Sustainable cost reduction is almost always possible, but it is a skill reliant upon market knowledge and a deep understanding of how money spent enables business performance. For instance, cuts that have a detrimental effect on service levels and quality that impact reputation and, therefore, revenue will do more long-term harm than good. Businesses must reduce costs smarter, and look to non-labour costs for value opportunities.
Engaging the supply base
For most businesses, there will be a need for cost savings in the short term. There is definitely a place for workforce reconfiguration and negotiation with suppliers, but not at the material expense of other business imperatives. Approaching suppliers more strategically can lead to greater value that can help soften the burden of increased costs (on both sides of the fence) whilst protecting the relationships that will serve you in the longer term.
Initial cost savings can be realised through a commercial reset. Think: eliminating waste, negotiating improved commercials for future commitments, claiming unclaimed rebates, and better leveraging requirements. Think about how your actions can establish trust with your suppliers rather than destroy the relationship. This will ensure that you are on level ground before exploring bigger and bolder initiatives together.
Now, you can collaborate on value engineering initiatives that aim to reduce complexity or improve processes, as well as value chain optimisation initiatives that explore optimising logistics or supply chain collaboration. The combined focus might be on reducing risk or identifying areas for automation to drive greater efficiencies.
Greater savings potential comes from better and closer alignment of business needs and market capabilities. It is about aligning your cost base to enable your bigger-picture business goals by eliminating waste and nurturing what’s left. Businesses that act in isolation of this could find themselves falling behind when the budget dust settles. Whilst the increase in tax pressures presents challenges to businesses, knowing how to navigate them in the short term while maintaining a long-term view will be key. If you’d like to discuss more on how Proxima can help you navigate cost pressures by reducing and optimising supplier spend, get in touch.
