28 June, 2016

Opinion: How companies are getting smarter in the battle against labour inflation

By Mike Shipley

The seasoned, or battle-hardened, operators among us will argue it was ever thus.  But it is clear that the bar and restaurant industry is operating in a challenging market, buffered by significant headwinds in the form of rising costs, allied to an intensely competitive trading environment.

In terms of cost inflation, aside from the challenge of securing economically-viable new property, the costs for which seemingly continue to climb, one of the major battles is labour.  The new national living wage has ramped labour inflation, while overall employment costs are also on the move, with the smallest of companies shortly required to provide (and contribute to) workplace pension schemes.

It is 12 weeks since the introduction of the national living wage.  We are currently monitoring labour costs and average hourly rates for restaurant and bar staff via Fourth Analytics, to see how this new baseline rate has impacted overall pay – and expect to be able to share these numbers with the market soon.  What we believe we will see in many cases – perhaps over time – is actual pay sitting above the living wage base, as companies compete for people.  It will also trigger pay increases up through organisations, as companies bid to maintain pay bands for more senior workers.

What is clear is that this spike in labour costs is not a one-off event – we are in an era of wage inflation, with further living wage hikes pegged, through to 2019.

In the intervening period since the living wage came into force in April, what has been clear is that many companies have been forced to re-evaluate the ‘value proposition’ for their staff.  Some have ended free food, while others have scrapped paid lunch breaks.  Many operators will no doubt be reviewing menu pricing.

What is also clear from the narrative of our national press and our politicians, is that there is little understanding of, or sympathy for, the economics of running bars and restaurants.  George Osborne suggested that such trimming of staff benefits and perks was not ‘in the spirit’ of the new living wage regime.

What is clear to us – in this sustained period of labour cost inflation – is that companies feel compelled, out of existential necessity, to find new, better, smarter and more productive ways of working.  Again, the seasoned operators will argue that it was ever thus.

A big part of the answer lies in productivity-gain initiatives.  Put simply, in terms of labour, this requires companies to schedule better and plan labour better.  In turn, this means they have to forecast their sales more accurately.  It is very simple to write in a blog, but actually very complex to deliver, although software and algorithms tend to do the vast majority of the heavy lifting.  What the software produces in the way of a forecast is overlaid by operator insight, of course. 

We see leading bar and restaurant companies using complex software to more accurately predict sales, and align their businesses accordingly – in terms of labour scheduling, kitchen prep, inventory and so on.   Done properly, this work drives both top-line revenue and margin.  We are aware of one business that has realised a multi-million-pound advantage from this work – growing sales and making savings, and in doing so, shaving a full percentage point from total group labour costs. The new national living wage promises to push increasing numbers of hospitality businesses further down this path. 

Mike Shipley is Analytics & Insight Solutions Director at Fourth, the leading business software partner to the hospitality industry

PS.  What was pay in hospitality like prior to the new living wage?
The new living wage requires hourly paid staff over 25 to receive £7.20 per hour, a 50p per hour rise from the national minimum wage previously applicable (and still applied to over-21s) of £6.70.  It means that for a large company employing 1,000 over 25s full time, labour costs rose in April £1m (plus a further 14% NI).  Looking back using data from the Fourth Analytics database, we can see that the average hospitality worker over the age of 21 received an hourly wage of £7.04 in October 2015 – just 16p shy of the new living wage. 

Fourth is a proud sponsor of the Future of Finance & Development Seminar 2016.


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