The middle brands in the Hospitality and Leisure sector will feel the squeeze. PSD’s Flemming Hansen considers the effect of the National Living Wage on the Hospitality and Leisure Sector.

 

The National Living Wage has now been implemented and some experts are forecasting as much as a 5% decrease in profit margins.

Businesses are accepting the pressure to make sure the lowest paid employees feel the impact of this increase in their wage. However they also realise the need to maintain the pay difference between these employees and their staff with supervisory duties. Most business will be able to maintain this difference, by also increasing supervisor wages too.

So how could businesses look at protecting their profit margins?

Businesses within the Hospitality and Leisure sector have two areas to explore; increasing productivity through innovation and passing on all or some of the increases to the consumers.

Coffee and food retailers, quick service operators, and budget accommodation providers will be the segment most likely to look at how technology can help them increase their productivity and reduce labour costs.

Technological innovation has been in progress for a while, with retailers such as McDonalds, Tossed and DF Mexico implementing a self-service option into their new stores, thus reducing labour cost. Our culture is increasingly reliant on mobile technology and apps and so it is natural that the retail led operators would be developing their service operations in this way.

The premium segment will not be able to rely on the same technological innovations. It is widely acknowledged that if a consumer pays a premium price they expect a personalised premium service; a high volume of well trained staff to attend to their every need. Any technological advance included in the service will be a value add to the experience and not a service purchased by the consumer.

Any staff working in this segment will, most likely, be enjoying a wage that sits above the NLW, so any direct financial impact is likely to be less. To acquire this high level of service, the business needs to pay their staff more anyway so any cost to the consumer will be proportionally less.

So this leaves us with the brands in the middle - the casual/family dining, 3/4* hotel brands, and branded pub operators. This segment is where the effect of the NLW will be felt the most and overall profitability will be affected as there are few areas where increased costs can be recovered.

The service style provided in these establishments relies on staff who can deal with a high level of transactions and with consumers who want an interactive service with a greater variety of options. Also, the consumer is less predictable and more price sensitive allowing for limited flexibility with boosting prices. Typically, they operate with an already finely tuned supply chain and most have the appropriate technology in place to provide effective management of the labour force.

So where will the funding come from?

A small proportion will go to the consumer, and rightly so, but expect to see reduced profitability in this segment. It will be important for these businesses to focus their efforts on maintaining their reputation for the long haul, rather than running the risk of alienating their consumers for short term profitability.

Whilst the National Living Wage must be embraced, it should be recognised that it will take time for some mid-market brands to adjust their costs. However with increased retention and with employees having a fairer pay packet, this can surely only be viewed as a good thing for the industry in the long run.