How to cope with increasing labour costs for wholesalers

Whoever wins the general election, the national minimum wage and National Living Wage will rise, increasing wholesalers’ labour costs. Priyanka Jethwa looks at the best ways to deal with the challenge.

April saw the National Living Wage (NLW) – the national minimum wage for people aged 25 and over – going up from £7.20 to £7.50 an hour. For people aged 24 or younger, the national minimum wage increased 1%.

Further hikes are planned over the next three years, irrespective of who is in power. Should the Conservatives win the election, they’ve promised to increase the NLW to £8.75 an hour by 2020. Meanwhile, Labour is promising to increase both the NLW and the national minimum wage for anyone aged 18 or over to £10 an hour by 2020 if it wins.

At a time when margins remain tight across the board, there can’t be many wholesalers jumping for joy, as wages represent the biggest expense most of them face. A study by the Federation of Wholesale Distributors (FWD) found that the most recent minimum wage rise affected 30% of its members’ 70,000 employees. And 20% of FWD members said they will consider laying off staff as the rate increases.

This feature looks at what impact the changes have had and could have on wholesalers and explores what they can do to ensure that further – and potentially markedly steeper – rises don’t affect productivity and stymie growth.

Small business woes

The average small business will have to pay out an extra £2,600 this year, thanks to the combined impact of the NLW rise, National Insurance and pension auto-enrolment contributions, according to the national chairman of the Federation of Small Businesses, Mike Cherry.

For The Kentish Match Company, which has a workforce of seven employees at its base in Kent, the increase in the NLW won’t pose an immediate threat, as most of its employees are older and only work part-time.

However, examining the company’s long-term history, its operations coordinator Matthew Moare notes that as the minimum wage has steadily increased over the years, the company has had to stock more products to survive, especially as the major supermarkets continue to steamroller into the convenience market.

He says: “We used to be quite niche about 10 years ago, only stocking 500-600 lines. Now we’re at more than 800.”

Sony Bihal, MD of Time Cash & Carry, points out that Lidl and Aldi are offering staff rates of around £11 an hour. He says: “As a London-based wholesaler, it’s impossible to drive higher margins as the market is complex, unlike bigger supermarkets which have the power to negotiate prices.”

A ‘Grade III’ – or manual work – employee at Time receives £8.50 an hour. If the Conservatives win the election and increase that to £8.75, based on 100 employees working 40 hours a week, Time will face paying an additional £52,000 a year in wages.

However, if Labour wins and increases the NLW to £10 an hour, Time would need to pay out an extra £312,000 a year, not accounting for inflation.

But Bihal says the effect won’t be as bad as those figures might suggest. “The wage rise won’t hurt us too much, as it’s not just the wholesale channel that will be affected – it’ll be a national change. In fact, I’ll be happy if it increases to £8.75, as paying people a higher wage means more money will be directed back into the economy.”

Simon Hannah, MD at Scottish wholesaler JW Filshill, points to another potential benefit – with retailers facing pressure to keep control of budgets, they’ll look to cut costs wherever possible. A delivered service from their local wholesaler will take away their need to send employees out to buy stock, maximising their time in-store.

For small to medium-sized wholesalers with delivered capabilities, this could open up new opportunities to expand their customer base and cover their own rising wage costs.

Keeping up with creativity

Ensuring productivity remains high amid wage hikes is a key concern. David Gilroy, co-founder and MD at Store Excel, a business that supports independent stores, says: “The UK’s productivity is one of the lowest in the western world and this needs to be addressed.”

Filshill has a unique pay structure, in which employees are paid based on their productivity levels, led by a system that calculates how long an order will take to process. The system is designed around pay-for-performance, motivating individuals to carry out a task quicker so they’ll be paid more.

Hannah says: “It’s proven to be successful, as results show productivity has increased by 26.5%. Our drivers are on a similar scheme where their productivity is based on factors such as checking vehicles and rolling products onto shop floors.”

The company already paid its employees more than the new NLW rate, so the latest rise hasn’t affected the business. However, Hannah adds that pay-for-performance could potentially be implemented to work across the board in sustaining productivity levels.

To achieve this, he says, “Companies need to be robust, and they need to calculate how to do this properly before they take any measures.”

John Weaver, CEO of Staffordshire-based wholesaler Tree of Life, believes that investing in technology is a surefire way to increase productivity.

He says: “In the past three years, our productivity levels have doubled. This has been as a direct result of investing in management, and also in software and hardware training for our staff.

“We’re now in the top 10 in the UK in terms of efficiency. The NLW gave us a boost by shortening the timeline for investments in tech, which we spent a seven-digit sum on.”

Meanwhile, Booker Wholesale CEO Charles Wilson, who notes that Booker pays more than the NLW, also talks up the importance of investing in efficiency improvements across the business as a way of preparing for potentially marked increases in the NLW.

Making morale matter

Janet Lung Standing, director at Janet Standing Consultancy, a strategy development consultancy, believes that the wage rise is a positive change that will help both individuals and the economy in the mid-to long-term.

“Companies that have workers who aren’t distracted by making ends meet will have better productivity levels,” she says. “The competitive edge will come from companies with leaders who understand this, so are in a position to motivate their workforce accordingly.”

Standing argues that it is likely to be smaller wholesalers who can do this best, as the bosses tend to be the owners, so know the frontline staff personally.

In contrast, the morale of employees in bigger businesses, where there is a management hierarchy, may prove to be an area of concern.

Filshill’s Hannah says: “Should you have a supervisor being paid a higher wage and now their subordinate is being paid a wage closer to theirs, you have to wonder whether the supervisor is happy shouldering more responsibility for a fraction more of the pay.”

To counteract issues such as these, employers must take measures to maintain employees’ confidence. One way to do this is to avoid cutting bonuses where possible; another is organising company social events. In any business, an enthusiastic workforce that feels like it is being looked after is more likely to have a culture of hard work.

Extra training is another way of getting the most out of employees in the wake of wage rises; it is also a way to make staff feel empowered. Areas where this could be valuable are IT or manual handling roles, as it will avoid the need to employ specialists for specific tasks. For smaller wholesalers in particular, it is essential for employees to know how to work IT systems.

Whatever the outcome of the general election and the winners’ plans for both the national minimum wage and the NLW, it’s clear that there are measures wholesalers of all sizes can take to ensure that a rise in the wage bill doesn’t have a detrimental effect on productivity.