Blackfriar: National Living Wage symbolises gamble at heart of Osborne’s policy

The chairman of JD Wetherspoon said the Government’s new National Living Wage threatens to put many pubs out of business, warning of “unsustainable pressure” on an industry struggling with taxes and competition from supermarkets.

Chancellor George Osborne last week announced a bumper pay increase in his first post-election budget, with the current £6.50 minimum wage set to rise to a £7.20 for those aged over 25 from next April.

Renamed the “living wage”, the rate will grow steadily over the following four years to around £9.35 an hour.

“Pubs contribute around 40 per cent of sales as taxes of one kind or another and are important generators of jobs,” said Mr Martin.

“Capricious initiatives by the Government, widening the financial disparity between pubs and supermarkets, will threaten the future of many more pubs,” he added, as he trimmed the group’s own profit expectations.

Wetherspoon, which operates more than 900 pubs, had already agreed to raise its average minimum pay by 8 per cent from August to £7.29.

Higher wages, price competition and investment in improvements to its pubs are depressing Wetherspoon’s margins.

Shares fell more than eight per cent yesterday after Wetherspoon said pre-tax profit in 2015-16 would be unlikely to better this year’s figures.

Many pubs have lost drink sales to much cheaper supermarkets and around 29 pubs a week are closing.

Wetherspoon, which spends almost a quarter of its revenue on wages, called on the Government to harmonise VAT sales tax and business rates for pubs and supermarkets to ease pressure.

Pub groups argue that supermarkets can subsidise alcohol prices because they do not have to pay VAT sales tax on most food sales. Pubs pay 20 per cent VAT on food they serve.

Numis analysts slashed profit expectations for the current year due to Wetherspoon’s already agreed wage increases, heightened competition from supermarkets and restaurant groups, as well as increased costs.

But Alex Paterson, an analyst at Investec Securities, said Wetherspoon might end up benefiting from the living wage, as it will boost spending power for its customers.

He added: “We suspect that higher wages not only to JD Wetherspoon’s staff, but also more widely for other workers from the subsequently announced living wage, will boost spending in JD Wetherspoon’s pubs.” That remains to be seen and symbolises the big gamble at the heart of the Government’s policy that business can absorb the cost of the National Living Wage and consumers plough the extra cash back into the economy.

Bernstein, the money manager, said the new wage equates to more input inflation and consumers should get ready to pay for it.

Analyst Bruno Monteyne describes retailers as distributors, taking input costs, adding a premium and charging this to customers.

He said the Summer Budget added another element of cost inflation, which retailers will be able to pass on to consumers.

“It impacts almost all retailers almost equally, so they all get a similar proportional hit... which they pass on to consumers,” said Mr Monteyne.

“The consumers most affected by higher food prices are likely tbhe very consumers benefiting from higher wages.”

The retailers Bernstein has spoken to about the wage increases have been “relatively sanguine” about its effects, he added.

Blackfriar hopes they are not being complacant and wonders if they might soon be adopting a similar tone to Mr Martin.