As all factions of the UK fresh produce sector digest the government’s plans to introduce an obligatory National Living Wage, Produce Business UK examines the potential ways in which the contentious strategy could affect the fresh produce supply chain and how businesses could try to offset the increase in labour cost
The government’s plan to introduce a National Living Wage from April 2016, announced last month (July, 2015) as part of chancellor George Osborne’s summer budget, is creating widespread concern throughout many different industries – not least the fresh produce sector.
What is the National Living Wage (NLW)?
The NLW is a compulsory rate of pay of £7.20 an hour for all working people aged 25 and upwards. It will be introduced next April (2016) and the Low Pay Commission is set to recommend future rises, with the government aiming to reach a target of more than £9 an hour by 2020. The National Minimum Wage (NMW), which is currently £6.50 an hour, will still apply to under 25s.
While the majority of people are still processing the news, produce industry representatives have already expressed concern that – given that labour is one of the main costs for fresh fruit and vegetable growers and for retailers – the above-inflation increase of the NLW is going to put a significant strain on the supply chain.
Bolt from the blue
One of the initial causes for concern is the fact that the NLW announcement has come as a surprise. National Farmers Union (NFU) deputy president Minette Batters claims the industry is unprepared for this level of impending change.
“Agricultural production is planned, costed and budgeted well in advance so this announcement has come with little warning to our farmer and grower members, who will be extremely concerned about the upward pressures throughout their businesses and over the lack of time to adapt accordingly,” she explains.
Batters has written to farming minister George Eustice asking for a delay to the introduction of the NLW. “Horticulture is a very progressive and innovative sector,” she adds. “The sector has a fantastic track record of growth, which has seen the cropping season extended and new products launched. However, just as Defra started work on its 25-year Food and Farming Growth Plan, there are real concerns that this rapid inflation in wage costs could have a permanent damaging impact – making farmers less competitive compared with others in the European Union.”
Making it fair for all
Another key worry is that – even though the majority of businesses operating within the sector pay a basic rate that is more than the NMW – the introduction of the NLW is likely to create a ripple effect throughout companies’ pay structures.
Jack Ward, chief executive of British Growers Association (BGA), explains: “Although the living wage only applies to over 25s, it is likely to impact on the pay differentials which operate in most employment structures. If there is a significant increase in basic rates of pay, this will put pressure on businesses to increase rates for employees currently earning above the living wage rate in order to maintain differentials.”
British Retail Consortium representative John Munro adds that a similar situation is likely to occur in the retail sector. “In order to make working at different levels meaningful you have to maintain a differential,” he notes.
Higher prices for consumers?
Munro also emphasises that a major concern for retailers is not the jump to £7.20 an hour but rather the planned increase to around £9 an hour by 2020. He explains: “It’s key to note that the retail industry pays on average £7.30 an hour, whereas the NLW is £7.20 an hour. So even in April, for most retailers there will not be a direct impact. The concern is how they get to £9 an hour by 2020. People are the largest cost to retail businesses so obviously this will present an increased cost.”
Munro asserts that because of competition, there’s a “confidence” that this cost will not be passed onto the consumer. He says: “They [retailers] will be looking at their operations and how they can make them leaner – and how they can increase the productivity of their workforce. It’s about making the existing workforce work harder. So we will probably see fewer increases in job numbers.”
However, Ward at BGA in fact hopes that any increases to growers’ labour costs will indeed be reflected in higher consumer prices. “To remain financially sustainable these additional labour costs will need to be recovered,” he points out. “How the recovery of these costs will take place in practice will vary from business to business. Ultimately, it should lead to higher consumer prices to reflect the increased production costs.”
Driving the case for automation?
Industry representatives and analysts believe that businesses could try to offset rising labour costs by increasing their use of machinery – either in the field or in the packhouse.
Ward explains: “Part of the solution will lie in increased consumer prices but the living wage will also drive change within the production process and focus more attention on automated systems to reduce the reliance on employed labour.”
Similarly, a report in response to the NLW by the market analyst Moody’s suggests that accelerated automation, along with improved staff sufficiency and, to some degree, lower staff levels, could be how some of the large food retailers tackle this issue.
Moody’s vice-president and senior analyst Sven Reinke says: “Labour-intensive supermarkets may increase automation, such as self checkouts.” Reinke adds that a further gradual shift towards the online channel could also provide cost reduction opportunities for retailers since it reduces the need for “labour-intense” stores.
Darker times ahead?
Reinke also points out that higher labour costs could also accelerate the shift to retailers operating “dark stores” – that is, warehouses that are built specifically to facilitate online shopping, and prompt a u-turn on plans for greater staff numbers in store.
“Tesco already operates six dark stores and Sainsbury’s will open its first dark store in 2016 to service its growing online business,” he notes. “We also anticipate that Tesco, Morrisons and Sainsbury’s could rethink their strategy of putting more people on shop floors to improve service and customer experience as a way to differentiate themselves from the discounters.”
Adapting to change
Given the NLW announcement was only made a few weeks ago, it’s difficult to accurately predict what all of the outcomes might be. But, as Ward points out, the fruit and vegetable sector is well-known for its ability to adapt to a constantly changing environment.
The produce industry will inevitably need to find ways of coping with this new challenge. As for retailers, BRC’s Munroe adds that, if necessary, the sector would work with the government in future to see where retailers’ [price] pressures could be eased.