Round table: The effect of the National Living Wage in 2016

27 January 2016 by
Round table: The effect of the National Living Wage in 2016

In July 2015, the government announced that it will introduce a new National Living Wage, meaning over 25s must be paid £7.20 an hour, rising to a projected £9.35 by 2020. With the legislation set to come into force in April, The Caterer partnered with Christie + Co to discuss its implications as well as the effect of international investment on the property market in the coming year. Tom Vaughan reports

The attendees

Martin Couchman, deputy chief executive, British Hospitality Association

Sir James Devitt, director, Herald Hotels

Heiko Figge, head of hospitality and leisure, Moorfield Group

Joanne Jia, head of investment (Asia), Christie + Co

Jeremy Jones, director, head of hotels (brokerage), Christie + Co

Paul Johnson, chief executive, Kew Green Hotels

Simon Lester, chairman and chief executive, Lester Hotels

Matthew Welbourn, managing director, Compass Hospitality

Barrie Williams, director and head of hotels, Christie + Co

The National Living Wage will be introduced from April. What effect is it going to have on businesses?

Martin Couchman (MC): It was the biggest shock I've had from a government announcement in over 20 years. We thought they might do something around the edges, but not a move in this particular way. The general consensus is that the only way this is going to work is 7% compound increases, year on year, until 2020.

Paul Johnson (PJ):

Heiko Figge (HF): It's morally right, we can all agree with that. And we can all agree that we've just gone through a very positive period, so if ever there was a time to introduce it, now must be it. It's just a question of how it is best implemented. My view is that it is long overdue. We have always been perceived to be one of the lowest-paying industries. Of course, you can't absorb it, so we have to look at things like productivity - how do we get our people better trained?

What kind of pressure will it put on hospitality businesses?

Simon Lester (SL): When you go into the regions, hotels are still under massive pressure. We have big groups coming to us and asking for discounts and I have to ask them "Are you crazy?". The question is, how can we educate our customers to accept that they will have to pay more if they want to have a product of a reasonable quality? That is our challenge because no one argues with the social-economic issue of paying people the right salary.

Matthew Welbourn (MW): They judge us on a price comparison website, so the reality is that prices won't rise because we'll continue to undercut each other. The mid-market hotels that haven't got economies of scale or price will really feel the pain.

Barrie Williams (BW): Interestingly, there was some work done by STR in terms of revenue per available room between 2007 and 2014, and in actual value terms every single region is above the 2007 peak. But if you adjust it for inflation, the only two that are up are London - which was 1.1% up - and Aberdeen. However, the performance of Aberdeen in the last 12 months means that this region is no longer up on 2007. It does show, though, that there's still revpar improvements to be made in the regions versus 2007.

How do you plan to maintain profitability?

SL: I think a lot of hotels became very good at becoming more efficient and more lean in order to survive. I'm not sure there's a lot of fat left in our business.

MW: I agree. The productivity squeeze of the recession is still with us, but I think we'll see more investment in plant and machinery. That extra dishwasher that saves you a half day's labour - you are going to invest £6,000 replacing it. Or the broken ice machine that means someone has to keep running out to Tesco - you are going to get it fixed. Are you going to pay a kitchen porter £19,000 in five years time? You're not, you're going to look to technology to take some of that work away.

PJ: The only way you can really cope with it is to cut jobs. I don't think there are many front-line positions we can take out any more, so it's going to have to be management positions. We're also going to look at shift patterns. Why does a shift have to be eight hours? Why can't it be seven and a half? You're paying people half an hour less so pay doesn't go up overall. We've got a working group right now looking at ways of mitigating it.

SL: The government suggests that 60,000 jobs will be lost as a result of this, but I think that is woefully low.

MC: When the low-pay commission was first started in 1998 we had a report that said there would be massive job losses in the industry and in the long-run it was wrong. The industry actually grew. We've just had a survey commissioned and two things came out of that. When we asked what it's going to do over the next five years, most people weren't looking at big jobs cuts - more like hours cuts. Second, a lot of middle-sized businesses said that they don't know how they can absorb it without cutting service standards. These are family owned businesses and they are going to come under even more pressure.

What else can operators do to try and mitigate these costs?

SL: We've been looking at our menus closely, and it sounds terrible to say this, but in mid-market hotels you can downskill the quality of the chefs. We have one hotel where 38% of all dishes we serve are burgers. So a grill chef is a lot easier to come by than the type of chef I was hiring in a bid to make customers eat the type of food I thought they wanted. Giving them what they want is letting us make a saving.

HF: We also need to look at our shift patterns. They are so inflexible. We haven't quite sussed that life has changed. If we broke up these

historic shift patterns we might be able to solve some of our recruitment issues. Appeal to the mums who want to do a few hours around dropping their kids off. Or appeal to the people who feel like can they can work a few jobs.

PJ: I think there's a lot of opportunity for people to join purchasing consortia and to look at all cost areas. We're very good at that. When we take over hotels we increase profitability just by looking at all the different cost lines. If you've still got 30 telephone lines going into your independent hotel, then you've got far too many, as nobody uses a landline phone any more but you're paying for them. We can take over a hotel and remove £6,000 worth of line rental costs.

Since the legislation only applies to over 25s, do you anticipate that it will affect your recruitment strategy?

HF: We have a very transient industry. Not a static workforce that has been there for many, many years.

PJ: There's a high percentage of under 25s in our sector. In bars it is 47%, and in restaurants it is 39%. The impact is mitigated somewhat by those employees who you can leave on

minimum wage. What we found in the last four or five years is that there are lower wages for younger people, but supply of labour means the younger person can say: 'Put me on the National Living Wage or I won't work for you.' It's a potential for saving that I see being eroded as well.

SL: One good thing about this is we will make it a level playing field against the likes of Tesco. They can put wages up by 10p for shelf stackers and we lose a whole lot of staff. But we're not going to have a corporate policy about changing our recruitment. We're not going to have it that everyone under the age of 25 will be paid the same salary. We are going to base it on experience. We will have the flexibility in our structure.

Is it just about cutting costs?

James Devitt (JD): We're faced with something we all agree should happen and it is positive for people who are in the industry. There are larger things a company can think about, such as growing revenue rather than shaving the cost line. That is a much more fruitful discussion for the table and the industry as a whole.

HF: Regional occupancy is - correct me if I'm wrong - about 70% at a £70 rate. Of course, it moves around a bit, but there is space for properties to say, why don't you come to my business instead of another one.

PJ: Yes, we have to drive revenue. But you've got to be careful of costs the whole time. If the economy takes a downturn, you have to be as lean as you can be.

National Living Wage: meeting your obligations

The current minimum wage of £6.50 an hour will be replaced with a new rate of £7.20, which is expected to rise further to more than £9 an hour by 2020.

The concept of a living wage already exists (as recommended by the Living Wage Foundation), and has been voluntarily adopted by more than 1,000 employers across the UK who have been given Living Wage Employer status. It is set at a higher rate and is not to be confused with the new National Living Wage, which will be mandatory, and the respective rates of pay will be set by the government.

By enshrining such a living wage in law, this will compel businesses in certain industries to implement a potentially significant pay rise for many of their employees. Employers will therefore need to consider carefully how they implement this change within their organisation, including assessing the knock-on effect it is likely to have in terms of their existing pay scales, job evaluation schemes, pension costs and other employee benefit schemes. Key considerations are likely to include:

  • Unpredictability of payroll costs and subsequent issues with budgeting and forecasting.
  • Whether to retain existing pay scales and use a supplement or implement new ones.
  • Practical administration and payroll implications.
  • Any employee relations issues that might arise - for example, where an employee's wages have been inflated to a level where they are being paid as much as their supervisor. Employers should also ensure there are pay structures in place that reflect the value of jobs within the organisation. They should therefore consider whether a job evaluation study might be appropriate. Such studies have been an important tool for setting pay rates among public sector employers, particularly to ensure equality between male and female employees.

Jawaid Rehman is an employment partner at national law firm Weightmans LLP.

The effect of international property investment

Let's start out by finding out what different areas have been busy and what areas are looking attractive.

BW: During 2014 and 2015 everything has been busy. What's been interesting is that it's not a movement away from London, because London will always be attractive, but in the last 12 weeks there has been a lot of interest - from Asia, from the Middle East - in the regions. My expectation for 2016 is that the appetite and equity out there will continue.

PJ: Just talking to our guys in acquisitions - they are putting in their budgets for 2016 and 60% of it will be overseas.

Jeremy Jones (JJ): I think what's changed is that overseas buyers have discovered regional UK. Even the Qataris of this world are buying properties in non-core places: Edinburgh, Heathrow.

BW: It's not just about returns. It's about the stability of the UK - it is seen as a safe haven, from small, single assets at £7m to big, big businesses at £400m. It's freehold and it's viewed as safe.

How important is freehold? Do Asian investors understand leasehold?

Joanne Jia: So, so important. In Asian cultures, freehold property has got much more value. They see leasehold as not owning it.

PJ: We were bought by a Chinese company last year. I was out there recently and I find it astonishing that in China you never own the freehold. The state owns everything. You have a leasehold of 40 years for business and 70 for residential. They love freehold because they can't get their heads around owning it.

Where are Asian investors looking?

JJ: Some clients are still only interested in central London because even though it is expensive, it is safe. Then you come down a level where a lot of these investor's children are integrated into the school or university system here and that becomes an influence. As does the football team they support.

Joanne Jia: They want to learn. They want to show how to serve Asian clients, but they also want to learn operation and management skills.

JD: We have to be aware around the table that when they buy, they won't be selling. They are there for the long-term and need advisers for the long term. The America funds are definitely the other end of the spectrum - they ask about the exit before they make the entrance.

Why are Chinese investors looking to the UK in particular?

Joanne Jia: One of the reasons behind that is Chinese tourists are on the rise. Chinese travellers made 117 million trips in 2014 and spent £948b on those trips. And only 6% of Chinese people have passports. It is only the beginning. So these groups see a lot of potential.

PJ: If you look at China Travel Service - the largest travel agent in China - in 2015 they only sent 14,000 people to the UK. But that will double this year. Not a lot still, but the growth rate suggests it will soon be through the roof. We've already seen a large increase in Chinese guests and we're looking at implementing a corporate programme for these guests across all our IHG hotels and in other hotels where it makes sense such, as the Grand in Brighton.

What are the cultural differences with Chinese travellers and what simple things can a hotelier do to make them welcome?

PJ: Chinese people have a hot breakfast, so you need to make sure there is porridge. Providing slippers, bottled water and Chinese tea is important too. It also makes sense to have information in Chinese and Mandarin on the hotel and the local area. We put porridge on the buffet anyway, but everything else will be as a pack, which we can leave in the room. And where it makes sense, we put Chinese staff in place. Also, they use a different credit card - Union Pay - and we've already implemented that.

HF: I think foreign investment is great news for our industry. How long have we sat around tables like this and talked about the assets that are no longer fit for purpose, that are falling behind international standards? Especially in regional towns. For these investors to come in and be prepared to invest is surely good news.

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