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Forget Brexit, It’s the National Living Wage the FMCG Industry Should Watch Out For

It’s no secret that the Brexit shockwaves have rippled through the food and FMCG industry. The UK’s largest manufacturing sector contributes more than £28 billion a year to the economy and across the entire chain, from farm to fork, accounts for more than 13% of the United Kingdoms national employment.

For some time now, the industry has continued to fly through the turbulence thrust upon it by the decision to leave the EU, along with apprenticeship levy’s, the introduction of workplace pensions, and the impact it has had on price, availability, quality and employment. But, is Brexit the only dark cloud looming over the future of Britain’s food and FMCG sectors, or has the media whirlwind surrounding Brexit overshadowed other dark forces at play?

Yes, we are talking about the National Living Wage.

The National Living was first announced in the July 2015 budget, where then-chancellor George Osborne set an hourly rate of £7.20 for employees aged 25 and over; it came into force in April 2016. Earlier this year, it jumped by 4% to £7.50, leaving workers better off by up to £500 a year. The goal is for the wage to sit at £9 per hour by 2020, although this has since been revised and is projected to be £8.75.

While of course, the National Living Wage was brought into play to ensure that employers were unable to exploit their workers, especially those working in lower paid industries that relied on cheap labour, such as hospitality and retail. It would also work to reduce the level of ‘in-work poverty’, of which it is reported that 60% of working families are below the poverty line, relying on food banks. Ultimately, the Government wanted to force Britain out of its ‘low-pay, low-productivity trap’.

With regards to the food and FMCG industries, it was reported that 7% of the manufacturing workforce and more than 20% of those working in agricultural positions would be receiving a pay rise in line with the mandatory increase, positions This would be individuals working in positions such as factory production lines, warehouse operatives and agricultural labour work, such as picking, that were going to benefit from an increase.

It was predicted that 4.5 workers would benefit as soon as the national living wage was introduced, with this figure rising to 6 million (23% of the workforce) by 2020. The introduction of the wage equated to a 10.8% pay rise for those who had been earning the minimum wage for 12 months or more and was five times the earnings growth rate in the UK back in April 2015.

Is the National Living Wage the answer when it comes to ensuring that the UK workforce has enough income to support themselves and their family when compared to the cost of living? Does the increase enable them to combat the impact of rising inflation (currently at 3%)? Because naturally, as employers are now struggling to cope with their increased payroll bills, as not only the wages they are required to pay has risen, but so has their national insurance and workplace contributions.

The National Living Wage costs a business in the FMCG or food sector around an extra £3 million per year. Of course, the domino effect of this increase is going to be passed onto the consumer, and it has been predicted that the overall increase in retail prices will sit at £3,260, 48. Labour intensive crops such as fruit and vegetables that are picked by hand could become unaffordable as labour costs could increase to 70% of turnover; the NFU have calculated that the National Living Wage will push up the costs of seasonal wages for growing businesses by 35% by 2021. This is equivalent to annual wages inflating by 7% each year – far higher than the expected wage inflation of 2.5%.

 

It is also expected that there will be an increased battle between retailers, suppliers and producers when it comes to terms; however, this has been the case since the recession and it will be a challenge to see progress on this front.

While of course, the cost of goods is going to cause the public to feel the pinch, it’s the employees that will also directly experience the negative repercussions of the National Living Wage. There will be job losses, along with a reduction in staff hours and overtime as employers are unable to meet the increases, with a predicted labour force reduction of 2.1%.

For those that are not affected by reduced hours or job cuts, they may find that any generous bonus or benefit packages are revisited by employers in order to fund the pay increases.

There are also FMCG and Food brands that have already experienced the severity of the impact when it comes to failing to pay the minimum wage, as they were featured on a list of 200 companies named and shamed for exploiting staff, among those featured were peppermint UK, Foods Catering Academy and Mr Moos Family Butchers.

Although on the other hand, there may be a positive outcome, as firms are forced to search for ways in which they can become more efficient and innovative, areas that we know the FMCG has previously lagged in. The new model may also begin to impact staff retention rates, improving turnover and lowering recruitment costs, and they become more profitable as a result.

The National Living Wage is set to increase until the year 2020, and when coupled with the effects of Brexit, it is very real that the UK will struggle to perform in the global manufacturing market, or firms look to outsources areas of operations to outside the UK because the rising labour costs is leading to their business being unsustainable.

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