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Will the minimum wage rise hurt your portfolio?

Joanna Faith
Written By:
Joanna Faith

A new living wage comes in next April. While it will be good news for workers, it could have negative implications for companies you invest in.

In April next year, the government will introduce a compulsory ‘national living wage’ (NLW) of £7.20 an hour for all workers aged 25 and over.

This is 50p more than the prevailing National Minimum Wage, which will still apply for employees aged 24 and under.

The new NLW will be introduced in stages until 2020, at which time companies will be required to pay a minimum of £9 an hour.

Since the Chancellor announced the initiative in his Summer Budget, a handful of big businesses including pub giant Wetherspoons and recruitment firm Manpower have spoken publicly about how it will increase their wage bills.

This will undoubtedly have left investors nervous.

However, Chris Wright, who manages the Premier Ethical fund, thinks people should be sceptical of firms who complain too vigorously.

“If you invest in a company that can’t afford the living wage you might want to consider how good a business it actually is,” he says.

While this may be the case, the reality is some industries and sectors will be hurt more than others.


Retail is one area most susceptible to wage changes because it relies heavily on low paid staff.

Bosses of big retailers including Tesco have said the higher wage will put pressure on their businesses.

However, despite almost 40% of workers in the space being affected by the NLW, according to research by the Resolution Foundation, Ian Woolley, an investment analyst at Hawksmoor Investment Management, says the changes “appear manageable”.

“The retail sector is in a relatively good position to manage the upcoming increase in staff costs,” he says.

Take Next as an example. The high street chain has said it will respond to the new wage with a combination of select price hikes and fewer-but-better-quality staff.

But as Woolley points out, price increases will affect companies in the sector across the board.

“Increases in staff costs affect most retail businesses to a similar extent, so shouldn’t greatly impact competiveness,” he says.

“This is particularly the case considering the large proportion of Next’s customers will have a pay rise too: if wages keep pace with prices, the demand for clothing shouldn’t be overly impacted.”

Not all retailers are concerned. Morrisons seemingly backed the NLW by announcing plans in September to increase its hourly rate for its almost 90,000 store staff to £8.20 an hour from a previous minimum of £6.83.

One type of business in the space that might feel the pinch is discount retailers.

“Poundland, for example, presumably cannot raise their prices without requiring a change of trading name,” says Woolley.

“In the low-margin, price inelastic business of discount retail, cost control is everything.”


As alluded to above, the founder of JD Wetherspoon has warned the new living wage risks further pub closures, especially in less affluent areas.

Woolley is equally concerned about pub industry profits, which, he says, are likely to feel the “NLW pinch acutely”.

“For the publican, staff account for 30% of total costs as compared to just 10% for a major supermarket. This comes at a difficult time for the great British pub anyway with the rise and rise of the home entrainment system, the end of the beer-tie model, and an unequal tax regime,” he says.

“This year supermarket sales of alcohol have overtaken those of pubs for the first time ever.”

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Companies in this sector are known for hiring cheap labour. An obvious example is Mitie, which provides outsourced low-skilled staff.

Woolley says the new higher wage will be “hugely challenging” for this business and others like it.

However, Wright says the new wage policy will make staff more productive.

He notes that while Mitie’s share price initially fell after the NLW announcement, it has since rebounded 11%.

“This shows the market thinks it [the NLW] won’t be a problem,” he says.

Mitie has publicly backed the new law.

“We are positive about this move, which ensures that those of our people who are affected, are better rewarded and feel more motivated to do the jobs they do. It will also improve retention rates across our business,” the firm said in its September trading update.


One area set to benefit from a higher minimum wage is technology.

Woolley says: “By substantially increasing the cost of labour, the NLW will effectively price out the market the worker who cannot add sufficient value.

“As the cost of technology falls and the price of labour rises, an investment into automation and robotics becomes an economic necessity for more companies.”

He believes there are “huge” investment opportunities in technology. One technology company he backs is Laird, which manufactures components for smartphones, games consoles, and increasingly for use in tech-heavy connected cars.

Laird has been on the Hawksmoor equity buy list since January 2015.