High street stalwart the John Lewis Partnership is considering further curbs on staff benefits as it becomes the latest retailer to fight back against soaring costs for the sector.
Documents seen by City A.M. suggest the escalating national living wage could cost the John Lewis Partnership an additional £171m in 2020. Between 2015, when the policy was announced, and 2020, the cumulative amount could come to nearly £500m.
The company's lowest-paid staff earn hourly rates that already exceed the national living wage, but it will be hit by a "ripple effect" as higher levels of pay need to rise to maintain the gap between those employees and staff at the bottom of the ladder.
The 2020 hit is roughly equivalent to the current bonus paid out to the company's staff in a dividend each year.
How the John Lewis Partnership is changing
Following a review, new staff at Waitrose – which falls under the John Lewis Partnership – will not receive paid breaks. Existing staff were also asked to give up paid breaks from 1 January. The company insists no employee will be worse off under the reforms. However, premium pay for all John Lewis Partnership staff is also under review. Premium pay sees staff earn more on Sundays and Bank holidays; other retailers, such as M&S and Morrisons, have recently slashed premium pay.
In discussions between staff, one managing director told colleagues the John Lewis Partnership could save £12m by slashing so-called leisure benefits, which subsidise staff trips to "a massive array of attractions and venues". However, it was noted that these perks are "hugely valued" by staff, and scrapping them would not offset the hit from a rising national living wage.
The retail giant cut overtime and Sunday pay for new Waitrose employees in April, and said the changes were not motivated by the national living wage. City A.M. understands that management estimates savings from the move will be £3m-£4m this year, rising to £60m-£70m over the next five years.
Speaking to staff in July, the John Lewis Partnership's chairman Sir Charlie Mayfield said: "We have a huge variety of historic premium pay arrangements and some at least are incompatible with the principle that we must uphold of pay for performance.
"They are also increasingly out of line with the market. We need to tackle this, but I want to be clear that this is not primarily to save money in total."
The news comes as MPs in the House of Commons supported a motion that the government should close "loopholes" in the national living wage legislation, whereby businesses cut employee perks to save money lost on higher wages.
A focus on staff productivity
The John Lewis Partnership intends to increase its basic pay rate to £10 per hour by 2020, City A.M. understands, ahead of the national living wage rate of £9 per hour by 2020.
Waitrose said that staff losing paid breaks would be given a higher hourly rate, and that employees could opt to keep paid breaks if they so wished.
New staff will not be recruited at a higher hourly rate to compensate for not receiving paid breaks.
"As they are joining on unpaid breaks, you do not need to compensate for the loss of something they never had," Waitrose said in a communication to staff.
In a discussion session between staff and management in 2015, former John Lewis managing director Andy Street said he thinks the business should aim to pay employees £12-£13 per hour, and that this could be achieved by improving productivity.
Mayfield told employees this July that the company is making changes because retail is "suffering" and that "profitability across the industry will not recover to previous levels."
"There are no easy choices," he said. "This is essentially why we are reducing and redirecting levels of capital investment."
A sector under pressure
Julie Palmer, partner at insolvency firm Begbies Traynor, which has been analysing insolvency rates in retail, said: "Cutting bonuses enables you to maintain your staff levels and that allows you to maintain the customer services, it’s the least risky option for retailers.
"We are in a market of rising prices at the moment, not only the national living wage but also the post-Brexit exchange rates movements.
"If those can’t be passed on, retailers will have to look at reducing the cost of staff or number of staff, and if they can’t, we’ll see retailers moving towards insolvency."
The British Retail Consortium (BRC), which supports the national living wage, said: “It’s important to recognise that the extra costs to retailers stemming from the national living wage come on top of new charges such as the Apprenticeship Levy and rising business rates."
The spokesperson added: "We’re now in the fourth year of falling shop prices and so in an industry that already has small margins it’s important that future increases in the NLW don’t add to this already heavy burden."
The growing trend for cuts to staff perks
Other retailers such as M&S and Tesco have been cutting staff benefits in response to rising costs. Around a year ago Morrisons said it would cut Sunday pay and paid breaks. M&S is cutting premium pay for staff on Sundays and bank holidays.
Tesco announced in February that it would cut pay rates for night shifts and weekend shifts. The retailer now faces a lawsuit from long-serving employees who claim the business' changes discriminate against older workers.
A John Lewis spokesperson said: "We continue to pay well above the NLW and to give you a sense of the scale of that, in this year’s pay review in March, rates increased by 5.1 per cent on average for our lowest paid partners. This year, we chose to invest £33m in our non-management Partners at pay review, whereas had we simply complied with the National Living Wage, costs would have been only £3m higher than last year."
The company said its figures came from modelling carried out in 2015 to give more information to staff about how th company maintains "unique pay for performance policy".
"Our Partners are co-owners of our business, and they have rightfully asked to understand what the introduction of the National Living Wage could mean to their business," the spokesperson said.