27th jan 2017
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The long-standing puzzle remains unsolved in a year of many changes. In Quarter 2 (2016), we witnessed the collapse of the high street stalwart, British Home Stores, due to a series of leadership failures resulting in 11,000 job losses. Also important to note is a great deal of change within the labour market, with the introduction of an increased NLW which is forecast to directly benefit 2.7 million people. And then there was the call for Brexit.
A Turbulent Time.
Many argue that the events prior to and following the Brexit vote have cast a shadow over the future of the UK, while productivity remains well below fellow G7 advanced economies. Labour Productivity – the ONS Q2 Bulletin brought news of 0.6% growth in Output per Hour since Quarter 1. For the first time since 2008, UK productivity had returned to pre-downturn levels. In the same breath, the Labour Force Survey reported an increase in the number of workers (0.5%), and the number of jobs (0.6%) while in November 2016 the UK reached its lowest unemployment rate for 11 years at 4.8%.
Preliminary estimates suggest that between October and December 2016, UK GDP increased by 0.6% on Quarter 3. Although growth appears to be slowing, estimates suggest that GDP grew by 2.0% overall during 2016. Services were a key contributor with an estimated GDP growth of 2.8% in 2016 with retail trade contributing an increase of 5.0%. Following the vote for Brexit, concerns were raised in anticipation of a decline in economic growth – so far at least, this projection has not yet been realised. However, Britain is facing a challenging time ahead while preparing for a future outside of the European Union. Prime Minister Theresa May is hoping to trigger Article 50 as soon as March 2017 with proposed plans to change the existing free movement rules – how will this impact UK productivity?
Skill Matches – missing piece of the productivity puzzle?
OECD stats suggest that the UK has a high rate of mismatch between existing skills and those required for the job. This macro outlook is propagated from the micro level – we see this lack of skills matching consistently across retailers estates. OECD estimates that as many as 24% of workers in the UK have mismatched skills which points towards the need to align education with skills in demand. One industry keen to improve its image is road haulage. A report from the Chartered Institute for Logistics and Transport suggests that the average age of UK HGV licensed drivers has reached 57 years old. While 85% of goods consumed in the UK are moved by road, both service and manufacturing industries in particular face a growing challenge to deliver customer excellence as they strive to deliver to even stricter deadlines. The proposal to implement a work permit system could impact the industry heavily as according to the FTA, nearly 10% of HGV drivers currently employed in the UK are EU nationals.
A Living Wage.
As highlighted earlier, the NLW was implemented across the UK on the 1st April 2016, bringing the minimum wage for 25+ year olds to £7.20ph, with incremental increases projected to take the NLW beyond £9ph over the next 3 years. In the autumn 2015 CIPD Labour Market Outlooks Survey, a large proportion of retailers expected NLW to greatly impact their staffing costs, in turn making a focus on productivity more important. Despite the NLW being solely applicable to those aged 25+, latest figures suggest that between 10-15% employees aged 16-24 are paid a wage equivalent to the NLW. In April 2017 the NLW will be raised to £7.50, an increase of 30 pence since the same time last year, likely to be another headache for retailers while drawing up the budgets for next year.
As a result of such changes, the cost of labour has increased, and is set to increase even further. Q2 saw Output per Worker grow by 0.2% on the quarter, while Output per Job remained flat due to a reduction in average hours worked. A marginal increase in Output per Hour (0.6% set against a rise of 1.2% (vs. Q1) whole economy unit labour costs should be a cause for concern for many employers. These figures represent labour costs outgrowing productivity – but why?
How does the UK compare?
Many suggest that meagre wages and employment instability are to blame. The concept of ‘flexible working’ has been floating around for several years now, billed as a productivity silver bullet by some, the aim of recruiting and retaining the right people for the right amount of time seems like a great value means of achieving business objectives, however the management overhead to deliver this approach effectively is consistently underestimated.
This approach only turns out well if the business is living it, fully flexible employees are likely to be less engaged meaning it’s up to the business, specifically management, at every level, to ensure that there isn’t a counter-productive impact from dis-engaged colleagues.
SWL have seen best intentions in this area fail time and again as management priorities change; this always impacts productivity and based on this the trend away from full flex and zero hours is a wise one. Improved security for colleagues improves engagement (which SWL treat as a metric built from a basket of measures), which in turn improves businesses overall productivity.
Businesses across Sweden have reduced the working day from 8 to 6 hours though offering the same wage, the benefits gained were considerable including a reduction in sick leave and improved employee wellbeing. Toyota centres in Gothenburg, Sweden, have been operating a 6 hour working day for over 13 years, delivering profit increases and lower turnover rates, while this approach is difficult to implement in retail, especially in light of NLW, it does show the positive impact of more engaged workers on profits.
Overworked and under-performing?
Interestingly, when reviewing hours worked in the UK against fellow G7 countries, working more hours than our counterparts in France and Germany makes little positive difference to the productivity gap. The UK has slightly narrowed the productivity margin between the UK, Italy, France, Germany and Canada, though has also allowed Japan to gain further ground. GDP per Hour worked suggests an 18 percentage point negative difference between UK and G7 economies. Productivity is a serious item on the country’s to-do-list and should be for every business.
What does all of this mean for retailers?
Retailers face a period of uncertainty with projected rising labour costs as well as increasing supplier costs. The BRC have warned that a combination of a weaker pound, rising input costs alongside the rising NLW could bring a wealth of uncertainty to retailers. On the other hand, as a Hargreaves Lansdown Analyst suggested recently, the weakness of sterling can offer an opportunity for visitors to take advantage of the deflated price following a recent uplift in UK sales at Burberry. As political and economic uncertainties capture the minds of many retail consumers, retailers must work hard to offer customers the best possible experience.
Robust controls will support the retailer to assure profitability. While sales are increasing across most retail verticals, maintaining profitability is increasingly difficult. The British Retail Consortium reported that the final week of 2016 brought a much needed gift of a solid finish after a roller-coaster year. While British retail experienced slower total growth in 2016 (1.2%) than in 2015 (1.8%) Christmas witnessed much stronger performance than anticipated. With FY17/18 just around the corner, there is no time like the present to make space for productivity, both in the boardroom and on the shop floor.
WHAT WE KNOW FOR SURE AT SWL…
Is that robust control is pivotal in running a successful retail business. By equipping your senior team vital actionable intelligence from an SWL Productivity HealthCheck the business can ‘act on fact’ ensuring the right decisions are made to improve productivity. SWL then underpins these learnings and process improvements with the correct tools for the job, SWL’s productivity suite covers from labour budgeting to performance monitoring ensuring that improvements are long lived and repeatable.