Britain’s big retailers – including Tesco, Sainsbury’s and Marks & Spencer – say they are stepping up their drive for efficiency through automation and other measures to limit the impact of rising costs on the prices they charge customers.
A the UK economy struggles to grow, the new Labour government’s solution is a hike in employer taxes to raise money for investment in infrastructure and public services, which has prompted criticism from the business community.
Retailers have said the increased social security payments, a rise in the national minimum wage, packaging levies and higher business rates – all due to come in in April – will cost the sector £7 billion a year.
Concerns over the wider economic impact of these charges sent retail share prices sharply lower this week and drove up government borrowing costs.
Retail
In the retail sector, larger players have more scope to adapt and are cushioned by previous healthy profits, but analysts have said smaller players could find themselves under severe pressure.
CEO of clothing retailer Next, Simon Wolfson, said automation in the retail industry was inevitable as companies struggled to keep costs down.
Wolfson said, “With any mechanisation project you’re always looking at a pay-back on it – you’re saying ‘what’s the saving versus the cost of the mechanisation, or AI or software.
“If the price of the mechanisation doesn’t go up, but the price of the labour it saves does go up, it’s going to mean that more projects can be justified.”
Tesco – Britain’s largest supermarket group – is also increasing automation and will open a robotic chilled distribution centre in Aylesford, southeast England, this year.
Similarly, number-two grocer Sainsburys is embracing technology by encouraging more shoppers to use its SmartShop handheld self-scanning technology.
One top 30 investor in Sainsbury’s – who also owns shares in Marks & Spencer – sympathised with Britain’s smaller retailers.
He said they would be disproportionately impacted by the employer tax hikes as they do not have the capital to mitigate it through investment in technology.
The investor said, “If you’re a business selling light bulbs from one unit in Hemel Hempstead (a town northwest of London) you can’t do it.”
'Ruthlessly Focused'
Even though Tesco faces a £250 million annual hit from the hike in employer national insurance contributions alone, CEO Ken Murphy said it would cope.
Having navigated the Covid-19 pandemic, supply chain disruption and commodity and energy inflation, he said Tesco was used to dealing with rising costs by finding savings elsewhere.
Finance chief Imran Nawaz said Tesco’s ‘Save to Invest’ programme was on track to deliver £500 million of efficiency savings in its year to February 2025, having delivered £640 million in 2023/24.
Nawaz said, “As we look ahead it’s clear it’s going to be another year where we’ll need to do a stellar job.”
Sainsbury’s – facing an additional £140 million in national insurance headwind – is similarly targeting £1 billion of cost savings by March 2027.
Clothing and food retailer M&S – facing £120 million of extra wage costs – said it aimed to pass on “as little as possible” to consumers.
M&S CEO Stuart Machin said, “My summary is: big job, but lots in our control and we’ve got to be ruthlessly focused on costs in these next 12 months.
“We talk a lot about volume growth, because the more we sell, the more than offsets some of these cost pressures.”
However, for many small players, raising prices is the only option.
A British Chambers of Commerce survey of 4,800 business, mostly with fewer than 250 staff, found 55% planned price increases – potentially hampering the fight to contain inflation and grow the economy.
And for some, more drastic action may be required.
British discount retailer Shoe Zone has said the additional costs of the budget mean some stores had become unviable and will be closed.
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