UK Autumn Budget: crucial next steps for retailers

As businesses assess the impact of the Chancellor’s recent announcements, there are actions retailers can take now to mitigate the impact on costs.
 

A week on from the Chancellor’s announcements, it is clear that the UK’s Autumn Budget is a challenging one for business. Not all industries will be affected equally, though, and even within sectors the impact will vary. Over the next few weeks, we will take an industry-specific look at several sectors – retail, hospitality and leisure, as well as the private equity and financing impacts – and the immediate steps to take to contain cost bases and protect trading outlooks. Our series begins here with the retail industry.

It is sectors including retail with large, part-time, or relatively lower paid workforces that will bear the brunt of the increase in employer National Insurance contributions (NICs) from 13.8% to 15%, and the Chancellor’s decision to nearly halve the threshold at which employers become liable for it (from £9,100 a year down to £5,000). These changes alone are expected to deliver £25 billion of the Budget’s £40 billion in projected new tax income. 

Retailers also face larger-than-expected increases in the National Minimum Wage and National Living Wage, and potentially higher costs from suppliers. While the Bank of England has recently cut interest rates again to 4.75%, Governor Andrew Bailey also outlined the likelihood of inflation being boosted as a result of the Budget and interest rates remaining higher for longer. 

The challenges do not stop there. Companies have yet to contend with government plans for a zero-waste economy, an overhaul of business rates, and a forthcoming Employment Rights Bill, all of which are likely to increase the cost of doing business. 

Retailers take stock

For a sector already struggling with cost inflation, cash-strapped customers and low margins, the Autumn Budget delivered an unexpectedly heavy blow. Retailers are looking at direct hits to their cost base – reportedly to the tune of £140m for Sainsbury’s as a result of NICS alone – free cash flow, profitability and, by extension, their share price.

Retail is the largest private-sector employer in the UK, supporting three million direct jobs and a further 2.7 million in the supply chain, many of which are part-time or entry-level posts. The tax rises on employers will hit hard: the British Retail Consortium (BRC) estimates retailers are facing £2.5 billion in additional costs because of the increase in employer NICs and the larger than expected rise to the National Living Wage. In addition, implementing the Employment Rights Bill might add between £300 million and £800 million to the wage bill, according to the industry association. Retailers can also expect cost pressures to feed through from their supply chains, as the latter will also be facing higher labour costs.

An overhaul of business rates, slated for 2026, is likely to have an unequal impact across the industry. The government is promising to fund a reduction in rates for small businesses by increasing rates for large ones with a rateable value above £500,000. This altered equation is expected to make city convenience stores more profitable and larger stores less so, strengthening the position of retailers that operate a mix of both, while placing pure-play superstore retailers at a disadvantage. If larger stores become unprofitable, there is a real possibility that those that are already challenged could be closed.  

A three-pronged defence

These changes are causing retail leadership teams across the nation to rerun forecasts and reconsider opex budgets, capex commitments, and margin expectations.  

In the opex budget, management teams must take a fresh look at labour and non-labour spend. There may be room for additional efficiency gains through labour reductions or offering part-time workers fewer hours, although the industry has already shed almost 400,000 jobs in the past three years, meaning the room for manoeuvre may be limited. 

Retailers could also consider outsourcing part of their labour needs to third-party business service providers – although the latter will also be seeking to pass on their own higher employment costs to clients. Meanwhile, capex will require reprioritisation across productivity and growth – the need to drive better return on investment has become even more critical. 

Even when taken together, these labour-saving measures, in many cases, may not be able to offset the full impact of the Budget’s tax increases on the cost base. Given the margin structures of most retailers, it is highly likely that companies will have to revisit their pricing strategies as well. 

We’re likely therefore to see more price inflation coming through the system. The question is, how much of this can be passed on to shoppers, and on what kinds of goods? Already, price sensitivity is running high. Raise prices too quickly and retailers risk losing market share to their competitors. Keeping a lid on prices, on the other hand, could erode margins and force even higher rises later down the line, or even tip some of the most vulnerable businesses into insolvency. 

Retailers, then, need to consider pricing strategies carefully. To do so, they will need to model the impact of the Budget on their cost base. In addition, they should repeat the exercise for the cost base of their competitors to gain insights into what their response might be under different scenarios. Companies should also carefully model the ability and willingness of their own consumers to pay higher prices. 

We have already seen reports of pricing responses from Sainsbury’s and M&S, with the CEO of the former also referencing the pressures already faced in the hospitality industry due to higher restaurant prices – an industry we will cover in our next article. Resulting strategies may be reflected in a single increase now on a basket of goods, or incremental price increases staggered over time. In addition, the hike in the minimum wage and living wage may provide a temporary wave of demand from consumers in a lower wage bracket that retailers must capture before inflation kicks in. 

Finally, retailers should factor in the known unknowns. These include the likelihood of higher borrowing costs and the potential impact of changes to business rates.

We know that it is tough out there, but we believe retailers have a range of strategies to respond to the Autumn Budget, despite the unexpected severity of the impacts that it has catalysed. The sooner they act, the more effective these measures are likely to be.

Read our Budget reflections for Hospitality and Leisure: