Background
As the UK enters the business end of the Brexit negotiations, its economy has shown surprising resilience since the referendum in June 2016. The FTSE 100 and 250 is approximately 20% above pre-referendum levels at the time of writing. The economy has avoided a recession, dealt with a weakened Sterling, and employment remains at record highs. However, the level of uncertainty facing UK industry remains high until the EU talks are concluded. Indeed, we are constantly reminded by Brexiteers and Remainers alike that nothing is final until everything is agreed.
The reality of growth-absent quantitative easing at a global level is already spooking markets, with the global corrections witnessed in February. In the UK, productivity is stubbornly low and the consumer is under pressure from rising inflation and limited wage growth. In addition, the UK is facing increasing competition from mainland Europe in its appeal for working conditions. Along with Brexit uncertainty, these factors have hindered boardrooms’ decision making, particularly in areas such as employment and investment.
The UK workforce – current migration landscape
EU leavers has increased to 130,000 from 95,000 to YE Sep 17 (having not risen past 100,000 since 2010)
Net EU migration was 90,000 for the year to September 2017, the lowest levels for 5 years. For those coming to the UK, the ONS reports that fewer were coming for work related reasons. This means that employers have needed to look further afield which involves more time, visas and cost.
Other countries, particularly English speaking nations such as Australia, New Zealand and South Africa have always provided a good source of labour and may have offset this decline. However, with the weakness of Sterling vs. these respective currencies, the UK is a less competitive market for an employee, who traditionally views it as an attractive base to travel across Europe.
Sterling has weakened by 14% vs. Australian dollar since June 2016
The EU recovery
The other side of the migration story is that Europe as a whole is recovering – GDP growth has been steadily increasing and fewer column inches depict an image of doom in the Greek, Spanish or Italian markets. Subsequently, investment is increasing with confidence.
The unemployment rate in the EU has fallen from 11.0% to 7.3% since the peak in 2013 according to Eurostat. In other words, domestic demand is growing and the UK no longer offers the safe haven for workers as it did during the European recession. Forecast growth from IMF shows that the continent is set to outperform the UK over the next few years, representing a pull factor for employees. This draws increasing allocation of investment from buyers; we are already seeing an increasing allocation for Europe (excluding UK) in terms of intended deal flow, especially from US and European funds:
A survey of 136 members of the British Hospitality Association (BHA), representing 266,799 employees, found that 25.2% of their workforce comes from the continent, meaning that any material shift in EU workers in the UK could lead to staff shortages and wage inflation. It is widely expected that London and the South East will be more exposed, however the data shows other regions will also be significantly affected, such as Scotland and the South West. (Northern Ireland has a high percentage given the number of workers who are from the Republic of Ireland).
Wage inflation
The net result of the UK’s appeal as a location to work is, unsurprisingly, wage inflation for certain sectors. Hospitality has seen the largest increase in advertised salary levels of all the major industries. Data from CV library shows a 6.5% increase year on year (to February 2018) for pay in the sector. This will obviously have a knock on impact on pay reviews for employees, and operators will need to find more innovative ways of retaining staff in order to protect margins.
What UK operators within leisure & retail need to know
In summary, while direction of travel appears to be for a softer Brexit, there is no certainty, and what is clear is that employees are voting with their feet. What does this mean for L&R sector operators and potential transactions? With all macro-economic factors indicating a faster growing continent vs UK, decision makers should be mindful of the following:
- Wage inflation is already coming through, especially for hospitality
- Increased diligence is needed with regards to source of labour and potential exposure to EU and non-EU workers
- Employers are starting to look further afield for skilled staff, beyond the EU, which will have higher associated costs and challenges from limited Tier 2 visas
- Industry margins will continue to be under pressure which means potential short-term risks to profitability
- Retention challenges are expected in the UK, with employers needing to look at other initiatives to retain staff
The sector has faced these challenges before with the introduction of the National Minimum Wage and unfortunately, these headwinds are unlikely to dissipate in the near future. As is always the case, planning for these eventualities is key and those looking ahead will be able to mitigate some of these risks.