The UK’s hospitality and retail industries are bracing for a multi-million-pound shock following changes to national insurance contributions (NICs) in the recent Autumn Budget.
Experts predict that many businesses in these sectors may soon enter “survival mode,” a reaction to the compounded pressures of rising costs, lower profit margins, and uncertain economic conditions.
Go deeper with GlobalData
Short-term strategies to stay afloat
Gemma Thompson, Senior Consultant for Strategy and Growth at Proxima, a Bain & Co. firm, explains that survival mode often equates to panic measures taken to remain profitable in the face of escalating costs.
“Employers in low-wage sectors such as hospitality and retail will see a higher impact from the changes. For some businesses, survival mode will involve cost-cutting through reducing staff numbers and negotiating hard with suppliers,” Thompson remarks.
She highlights that businesses may also resort to passing costs on to customers or abandoning investments in innovation to offset the financial pressure.
“The risk is that businesses become so focused on surviving in the short term that longer-term strategy, growth, and competitive advantage not only take a backseat but are also inhibited by decisions made in isolation from these future-facing imperatives,” Thompson warns.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThompson references the Proxima State of Spend Report, which shows that labour costs account for around 24% of revenues in the FTSE 350’s discretionary spend category, while third-party suppliers make up the remaining 76%.
As a result, any increase in labour-related costs will impact both categories. “A 10% reduction in non-labour costs, such as purchased goods and services, could produce, on average, a 30% boost to EBITDA,” she explains, stressing the importance of managing both labour and supplier costs in these challenging times.
Impact on staffing and wages
The lowered NIC threshold for low-wage sectors will place additional strain on hospitality and retail employers, who are already facing increased pressure due to rising wages.
“The challenge presented by the lowered NIC threshold is exacerbated by the increases also made to the National Minimum Wage (NMW) and National Living Wage (NLW),” Thompson states.
Employers will likely be forced to adjust staffing levels, possibly opting for part-time or temporary workers to stay under the threshold.
In some cases, businesses might slow wage increases, which could be particularly difficult in a sector already reliant on low wages. “Staffing changes could impact job security and benefits, which, in turn, could create a service-level risk for employers,” she adds.
Thompson also notes that businesses may consider automation or outsourcing functions to reduce labour costs. However, she cautions that these operational decisions should be made carefully, as they require long-term planning and robust risk management to ensure adequate control is maintained.
Strategies for long-term resilience
To cope with the financial strain, Thompson advises businesses to make use of government support schemes available to them.
“There is increased relief for small businesses in the expansion of the Employment Allowance, which will rise from £5,000 to £10,500. Large businesses, too, should familiarise themselves with support schemes, such as business rates or the apprenticeship levy,” she recommends.
She also advocates for a more strategic approach to cost-saving measures. “Rather than cutting jobs or investment, businesses should reset their commercial relationships with suppliers.
Optimising supplier relationships is crucial for sustaining EBITDA in the long term,” Thompson suggests. She encourages businesses to negotiate better terms with suppliers, claiming unclaimed rebates, and leveraging requirements across the sector.
Thompson sees collaboration with suppliers as key to alleviating the financial strain. “Once you’re back on level ground with suppliers, the real relief comes from collaborating with them and thinking more innovatively to unlock the money that can soften the NIC pressures,” she states.
By working with contingent labour providers to optimise workforce management or exploring innovative technologies with suppliers, businesses can reduce costs while still protecting valuable relationships.
A time for collaboration, not panic
In her final remarks, Thompson stresses the importance of avoiding knee-jerk reactions that could have long-lasting negative effects.
“Reports of a budget-induced ‘survival mode’ suggest panic stations. To avoid the full financial impacts, many organizations may default to cutting costs hard and fast. Yet, while the forecasted impacts are significant, companies must refrain from making decisions that may harm them in the long run,” she says.
Instead, she encourages hospitality and retail businesses to collaborate more effectively with their suppliers, taking a smarter approach to cost reductions that safeguards both relationships and performance.
“Rather than cutting investment and jobs, now is the time for greater collaboration with the supply base. This is an opportunity to reset commercial relationships and unlock value through optimising the value chain and improving demand management,” Thompson concludes.
With these strategies in mind, the hospitality and retail sectors can better navigate the budget shock and position themselves for future resilience.
