By Kit Rees
LONDON, April 1 (Reuters) - Britain's National Living Wage,a higher minimum wage, came into effect on Friday and could hitthe earnings of retailers, restaurants, pubs and outsourcingfirms in particular.
The National Living Wage starts at 7.20 pounds per hour forworkers in the UK aged over 25, set to rise to around 9 poundsby 2020.
Three industries alone - retail, hospitality and admin andsupport services - employ 46 percent of people affected, withthe total wage bill across Britain expected to rise by 4.5billion pounds as a result, according to think-tank TheResolution Foundation.
Some investors see the gradual increase in wages as a causefor concern in terms of how it will hit companies' results.
"We'll find that this is a feature that is an increasingdrag on earnings in these sectors, rather than something thathappens on day one. I think some people are apprehensive aboutit, probably some valuations have come down a bit but I don'tthink it's all fully priced in," Gervais Williams, managingdirector at Miton Group, said.
RETAILERS
The British Retail Consortium has estimated that theadditional cost to retailers will be between 1-3 billion poundsannually by 2020.
Yet if the apprenticeship levy and projected increases inrates are also taken into account, then the retail industry islooking at 14 billion pounds of costs in the next four years,equivalent to around 20 percent of industry profitability.
The UK's General Retail Index has slid 8.5percent this year, underperforming the FTSE All-Share Index which is down by only 2.5 percent so far in 2016.
Analysts said that Next and Sports Direct could be hit particularly hard.
Investec analysts also said Poundland could beaffected as the company cannot increase its prices.
Analysts at Jefferies noted that an increase in wages couldresult in more store closures, another side-effect of more than60 percent of retail leases coming up for renewal in the nextfive years.
Analysts expect retailers such as Argos, owned by HomeRetail which is set to be acquired by Sainsbury, Debenhams and Tesco to downsize.
Yet companies with strong online businesses and moreflexible labour and retail spaces will do better than legacynames, according to analysts at Credit Suisse.
Additional pressures, such as a price war with thediscounters, could hurt food retailers more than clothingretailers.
"It cuts across the whole sector. Food retailers areprobably going to be more impacted than anyone else simplybecause their margins are lower and the competitive threatacross the food retail sector is very significant at themoment," Simon Irwin, retail analyst at Credit Suisse, said.
PUBS AND RESTAURANT GROUPS
The hospitality sector is set to experience the biggest wagebill increase, of 3.4 percent, as almost half of employees willbe affected by the National Living Wage, The ResolutionFoundation said.
Groups with low prices and low margins such as JDWetherspoon will suffer, along with Costa-ownerWhitbread, pub operators Mitchells & Butler,Adnams and Punch Taverns.
JD Wetherspoon's EBIT (earnings before interest and tax) ispredicted to fall 38 percent following a 10 percent increase inthe average wage, according to data from Liberum.
However within the sector, Marston's should dobetter given its restructuring, while measures taken byRestaurant Group to reduce the impact have been lookedat favourably by investors.
SUPPORT SERVICES
Among some of the companies most likely to be hit by anincrease in wage costs are support services firms, according todata by Liberum, including outsourcing companies.
Outsourcer Serco Group would suffer a 295 percentfall in EBIT with a 10 percent increase in the average wage,although analysts pointed out that its work force, along withthose of other companies, is not entirely UK-based.
Likewise Mitie Group and Interserve wouldtake an 80 percent and 74 percent hit to their EBITrespectively. (Reporting by Kit Rees; Editing by Robin Pomeroy)
