The Fair Work Commission minimum wage lift will be good news for our lowest-paid workers, but UBS says its bad news for these companies.
The commission seemed to insist the chunky hoist wouldn’t trigger a wage-price spiral in the middle of a record breaking inflation v interest tate rise battle.
But the tail end of trade last week saw a fair few retail stocks already stumble into the kind of pre-free fall wobble that presages at least some kind of minor tailspin.
UBS agrees and has provided a handy list of exposed ASX players.
To catch you up The FWC announced a 5.75 per cent increase in the national minimum wage (applies to about 1 per cent of all Australian employees), and a +5.75 per cent average award wage floor (applies to around 25 per cent of Australian employees).
For the latest ASX news, sign up here for free Stockhead daily newsletters
There is debate about whether this announcement adds to inflation pressures, but UBS economists now expect two further 25bp rate increases from the RBA at the June and August meetings, pushing the cash rate to 4.35 per cent.
The new national minimum wage will be $23.23 an hour, and $882.80 a week, based on a 38-hour week.
But that increase in the minimum wage comes with a sneaky rider.
The FWC’s conceded there’d be a “modest” bump to wages growth over the next fiscal year, but suggested it would “not cause or contribute to any wage-price spiral”.
And to lose anyone trying to follow the reasoning behind the decision, the FWC went on to explain, the minimum wage also ended “the alignment between the national minimum wage rate and the C14 classification wage rate in modern awards.”
We hear you exclaim, “What the …?”
Well, skipping the C14 nomenclature, it means the national minimum wage will actually lift by 8.65 per cent compared to last year’s (lower-comparative) minimum wage rate.
The FWC is selling it as only a 5.75 per cent increase, because that’s the size of the increase compared to a new classification thingy it also sprung at the same time.
“We acknowledge that this increase will not maintain the real value of modern award minimum wages, nor reverse the reduction in real value that has occurred over recent years.”
Good one. The wage hikes begin on the first full pay period from July 1.
MORE FROM STOCKHEAD: ASX tech in pole position, says Dicker Data | Zip ‘undervalued, ripe for takeover’ | UBS reckons 60:40 portfolio’s not dead
Brass tacks
Treasurer Jim Chalmer said on Friday, “The 5.75 per cent increase to awards is the biggest in history and will help 2.7 million workers.”
The 8.65 per cent increase is obviously much bigger … than the biggest in history.
From the POV of a lot of ASX businesses, the increase will hurt a lot of other people.
Companies most at risk can be formed into three groups:
The sectors most vulnerable and least vulnerable to labor cost increases. Picture: UBS
Earnings, profit margins tippe dto be first to go
Company results through the February reporting season showed that still solid levels of end demand were allowing most companies to withstand higher input costs by passing on to their customers.
However, UBS says with the labour cost pressures now intensifying, “by next results season in August, we could see an increased skew toward profit disappointment as swelling wage bills begin to eat into profit margins”.
All retailers in Australia will face an increase in labour costs greater than historical levels and at a scale that UBS says many will find difficult to offset.
Voila. Enter the risk to industry EBIT margins rather skewed to the downside.
Visit Stockhead, where ASX small caps are big deals
UBS: Comparatively better positioned ASX retailers
- Woolworths (ASX:WOW): low labour costs compared to sales, largest food retailer in Australia; essential products; large stores; well established and ongoing productivity initiatives, including in-store automation.
- Wesfarmers (ASX:WES): existing cost saving programs in place across retail divisions; Bunnings, Kmart ($7 average ticket size) and Officeworks enjoy strong value positions in market; Bunnings’ enterprise agreement at 10.5 per cent for three years with productivity initiatives including its “bank of hours” model.
- Coles (ASX:COL): low labour costs compared to sales; second-largest food retailer in Australia; essential products; large stores; “Smarter Selling” cost savings program expected to continue in FY24E onwards, although yet to be announced.
UBS: Comparatively worse positioned ASX retailers
- Premier Investments (ASX:PMV): high labour costs compared to sales; smaller stores; less-essential products; around 90 per cent of FY22 sales in Australia and New Zealand (ANZ).
- Accent Group (ASX:AX1) and Universal Stores (ASX:UNI): high labour costs compared to sales, smaller stores, less-essential products
- Lovisa (ASX:LOV): very high labour costs compared to sales; smaller stores; less-essential product at a very low price point; only 38 per cent of sales in ANZ (28 per cent of stores).
- Harvey Norman (ASX:HVN): labour costs incurred by franchisees; large stores but track record of HVN supporting franchisees; non-essential category; 66 per cent of retail network sales in Australia.
- Super Retail Group (ASX:SUL): super-high labour cost compared to sales; less-essential product; active plans to reduce costs.
- JB Hi-Fi (ASX:JBH): low labour cost compared to sales; less essential product (but strong telecommunications offer); already lean but will reduce casual hours.
This content first appeared on stockhead.com.au
SUBSCRIBE
Get the latest Stockhead news delivered free to your inbox. Click here