The chief executive of Tesco, Dave Lewis, has said retailers face a “potentially lethal cocktail” as profits slump but costs rise because of business rates and the national living wage.
Lewis said jobs were on the line in an industry that employs three million people, with the possibility that shops could close and prices on the high street could increase to pay for the extra costs.
In a clear message to George Osborne to take action to support the industry, Lewis said retailers faced £14bn of extra costs in the next five years from an increase in business rates and the introduction by the chancellor of the national living wage in 2016.
This is at a time when profitability in the industry is at its lowest level ever due to changes in shopping habits, price deflation and the rise of online shopping.
“In supermarkets, profitability has sunk from [margins of] 5% to 2% in five years and now we face significant new cost pressure. This is a potentially lethal cocktail,” Lewis told the CBI annual conference.
He said the business rates system was unsustainable and disproportionate, and an urgent review of the tax was needed.
Retailers will pay £8bn in business rates this year, a quarter of the UK total. It is by far the biggest tax the industry pays: for every £1 a large retailer pays in corporation tax, the company pays £2.31 in business rates. Tesco’s business rates bill has risen by 35% in the last five years at a time when profits have fallen significantly.
Lewis said: “Over the last five years property values have fallen, profits are down but business rates are up. Quietly but dramatically. Business rates have hit £8bn for retail. That’s over a quarter of the bill and significantly more than any other sector. That’s an enormous pressure. Shops have closed. Businesses lost. Jobs sacrificed.”
Lewis urged the government to consult with leading retailers about tax and regulation changes, warning that the national living wage could have unintended consequences when it comes into force. Businesses will be required to pay at least £7.20 per hour to workers over the age of 25, rising to £9 by 2020.
Tesco says national living wage will cost it £500m by 2020
He said: “Our concern, and the concern of many colleagues, is that there is pressure to increase base pay at the expense of benefits. We don’t think this is the answer. We shouldn’t simply strip down employment to an hourly rate or draw arbitrary lines. It’s more complex than that.
“Benefits are hugely important to our colleagues, valuable too. Our workforce is not homogeneous. Our colleagues say they value different things at different stages in their lives and at Tesco this is what we are trying to accommodate. We need a fuller debate aimed at doing the right thing for the people in our industry without imposing more cost, without providing individual benefit or business return.
“At Tesco we’re working on a menu of benefits which gives colleagues flexibility of choice and support which they value – including a competitive pension scheme, a 5% turnaround bonus, colleague discount, plus the opportunity to invest in the business through save as you earn. As an industry there is a worry that the unintended consequences of the living wage have not been fully thought through.”
Lewis also claimed that a reduction in the salt content of Tesco’s own-brand products had saved 1,500 lives.
On Monday shares in the company fell again on the back of analyst downgrades. Tesco shares fell 2.48p, or 1.4%, to 180.42p after Clive Black, an analyst at Shore Capital, said “so much more needs to be done for Tesco UK to be a destination of choice” for shoppers.