Wage hikes at supermarkets: What does this mean for profit margins in an inflationary setting?

Sainsbury's, Tesco, Lidl, Asda, Aldi and Morrisons are among the UK supermarkets looking at pay rises amidst the cost of living crisis. We've listed several scenarios that could pan out, highlighting the potential impact on profit margins, prices and sales.

Wage hikes at supermarkets: What does this mean for profit margins in an inflationary setting?

In the current inflationary period, retailers tread a delicate balance between passing on higher costs on consumers and staying competitive with other retailers.

Sainsbury's is a great example:

On one hand, it faces an investor vote on workers pay amid cost of living crisis. On the other end, Sainsbury's is making more products cheaper in a price war with Aldi.

Perhaps they are confident investors will reject the proposals in the upcoming living wage vote? Or they could also be offsetting any wage hikes for its lower paid/minimum workers cutting costs elsewhere e.g. outsourcing higher paid roles in commercial/finance/ operations & people services/HR as it looks to cut costs and plough money back into keeping prices low.

Sainsbury isn’t the only UK Supermarket looking at wage hikes. We’ve picked stories of other supermarkets including Tesco, Lidl, Asda, Aldi and Morrisons also looking at Pay Rises amidst the planned railway strikes;

What do these pay rises mean for companies' abilities to pass on high costs to consumers and their gross margins?

'10% minimum wage hike translates into a 0.36% increase in the prices of grocery products.’ Source

This means depending if the wage rise proposals are approved by investors multiple scenarios could pan out;
  • Sainsbury's may look to offset these margins elsewhere by axing certain operations in favor of outsourcing more - however there is an upper limit to this.
  • Sainsbury's may struggle driving their prices lower to be competitive, and pass these costs through to consumers if they have to pay higher wages to their workers (including contractors).
  • Considering the early indicators of industry-wide changes in customer behaviour amid the cost of living crisis with rising inflation and slumping consumer demand (e.g. basket sizes shrinking with more frequent store visits, customers trading down in products like pasta and bread), Sainsbury's may also see a drop in UK supermarket sales similarly to its competitor Tesco.
  • With the rising prices, Sainsbury's customers may also start to purchase more of Sainsbury's own, cheaper private label brands, similarly to what's happening in the US.
  • We may see industry wide further price hikes, accelerating already high inflation, further spiraling the cost of living crisis in the UK, which has implications on many other industries.

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