INDUSTRY FOCUS
Changing The Guard
In the UK Chancellor's July 2015 Budget, George Osborne surprised many political commentators by announcing that Britain would be following the example set by Germany last year with the introduction of a National Living Wage (NLW) of £7.20 (euro 9.26) per hour for people over twenty-five years old. Furthermore, this figure would rise to £9 (euro 11.58) per hour by 2020.
The announcement was a surprise on many levels: firstly because in opposition he had voted against a minimum wage proposed and introduced by his Labour predecessor Gordon Brown; and secondly because as a Chancellor known for his 'adversity Britain' approach, the inevitable increase in the national wage bill would put his Conservative Government on a collision course with its natural allies, the wealth-creating business community.
Osborne may have wrong-footed the Labour opposition, but the rise was a political and economic gamble particularly in the traditionally low-paid sectors such as retail where calculations from the British Retail Consortium (BRC) and the Centre for Retail Research (CRR) predicted wide-scale job losses, store closures, and price increases as retailers sought to pass on increased wage costs to consumers.
Even the Office of Budget Responsibility (OBR), established by George Osborne, estimated that 60,000 jobs would be lost in all sectors of the economy because of the NLW.
CRR Projections
In a paper published by the Nottingham-based CRR, the economic think tank argued that the retail sector costs would rise above £3.26 billion by 2020, and despite the labour shedding and operational changes retailers bring in to reduce costs, the NLW is likely to increase retail prices by about 1.1 per cent per year between 2016 and 2020.
The CRR argues the NLW will herald an end to free home delivery for all except high-value baskets, for example £65 (euro 94.87) minimum. The retail costs of 'click and collect' will also rise, and the CRR expects one-third of retailers to introduce a charge unless the order size is more than £40 (euro 58.38). This is likely to have far-reaching implications for future omni-channel sales modelling.
According to the CRR, many retailers will shed labour by cutting staff hours and head count, mostly by not replacing employees when they leave. A store with ten employees on the NLW in August 2015 is paying a total remuneration to staff of £65.00 (euro 94.87) per hour plus £8.97 (euro 13.09) employer's national insurance, a total of £73.97 (euro 107.96). Now under the new wage regime, it will have to pay £72.50 (euro 105.82) per hour plus £10.00 (euro 14.60) national insurance, a total of £82.50 (euro 120.42). The CRR calculates that by eliminating one member of staff, its hourly wage bill will be more or less where it was before.
Projecting this forward, the CRR suggests there will be job cuts of at least 60,900 workers or 2.1 per cent of the 2015 work force. This figure includes part-time workers, but if the focus was on full-time equivalents (FTE), job losses are likely to be around 42,000.
Furthermore, the figures suggest the NLW will impact store closures because higher labour costs will make marginal outlets unprofitable, which could push some retailers into administration. The CRR argues that as store numbers have been falling anyway, the higher labour costs will accelerate the process, making the total fall in store numbers in the period around 14,000.
Germany
But are these fears borne out of reality? Other countries have introduced minimum wages, but in a referendum in May last year, Switzerland voted overwhelmingly to reject a proposal to introduce what would have been the highest minimum wage in the world. Under the plan, employers would have had to pay workers a minimum of twenty-two Swiss francs (£15 or 18 euros) an hour.
In Germany the wage was set at 8.50 euros (£6.80) in January 2015 after years of relying on trade unions and business groups to fix minimum pay. The move, criticised by many businesses, has proved successful despite the fact that it has not been fully implemented across the board.
The minimum wage was the subject of much controversy in Germany with business leaders warning that it would result in fewer jobs or force companies to move production facilities to other countries where labour is cheaper. Lobbyists also claimed that the policy would make Germany less competitive. Others were angered by concessionary measures, including a two-year grace period for some employers to phase in the policy.
Additionally, the wage did not cover minors, interns, trainees, or long-term unemployed people for their first six months at work. The wage will be reviewed annually from 1 January 2018.
The Institute of Economic and Social Research has now presented a first comprehensive review of the first year since the introduction of the minimum wage, with clear evidence that millions of workers have benefited from it without the predicted negative impacts on the labour market.
The results published earlier this spring reveal that the new minimum wage has, for the first time, reversed the long-term trend towards higher wage inequality in Germany. In 2015, unskilled and low-skilled workers experienced above-average wage increases. While the overall gross hourly earnings had increased by 2.0 per cent by the third quarter of 2015 compared to the same quarter of 2014, semi-skilled workers experienced a 2.4 per cent increase and unskilled employees a 3.7 per cent hike. Particularly high wage increases can be found in Eastern Germany, where semi-skilled workers gained 5.5 per cent and unskilled workers up to 8.2 per cent. Similar observations can be made for employees in so-called mini jobs, a special form of marginal part-time employment, whose wages also increased significantly faster than those of other employees.
As revealed in the figures from the CRR, retail will be an area that the NLW is likely to impact. Retailers looking to reduce costs will endeavour to remove head count to control costs or, as a last resort, pass on the increase in higher prices. There is already evidence that the NLW is driving this kind of behaviour.
James Harris, a director with cash-counting specialists Volumatic, said his order book was filling up as a result of its introduction. "There is definitely interest in automated cash counting since the introduction of the National Living Wage because by its very nature it takes mundane tasks out of the equation and increases productivity at the same time as reducing costs. The staff can then focus their energies upon customer service and selling more," he said.
Guarding
Another area where the NLW is likely to have an impact is loss prevention and specifically guarding contracts, arguably the biggest expense for retail security teams. Stuart Lodge, CEO of Lodge Service International Ltd, said, "Initially when it was first announced last year, I was fully in support of the living wage as I believed it would have a really positive impact on the guarding industry by improving wages, quality, and rates. Sadly all it has done is impact the first aspect.
"In our experience, the NLW was a significant increase, totally out of line with inflation, and we have seen buyers and procurement teams pushing back and, in some cases, going to tender or forcing rate reductions. Although this may be rare and driven by procurement, this is a significant squeeze on margin and, I believe, will threaten the future of the quality guarding industry.
"I have always advocated a graded structure whereby a client could see what they were getting similar to the South African model. A Grade DÐF access-control night-watchman type role, which is non-public facing, on a twelve-hour shift often around derelict buildings.
"Moving up the grades, a Grade C higher-risk possibly supervisory person, CCTV operative, et cetera, followed by a Grade B customer-facing guard who is able to communicate with clients and the public as well as holding basic IT and training skills. At the top of the hierarchy is the Grade A guard who would be able to conduct risk assessments and evaluations, hold basic investigative skills, and be able to make decisions and design solutions.
"This is structured regionally where pay and charge rates are directly linked to the grades. Therefore both the client and the member of staff get charged/paid according to experience, training, and communication skills.
"Historically we would employ officers on an average of £7 depending on locality and supervisors on £7.25, £7.50-plus. Now we are currently faced with a situation where the bar has been raised to £7.20 irrespective of talent, literacy, or even command of English. Inevitably, it will have an impact throughout the grade structures, one that currently can't be passed on.
"Now, although the Government has stated a target of £9 by 2020, no one can say whether this will come in forty-five pence increments every April or all in one go. One thing is for certain: in light of inflation currently running at around 0.5 per cent, no client will accept a comparative increase. So with a rolling potential 6 per cent labour rate increase annually and additional percentage points on employer's contributions to auto-enrolment schemes, combined with the removal of revenue schemes such as travel and subsistence, I believe the industry will need to be raising rates by an average of 5 per cent a year to keep up or just see a total erosion of margin."
Lodge added, "How will these costs be met? What impact will it have on LP buying and businesses? I fear these increases will not be accepted fully; budgets will remain, and hours will be cut and even rates. With the ever-increasing costs of labour and reductions in the cost of technology, the swing towards specialist roles and blended manpower solutions with technology is inevitable as highlighted in the BRC paper 'better but fewer staff', which anticipated 900,000 fewer retail jobs by 2029."
He concluded, "In regard to the calibre of candidates, there may be an expectation by employers and clients that the pay increases bring greater qualified staff. The reality is governed by who is going to pay for it. In reality there will be guaranteed increases with nothing in return, and the vast majority of the sector's employees will be scraped up by the base and will sit alongside the previously NMW (National Minimum Wage) staff who could aspire to reach above through better training, experience, length of service, et cetera."
Certainly this will push buyers out of a comfort zone into thinking more broadly about technology and system solutions and whether they need manned security per se or a blended combination of monitored detection devices and response teams.
Opportunity
Jason Trigg, CEO of Cardinal Security, said the NLW was an opportunity as well as a threat to the sector. He argues that there is a greater role for technology to play to reduce costs, and at the same time, the deployment of manned guarding would be managed in terms of an emphasis upon risk. In other words, retailers using intelligence and risk mapping, for example, would identify their top 'hot' stores and focus their guarding effort there, but only for as long as a manned operative was necessary. They would be moved on to the next risk zone as soon as theft and anti-social behaviour had reduced.
"While the NLW calls in to question the whole future of guarding, there is more that can be done in terms of training and accreditation and benchmarking against other European models and a comparison between the ROI on in-house versus outsourced guarding. There are many variables in play here.
"Technology is also being deployed in terms of virtual guarding. For example, the use of tethered drone technology to watch remote sites or guards wearing body cams for enhanced and admissible evidence gathering will add value to the retailer to ensure good quality service in everything from reducing burglaries to keeping their stores safer for customers.
"Whereas guarding has not changed in recent years, there have been dramatic changes to the role of the crime partnerships and information-sharing platforms in response to cuts in police budgets. As police numbers have receded, we are about to see the introduction of private policing. Guarding has to follow this paradigm shift.
"No longer can we rely upon a lot of officers being deployed at the front of store, the model has got to change. The security industry is a mess because it has allowed itself to be perceived as a price commodity and retailers and their procurement teams looking for value push back on price at every opportunity. This is a race to the bottom that no one can win. The industry is only going in one direction from a cost point of view.
"No one wants to be giving more money to poor-quality people and poor service, so this NLW is an opportunity to improve the quality of the personnel, the strategic deployment of more store detectives, for example, where we are looking for quality not quantity."
Trigg further argues that within retail there is now less of a silo mentality between retail LP and operations and the sharing of resources from CCTV to customer service assistants.
Speaking at the recent Retail Risk event in London, Jon Wright, head of safety and loss at River Island, said that the business introduced a non-arrest strategy that sees store associates engage with customers, both paying and non-paying, in a new and proactive way, which deters thieves but assists sales.
Likewise, other retailers are looking at collaborating in bigger groups to better protect town or city centres in what could be regarded as the first private business police forces.
"This is moving towards a risk and total-loss model and away from 'cops and robbers,' " said Trigg, an advocate of greater collaboration between the business community and law enforcement who believes that retailers would invest in a guarding model that adds value to their customer's experience, irrespective of the NLW.
"Rather than guards standing around doors of individual stores, you would have a model of a shared resource around a shopping centre sharing information, a perimeter model that all retailers buy into that also brings in supplementary intelligence and technology such as ANPR (automatic number plate recognition) and facial recognition."
The introduction of the NLW and the average 20 per cent reduction in Police resources, also driven by George Osborne, has meant that this model is being mooted in one prominent London shopping centre where guards currently paid for by individual retailers stand metres apart from one another but do not even communicate, let alone share intelligence on the levels of threat impacting the centre.
Under these new proposals, security guards would be replaced by a more collegiate team of 'retail officers' who, working together and with the contributing retailer's intelligence and shared technology, would have shrink, stock loss, and centre safety as their KPIs.
"Wage change is a catalyst for improvement because the industry has to rethink what good looks like and how to build a return on investment and more client-centric shopping," added Trigg.
Anthony King, CEO of Bradford-based King's Security, agreed, "Security is currently a grudge purchase, so the new wage regime is going to create a challenge for all businesses to reimagine themselves."
Increase after increase in cost is simply not sustainable, so security businesses have to look at how to do things smarter and make greater use of technology and information sharing and collaboration. This could look like more mobile guarding or response officers who are deployed dynamically according to intelligence. Retailers already share information, so the resource could be paid for collectively. It is a model that works in European cities, so it can work here too.
King argued that the NLW will also benefit the retail community as it will also mean that they can insist upon a better quality of guard in terms of training and multi-skilling. "This is a real opportunity to bridge the gap between the security industry and law enforcement as guards will be empowered to manage levels of anti-social behaviour that the Police no longer prioritise. Moving this model forward is a real opportunity."
So it would appear that the NLW is not the black hole painted by many business commentators, but an opportunity to reimagine the future of law enforcement and consolidate knowledge and technology to achieve more with lessÑin short, bring about a minor revolution in retail security with the changing of the guard.
