Victoria Young: Why labour shouldn't scare investors

The minimum wage will increase again, this time to $20 from April 2021. Photo / 123RF

As another Labour day came and went, investors might spare a thought for workers, or at least, their impact on the bottom line of listed firms.

Businesses have been responding to the largest minimum wage hike in history to $17.70 this year. The government has indicated it will increase to $20 from April 2021.

Add to this the somewhat stalled threat of Fair Pay Agreements, which would see minimum pay set across entire industries, and it's easy to see cause for concern.

Restaurant Brands highlighted the impact of increased labour costs in its first-half results earlier this month. Earnings before interest tax depreciation and amortisation at its local Pizza Hut unit of 100 stores, fell from 7.1 per cent of sales to 2.1 per cent of sales compared with the same half last year.

Jarden analysts Andrew Steele and Lily Zhuang said in a note that while the first half result was better than expected, it was tempered by wage pressures.

The company's star division KFC, which had margins of 21.6 per cent, has told the market it won't be able to maintain this level due to wages.

Technology is often assumed to be a fix for rising pay but it is early days and chief executive Russel Creedy says having customers order their chicken through electronic kiosks doesn't yet mean a reduction in staff.

Instead, those till operators are now likely to be found on the restaurant floor in a concierge-type role, improving service. But as Restaurant Brands prepares to spend $100 million for a US beachhead to continue geographical diversification, it looks well balanced to combat wage inflation.

Fortunately for KFC investors, any progress on Fair Pay Agreements won't double down the impact of rising employee costs.

The reality is wages are relatively high already, so they are unlikely to be impacted further by these agreements. Restaurant Brands already pays an average wage of $21, although it's probably worth pointing out if Creedy worked a 40-hour week his pay would be $500 an hour. That's ignoring what he gets in shares.

Restaurant Brands CEO Russel Creedy. Photo / File

The work has already been done by the unions. Fair Pay Agreements are targeted at industries where union membership is low, with the working group on the issue highlighting areas where workers are paid less than $20 per hour.

Should the government get a move on with FPAs, it would appear SkyCity is directly exposed because security workers and cleaners are expected to be among the first to sign up.

But the casino operator is ahead of the curve, having committed to a minimum wage of $20 per hour, a year earlier than the government target. It also continues to look for tech to help, replacing security staff with cameras and bringing in more electronic tables for games like roulette.

So while the business lobby continues to jump up and down about the threat of FPAs, there is little for SkyCity investors to fear on that front - there is already a significant union presence at the casino that's pushing wages up. Union leaders will boast they don't need FPAs as the government is doing their work for them.

Reporting requirements for listed firms mean unions can much more easily point out perceived unfairness as they know exactly how much profit the company makes and top executives earn.

Supermarket workers are the other group also expected to sign up for FPAs, as there are 15,600 operators and cashiers in this country, and 91 per cent of them are paid less than $20 an hour.

However, the reporting structures of the major players – Woolworths-owned Countdown and the north and south Foodstuffs cooperatives - make it hard to work out their wage bills.

Investors might want to consider the impact of the aged care pay equity settlement that when enacted in 2017 saw workers on the then minimum wage of $15.75 per hour move to at least $19 per hour, a 21 per cent pay rise.

While the aged care sector warned of a $500m hit for the industry the sky hasn't fallen yet, although the use of government subsidies makes it hard to tell.

Reviewing the annual reports of Oceania Healthcare and Metlifecare shows low single-digit per cent increases in wages as a per cent of revenue in the past three years. This is after you strip out the paper gains these companies book from increases in property valuations. Ryman Healthcare, the other major NZX-listed retirement village operator, doesn't separate out wage costs in its annual report.

NZX minnow Green Cross Health has been vocal about the challenges the pay equity deal has brought to its community health unit which has struggled to make money following double-digit increases to its wage bills.

Despite this, the company - which also owns pharmacies and medical centres – managed to lift net profit in the March 2019 year

Rising wages do impact firms but not all companies are created equal. The smaller business owner might beware of fair pay but the blue-chip investor should not.