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Aussie companies face higher wages bills but profits resilient

Nicki Bourlioufas  |  21 Mar 2022Text size  Decrease  Increase  |  
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Higher wage bills and rising staff turnover is one of the biggest risks that Australian companies face in 2022 as inflation rises to multi-year highs and the job market tightens, according to experts.

But rising wages costs aren’t necessarily all bad news. Companies that can charge higher prices and keep their customers potentially increasing their profits even as inflation rises.

Morningstar senior equities analyst Johannes Faul says in this environment, companies may remain just as profitable.

“If wages go up by 4 per cent, and that's the only thing that changes, then that's bad news for retailers,” he says.

“But if wages go up and sales double, then it doesn't really matter. The big question is how consumers will react to rising prices.”

Supermarkets resilient

Among retailers, Faul says demand for food at supermarkets and other retail goods could remain resilient in the face of rising prices given households are sitting on record levels of household wealth and the nation is almost fully employed.

Management at both Woolworths and Coles expect groceries to get more expensive in the second half of fiscal 2022. Woolworths estimates shelf prices at its Australian supermarkets have already increased by 2 per cent to 3 per cent in the first seven weeks of the second half of the 2021-22 fiscal year.

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“In the current environment, a slight rise in prices will be slightly beneficial to retailers,” Faul says.

“In our base case valuations for retailers, we expect the current environment to be slightly supportive of retailer earnings in the near-term.

“Medium term we expect inflation pressures to ease, and we forecast CPI growth (inflation) to average 2.5 per cent over the next decade, which is the mid-point of the RBA’s target band of 2 per cent to 3 per cent.

“I think demand will do better if consumers are employed than if they were unemployed.”

But other sectors aren’t so lucky. Morningstar analyst Brian Han says that staff turnover and wage costs are big risks for companines who can’t raise their prices.

“Investors need to keep an eye on companies or sectors where there is little pricing power to compensate for rising costs,” says Han.

“I think infrastructure and utilities sectors are well-placed because they usually have built-in inflation escalators in their revenue or regulatory concessions.”

Consumer discretionary at risk

Diana Mousina, senior economist with AMP Investments, says companies in the commodities space too should manage wage pressures because of the increase in commodity prices. Morningstar’s director of equities research Mathew Hodge adds that labour is such a small part of the cost for the miners, profits is not really impacted.

But other companies, like those in clothing, footwear and accessories are likely still under pressure from high competition and constant downward pressure for their goods, so broad wage rises may be harder to offset.

“Given the strength in the employment figures, I would assume that labour market churn is at a multi-year high as the unemployment rate is down to 4 per cent, its lowest level since 2008 and is likely headed lower, taking it to the lowest levels seen since the 1970s,” says Mousina.

“So, I assume that turnover/quits rates would stay pretty high in this environment, especially as wages growth increases which encourages staff turnover.

“A rising wages environment is a risk for company profitability (as wages are usually the largest cost for a business), but this could be offset by an increase in prices received for goods sales, or an increase in the volume of sales.”

Not the 70s

To a degree also, companies may be able to withstand higher wages bills after years of minimal wages growth, says Stephen Miller, investment strategy consultant with fund manager GSFM.

“Real wage increases have been relatively modest recently, so much so that the wage share of national income has been declining and the profit share has been rising for most of the last 20 years,” he says.

“On the surface this might suggest that firms could probably afford some accelerated level of wage increase. It is not quite that straightforward but certainly the argument can be made.”

Chart: Company operating profits rose a seasonally adjusted 13% in the December quarter from a year earlier

Company operating profits

 

Mark Kiely, head of Antares Fixed Income, adds that while wages growth is likely to accelerate, it is unlikely to reach the levels that it did in the 1970s because Australia does not have the same level of centralised wage fixing today as it did back in the 1970s.

“Wage setting is nowhere near as centralised as we were in the 1970s when many peoples’ wages were indexed to inflation,” he says.

“That's very different from where we are now. While a change in government policies could change that, we are unlikely to see the rapid wages growth of the 1970s.”

GSFM’s Miller agrees. “To me it seems a long bow to draw to argue that the current circumstance is similar to back then [the 1970s and 1980s]. So yes, wage rises may be a ‘risk’ but they are not axiomatically so, and there are circumstances where the outcomes could be "win/win" for workers and firms.”

Great resignation?

But staff turnover will likely increase, says Kiely. Already, he has noticed that in the financial services sector, professionals moving from existing employers into higher paying jobs.

Professor Nick Wailes, Deputy Dean, UNSW Business School, Director of AGSM and Program Director of the online Master of Management, sees the risk of a broader ‘great resignation’ across several sectors. Contrary to many commentators denying that Australia will experience a US-style great resignation, he says that analysis is flawed.

“While in aggregate there might not be evidence of a great resignation, there is ample evidence of industries, sectors and job roles where there are shortages of talent (and so strong incentives to look for new roles) or where workers are reassessing whether they want to return to the way that they worked pre-pandemic,” Professor Wailes says.

“My conversations with leaders in the professional services industries, like management consulting for example, really highlights the extent to which they see attracting and retaining talent as a critical challenge for them now and into the future.”

is a Morningstar contributor.

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