UK retailers step up search for savings ahead of April tax hike by Reuters

Written by James Davie and Paul Sandel

LONDON (Reuters) – Major British retailers, including Tesco (OTC:), Sainsbury’s (LON:)’s, M&S and the next (LON:), say they are intensifying their pursuit of efficiency through automation and other measures, to limit the impact of rising costs on the prices they charge their customers.

As the UK economy struggles to grow, the new Labor government’s solution is to raise taxes on employers to raise money to invest in infrastructure and public services, which has drawn criticism from the business community.

Higher social security payments, a rise in the national minimum wage, packaging duties and higher business rates – all coming in April – will cost the sector £7 billion ($8.6 billion) a year, retailers said.

Fears of the broader economic impact sent retail stock prices sharply lower this week and raised government borrowing costs.

In the retail sector, larger players have more room to adjust and are benefiting from previous good profits, but analysts said smaller players could find themselves under intense pressure.

Clothing retailer Next said it faced a £67m increase in wage costs in its year to the end of January 2026, but it still expects profits to grow.

She believes she can offset the high wage bill with measures including a 1% rise in prices which she said was “unwelcome, but still below general UK inflation”. The company said it can also increase operational efficiency in its warehouses, distribution network and stores.

Simon Wolfson, the company’s chief executive, said more automation was inevitable across the sector.

“In any automation project, you are always looking for a return on it, you say what is the savings versus the cost of automation or artificial intelligence or software,” he told Reuters.

“If the price of mechanization does not rise, but the price of the labor it provides does, that means more projects can be justified.”

More robots?

Baker’s and the fast food chain Greggs (LON:) Last year it opened a highly automated production line at its site in Newcastle, north-east England, meaning it can make up to 4 million more steaks and other products each week from the current 10 million.

Tesco, Britain’s largest supermarket, is also working to increase automation and will open an automated chilled distribution center in Aylesford, south-east England, this year.

No. 2 grocer Sainsbury’s is encouraging more shoppers to use SmartShop’s mobile self-scanning technology.

Although Tesco faces an annual loss of £250m from the increase in employers’ National Insurance contributions alone, chief executive Ken Murphy said it would overcome that.

Having weathered the coronavirus pandemic, supply chain disruptions and commodity and energy inflation, he said Tesco had become accustomed to dealing with rising costs by finding savings elsewhere.

Imran Nawaz, chief financial officer, said Tesco’s Save to Invest scheme was on track to deliver £500m in efficiency savings in its year to February 2025, after delivering £640m in 2023/24.

“As we look to the future, it is clear that it will be another year in which we will need to do an excellent job,” Nawaz said, pointing to the savings resulting from better procurement by Tesco’s purchasing organisation, in logistics, shipping and reducing waste.

Sainsbury’s faces an additional £140m of National Insurance headwinds, and is similarly targeting £1bn of cost savings by March 2027.

Clothing and food retailer M&S, which faces £120m in additional wage costs, said it aims to pass on “as little as possible” to consumers.

The 141-year-old retailer, one of the biggest names on Britain’s high street, is in the middle of a successful transformation program and believes it can continue to make further savings, modernizing its distribution and supply chain.

“My bottom line is: a big business, but there is a lot under our control and we have to be very focused on costs over the next 12 months,” said Stuart Machin, the company’s chief executive.

“We talk a lot about volume growth, because the more we sell, the more it offsets some of those cost pressures.”

Ian Lance, fund manager at Redwheel, one of M&S’s biggest investors, said the company was likely to be able to meet cost challenges better than most. “They have an exceptionally capable management team and offer products that clearly resonate with consumers because of their quality and value,” he said.

But for many small players, raising prices is the only option.

A survey by the British Chambers of Commerce of 4,800 companies, most with fewer than 250 staff, found that planned price increases of 55% – could hamper the fight to contain inflation and grow the economy.

For some, more drastic action may be needed.