Retail giant Next will increase prices by 6% in order to make up for extra costs that will come from the introduction of the national living wage, which was announced in July. The company said in the long term, the new wages will cost £27m (€37m, $42m) and it will raise retail prices in order to prevent its margins from shrinking.
"The £27m additional [living wage] cost is not immaterial but, in the context of Next's wider cost base, is not transformative," the company said in a statement. "We estimate that we would need to increase prices by around 1% to compensate for this cost which, taken over four years, is unlikely to have a material effect on the trading performance of the business.
"This is probably a pessimistic view of the required price rise, as we have assumed no improvements in productivity. In reality, we hope to be able to compensate for some wage inflation through increased productivity measures throughout the business."
The price increase was announced along with the company's half-year results. Next reported its pre-tax profit was up 7.1% from the same period in 2014, while sales increased by 2.7%. The strongest revenue came from its Next Directory division, which was up by 8.2%. Next's plans and its strong results kept investors engaged, as the company's share price jumped by over 2%.
Chancellor George Osborne's living wage, announced in the Tories' emergency summer budget, has generated discontent in several industries. Hospitality companies have said they are preparing for the first increase to £7.20 in 2016, while retail body Association of Convenience Stores has said it could cost the industry 80,000 jobs.
John Cridland, the outgoing head of the Confederation of British Industry, was also critical of the living wage. He said: "It's business investment which drives productivity growth and it's productivity on which wage growth depends. All three are now rising. But wages can only grow as businesses grow. A £7.20 National Living Wage in 2016 and a £9 National Living Wage by 2020 are laudable objectives, but they are a gamble."
Cridland's successor, Paul Drechsler, has also spoken up about the new policy. In an interview with the Financial Times, he said: "I've talked to several chief executives and been surprised by the impact on their profits of the change. In one company it would wipe out all of their profits."