A wageflation hangover is coming for European companies
The recent season of strikes at TotalEnergies, Stellantis, SAS and Airbus shows workers are determined to boost pay in 2023 to offset eroding purchasing power
European companies dealing with the worst energy crisis and inflation in four decades are bracing for a fresh shock: wage inflation and the increasing threat of worker actions. That ominous theme has emerged in this earnings season, with most of Europe's biggest companies—from Unilever and Nestlé to L'Oréal, Sodexo and Ahold Delhaize—warning that prices might have to rise further in 2023 amid tough wage negotiations in a tight labor market.
A season of strike action is already in full swing across Europe, as workers—suffering the biggest decline in real income in years—push for higher pay. Workers at TotalEnergies in France, pilots at Scandinavian airline SAS and production staff at carmaker Stellantis in Italy have all gone on strike in recent months. The latest in a string of British rail worker strikes was canceled at the last minute last week, but staff at Britain's Royal Mail have strikes planned in November and December. And on Nov. 7 workers at UK packaging maker DS Smith, which supplies multinationals including Amazon, voted to strike.
With productivity almost flat and a number of countries in the euro area, as well as Britain, entering recession, the wage demands could put additional pressure on companies' bottom lines. Nestlé SA Chief Executive Officer Mark Schneider says worker pay is a very important issue for the coming months. "We're watching this very closely," he told Bloomberg Television. "In most countries those negotiations for '23 will unfold during the winter and in the first quarter."
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Euro-Area Indicators
Year-over-year change
Prices in the euro area rose 10.7% on average in October, an all-time high, while pay rates in the second quarter grew only 4.1% from a year earlier. Unions are seeking to narrow the gap, with shortages of skilled labor giving them leverage. In light of the tighter job market, Melanie Baker, a senior economist at Royal London Asset Management, says she "wouldn't be surprised to see wage inflation rise further."
Should that happen, worker-heavy service providers such as Sodexo SA and retailers like Ahold Delhaize will be most exposed to higher payroll costs. Groups such as Nestlé and Unilever Plc are also expecting labor negotiations in most of their markets.
Other companies are already dealing with walkouts. Last week, as red banners and whistling filled the air, Airbus SE employees marched out of an assembly plant in Bremen, Germany, in a bid to secure an 8% pay raise. Negotiating on behalf of 3.9 million manufacturing workers, including many at Airbus, the IG Metall union argued that wage hikes were needed to meet rising energy bills, which are now more than 40% higher in the euro area than they were last year. In response, the employers' association that represents Airbus, Mercedes-Benz and Volkswagen, among others, has insisted there simply won't be extra profits to pass down the line.
"During this period there will be no growth that can be distributed," says Gesamtmetall President Stefan Wolf, adding that companies have been hit by inflation, too. Yet, Germany's recent decision to hike the minimum wage by 22% could embolden unions while stoking inflation in the broader economy.
A wage-price spiral, should it occur, would complicate central bank efforts to get inflation under control. The European Central Bank hiked a key interest rate by three-fourths of a percentage point for the second time last month and has indicated further increases are in the works. Even if this increase in borrowing costs triggers a mild recession, ECB President Christine Lagarde has warned it won't be enough to rein in prices.
This puts companies in a tricky position. "For much of industry, the first half of the year was easy because it could pass on price rises," says Philippa Sigl-Glöckner, managing director of Dezernat Zukunft, a Berlin-based economic think tank. While such companies as Unilever did push through record price hikes, not all of their material and operational costs were handed off to consumers. Making up for that margin hit will be challenging. "Global demand is weakening, and buyers won't accept further rises," Sigl-Glöckner says.
That rationale for tamping down wage hikes likely won't fly with many unions, which have watched as companies over the past year passed on record price increases with only limited hits to their sales. "Now that we're beginning to understand the persistence of inflation, there will be enormous pressure to increase wages," says Maria Demertzis, deputy director at economic think tank Bruegel, based in Belgium, where wages are already indexed to inflation. "Households have lost so much purchasing power that for any given union strike, the pressure will be higher than otherwise."
For consumer brands, the optics of wage negotiations are especially delicate. Companies such as Nestlé and Unilever are closely scrutinized for any indication they might be gouging consumers, and with hundreds of thousands of employees around the world, they can't afford to be seen as shortchanging their workers. Some companies have tried to get in front of the issue. British grocer J Sainsbury Plc raised front-line pay 7.9% this year and threw in free food and store discounts. And cosmetics group L'Oréal SA said it was approving higher-than-usual pay increases.
Nestlé has increased salaries for blue-collar workers in the US, and Chief Financial Officer Francois-Xavier Roger, on a call with analysts, predicted wage inflation would become a bigger issue at the start of 2023. Echoing that sentiment, Danone SA CFO Juergen Esser says wage inflation ranks alongside rising energy costs and milk prices as one of the dairy giant's concerns.
Unilever spent €5.1 billion ($5.1 billion) on salaries and wages last year, so even small-scale global pay raises could wipe out hundreds of millions of euros in profit. The maker of Marmite and Hellmann's mayonnaise has paid all of its 148,000 employees a living wage—independently defined as earning enough to afford a decent standard of living locally—since 2020 and has pledged to meet that standard for its 54,000 suppliers by 2030. Last month, Unilever CFO Graeme Pitkethly said the multinational was still collecting data as to how wage increases would affect its business.
The stakes are also high for such business-services companies as Sodexo and Compass. Because contracts with clients are typically set several years in advance, they face a big risk that employee pay expectations will outpace budget projections. Sodexo has struggled to fill positions, particularly in the US, where worker shortages are pushing up wages. And Compass, which spent £9.3 billion ($10.7 billion) on staff costs last year, reported profit of only £357 million—suggesting significant wage hikes could be painful to its bottom line.
This is a global issue with no simple solution. Last year, for example, 24% of Danone's 97,737-person workforce was located in Latin America, notorious for its eye-watering inflation rates. An additional 26% was in Europe, where inflation is weaker but unions are stronger. That means the company will have to negotiate wage bumps not only regionally but also across parts of the world with wildly disparate economic dynamics. "We will look at it in a country-by-country mode," says Danone CFO Esser. With inflation still rising, there's more pressure than ever on companies to bring down their spending. But holding down wages can backfire, and the next several months will show whether pay is one cost that companies can't afford to cut.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
