There Are Strikes in the EU Over Wages. How Will This Affect Corporate Profits?
European workers are facing a sharp drop in real incomes and inflation, which reaches almost 11%. Despite the strikes, companies are in no hurry to raise wages, as this could affect corporate profits.
In 2022, Europe’s largest companies are facing record inflation and the worst energy crisis in 40 years. Now corporations are preparing for new challenges.
Against the backdrop of inflation, the purchasing power of the population is falling, and workers are demanding higher salaries. Despite the fact that many European companies are experiencing a shortage of qualified personnel, not all firms are ready to accommodate employees, fearing that this will negatively affect the financial performance of the companies themselves.
For example, the British FMCG giant Unilever spent €5.1 billion on employee benefits in 2021. Even a small increase in salaries can lead to the corporation losing hundreds of millions of euros in profits.
Europe’s biggest firms - Unilever, Swiss food maker Nestlé, French perfume and cosmetics brand L’Oréal, France’s Sodexo, which organizes corporate catering and integrated building services, and Dutch retail chain Ahold Delhaize - warn that talks to raise staff salaries may lead to higher prices for the companies’ products in 2023. Bloomberg figured out how dissatisfied employees can affect the profits of their own companies.
Trade unions against top management
Consumer prices have been skyrocketing in the euro area since March 2022. In October 2022, inflation accelerated from 9.9% to a record 10.7% year-on-year, according to Eurostat estimates.
The purchasing power and real incomes of people are falling to the lowest levels in the past few years. At the same time, wage rates in the second quarter of 2022 increased by only 4.1% year-on-year.
Under these conditions, the unions seek to increase payments in order to level the gap between the income and expenses of workers. The shortage of qualified employees in the European labor market gives them certain leverage on the management of companies.
In the second half of 2022, a wave of strikes swept through the largest European enterprises. In recent months, workers at oil and gas company Total Energies in France, pilots at Scandinavian airline SAS and carmaker Stellantis in Italy have been on strike.
The British Royal Mail has already scheduled protests for November and December 2022. In early November 2022, workers at the British packaging manufacturer DS Smith, which supplies products to multinational corporations, including Amazon, voted to strike.
According to Paul Hollingsworth, BNP Paribas chief economist for Europe, the increase in the number of strikes suggests that there has been a “shift in bargaining power towards workers.”
Finding a compromise
The topic of wage negotiations is of particular importance to corporations that supply popular consumer goods and food products to the market. Companies like Nestlé and Unilever, which employ hundreds of thousands of people around the world, are keen to avoid a reputation for underpaying their employees.
Some firms have already gone to meet their employees. Thus, the British supermarket chain J Sainsbury increased staff salaries by 7.9%, began to give out food for free and offered discounts in the network’s stores.
Nestlé has increased the salaries of blue-collar workers in the United States, usually on an hourly or piece-rate basis, such as truck drivers, movers or cashiers. According to the chief financial officer of the corporation, François-Xavier Roger, the need for higher wages will become a more serious problem in early 2023.
Meanwhile, in a number of countries, the confrontation between top management and trade unions is acquiring enormous proportions. In France, oil refineries were closed in October 2022 due to protests.
In Germany, IG Metall, the largest metallurgy and automotive trade union, continues to negotiate with the employers’ association Gesamtmetall (including, among others, Airbus, automakers Mercedes-Benz and Volkswagen) for an 8% wage indexation for about 3.9 million workers. Company representatives say they can’t afford to revise salaries when a recession hits.
If the parties cannot agree, the risk of large-scale strikes increases, Bloomberg notes. In particular, they can lead to the closure of production lines at some of the largest German enterprises - the aircraft manufacturer Airbus, the automaker Mercedes-Benz AG and the steel concern Thyssenkrupp.
Dangerous spiral
Prices in Europe are rising so fast that it creates a wage-price spiral, says Clemens Kuhl, a professor of macroeconomics and international monetary economics at Maastricht University. People are facing rising costs of living and demanding higher wages, and firms are forced to meet them due to a shortage of staff, the expert explains. The result is a vicious circle: companies raise prices again to offset the costs of increasing the payroll, inflation rises, people again face a fall in purchasing power.
At the same time, labor productivity has remained virtually unchanged in recent years, and a number of eurozone countries and the UK are entering a recession. Under these conditions, the need to revise wages is likely to put additional pressure on companies’ bottom line. Juergen Esser, chief financial officer of food manufacturer Danone SA, sees the increase in salaries as a problem for the company, as rising prices for energy and raw materials.
In particular, companies providing business services, such as Sodexo and the British Compass, which operates in the field of corporate catering, may be at risk. Since contracts with clients are usually concluded for several years in advance, firms take them into account when planning the budget, including staff salaries. Unplanned increases can hit companies’ profits.
In 2021, Compass spent £9.3bn ($10.7bn) on staff and now the company says it made just £357m ($421m) in profit. This suggests that a significant increase in wages can have a painful effect on its future results.
“For most industrial companies, the first half of the year was easy because there were no price increases,” says Philippa Siegl-Glockner, managing director of the Berlin economic think tank Dezernat Zukunft. However, in the future it will not be easy to compensate for the decline in margins: demand around the world is already weakening, and not all buyers will be ready to purchase at higher prices, the expert notes.
Current forecasts for the financial performance of European corporations look rather pessimistic, Reuters notes. It is assumed that in the fourth quarter of 2022, the profit of companies will increase by 18.6%, but in the first quarter of 2023 the growth will be only 3%.
On the ECB’s radar
Potential problems associated with salary increases are also being discussed at the European Central Bank (ECB). At the ECB’s latest meeting, ECB President Christine Lagarde called “higher-than-expected wage growth” a key risk factor in inflation forecasts.
The ECB estimates that wages in the euro area will increase by 4% or more in 2023. Growth was “subdued to moderate” in 2022 as it was still largely driven by agreements made in 2021 or earlier.
“The dynamics of wages may be gaining momentum,” Luis de Guindos, vice chairman of the European Central Bank, said in mid-November 2022. “Inflation is still high, and this could lead to higher-than-expected salary increases.”
According to Nestlé CEO Mark Schneider, the issue of employee compensation will remain a very important topic in the coming months. In most countries, salary payments in 2023 will be discussed in the winter and in the first quarter of 2023, he said.
At the same time, the growth of 4% planned by the ECB will still mean a loss in the purchasing power of the population, the bank notes. According to the forecasts of the regulator, in 2023 inflation will average 5.5%.