7% of Aus hospitality businesses forecasted to shut doors over next 12 months

The February 2024 CreditorWatch Business Risk Index (BRI) has revealed that businesses in the food and beverage services sector are currently at the most risk of external administrations and business failures, with more than 7% expected to terminate operations over the coming 12 months. 

Hospitality has been labeled as the most vulnerable sector against an economic backdrop in which all Australian business sectors are experiencing increased difficulties, with payment defaults from business-to-business transactions at a record high. 

“This comes as a direct result of the increasing cost pressures that Australian businesses are confronting from factors such as higher interest rates, inflation, wages and labour shortages,” said Anneke Thompson, Chief Economist at CreditorWatch, in a statement provided to the Drinks Association.

“[This is] coupled with lower consumer demand as households struggle to manage cost-of-living pressures.”

According to CreditorWatch, data concerning payment defaults tends to have a strong correlation with business failures. Businesses with one default have a 24% chance of going insolvent in the following year, while businesses with two defaults have a 42% chance and businesses with three defaults have a 62% chance. 

The February 2024 BRI also shines light on the decreased average value of invoices.

“[This shows] businesses were running down their inventories in anticipation of further declines in consumer demand,” said Thompson.

“While the February BRI data recorded a seasonal increase in the average value of invoices from January to February (up 10.4%) values continue to trend downward and sit at their lowest point since September.

“The sustained fall in the average value of invoices over 2023 was a very good leading indicator of the overall slowing of the economy.”

The food and beverage sector continued to have the highest rate of external administrations throughout the reporting period of the CreditorWatch index.

“This sector is expected to remain to maintain its unenviable position at the top of this table as Australians pull back their spending at restaurants and on takeaway in the face of cost-of-living pressures,” said Thompson. 

“Unfortunately, given the decline in the average value of trade invoices and the record level of trade payment defaults recorded in February, we expect that the rate of external administrations will continue to increase over 2024.”

According to the analysis on the CreditorWatch BRI, pressures on Australian businesses are unlikely to alleviate up until the beginning of 2025 at the earliest. 

“Based on BRI data coming through and models projecting external administrations and business failures, we expect the next six months, at least, to be very challenging for Australian businesses,” said Thompson.

“All businesses will need to watch their cash flow very closely, even when the cash rate begins to decline, which at this stage looks to be sometime in Q3 2024.

“It will take three or four cuts to the cash rate before Australian consumers start to feel more comfortable making purchases of discretionary items and spending on entertainment, which is unlikely to be until early 2025.

A CreditorWatch guide to best credit management practice can be found here.