Hospitality business failure rates are set to rise again

According to CreditorWatch's June Business Risk Index, 9.1%, or one in 11, Australian hospitality venues will fail over the next 12 months. This represents both an increase from the sector’s current 7.5% business failure rate and from February's 7% 12-month failure rate forecast.

According to CreditorWatch’s CEO Patrick Coghlan, “it is small businesses that are hurting the most as they are more vulnerable to adverse economic conditions than larger businesses. They operate on tighter margins and are less able to take measures to cut costs.”

The recently released June Index also reported that the average value of invoices held by Australian businesses has dropped to a record low, down 49.9% year on year. CreditorWatch says this decrease is a reflection of businesses winding back their inventory due to higher prices and declining demand. It also recognises the sector’s status as the top ranked industry for major outstanding ATO debts as a factor contributing to current economic pressures. Currently, 1.65% of Food and Beverage Services owe the ATO $100,000 or above.

“The combination of declining order values and increasing payment defaults is a major concern as it indicates more businesses are experiencing both cost and demand pressures,” said Coghlan.

“With another rate increase becoming increasingly likely, we expect both metrics to deteriorate even further.”

In addition to being the industry with both the highest current business failure rate and the highest forecasted business failure rate, Australia’s Food and Beverages Services is also the sector that experienced the greatest change between the two, with the rate of failure forecasted to increase 1.56% over the next 12 months. 

The next most at risk industry - Arts and Recreation Services - has a current business failure rate of 5.35% and a 12 month forecasted failure rate of 5.67%, significantly less than hospitality.

Anneke Thompson, Chief Economist at CreditorWatch, believes that businesses are currently in the toughest phase of the monetary policy cycle.

“Monetary policy decisions usually lag what is happening in the broader economy, as data takes time to filter through to the RBA, and the RBA also wants to see a few months’ worth of data to be more certain that their decisions taken at board meetings are the correct ones,” she said.

“While this approach is sound theoretically, in practice it means businesses have to endure high interest rates long after consumer demand has plummeted, and discretionary spending has significantly weakened.”

The CreditorWatch June Business Risk Index also shines a light on the regions that are currently most and least at risk of business failure. Six of the top 10 regions with the highest level of risk are located in Western Sydney, followed by South-East Queensland. 

The regions with the lowest risk of business failure are concentrated around regional Victoria, North Queensland, and inner-Adelaide, Australia’s best performing capital city by a considerable margin. 

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