Business conditions will feel recessionary for most consumer-dependent businesses, particularly in 'mortgage belt' areas
Australia’s hospitality businesses, specifically in food and beverage services, face the highest risk of failure over the next 12 months, according to the latest CreditorWatch Business Risk Index.
The primary challenge for these businesses is their reliance on consumer discretionary spending, which has diminished due to cost-of-living pressures. Additionally, these businesses are grappling with rising costs, including power prices, ingredient costs, and labour shortages.
The food and beverage services sector also leads in external administrations, ATO tax debts exceeding $100,000, and is third in arrears.
The CreditorWatch report also found small hospitality businesses particularly vulnerable, as unlike larger enterprises, SMEs often have smaller cash reserves and less flexibility to cut costs. Data shows that small businesses in the food and beverage sector are at greater risk of failure, while large hotel groups in the same sector have the lowest failure rate among large businesses.
CreditorWatch chief executive Patrick Coghlan (pictured) said conditions for hospitality businesses are likely to worsen before improving.
“The outlook for hospitality businesses is not likely to improve until we see a lift in consumer spending,” he said. “And that is not going to happen until the impacts of one or two rate cuts filter through to households. We don’t anticipate that being felt until at least the second half of next year.”
Meanwhile, business-to-business payment defaults have reached a record high, increasing 69.4% year-on-year, as businesses struggle to pay their invoices. Interest rate hikes, high inflation, labour shortages, and weak consumer demand are squeezing margins across industries.
CreditorWatch found a strong correlation between payment defaults and business failures, noting that a business that defaults on a payment has a 20% chance of failure within the next year, rising to 66% with four or more defaults.
“While Australia is far from being in a technical recession, and Treasury is still forecasting positive, albeit weak, GDP growth over the three-year outlook, business conditions will feel recessionary to most businesses that rely on consumer spending, particularly those businesses located in ‘mortgage belt’ areas of our capital cities,” said Anneke Thompson, chief economist at CreditorWatch.
The credit reporting bureau expects tough business conditions to persist until mid-2025 when lower interest rates may provide some relief. The $300 energy rebate announced in the Federal Budget and lower income tax rates from July 1 may offer limited benefit, but are unlikely to significantly improve the outlook for most Australian households. Consequently, insolvency rates are expected to rise through to mid-2025.
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