Business Failures Reaches COVID Levels, Food Services Worst Hit

A woman looks at signs at a store closed due to COVID-19 in Niles, Ill., on May 13, 2020. Nam Y. Huh/AP Photo

Australian businesses are failing at a rate not seen since the height of the pandemic lockdowns in October 2020. All sectors are affected, but food and beverage services are worst hit, according to the October Business Risk Index (BRI) from CreditorWatch.

Annualised insolvency rates have more than doubled over the last 18 months, exceeding pre-COVID levels by about 25 percent.

Court actions are also now well above pre-COVID levels as large creditors such as banks and the ATO seek to recover debts. The number of cases went up by 13 percent from August 2023 to August 2024.

The average failure rate across all sectors currently sits at 5.04 percent of total businesses, up from 3.97 percent in October last year.

The previous high was 5.08 percent, recorded in October 2020 at the height of COVID-19. After the initial phase of the pandemic, the failure rate began to decrease steadily, before it began to rise again in October 2023.

The food and beverage sector recorded the highest failure rate of all industries in the recent study, increasing to 8.5 percent on a rolling 12-month basis, up from 8.3 percent in the 12 months to September.

CreditorWatch forecasts the failure rate in the sector over the next 12 months will rise further to 9.1 percent.

In difficult financial times, people tend to swap their spending from pricier restaurants to cheaper options.

Data Broken Down

Household spending data for September from the Australian Bureau of Statistics (ABS) showed that the number of visits to, and sales in, hotels, cafes and restaurants across all price points was 1.7 percent lower than a year ago.

Sales in the tobacco and alcohol sector were even weaker in volume terms at minus 16.6 percent year-on-year.

Administrative and support services ranked second, with a 6 percent failure rate, followed by arts and recreation services (5.9 percent) and transport, postal, and warehousing (5.8 percent).

In one possible glimmer of good news, the failure rate in construction (5.3 percent) may be levelling out.

Failures are higher than pre-COVID levels for construction, administrative, and support services, and food and beverage services. The challenges in the food service and construction sectors have existed for some time.

Data source: ASIC database direct link, CreditorWatch industry data; business failure rate defined as voluntary and involuntary administrations, ASIC strikeoffs, and voluntary business deregistrations. CreditorWatch

Aside from tough economic conditions driving consumers to keep their money in their pockets, and businesses also facing higher costs, CreditorWatch says many are suffering due to the Australian Taxation Office (ATO) having recommenced collection activities to recover some of the $35 billion owed to it by small businesses, which “will be a source of added stress and insolvencies for the foreseeable future.”

Food and beverage is the leading industry for outstanding ATO tax debts, with 1.8 percent of companies in that sector having outstanding debts of more than $100,000.

CreditorWatch now has 28,780 records of businesses with overdue tax debts of more than $100,000, with sole traders comprising almost half (14,216) of these.

Data from the Australian Taxation Office. CreditorWatch

Food and beverage and construction, along with arts and recreation services and transport, postal and warehousing all tend to have a high proportion of their costs in wages and have thus been hardest-hit by the relatively high national minimum wage increases.

Confidence Increasing

The company’s Chief Economist, Ivan Colhoun, says it’s not yet apparent what effect the July 1 tax cuts are having, but they “will ease some of the pressures on consumers and businesses.”

“Pleasingly the unemployment rate remains very low at 4.1 percent. Consumer confidence readings have risen notably from very low levels in recent months, business confidence also rose in October and business conditions are around long-term averages according to the NAB Business Survey,” he noted.

CreditorWatch CEO Patrick Coghlan says that while inflation increases appear to have peaked, businesses are now awaiting interest rate relief.

“A slowdown in the inflation rate will certainly help businesses, but this just means that price rises have slowed down, so the cost pressures remain,” he said. “In most cases, you won’t see the cost of [inputs] coming down.

“Businesses desperately need interest rates to come down so households have some relief in cost-of-living pressures and start spending more.”

The regions with the highest risk were Western Sydney and South-East Queensland.

Adelaide has the lowest forecast failure rate among the capital city CBDs at 5.1 percent, followed by Perth (5.2 percent), Melbourne (5.8 percent), Brisbane (5.9 percent) and Sydney (6.2 percent).