One in 11 Hospitality Businesses at Risk of Failure: CreditorWatch

A for sale sign is seen in the window of an empty shop front in Perth, Western Australia, on March 18, 2024. Susan Mortimer/The Epoch Times

The failure rate for Australian businesses across all sectors is forecast to continue to rise, but those in hospitality are seen as particularly vulnerable.

New data released today by reporting agency CreditorWatch reveals that the value of current orders is at a record low, falling by 49.9 percent year-on-year as businesses reduce the inventory they keep on hand in response to declining consumer demand and higher prices.

That greatly subdued demand is forcing more businesses into debt and putting many at risk of closing altogether.

At particular risk is the hospitality industry, where the failure rate is predicted to be 9.1 percent—or one in 11. That’s up from 7.51 percent a year earlier.

Overall, the business failure rate increased by 8.8 percent to last year.

The average value of invoices held by Australian businesses in a study conducted by CreditorWatch in June 2024. CreditorWatch

Hospitality traditionally has a significantly higher failure rate forecast than other industries during tough economic times, primarily because it relies heavily on discretionary spending.

As consumers are forced to put more of their income into higher mortgage payments, rents, power bills, and other essentials, they’re left with less to spend on things they enjoy.

The news is slightly less bleak for other sectors, with an average failure rate across the economy of 5.1 percent.

Even those involved in transport, postal, and warehousing aren’t immune, with the third highest risk factor of 5.45 percent.

Arts and recreation, education and training, administration and support services, financial and insurance services, and accommodation also fare worse than the average.

Only two sectors are forecast to buck the trend, with failures in construction and manufacturing reducing by 0.26 and 0.09 percent respectively, and with their overall rates at or slightly less than the average.

Invoice Defaults

Another measure of business health has also declined in the CreditorWatch study—the number of businesses defaulting on invoices has risen despite lower order values.

Defaults reduced from May to June but have been trending up since the middle of 2021 and are now well above pre-COVID levels, with businesses caught between rising costs and declining demand.

CreditorWatch has identified “a strong correlation between a B2B payment default and the chance of a business failing over the following months.”

Australian business-to-business trade payment default index. CreditorWatch

Likely as a direct result, court actions are also well above pre-COVID levels, having seen a 37 percent increase in the year to June 2024, while credit inquiries dropped between May and June and remain flat across 2024.

The Australian Taxation Office (ATO) is often a creditor in winding up applications before the courts and is pursuing $34 billion worth of debts from small businesses and the self-employed.

Total collectable debt owed to the ATO jumped to $52.4 billion as of Dec. 31, 2023, roughly double the $26.4 billion at the end of 2019. Small businesses account for $34.1 billion, or 65 percent, of the total figure.

According to CreditorWatch, the top-ranked industry for outstanding ATO tax debts above $100,000 is food and beverage services, with a rate of 1.65 percent.

Construction and electricity, gas, water, and waste services are next at 1.18 percent and 0.94 percent, respectively.

CreditorWatch CEO, Patrick Coghlan, said conditions are becoming “truly dire” for Australian businesses.

“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,” he said.

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

Regional Differences

There are regional variations in the profile, with Adelaide City continuing to rank as the safest CBD in terms of insolvency risk.

This CBD benefits from relatively low rents and large numbers of workers and international students, giving it an overall default rate of 4.94 percent over the next 12 months, up from 3.98 percent the previous year.

Businesses in all the other state capitals run a higher-than-average risk, with Perth at 5.19 percent (up from 4.10 percent), Melbourne at 5.87 percent (4.20), Brisbane at 6.01 percent (4.46), and Sydney at 6.20 percent (5.08).

The top four worst areas for risk are also in New South Wales: Bringelly-Green Valley (7.84 percent), Merrylands-Guilford (7.82 percent), Canterbury (7.66 percent) and Auburn (7.46 percent).

It should be noted that these rankings only cover areas in which 5,000 or more businesses are operating.

CreditorWatch does not expect the situation for small businesses to improve any time soon, despite the sharp decreases in both demand and ability to pay bills.

The company’s chief economist, Anneke Thompson, explained that the Reserve Bank of Australia waits to see several months of data before making a decision “to be more certain that their decisions taken at board meetings are the correct ones.

“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,” she said.