Retail, hospitality operators brace for insolvency crunch

The insolvency storm surrounding retail and hospitality is expected to intensify in 2024 as the full impact of interest rate rises flushes through the economy.

Retail, hospitality and tourism sectors will come under increasing pressure in the early stages of 2024 as the full impact of aggressive interest rate rises flushes through the Australian economy.

Alongside construction, industries sensitive to discretionary spending have felt the brunt of interest rate increases and cost-of-living pressures over the past two years, and many more operators are expected to tip over the edge as the Australian Taxation Office reins in the ballooning stockpile of debt it amassed during Covid-19.

The latest statistics from the Australian Securities and Investments Commission show there were 11,223 company collapses for the year to December 3, up 37 per cent from 8140 for the whole of 2022.

Construction accounted for the lion’s share for the period with 3046 failures, up 27 per cent compared to the full 2022 year, followed by accommodation and food services, and retail trade.

The holiday trading period is looming as a critical time for retail, hospitality and tourism operators who often rely on the end-of-year sales rush.

Australian Restructuring Insolvency and Turnaround Association chief executive John Winter said the impact of cost of living and higher interest rates would play out at the check-out in the coming weeks, setting the scene for what could be a challenging start to 2024.

“The same industries that are under pressure because of interest rates cutting discretionary spending are the ones who also have a huge reliance on a big Christmas and summer trade: hospitality, tourism and retail,” he said.

Australian Restructuring Insolvency and Turnaround Association chief executive John Winter. Picture: Jane Dempster

“They generally rely on high profits in the summer to carry them through the year. If that doesn’t happen, they can be under serious pressure to survive later in the year

“Retail, hospitality and tourism will be under close watch as the rises in interest rates start to bite. And it won’t take more increases in rates for it to hurt.

“There’s always a long lag time before each rate rise actually starts to cause its full impact.”

The year-to-date insolvency figures are slightly higher than the equivalent pre-Covid period in 2019, before temporary measures were put in place to protect vulnerable businesses during the peak of the pandemic.

However, with unpaid taxes and business debts owing to the ATO soaring to $45bn, up from $26.5bn before the pandemic, insolvency experts expect a more assertive debt collection approach by the tax office in 2024 could tip many more businesses over the edge in 2024.

Mr Winter said the ATO had a responsibility to take more action to claw back business debts, after remaining “quite passive” throughout 2023.

“While they have sent plenty of threatening letters to taxpayers, they have not really been doing their job in enforcing recoveries,” he said.

“When the ATO doesn’t do its job in demanding payment of tax debt, they become an unofficial lender; they knowingly ramp up the debt load of those businesses.

“What that does is put other creditors at risk – generally other small businesses. That’s a real problem when the ATO is knowingly allowing this to occur.”

Cost-of-living pressures are putting the squeeze on consumer spending.

Revive Financial head of business restructuring and insolvency Jarvis Archer said December was the busiest in his 22-year career.

“January is already busy which is a first,” he said. “Retailers and restaurants have generally reported very quiet trading over December. This is particularly worrying for those businesses who rely on the Christmas trading period to bolster the rest of their year.

“What they’re seeing is foot traffic down slightly, but those people are spending much less.”

Mr Archer said recent conversations indicated that 2024 would result in some bigger business insolvencies as well significant difficulty in the agricultural sector which has struggled to pass on its increased costs to the big supermarkets.

“Construction, retail and hospitality are expected to continue to experience high levels of insolvency for at least the first half of 2024,” he said.

Up to December 3 there were 4684 insolvencies in NSW, up 42 per cent on the calendar year of 2022; 2822 in Victoria (up 27 per cent); Queensland has 2156 up 45 per cent; Western Australia increased 25 per cent to 785 and South Australia 455, up 57 per cent.

The construction industry has been the biggest contributor to nationwide insolvencies over the course of 2023 as builders, bound by fixed-price contracts, faced rises in materials and other building costs.

High-profile failures during the year have included Porter Davis Homes, the Lloyd Group, Brisbane’s LDC, PBS Building, Melbourne’s Hallbury Homes, and the Toplace development and construction empire previously run by fugitive Sydney developer Jean Nassif.

Oracle Insolvency Services partner Yulia Petrenko said some builders were coping better than others with the difficult market conditions, while more pain was likely for those struggling to win work in a competitive marketplace.

Oracle Insolvency Services partner Yulia Petrenko. Picture: Naomi Jellicoe

“The construction industry features heavily (in insolvencies) but there are two extremes,” she said.

“Some builders and tradies are doing exceptionally well with work locked in for years, while others are flailing under fixed-price contracts, a lack of skilled labour and the supply and cost of materials.

“The loss of the Commonwealth Games in Victoria has been a blow for the building industry with $7bn in infrastructure work axed.

“In the next 12 months we expect a growing divide between the builders and tradies who have a steady stream of work and have overcome challenges of supply and staffing, and those in the opposite position.”

Meanwhile, online clothing retailer EziBuy, Victorian fashion brand Nobody Denim and luxury women’s fashion brand Alice McCall were among the retail casualties in 2023, as customers reduced their expenditure.

Andrew Spring of Jirsch Sutherland.

Jirsch Sutherland partner Andrew Spring said the holiday trading period was shaping up as a major test for retailers across the country.

“We recently engaged with an eCommerce business that described sales as ‘dropping off a cliff’, principally due to cost-of living-pressure on discretionary spend,” he said.

“In my view, we are seeing a correction away from the more willing consumer spending behaviour of the last couple of years, and that’s likely to continue into 2024 as household savings continue to decline.

“There’s been plenty of talk about consumers watching their pennies at Christmas, and that will be a key challenge into the new year.

“Traditionally we see an increase in insolvencies in the retail sector in the first quarter of the year if a slower-than-expected Christmas period occurs.”

Mr Spring said personal insolvencies were also likely to continue to rise in the new year, following a 29 per cent spike in the September quarter.

“There’s usually a lag between when a company is wound up and when a director declares bankruptcy or uses another of the personal insolvency regimes,” he said.

“According to AFSA (Australian Financial Security Authority) statistics, in the September 2023 quarter over 25 per cent of personal insolvencies were business related.

“As business costs continue to spike, we believe there’ll be more business owners that will personally end up in financial distress – particularly if they have provided personal guarantees.”

Originally published as Retail, hospitality operators brace for insolvency crunch