Insolvencies forecast to peak in the middle of 2025 as interest rate cuts kick in

Coffee prices are set to rise ‘significantly’ as the hospitality sector gets smashed by rising costs and high interest rates, but there may be better times ahead.

tCreditorWatch’s data indicates that the hospitality industry is under more pressure than other industries.

There’s more pain to come for small business this year, but insolvency numbers are expected to peak in the middle of 2025 as expected interest rate cuts kick in, according to credit reporting bureau CreditorWatch.

Chief executive Patrick Coghlan said while CreditorWatch’s next Business Risk Index would be released later in February, data was showing that “it’s as bad as it gets” for small business, with hospitality bearing the brunt.

“Insolvencies are at a record high and that will continue for the foreseeable future,” he said. “We expect that to peak at around the middle of the year. If we get an interest-rate cut in February that will provide confidence and with an industry like hospitality it can have an almost immediate impact because all of a sudden people have a bit more money in their pockets.

“I think the last six months of the year will be more positive, but of course the caveat remains if inflation remains sticky and tariffs are introduced and they can’t reduce interest rates.”

CreditorWatch’s last BRI, released in mid-December, pointed to an extremely challenging start to 2025 for Australian businesses.

Insolvencies, the business failure rate, business-to-business payment defaults and court actions were all on the rise as businesses battled a combination of cost increases, high interest rates, wage increases, skilled labour shortages, increased Australian Taxation Office enforcement activity and soft consumer demand.

The price of a flat white coffee is on the rise.

Dean Merlo, who runs Merlo Coffee, one of the country’s biggest independently owned coffee roasters, said hospitality businesses remained under pressure.

He said a rise in green coffee bean prices and the impact of cost-of-living pressures meant he had to increase prices ­“significantly”.

“I told our mob that this is just a blip and we’ve been monitoring coffee prices for 30 years and it will come back. But with all the stuff we’re reading it doesn’t look like it will,” he said.

“Also, the trouble is that a lot of people have that first coffee and you ask if they want a second cup and they almost always seem to pat their pockets as they’re talking to you and say ‘I’m OK’. It’s all about money. Right now people don’t know where the ceiling is on their mortgages and they’re always conscious of money. If they see interest rates drop then they will start to think ‘that’s the ceiling. It can’t get any worse’ which will give them the confidence to spend.”

In addition to supplying the public and its own 16 Merlo stores in Queensland, the company supplies more than 1500 cafes and restaurants throughout Australia.

Mr Merlo said the family company’s turnover was similar to 12 months ago but profit was significantly lower.

“The cost of goods is killing us and that’s the same for everybody – there’s no escaping it,” he said.

“When you look at us on a global scale, we are very cheap compared to what you would pay in other countries – it’s $8, $9, $10 in other countries to buy a gourmet coffee.

“We charge $4.90 for a standard flat white and we’re just about to put all of our prices up significantly – not because we want to but pretty much because we have too.”

CreditorWatch chief executive Patrick Coghlan.

According to the latest data from the Australian Securities & Investments Commission there have been 7755 insolvency first appointments between July 1 last year and January 19, compared to 5359 at the same period 12 months ago. There have been 1348 accommodation and food services insolvency appointments, up 64 per cent from the same period a year ago. CreditorWatch’s last BRI found the average business failure and closure rate for all sectors was at 5.1 per cent, the highest rate since August 2020. The failure rate is expected to reach 5.6 per cent over the next 12 months.

CreditorWatch’s data indicates that the hospitality industry is under more pressure than other industries in a number of key areas. Food and beverage services leads the industry rankings for the business failure rate, late payments, ATO tax debt defaults over $100,000, and is ranked second for payment defaults.

The latest Australian Bureau of Statistics retail trade data for cafes, restaurants and takeaway food services shows that spending at these outlets has been largely flat since the beginning of 2023.

Mr Coghlan said the hospitality sector was highly exposed to many different economic headwinds. “It’s not just consumer spending but also interest rates have jacked up and commercial rent has increased,” he said.

“And there is a shift to hybrid working so you don’t have people in the office five days a week buying coffee and sandwiches from the same place – they’re only doing it three days a week.

“But if we get an interest rate cut in February that will provide confidence and for an industry like hospitality it can have an almost immediate impact because all of a sudden people go ‘great, I have a bit more money in my pocket and I can see light at the end of the tunnel’.

“We still expect it to be tough for another six months but we know that once businesses have more certainty about the future – be that inflation, interest rates and consumer behaviour – they will start investing.”

Originally published as Insolvencies forecast to peak in the middle of 2025 as interest rate cuts kick in