Warning one in 13 hospitality businesses could fail

The cost of living crisis is having a crippling impact and it could change the face of this prominent sector.

A chilling warning has been issued that one in 13 hospitality businesses across Australia are facing going bust as the industry grapples with the crippling cost of living crisis.

New data has revealed that the hospitality industry is most vulnerable to current economic conditions as consumers disposable income dries up and its hit by huge prices increases.

News.com.au has reported on a number of hospitality business failures over the past six months alone.

Hospitality business Good Group Australia, which operated a high-end string of steak restaurants and several other Asian venues across three Australian states fell into administration and ceased trading this month owing $23 million.

Its closure resulted in the loss of 200 jobs.

After 18 years in business, Asian fusion restaurant Gingerboy shut down in April blaming “market pressures since Covid lockdowns”.

A number of other restaurants have joined the growing pile of failures, including Elements Bar and Grill and three stores in Sydney restaurant franchise Bondi Pizza, as well as Mexican restaurant Checho’s, in Sydney’s outer western suburb of Penrith, which was shuttered in March.

Hospitality owners are struggling to survive in the economic climate. Picture: iStock

Late last year, an arm of major Victorian catering business, Legacy Hospitality Group, also went bust with debts in excess of $1.7 million.

Credit reporting bureau CreditorWatch’s said hospitality was ranking first among industries for the rate of external administrations as well as racking up Australian Taxation Office tax debts greater than $100,000.

The industry also ranked third for arrears in terms of invoice payments more than 60 days late.

Aside from the consumer crunch, businesses have also struggled to manage cost pressures, such as power prices and cost of ingredients, as well as labour shortages, CreditorWatch noted.

It found smaller hospitality businesses were bearing the brunt of the economic crisis as they tend to tend to have smaller cash reserves, while larger outfits are less able to take measures to cut costs such as laying off staff.

Conditions will get worse for businesses in the hospitality sector before they get better, warned CreditorWatch CEO, Patrick Coghlan.

“Hospitality is a high risk industry even in boom times unfortunately. It’s hard for hospitality businesses to pass on price rises compared to those in most other sectors. Consumers can easily ‘trade down’ to a cheaper venue or just eat at home,” he told news.com.au.

“The fact that so many hospitality entities are small businesses means that they are likely to have lower cash reserves than larger businesses and are unable to take measures to reduce costs such as cut staff.”

CreditorWatch CEO Patrick Coghlan. Picture: Supplied

Hospitality businesses have really struggled since the pandemic and this decline in discretionary spending has had a greater impact because of the precarious state that many of them were already in, he added.

“Closures in the sector will have obvious knock on effect for suppliers to those businesses, as well as for staff,” he said.

“Small businesses in the hospitality sector that have loans against the family home are likely to find themselves in difficulty if they cannot cover repayments.”

The outlook for hospitality businesses is not likely to improve until we see a lift in consumer spending, Mr Coghlan said.

“And that is not going to happen until the impacts of one or two rate cuts filter through to households,” he said.

“We don’t anticipate that being felt until at least the second half of next year.”

Overall, businesses across the sectors are struggling with external administrations up 48 per cent year-on-year with the rate now well above pre-Covid levels, CreditorWatch found.

In particular, the healthcare and social assistance industry saw a 58 per cent increase over the past 12 months, likely due to smaller NDIS providers, which proliferated during the early stages of the NDIS rollout and are now facing increasing scrutiny and competition, it noted.

CreditorWatch chief economist, Anneke Thompson, says very weak consumer spending is noticeably hurting customer facing businesses, particularly those that are classified as smaller businesses.

“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.”

It is highly unlikely that the $300 energy rebate for each household that was announced in the federal budget will be enough to persuade consumers to open their wallets to any great degree, according to CreditorWatch.

It has predicted insolvency rates to rise until the middle of 2025.