CreditorWatch reports food and drink sector most at risk amid insolvency surge

Payment defaults between food and beverage businesses soared 31 per cent in the year to May, and there are fears conditions could get worse.

Cafes, restaurants, bars and other hospitality venues are showing signs of financial distress leading into the new financial year. Picture: Jake Nowakowski

Australian businesses are bracing themselves for a tough start to the new financial year, with CreditorWatch’s latest financial health check pointing to a continuation of the recent surge in corporate insolvencies.

The credit reporting bureau’s Business Risk Index (BRI) for May found businesses in the food and beverage sector – comprising pubs, clubs, restaurants and other hospitality venues – were most at risk of failure, as households tighten their budgets ahead of a Christmas trading period that’s shaping up to be “one of the weakest on record”.

According to CreditorWatch figures, payment defaults between businesses in the food and beverage sector soared by 31 per cent in the year to May, and there are fears conditions could get worse as the Reserve Bank’s monetary tightening begins to take hold of the economy.

“While the construction sector continues to gain the most media attention due to insolvencies, the food and beverage sector has the worse insolvency rate in the country,” CreditorWatch says.

“These businesses tend to be smaller so get less attention, but there are clearly challenging conditions as supply and labour costs are still high, and customers are tightening their belts.

“So far, most Australian employees have felt quite comfortable in their employment and therefore have been more confident to continue to spend and book holidays and tables at restaurants. As the unemployment rate inevitably moves higher however, this trend will reverse, and a lot more belt tightening will occur.”

CreditorWatch expects more pain ahead across industries.

Other business indicators tracked by CreditorWatch also suggest there’s more pain ahead for industries ranging from construction to hospitality and retail, with the rate of external administrations, trade payment defaults, court actions and credit inquiries all worsening.

Credit inquiries are up 85 per cent year-on-year, as businesses become more nervous about the financial health of their trading partners.

Any hopes the Reserve Bank’s monetary tightening is nearing an end are also beginning to fade, with minutes from this month’s meeting revealing the central bank’s worries around the increased risk that inflation will take longer to return to target than had been expected.

The RBA expects it will take two years for inflation to return to the top end of its 2-3 per cent target, and another rate rise is now expected when the central bank next meets on July 4.

CreditorWatch chief economist Anneke Thompson said that was likely to pile even more pressure on Australian businesses.

“The latest monthly inflation and unemployment data suggests that we will be hit with more rate rises in the coming months, adding to the challenge,” she said.

“Sentiment in the business community has shifted down now that it is clear that core inflation is proving hard to tame. It is now unlikely we will see any downward movement in the cash rate until mid 2024 at the earliest.”

The latest figures from the Australian Securities and Investments Commission show 650 Australian companies fell into administration or liquidation in May – up 58 per cent on April and 50 per cent higher than the same time last year.

Construction industry failures are among the highest of all industries, reaching their highest level since June 2020.

CreditorWatch expects more pain ahead across industries.

“We expect that insolvency levels will continue to rise, particularly as we enter the new financial year, and many businesses confront a reduced revenue forecast in their new budgets,” it says.

“The new financial year will be a very challenging one for Australian businesses, particularly those in food and accommodation, tourism and retail.

“The Christmas period ahead, usually a boom time for the retail sector, is shaping up to be one of the weakest on record.”