Hospitality and retailer insolvencies rising at faster pace than construction as spending dries up

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Retail and hospitality businesses are becoming insolvent at a faster pace than the troubling construction industry 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 in the coming months.

The latest statistics from the Australian Securities and Investments Commission show there were 3412 in the December quarter, up 47.1 per cent from the previous year.

Construction accounted for the lion’s share for the period with 824 failures, up 38 per cent, followed by accommodation and food services, and retail trade.

Accommodation and food services recorded the fastest rate of any sector in the December quarter with claims up 92.4 per cent to 504 from the same period in 2022, while retail trade increased 40 per cent.

Revive Financial head of business restructuring and insolvency Jarvis Archer said it was anticipated that insolvencies would get worse before they got better thanks to a drop in consumer spending.

“The two sectors most reliant on consumer spending are hospitality and retail, and it’s showing in the sentiment of business owners and rising insolvencies in these sectors,” he said.

“The cash buffers businesses and people accrued over Covid have been depleted over the past six to 12 months.

“On the personal side, business owners are less able to refinance their houses because of the financial position of their business, and more difficult lending criteria due to higher rates.”

This week, the ABS reported that retail turnover fell 2.7 per cent in December – the sharpest decline since the introduction of the GST in 2000 once the pandemic-era fall of 4.2 per cent in August 2020 is excluded.

HLB Mann Judd restructuring and risk advisory partner Todd Gammel told The Weekend Australian that many businesses in retail and hospitality were doing it tough following a softer-than-anticipated period since Black Friday and many were sitting on excess stock that would have to be sold at low margins.

Okami Japanese restaurant chain has closed several of its eateries.
Okami Japanese restaurant chain has closed several of its eateries.

“If the scales tip too far in favour of selling goods at a lower margin then it pushes you closer to becoming unprofitable and unsustainable,” he said.

The once powerhouse vacuum cleaner retailer Godfreys entered into administration this week and 54 stores will close in the next two weeks. Mr Gammel said that it was likely other retailers could find themselves in a similar position about whether to “right size” the business or introduce extensive structural change.

“Periods such as now when there is a lot of pressure can make a business much stronger in the long term if they adapt and respond as they can learn what really makes the company drive,” he said.

In the past month, Japanese restaurant chain Okami put more than a dozen of its venues into voluntary administration across the country, blaming inflation and pandemic costs, while several Muzz Buzz outlets have also gone insolvent.

Restaurant and Catering Australia chief executive Suresh Manickam said the sector was resilient despite consumers choosing more affordable food options.

Godfreys will close more than 50 stores in the next two weeks. Picture: Morgan Sette
Godfreys will close more than 50 stores in the next two weeks. Picture: Morgan Sette

“Our sector is very resilient, but it is feeling the pinch with an increased cost of living adding a lot of pressure,” he said.

Mr Manickam added that soaring power bills were putting a lot of pressure on hospitality businesses.

“Energy is the biggest component of hospitality businesses from cooling, heating and cooking, and rising energy bills have had a big impact. We call on the government to deliver cost of living reforms and packaging that will help bring down energy prices.”

“Whereas before a restaurant might review their menu prices on an annual basis, it becomes much more frequent because of the current situation, so it is critical we get energy prices under control.

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Matt Bell

Matt Bell is a journalist and digital producer at The Australian and The Australian Business Network. Previously, he reported on the travel and insurance sectors for B2B audiences, and most recently covered property at The Daily Telegraph.