The latest industry risk ratings from credit reporting bureau CreditorWatch has revealed that businesses in the hospitality sector are currently exhibiting an extremely high level of risk compared to other sectors.
CreditorWatch currently rates 16.2 per cent of businesses in the food and beverage services sector as ‘high’ or ‘very high’ risk, significantly higher than second-ranked Administrative and Support Services at 7.2 per cent and Arts and Recreation Services at 7.0 per cent.
The report noted that businesses in the food and beverage services are currently struggling with high interest, increased input costs, energy price rises, reduced visitation in CBD locations, and lower consumer demand due to cost of living pressures.
At the other end of the scale, the Wholesale Trade sector recorded the highest proportion of businesses rated at ‘low’ and ‘very low’ risk (58.6 per cent), followed by Manufacturing (57.8 per cent) and Agriculture, Forestry and Fishing (51.3 per cent).
CreditorWatch Chief Economist, Ivan Colhoun shared that there are some common characteristics among sectors rated low risk, such as the hospitality sector.
“On the lower risk ratings side, unsurprisingly, there is a predominance of government or effectively government-funded business categories,” Colhoun said. “It will be interesting to see to what extent there is movement in risk ratings in the Education and Training sector over the next year, given the well-publicised changes to federal government policy in respect of higher education and immigration caps.”
Meanwhile, CreditorWatch CEO Patrick Coghlan commented that businesses in sectors such as hospitality and the arts are unlikely to see an improvement in business conditions until the RBA begins cutting interest rates.
“These industries that are heavily reliant on discretionary spending will, unfortunately, continue to find it tough until consumers feel a reduction in cost-of-living pressures, which won’t happen until we see a couple of rate cuts,” Coghlan said.
“Discretionary spending is one of the few ways that consumers can actively cut costs, whether that’s eating out less, buying fewer coffees at cafes or not seeing so many concerts or theatre shows.”
In relation to these findings, a report by ASIC found that 1,225 companies entered insolvency for the first time in September 2024. In seasonally adjusted terms, the number was slightly higher but not significantly so.
However, it has been noted that the number of registered companies has risen substantially between 2008 and today at 3.4m. This indicated that there were twice as many registered companies in September 2024 as there were at the start of 2009.
While it’s true that insolvencies are rising, the overall proportion is not as high as during either of the previous periods, though this may be due to the ATO bunching or catching up on insolvencies after the significant reduction in enforcement over the COVID period.
Ivan Colhoun commented that overall, restrictive monetary policy and several COVID after-effects (such as ATO enforcement actions, migration and foreign student policy changes) are combining to increase the risk of business failure, with interest-sensitive/consumer discretionary sectors most at risk.
CreditorWatch noted though that the rate of insolvencies is not yet especially high and the enforcement actions of the ATO are currently obscuring the underlying trend. Its modelling is expecting a further lift in insolvency rates, though expected interest rate cuts in the first half of 2025 and the beneficial aspects of recent tax cuts should prove a support.
This article was first published on sibling website Inside Small Business.
