Insolvency risks highest for food and beverage sector

There is a higher risk of insolvency for sectors in the Australian economy that are reliant on discretionary spending with the food and beverage sector topping the list of riskiest sectors at a 7.3 per cent probability of default, according to CreditorWatch.

by | 1 Mar, 2023

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In its latest Business Risk Index, CreditorWatch found that 64 per cent of consumers said they were already cutting back, with a further 17 per cent saying they had plans to.

‘Dining out’ was top of the list of areas where people were cutting back, with 74 per cent saying they have already reduced spending here.

The report said this emphasises the risk of this sector, as business owners will now not only be grappling with high costs, wages, interest payments, and rents but also lower demand.

Inflation also continues to be a key metric and while many economists believe inflation peaked in Australia in the December 2022 quarter, when it came in at 7.8 per cent, it is still well above the RBA’s target rate of 2–3 per cent.

The index stated that although the Australian Bureau of Statistics said that the unemployment rate had risen to 3.7 per cent in January and there are still almost 400,000 more employed people in Australia in January 2023 than there were in January 2022, it is likely that the strong gains in employment that were recorded in 2022 won’t be repeated this year.

“The ABS has recorded a drop in the number of employed people for two straight months now, suggesting we reached a peak in employment in November 2021,” said Anneke Thompson, CreditorWatch chief economist.

“Businesses will be far more cautious in hiring, although the good news is that at this stage there doesn’t seem to be any increase in mass redundancy announcements. While increasing unemployment is not great news for jobseekers, it is better news for the economy overall, as it greatly decreases the threat of a wage-price spiral.”

Ms Thompson said most industry turnover is quite volatile over the summer period, so it is difficult to draw any major conclusions on trends, however, household goods retailing is one sector where trade is well below 2022 levels and is in fact trading at or about the level it was in October 2021.

“This is likely a result of households pulling back on large expenditure and also a flow-on impact of many people making large purchases for their houses during lockdown periods,” she said.

“It is likely that as we see the peak of housing completions reached in around mid-2023, that household goods trading will continue to remain flat or even trend down.”

Seek Job ads data for January 2023 also showed that on a year-on-year basis, almost all sectors have recorded a drop in the number of advertised roles.

The biggest year-on-year drop was recorded in the information and communication technology sector, which was down 24.1 per cent, followed by hospitality and tourism, down by 13.8per cent. The only industries to have a higher number of job ads in January 2023 versus January 2022 are education and training, community services and development, and accounting.

Late payment rates for January were, on average, three times greater for small business relative to big business, reflecting differences in the ability of small businesses to enforce payment terms and collect on payment arrears and the willingness of some businesses to treat smaller suppliers as an interest-free bank.

Payment arrears have been slowly trending down across all industries but continue to be a problem in the construction industry due to inherent payment structures that incorporate delayed payments for projects. In January, 11.6 per cent of small construction businesses had payments that were 60 days or more in arrears compared to just 2.3 per cent of large businesses.

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