Businesses in Parramatta and the Gold Coast have the highest percentage risk of failure within the next 12 months, while companies in the accommodation and food services sectors are most vulnerable to collapse, according to a risk report from a major Australian insolvency firm.
In its March 2017 outlook report on commercial risks, SV Partners warns that accommodation, food and retail sectors have the highest percentage of companies facing financial risk over the next year. According to the firm’s analysis, 6.7% of businesses in the food and accommodation sector, or 1681 companies, are at risk of imminent failure.
SV Partners managing director Terry van der Velde said low wages growth and weak consumer demand present major concerns for businesses in this space.
“As disposable incomes shrink, and in an environment of low consumer confidence, hospitality and retail businesses may struggle to achieve the revenue necessary to cover their relatively high costs,” he said in a statement on the report’s findings.
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Meanwhile, it’s businesses in big city centres along Australia’s east coast that are at highest risk of failure, with 4.1% of companies in the Parramatta region found to be at risk of financial failure, while 3.6% of Gold Coast operations and 3.3% of businesses in Brisbane City are facing challenging times. Other areas of concern are inner Melbourne and Sydney City, where SV Partners says 2.5% of companies are at risk of failing within a year.
From costs to confidence, several factors are at play
In its analysis, SV Partners says high operational costs and wages are contributing to the tough conditions for businesses, pointing to the high exit rate of food businesses at the end of last financial year. According to the Australian Bureau of Statistics, 16.1% of food businesses ‘exited’ the market in the year ending June 30, 2016, although this figures includes businesses that closed voluntarily.
Against a backdrop of lower consumer confidence, it is unlikely that policy moves like a cut to Sunday penalty rates will save businesses on the brink of failure, according to the analysis from SV Partners.
“Wages costs are just one of a multitude of factors these businesses must manage in order to stay in the black,” said van der Velde.
The report also points to weakness in the retail sector, with other analysts also agreeing “it’s tough out there” for Australian companies.
In a research note this week, analysts at ANZ observed out that only 16% of the world’s 250 top retailers have so far launched a physical presence in Australia, and there was still plenty of room for the already stretched Australian market to face even more intense pricing pressures.
“Gross operating profits are falling, growth in income from sales has slowed and pricing power is under pressure from international competition,” ANZ senior economist Jo Masters said on Monday.
“Perhaps not surprisingly, the retail sector has been shedding jobs — with more jobs lost in the year to November 2016 than any other industry.”
Meanwhile, the process of actually getting paid continues to be raised as a significant challenge for businesses trying to stay afloat. In preliminary findings from Small Business Ombudman Kate Carnell’s inquiry into payment times, 79% of small business owners said late payments affect their mental health, while 50% said uncleared invoices have an impact on their ability to pay suppliers on time.
Overall, Australian businesses across all industries have a 2.5% chance of failure in the next 12 months, according to SV Partners.
“We urge businesses in all sectors, to develop strategies to deal with short-term pressures on budgets, consistent with long-term capital and revenue strategies,” van der Velde advised.