Credit reporting bureau, CreditorWatch, has released the June results for its Business Risk Index, and has forecast that one in 11 hospitality businesses in Australia will fail in the next 12 months.
The report does not segment the industry any further, although author Michael Pollack did note that that hospitality was more at risk of business failures than any other industry.
CreditorWatch is now forecasting the failure rate to increase from 7.5 per cent to 9.1 per cent – equating to one in 11 businesses.
This is well above the forecast for Arts and Recreation Services and Transport, Postal and Warehousing which are ranked second and third with forecast failure rates of 5.7 per cent and 5.5 per cent respectively. The average forecast for all industries in 5.1 per cent.
CreditorWatch CEO Patrick Coghlan suggested it would be smaller hospitality outfits that would have the most risk of failure.
“It is small businesses that are hurting the most as they are more vulnerable to adverse economic conditions than larger businesses. They operate on tighter margins and are less able to take measures to cut costs.”
Pub sector more resilient
As the CreditorWatch report is not segmented, Quantaco’s executive director, platform services and business advisory, Mitchell Stone suggests that pubs are far less likely to fail than smaller, more vulnerable cafes and restaurants.
“While the CreditorWatch report’s projection that one in 11 hospitality businesses may fail in the next 12 months is concerning, it’s essential to consider the specific dynamics within different segments of the industry. At Quantaco, our experience with clients, particularly in the pub sector, reveals a somewhat more optimistic outlook for pubs compared to other hospitality businesses like cafes and restaurants.”
Stone outlaid the following market observations that suggest pubs are still in a relatively secure place, despite an obvious curtailing of discretionary spending:
- Gaming Revenue Holding Up: Gaming remains a robust revenue stream for many pubs, providing a financial cushion that other segments might lack. This is particularly important in times of economic uncertainty.
- Decline in Food and Beverage: We have observed a slight decline in food and beverage sales, reflecting broader consumer spending trends. However, pubs are in a unique position to flex their food offering to attract a broad audience.
- Diversification and Resilience: Pubs often benefit from a diversified asset base, combining gaming, food and beverage, retail operations, and accommodation. This diversification helps mitigate risks associated with any single revenue stream’s volatility. For instance, during periods when food and beverage sales might decline due to changing consumer behaviours or economic pressures, the steady income from gaming can provide a vital financial buffer. Additionally, retail operations, such as bottle shops or merchandise sales, offer another layer of financial security. Accommodation services further enhance revenue stability, catering to travellers and tourists, thus spreading financial risk across different customer segments. This multifaceted approach allows pubs to remain financially stable even when one part of their business experiences a downturn. The ability to pivot and focus on the more profitable segments during challenging times is a significant advantage that pubs hold over more specialised hospitality businesses.
Limiting the damage
Alistair Jarvis, managing director of Profitability Partners – a gold sponsor of the Pub Leaders Summit – suggests that while the figures on their own can be alarming, with context concern decreases. Jarvis suggests that while the numbers may now be one in 11 hospitality businesses failing, they were until recently one in 13. He suggests operators focus on what is in their control.
“Yes, consumer demand is down massively, but you’ve still got things you can control. Your sales are going to drop, and you can’t control a drop. But you can still make efforts to improve your business, for example: making sure wages are in line and making sure the cost of goods are in control. So, it’s by making sure that all your controllables are in line with your sales and tracking everything to your sales. But at a certain point, it doesn’t matter what your sales are, you’re going to lose money if it’s too low.
“However, you can still limit the damage. You can still try and ride through the wave of low sales and get through by controlling those things.”
Planning for operations is also a crucial factor in being able to ride it out until conditions improve.
“In my opinion, I think the main reason for failure is not the lack of sales… it’s lack of planning around those controllables. Planning has always been relevant when times are good, it’s even more important when times are bad. So, the first thing I would suggest to any venue is to do a budget. Have a look at where you are now, and budget that out for the next 12 months to see what that looks like.
“It’s still possible to survive during this time, and even still be a profitable venue.”
Jarvis will be making a presentation titled “How Can I Make My Venue Profitable?” at the 2024 Pub Leaders Summit, brought to you by McCain and Australian Hotelier. You can buy tickets here.