High closure rate and insolvencies still plague retailers, study finds

Businesses in the retail sector remain under significant pressure with an elevated closure rate and rising insolvencies, despite improved trends in consumer discretionary spending.

According to CreditorWatch’s October Business Risk Monitor report, industries such as hospitality, construction and arts and recreation services are all seeing a moderation in business closures. This indicates that interest rate relief is starting to translate into increased discretionary spending.

Retailers, however, have yet to enjoy the positive trend, as business closures remained elevated in the latest study.

While fuel retailing saw a decent drop in closure rate (down 6.94 per cent from September to October), department stores and hardware, building and garden supplies recorded month-on-month increases of 7.94 per cent and 2.7 per cent, respectively.

Closures in the cafes, restaurants and takeaway food services are also “worryingly high”, with 10.6 per cent of businesses closing in the 12 months to November. Bars, pubs and clubs have fared better, supported by poker machine revenue. 

The report also finds that after a relatively low month, insolvencies rose sharply in October to a new high for retail trade, as well as sectors such as construction, transport, postal and technical services.

For the first four months of the current financial year, retail insolvencies rose 13 per cent.

In addition, CreditorWatch’s Trade Payment Default Index has been trending higher in recent months and recorded a sharp rise of 13.9 per cent from September to October. According to the company, the risk of insolvency can be as high as 8-15 per cent for companies with one or more registered invoice defaults.

“While consumers are beginning to open their wallets again, many businesses, particularly smaller operators in hospitality and retail, remain under intense pressure,” said CreditorWatch CEO Patrick Coghlan. 

“The sharp rise in trade payment defaults and stubbornly high closure rates tell us that now is not the time for complacency. Businesses need to stay vigilant, understand their credit risk exposure, and use timely data to protect cash flow as the economy transitions into this next phase.”

CreditorWatch chief economist Ivan Colhoun expects insolvency rates to remain relatively stable at elevated levels in the months ahead.

“The rate of insolvency might be a little below the recent peaks, notwithstanding the bounce back in October, due to the improvement in our Economic Conditions Tracker, but there remain important cost pressures below the surface and ongoing structural changes that suggest a significant decline in insolvencies is unlikely.”

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