Retail business failure rates highlight persistent challenges for sector: CreditorWatch

New data from leading Australian credit-reporting bureau, CreditorWatch highlights the ongoing challenges within the retail sector, with the greatest impact felt in food and fuel retailing.

Consumer spending in Australia remains weak, with retail spending staying flat since the start of 2024. While Treasury forecasts that income tax cuts and cost of living measures announced in the budget will assist in a recovery in real disposable income over the 2025 financial year, it remains to be seen if this will translate into increased spending in the retail sector.

Despite these challenges, the food retailing sector has shown resilience compared to other retail sub-industries. Consumers continue to prioritise spending on essentials, yet this sector faces its own pressures, including higher proportions of overdue invoices and a trend of consumers moving away from smaller food suppliers in favour of value supermarket chains.

Key insights:

• Food retailing and fuel retailing have the highest business failure rates at 5.40 per cent over the past 12 months.
• Food retailing has the largest proportion of invoices more than 60 days overdue at 9.41 per cent.
• Fuel retailing has the highest external administrations rate at 0.81 per cent over the past 12 months.
• Motor Vehicle and Motor Vehicle Parts Retailing has the lowest business failure rate at 4.27 per cent, equal lowest external administrations rate at 0.49 per cent, and lowest largest proportion of invoices more than 60 days overdue at 6.68 per cent, over the past 12 months.

In terms of store-based retailing, food retailing is performing better than other store-based retailing, which includes retailers selling discretionary items. According to the ABS’ latest Retail Trade data (April 2024) spending is down year-on-year in the Household Goods (-1.4 per cent), Clothing, Footwear and Personal Accessories (-2.5 per cent) and Department Stores (-1.3 per cent) categories.

While the Retail Trade sector overall makes up 10.6 per cent of all ATO tax defaults currently lodged, the ‘other store-based’ retailing category accounts for 71 per cent of these retail trade defaults. This is unsurprising given the slowdown in demand in these stores. Only 14 per cent of Retail Trade ATO tax defaults are in the food retailing category, as consumers continue to spend on essentials at supermarkets and other food retailers. This is supported by retail trade data, where spending on Food Retailing is up 2.0 per cent over the year to April 2024, versus 1.3 per cent in total retail spending.

The food retailing sector is not without its own stress. Interestingly, this sector has the highest proportion of invoices more than 60 days overdue, at a very high 9.41 per cent. Other store-based retailing has 8.05 per cent of invoices outstanding. Business failure rates are also highest in food based retailing – at 5.40 per cent – and equal with fuel retailing. This is likely due to smaller food suppliers – butchers, bakers, greengrocers etc. – being forced to close as consumers move to better value supermarket chains.

CreditorWatch Chief Economist Anneke Thompson said that Australian consumer confidence is likely to remain weak until there are two or three cuts to the cash rate.

“Only then will mortgage holders start to feel more confident that they have some breathing space in their monthly budget,” Thompson said.

“Given we are unlikely to see the second or third cut to the cash rate until the final quarter of 2025 financial year, we expect that insolvencies in the retail sector will increase, especially amongst smaller, discretionary retailers. The retail trade sector has already recorded a 35 per cent increase in insolvency rates over the year to April 2024.”