More restaurants and cafes closing than opening as impaired loans jump for construction and hospitality sectors

The hospitality industry is suffering under lower consumer demand and higher wages, and is now seeing the number of businesses shutting down exceeding that of new businesses entering the market, experts warn.

The warning comes as new figures from Westpac reveal the value of impaired loans has increased in the construction, accommodation and hospitality industries.

John Hart, chief executive of Restaurant and Catering Australia, says this year has been a dire one for the hospitality industry, saying it’s taken a huge toll on the number of businesses that are actually operating in the field.

“This is the first year we’ve seen the rate of closure exceed the rate of new businesses opening in the industry… that’s pretty damning,” he says.

“We’ve always had churn of about 18-19%, and we’ve always had that number going out of business, but we’re just not seeing the number of new businesses coming up to take their place.”

As part of Westpac’s legal requirements it released figures on impaired loans last week. One of the most significant increases was in the accommodation, cafes and restaurants sectors, which saw impaired loans rise from $134 million to $205 million – growth of 52%.

Hart says the failures are due to a combination of factors, although says higher wages are a key reason why some businesses can’t afford to survive.

“This brings up the question of how the industry is going to look moving forward, because you can’t sustain having nearly 50% of your revenues going out the door as wages.”

“That’s part of it, and it’s just because wage costs have gotten so high, the average business is not in a profit-making situation. That’s associated with this rise in impairment costs.”

Overall, Westpac revealed impaired loans grew from $4.58 billion to $4.61 billion, but specific industries reveal a much darker picture.

The construction industry saw its impaired loans grow from $111 million to $180 million over the past year, while finance and insurance also grew from $150 million to $213 million – growth of 42%.

Westpac’s figures show the utilities industry also saw its impaired loans rise from $56 million to $133 million, while the dedicated services industry saw impaired loans rise from $176 million to $242 million.

Actual losses for the previous year rose from $1.3 billion to $1.8 billion.

Meanwhile, separate figures from Westpac show the bank is expecting this Christmas to only be a “so, so performance”, at least in the retail sector.

The bank explains that as part of its Consumer Sentiment survey, there were additional questions on Christmas gifts. Just over one-third of respondents said they would spend less, while 54% said they would spend the same amount.

Similar results were recorded in 2009, leading Westpac to believe this year will be a lacklustre Christmas season.

“That said, the outlook is mixed rather than bad with attitudes towards gift spending about mid-way between the ‘dire’ reading in late 2008 (immediately after the GFC) and the upbeat responses seen in 2007, the last ‘boom’ Christmas for retailers.”