Cafe and restaurant owners have faced significant challenges in 2024, and they will be hoping the new year brings improved operating conditions. The hospitality industry operates on thin profit margins at the best of times; however, the last 12 months have delivered a perfect storm of difficult trading conditions.
Increasing Cost of Labour
The Fair Work Commission implemented a further 3.75% increase in award rates for hospitality workers, following a 5.75% increase in 2023.
This minimum increase in labour costs of 9.5% over the past 24 months has been a major factor in the high closure rate of cafes and restaurants in 2024. Nearly 1 in 10 (8.5%) hospitality businesses became insolvent this year—almost double the average insolvency rate in other industries.
Labour costs account for between 30%–50% of every dollar of revenue for hospitality providers, explaining why historically high wage increases have resulted in record numbers of businesses closing their doors.
Record Inflation
The by-product of the government’s COVID-19 response had what should have been obvious consequences, with inflation peaking in December 2022 at 7.8%. While it is now returning to the upper end of the historically reasonable range of 2%–3%, the damage has been done.
With the cost of sales (food and beverages) accounting for 25%–35% of revenue, cafes have attempted to pass these cost increases on to consumers—with limited success.
Interest Rates
Over the past 15 months, 13 interest rate increases have forced consumers to cut back on discretionary spending. This has included reducing daily indulgences, such as breakfast at the local cafe or buying a latte. Evidence of this shift is seen in the 20% decrease in restaurant bookings since 2022.
Financing
Major bank financing for SMEs has become significantly more restrictive over the last five years, leaving many operators with limited capital to navigate volatile trading conditions. Many have been forced to turn to third-tier (high-interest) lenders as a last resort.
Australian Taxation Office (ATO)
During and post-COVID (2020–2023), the ATO provided unprecedented leniency in collecting overdue accounts. However, this led to a substantial increase in outstanding balances. The ATO has since reversed its approach, now adopting a hardline process. This includes issuing director penalty notices to business owners who cannot repay outstanding amounts or meet a 12-month repayment plan.
Business Sales
The growing financial distress among hospitality business owners has resulted in a significant rise in business listings. Unfortunately, financials often do not support the sale prices required.
In better times, owners could ask for 3–4 times their earnings. However, in this environment, such multiples are increasingly difficult to achieve.
Conclusion
While all industries are cyclical, the current downturn for hospitality owners has been particularly harsh. Many are considering whether to sell, exit leases, or enter liquidation. The stress and burnout associated with these challenges make it difficult for business owners to make objective decisions about whether to continue trading, sell, or leave the industry.
How TR Consulting Can Help
TR Consulting offers a business health check to assist owners in making informed decisions. This service may include negotiations with creditors, changes to labour models, restructuring, or exploring innovative ways to grow sales.
Final Thoughts
The hospitality sector is undeniably facing an uphill battle, but with the right guidance and support, some businesses can find ways to adapt and thrive.
