Small businesses impacted by rising food prices, insolvencies

Due to numerous factors, including rising operating costs and weakening consumer demand, cafes, restaurants and takeaway food businesses were under intense pressure.

According to CreditorWatch, key contributors included successive wage rises since 2022, rent pressures, a 7.5 per cent rise in food prices, and limited access to credit after the pandemic left many businesses with higher debt. On the contrary, liquor-focused venues fared better from higher margins on beverages and lower exposure to the volatility of fresh food prices.

The data shows that the share of business-to-business invoices which are overdue by more than 60 days has jumped to 12.4 per cent in food service, tanking the national average of 5.9 per cent.

Pubs, taverns and bars were shown to be more than 60 days overdue at a rate of 10.7 per cent – its highest figure in more than a decade.

Despite this, clubs had lower delinquency rates at 3.1 per cent, which CreditorWatch said revealed healthier balance sheets and a greater ability to absorb rising costs.

CreditorWatch chief executive Patrick Coghlan said these figures showed that the hospitality sector was divided.

“Asset-backed pubs and clubs are holding firm, but cafés and restaurants are operating on razor-thin margins with very little room for error,” Coghlan said. “When overdue invoices in food service are running at more than double the national average, that’s not cyclical noise – it’s sustained financial stress.”

Lower discretionary spending

Adding to these cost pressures, lower real wages and higher interest rates have caused a softening of consumer demand as households cut their discretionary spending. According to retail data from CreditorWatch, cafe and restaurant turnover has stayed largely unchanged since early 2023 as Australians dined out less frequently and spent less on each visit.

Coghlan said this revealed an extended squeeze, not a sudden collapse, noting that businesses without pricing power, diversified revenue, or cash reserves were left exposed – pressure having built over months.

As smaller food service operators operate on slim profit margins and risk losing customers when contemplating cost increases, many of these businesses accumulated trade payment arrears and tax debts, with hospitality being the leading sector in ATO defaults, CreditorWatch found.

Insolvencies rising

In addition, CreditorWatch found that formal insolvencies in food service jumped sharply over the past year, exceeding pre-pandemic levels. Although it noted the potential for policy responses such as wage subsidies and easing inflation to alleviate some cost pressures, hospitality was a standout high-risk sector. Without relief on costs or a lift in discretionary spending, the company said, further closures were expected.

For much of 2025, insolvencies trended lower across the economy because of income tax cuts and interest rate reductions. Despite this, December 2025 saw the third-highest monthly total insolvencies on record, reporting 1,366 closures.

According to its data, insolvency risk was found to rise sharply as a business begins defaulting on invoices or accumulates ATO tax debt of $100,000 or more.

Further, it found that trade payment defaults and new tax defaults both improved during the first half of 2025, but deteriorated later in the year, with January 2026 defaults coming close to previous highs. These indicators suggest insolvencies are likely to rise further in the coming months, Creditor Watch said.

CreditorWatch chief economist Ivan Colhoun said a complex mix of forces was impacting the Australian economy through 2026, including global uncertainty, higher interest rates, cost-of-living pressures, and uneven sectoral recovery in industries such as residential construction and a miniature mining boom led by commodities such as copper, gold, and lithium.

“While unemployment remains low, households are still under significant financial strain,” Colhoun said. “As a result, business conditions are likely to remain challenging, and insolvencies are expected to stay elevated or rise slightly over the year ahead.”