Australia’s cafés and restaurants are facing record-high failure rates, with new data showing the food service sector is under significantly more pressure than pubs, clubs and bars.
The latest January Business Risk Index from CreditorWatch shows 10.4% of food service businesses closed over the past year, the highest rate of any industry and double the economy-wide average.
While pubs, clubs and bars are also closing at above-average rates, they are proving far more resilient, with annual failure rates closer to 8%, supported by stronger cash flows and asset backing.
Hospitality splits in two
CreditorWatch data highlights a clear divergence within hospitality. Early warning indicators show the share of business-to-business invoices overdue by more than 60 days has climbed to 12.4% in food service, compared with a national average of 5.9%.
By contrast, pubs and clubs have maintained much lower delinquency levels of 3.1%, reflecting healthier balance sheets and greater ability to absorb rising costs.
CreditorWatch CEO Patrick Coghlan says, “These numbers show the hospitality sector has effectively split in two.”
“Asset‑backed pubs and clubs are holding firm, but cafés and restaurants are operating on razor‑thin margins with very little room for error. 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.”
Why cafés and restaurants can’t absorb rising costs
Cafés, restaurants and takeaway food businesses are under intense pressure from a combination of rising operating costs and weakening consumer demand. Key factors include:
- Rising wages: Successive minimum wage increases since 2022 have significantly squeezed already‑thin margins.
- Rent pressures: Many venues are locked into prime retail locations, where pandemic‑era rent relief has ended and landlords have imposed sharp increases.
- Input inflation: Food prices rose 7.5% over the past year, driven by supply chain disruptions and extreme weather, while power bills have also climbed.
- Limited buffers: Many independent operators emerged from COVID with higher debt and limited access to credit, leaving little capacity to absorb further shocks.
Liquor‑focused venues have fared better, supported by higher margins on beverages and less exposure to fresh food price volatility.
Consumers pull back on dining out
Softening consumer demand is compounding cost pressures. With real wages under strain and interest rates higher, households are cutting discretionary spending. Retail data shows café and restaurant turnover has remained largely flat since early 2023, with Australians dining out less frequently and spending less per visit.
“This is less about a sudden collapse and more about an extended squeeze,” Mr Coghlan said. “Businesses without pricing power, diversified revenue or cash reserves are being exposed, and the pressure has been building for months.”
Small operators face mounting debt and tax arrears
Smaller food service operators are particularly vulnerable. They typically operate on slim profit margins and cannot easily pass on cost increases without losing customers. Many are accumulating trade payment arrears and tax debt, with hospitality leading all sectors in Australian Taxation Office defaults.
Formal insolvencies in food service jumped sharply over the past year, exceeding pre‑pandemic levels. Policy responses such as wage subsidies and easing inflation could gradually alleviate some cost pressures, but for now hospitality remains the standout high-risk sector. Without relief on costs or a lift in discretionary spending, further closures are expected.
National insolvency trends show renewed pressure
Across the economy, insolvencies trended lower for much of 2025 following income tax cuts and interest rate reductions. However, momentum has shifted again, with 1,366 insolvencies recorded in December 2025, the third‑highest monthly total on record.
First time insolvencies by industry
The table below shows the trends in insolvencies in the first half of the 2025-26 financial year compared to the same period in 2024-25. The results have been ranked by Insolvency incidence (the number of insolvencies for the Financial Year to Date divided by the number of businesses operating in that industry at 30 June 2025 i.e. at the end of the previous financial year).
Key insights:
- There were slightly fewer insolvencies in the first half of this financial year than the same period last year, reflecting the improvement seen over much of the 2025 calendar year.
- Mining had a relatively high incidence of insolvency likely reflecting differing business conditions being experienced by coal operators than for precious metals and base metal miners.
- Recent increases have been concentrated in Retail Trade and Transport, Postal and Warehousing, while Construction and Accommodation and Food Services continue to record the highest absolute numbers of insolvencies.
- Despite the lower absolute number of insolvencies in Hospitality, the incidence of insolvency is more than twice as high as in Construction, as there are over four times the number of businesses operating in Construction as Hospitality.
- The rise in insolvencies in Retail likely reflects the continuing pressures from costs on both operating expenses but also on customers’ cost of living as well as ongoing structural changes, including the rise of Black Friday sales.
- Conditions in the Transport sector reflect a variety of factors, with reports of increased competition from low-cost overseas-backed operators and difficulties related to higher interest rates.
ATO tax debt and trade payment default trends
CreditorWatch data shows insolvency risk rises sharply once a business begins defaulting on invoices or accumulates ATO tax debt of $100,000 or more.
Trade payment defaults and new tax defaults both improved during the first half of 2025 before deteriorating later in the year, with January 2026 defaults close to previous highs. Together, these indicators suggest insolvencies are likely to rise further in coming months.
Economic Conditions Tracker
CreditorWatch’s Economic Conditions Tracker signals a potential deterioration in economic conditions, reflected by softer profitability expectations in the NAB survey and weaker consumer perceptions of household finances.
While unemployment expectations have remained broadly stable, the Tracker’s long‑term average masks two offsetting forces: households continue to report significant cost‑of‑living pressure, even as very low unemployment expectations reflect the still‑strong labour market, with the unemployment rate at 4.1% in December.
The outlook
CreditorWatch Chief Economist Ivan Colhoun said the Australian economy faces a complex mix of forces through 2026, including global geopolitical uncertainty, higher interest rates, cost‑of‑living pressures, and uneven sectoral recovery – such as a recovery in residential construction and mini mining boom led by commodities such as copper, gold and lithium.
“While unemployment remains low, households are still under significant financial strain,” Mr 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.”
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Michael joined CreditorWatch in July 2021. He has more than 20 years’ experience in business journalism, marketing and communications strategy and digital content development. He is passionate about communicating to the business community how CreditorWatch’s product suite can help them grow and protect their companies.
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