Financial struggles in Victoria’s hospitality sector explained

In Short:
– The hospitality industry in Victoria faces major margin crises despite high consumer demand and significant business closures.
– Rising operating costs and reduced government support exacerbate financial pressures, leading to very thin profit margins.

Victoria’s hospitality industry is facing mounting financial pressure despite strong consumer demand, with rising operating costs squeezing margins and contributing to a wave of business closures.

Speaking on State of Hospitality, accountant, entrepreneur and Future Advisory co-founder Jason Robinson said spending across cafes, hotels and restaurants remains strong, but operators are struggling to convert that demand into sustainable profits.

Robinson, who also co-hosts The Numbers Game, said 3,910 hospitality businesses closed over the past year, making the sector one of the hardest hit by insolvencies, behind only construction.

He said hospitality operators are being squeezed across three major cost areas: wages, cost of goods sold and overheads such as rent, insurance and government levies.

For some businesses, those pressures have reduced profits to as little as $5 for every $100 in revenue, leaving little room to absorb further increases in costs.

The end of most pandemic-era government grants has added to the pressure, while payroll tax and land tax remain significant costs for operators.

Robinson said payroll tax can create particular challenges for successful hospitality groups operating multiple venues, as businesses can be assessed collectively, increasing their tax burden as they expand.

The pressure is also flowing through the wider supply chain. Suppliers are increasingly being forced to extend payment terms beyond 60 days, effectively acting as banks for hospitality businesses.

When a venue enters liquidation, suppliers can be left as unsecured creditors, creating further financial stress across the sector.

Robinson said the government could provide relief by increasing payroll tax thresholds and reconsidering the impact of various levies on businesses already operating on tight margins.

Despite the challenges, there are some signs of growth.

Melbourne’s nightlife sector has added around 3,000 jobs year-to-date, suggesting parts of the industry are continuing to expand.

Robinson said the operators best positioned to navigate the current environment are those closely tracking their weekly financial numbers, particularly labour costs and profit margins, rather than relying solely on periodic financial reporting.