Retail sector insolvency rates on the rise, data reveals
Insolvencies are increasing in the retail sector due to businesses being unable to meet their obligations, Grant Thornton has said.
The professional services firm said businesses in the retail sector are facing increased pressures due to the cost-of-living crisis, leading to rising numbers of insolvencies.
Retailers have been hit with challenges as consumers have been impacted by the current economic climate and inflationary pressures, which slowed retail purchases.
Grant Thornton said as disposable incomes shrink, consumers have cut back on non-essential purchases, which has led to subdued retail spending.
“The combination of increasing operation expenses and shifting consumer behaviour has led to a rise in insolvencies and businesses entering administration across all industries, and notably affecting high-profile retailers, signalling the severity of the situation,” the firm said.
“Contributing to this growing crisis are factors like inadequate financial management practices and insufficient contingency planning, as some retailers have found themselves unprepared for sudden economic shifts such as supply chain disruptions and fluctuating consumer confidence.”
The firm noted these management and supply hurdles faced by retailers had exacerbated their financial challenges.
Insolvent retailers were often caught between increased demand for discounted products and rising operational costs, according to Grant Thornton.
Data from ASIC highlighted that retailers have struggled to anticipate demand which led to a 28 per cent increase in insolvency rates over the year to September 2024.
The firm said some brick-and-mortar stores have felt the strain from increasing rent, utility costs and declining foot traffic.
“The significant rent increases and supply chain interruptions have exacerbated financial pressures, pushing many retailers to the brink, with smaller discretionary retailers being particularly vulnerable.”
“Although online retailers, with their lower overheads and pricing flexibility, may appeal to more cost-conscious shoppers, both physical and online stores must adapt swiftly to changing consumer behaviour and ongoing supply chain challenges to avoid insolvency.”
Insolvency data from ASIC highlighted the sub-sectors hit the hardest last financial year, including clothing, footwear, personal accessories, specialised food and electrical goods.
The sub-sectors hit the hardest this year included clothing, footwear, personal accessories, recreational goods, as well as furniture and housewares.
The firm said retailers must act swiftly to navigate increased insolvencies until the ripple effects of the RBA delayed cash rate cut are felt in the latter half of the 2025 financial year.
“To mitigate the risk of insolvency, retailers should adopt a combination of operational flexibility and customer-focused innovation,” Grant Thornton said. “An effective approach is to start by minimising operation and overhead costs.”
Recommended strategies also included closing underperforming stores, reducing fixed costs, opening pop-up stores, prioritising cash flow management and expanding or enhancing online operations.
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