Covid handouts end: 384 business failures in three months
Thursday, 27 October 2022
More businesses are failing as they are no longer propped up by Covid-19 handouts from the Government, according to a new report.
The quarterly report from BWA Insolvency found there was a 48% increase in formal insolvency proceedings in the third quarter compared with the second quarter, taking the total to 384. Receiverships increased 243% to 24 and voluntary administrations were up 60% to eight.
“Every industry has been affected by Covid in some way, but Government handouts kept a number of companies trading that probably would have failed without that help,” BWA Insolvency founder Bryan Williams said.
“Now they’re on their own, and with Inland Revenue showing far less leniency, many businesses are fighting against some major commercial headwinds.”
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New Zealand had 592,700 enterprises as at February this year, according to the latest Stats NZ data released on Thursday. That was up 5% from February last year.
Williams said the outlook was getting tougher for all businesses as the Reserve Bank hikes interest rates to reduce inflation.
“In the short term, the blunt tool of increasing interest rates will soak up the pool of discretionary income,” he said. “Consumers will be forced to reduce spending – lowered demand will cause discounting to take place and deflation to result.
“Margin contraction will be unsustainable for many businesses already experiencing tough times. Taking spending out of the marketplace is effective to reduce inflation, but it will kill businesses along the way.”
According to BWA, the transport and delivery sector had the biggest jump in formal insolvency proceedings, up 229% to 23, which Williams said reflected a shortage of drivers, as well as rising costs.
“Fuel costs may be able to be passed on, but if you have increasing labour costs and a layer of interest costs to a debt-burdened vehicle, then all of a sudden you’ve got a totally different story about viability,” he said.
The business services sector had the next highest jump, up 100% to 50, which Williams attributed to the change in working conditions for many businesses throughout the pandemic and the creation of hybrid working policies.
The construction industry had the highest number of insolvencies, up 50% to 107.
“It’s not difficult to see why the numbers are so high in this sector,” Williams said. “Costs are up, it’s hard to find workers, already narrow margins are getting vaporised, and material delays are causing friction costs.”
The food and hospitality industry, which was volatile and characterised by short tenures, had just 35 insolvencies in the quarter.
Williams said the sector had borne the brunt of Covid restrictions over the past few years and many in the industry had decided to “just walk out and turn the lights off”.
He noted equipment was often leased, and operators simply passed the key over to the building owner.
Williams said there was no seasonality to insolvency, although numbers did tend to increase ahead of Christmas.
“I suspect that’s a time of the year when business owners perceive there’s no hope and that the upsurge in the economy around Christmas is not going to get them out of the hole they’re in, and they’re probably right,” he said.