Australian accommodation and food services insolvencies rose more than 27% year-on-year in 2025, making hospitality one of the most financially stressed sectors in the country. More than 10% of restaurants and cafés are estimated to have closed in the past year alone.
I have never lost more money than when I thought I could run a restaurant.
What makes these numbers genuinely puzzling to many operators and investors is that they aren't being driven by a lack of demand. Australians are still dining out, travelling and spending on entertainment. Revenue in many venues is holding up reasonably well. It's profitability that's quietly collapsing underneath it - and by the time that becomes obvious on a profit and loss statement, the business is often already in serious trouble.
Understanding why this happens, how to spot it early, and what can realistically be done about it is essential for anyone operating in, lending to, or investing in hospitality.
The economics leave almost no room for error
Hospitality is a low-margin, high-operating-leverage business by nature. Across restaurants, cafés and comparable venues, industry benchmarks typically look like this:
- Labour: 30–40% of revenue
- Food and beverage inputs: 25–35% of revenue
- Rent: 8–12% of revenue (often 12–15%+ in prime dining precincts)
- Utilities: 3–6%
- Marketing: 2–4%
- Insurance and compliance: 1–3%
- Net profit: typically only 3-5%
Take a representative restaurant generating $2.5 million in annual revenue, with $875,000 in labour costs, $750,000 in food costs, $250,000 in rent and $450,000 in other costs - leaving roughly $175,000, or 7%, in net profit. Now run the sensitivity: a 5% rise in labour costs alone can drop that margin to around 5%. Add a 10% increase in food costs on top, and profit can fall to around 2%. Neither of those cost increases is hypothetical - both have happened, more or less simultaneously, across the sector over the past three years.
Four pressures in particular have compounded at once:
- Labour costs, up roughly 15–20% since 2022 through a combination of minimum wage increases, penalty rates, superannuation and ongoing labour shortages for chefs, venue managers and bartenders, with a further 4.75% minimum wage increase as at 1 July 2026.
- Food input costs, rising sharply on the back of supply chain disruption and agricultural inflation, particularly for meat, seafood and imported ingredients, with limited ability to pass these costs through in the price-sensitive mid-market.
- A shift in the food-and-beverage mix, as consumers move toward lower-margin non-alcoholic and low-alcohol drinks, eroding the traditionally high (60–75%) margins that alcohol sales have provided.
- Elevated commercial rents, which remain one of the largest fixed costs in the industry and are structurally difficult to reduce once a lease is signed.
This is the paradox at the heart of hospitality's financial stress: strong revenue, weak profitability. And because so much of the cost base is either fixed (rent) or contractually rigid in the short term (labour, leases), even modest declines in trading conditions can eliminate profitability entirely.
What distress actually looks like before insolvency
The businesses that navigate financial stress successfully are almost always the ones that recognise it early, well before a formal insolvency process becomes the only option. There are four categories worth watching closely, in yourself or in a venue you lend to or are considering acquiring:
Revenue decline. Falling table turnover, weaker weekday trading and declining average spend for restaurants; falling occupancy and conference bookings for hotels; declining food, beverage and gaming revenue for pubs. Because hospitality carries such high operating leverage, even small revenue declines can have an outsized effect on profitability.
Margin compression. Rising labour-cost-to-revenue and food-cost-to-revenue ratios are often the clearest early signal of trouble. A restaurant where labour costs creep from 35% to 40% of revenue can see its entire profit margin disappear, without necessarily showing any visible change in trading conditions.
Liquidity stress. This tends to show up in overdue tax liabilities, extended payment terms with suppliers, and increasing reliance on director loans to keep the business afloat. Many operators continue trading by injecting their own funds long after the underlying business has stopped being viable - which can delay a difficult but necessary decision rather than solve the underlying problem.
Operational indicators. Declining staff morale, reduced service quality and deteriorating venue maintenance are lagging signals, but they matter - they tend to accelerate the revenue decline that's already underway rather than simply reflect it.
What can be done: the restructuring playbook
Hospitality restructuring is distinct from restructuring in most other industries for one key reason. The venue usually needs to keep operating, serving customers and paying staff, while the underlying financial issues are being resolved. Much of the business's value sits in intangible assets - brand reputation, location, staff and customer relationships - that can evaporate quickly if trading simply stops.
Before any formal insolvency process, there's typically a range of informal restructuring options worth exploring:
Cost restructuring. Simplifying the menu (moving from, say, 40 items to 20) reduces food waste and kitchen labour requirements. Renegotiating supplier contracts, adjusting staffing levels and optimising operating hours are often the fastest levers available.
Lease renegotiation. Given how large a fixed cost rent represents, renegotiating lease terms can materially change a venue's viability - through temporary rent reductions, deferrals, or converting to turnover-based rent structures that align landlord returns with actual venue performance rather than a fixed obligation.
Capital injection. Existing owners or external investors can inject new capital to fund operational improvements, marketing or refurbishment - though this typically requires a credible turnaround plan before investors will commit.
Operational turnaround. This can include repositioning the venue itself (for example, shifting a struggling casual dining concept toward a premium positioning, or introducing entertainment programming and higher-margin menu items), adopting technology to reduce staffing and waste, or diversifying revenue through takeaway, delivery, retail products or events.
Early intervention meaningfully increases the likelihood that any of these approaches succeeds. Waiting until liquidity stress is acute - tax debt has accumulated, suppliers are unpaid, and the business is dependent on director loans - narrows the available options considerably, and often makes a formal insolvency process the only realistic path left.
Where this is heading
A few forward trends are worth watching. As pandemic-era government support measures continue to unwind, some operators carrying accumulated tax debt from that period may face renewed pressure. Consolidation is likely to continue, as larger, better-capitalised hospitality groups acquire distressed venues - often at valuations that reflect true underlying.
For operators, the message is straightforward. The earlier financial stress is recognised and addressed, the more options remain on the table. For lenders and investors, the same distress that's driving Australia's hospitality insolvency rate also represents one of the more interesting value opportunities in the sector right now - provided it's approached with the right operational and restructuring expertise.
Learn more about the challenges and opportunities facing hospitality with our latest industry report
