Retail insolvencies on alarming rise across the country

Financial burden brought on by the pandemic and the increasing cost of doing business blighting retailer efforts for success // By Mario Toneguzzi

Lingering pressures from the pandemic, combined with inflation and the rising costs of doing business, have had a devastating impact on companies throughout Canada in recent years with some alarming statistics for insolvencies.

A recent report by Equifax Canada indicated that insolvencies are mounting with many Canadian businesses facing an uphill battle, as evidenced by a 41.4 per cent surge in business insolvencies in 2023 when compared to 2022.

Simon Gaudreault, Vice President, Research and Chief Economist of the Canadian Federation of Independent Business, says the past several years have been a bit unusual for businesses.

“At the start of the pandemic, people may have expected a lot of immediate bankruptcies, but that’s not exactly how things turned out,” says Gaudreault. “Pandemic support programs, which were necessary in order to support businesses that were required by health authorities to close their doors, helped many small- and medium-sized businesses cope with the challenges. They also sort of froze the bankruptcy situation to a certain extent. Now we’re catching up. We’re catching up because the federal government was unwilling to further extend, for example, access to the Canadian Emergency Business Account program - the flagship COVID relief program it has put in place.”

Many businesses throughout the country have the added financial burden now of having to repay that loan.

“We’re going to start seeing those firms that weren’t able to pay, that are under a lot of financial stress, face some tough choices in the next few months,” he says. “So, it won’t be at all surprising to see the number of bankruptcies remain elevated for quite some time.”

He says that those numbers are slowly catching up from the lower-than-average numbers posted in the past few years, combined now with the current raft of economic challenges. In fact, he cites a recent Business Barometer by the CFIB which found that 51 per cent of small- and-medium sized businesses are saying that insufficient demand for their products or services is limiting their ability to increase sales or efforts related to production.

“That’s quite elevated from an historical standpoint,” he says. “We usually only reach those percentages in periods of economic slowdowns or even recessions. I’m not saying that this confirms we’re currently in a recession, but that one data point certainly indicates how tough business is at the moment. No matter the financial metric you look at right now, we can describe the small- and medium-sized business outlook at the moment in Canada as the following. You have one-third of small and medium sized businesses that say their financial situation is good or great. You have one third that are saying that they’re really struggling right now and it’s very tough, they’re in a tough situation. And you have the last third that is somewhere in the middle where things are a bit more normal. That’s the picture we have now on the financial side of things. When you think about it, the bottom third is made up primarily of small- and medium-sized businesses that are under a significant amount of pressure as a result of an elevated cost of doing business. The Bank of Canada is keeping interest rates very high. So that’s not only nipping demand but increasing borrowing costs, and slowing down the economy. If you have incurred a big debt during the COVID years, you’re still not back to full revenues. And that’s going to put pressure on your finances.”

Increasing insolvencies

According to the Office of the Superintendent of Bankruptcy in Canada, the total number of insolvencies (bankruptcies and proposals) in Canada increased by 5.8 per cent in February 2024 as compared to the previous month. Bankruptcies decreased by 0.5 per cent and proposals increased by 7.8 per cent. The total number of insolvencies in February 2024 was 28.2 per cent higher than the total number of insolvencies in February 2023. Consumer insolvencies increased by 25.2 per cent, while business insolvencies increased by 122 per cent.

“For the 12-month period ending February 29, 2024, the total number of insolvencies increased by 23.7 per cent in comparison to the 12-month period ending February 28, 2023. Consumer insolvencies for the 12-month period ending February 29, 2024, increased by 22.5 per cent in comparison to the 12-month period ending February 28, 2023. Consumer bankruptcies increased by 8.3 per cent, while consumer proposals increased by 26.3 per cent,” said the Office. “The proportion of proposals in consumer insolvencies increased to 79 per cent during the 12-month period ending February 29, 2024, up from 76.2 per cent during the 12-month period ending February 28, 2023. For the 12-month period ending February 29, 2024, consumer insolvency filings accounted for 95.8 per cent of total insolvency filings. Business insolvencies for the 12-month period ending February 29, 2024, increased by 58.1 per cent compared with the 12-month period ending February 28, 2023. Accommodation and food services, Retail trade and Construction registered the biggest increases in the number of insolvencies.”

Restaurants Canada says the restaurant industry is preparing for a tough first half of 2024. According to the Conference Board of Canada, the economy’s lackluster performance in the second half of 2023 will spill over into the first months of 2024 with minimal growth expected, once again leaving restaurants to navigate uncertain times and monumental economic challenges, says the national organization.

Data from Restaurants Canada tells the story.

“62 per cent of restaurants are operating at a loss or barely breaking even – up nine per cent from July 2023 when it stood at 53 per cent,” says Restaurants Canada. “This is compared to 10 per cent pre-pandemic. This alarming statistic underscores the immense pressure on the industry. It also leads to a notable upsurge in closures in 2023, with bankruptcies up 44 per cent – the highest annual figure in a decade. One of the main factors driving this difficult environment is weak sales, which are expected to persist in winter/spring of 2024. As consumers continue to curtail their discretionary spending, the foodservice sector bears the brunt. Disposable income is a critical factor influencing foodservice sales, as customers tend to dine out more frequently when they have greater financial flexibility.”

Kelly Higginson, President & CEO of Restaurants Canada, says the survival of restaurants is crucial for community prosperity.

“When the economy is strong, the restaurant industry is strong,” she says. “We are looking forward to a return to a normal pace of growth but need to work with governments to ensure we can bring profitability back to the industry. Topline sales are not translating to bottom line profit.”

Debt-stricken struggles

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) says business insolvencies in Canada surged by 41.4 per cent in 2023 compared to the previous year, the sharpest increase in 36 years of records from the Office of the Superintendent of Bankruptcy. It says 4,810 businesses filed insolvencies in 2023, the highest annual volume in 13 years, a sign that companies are struggling with higher debt-carrying and other costs. Business insolvency filings rose 34.7 per cent in the fourth quarter of 2023 as compared to the previous quarter, and more than doubled (51.6 per cent) compared to the same quarter in 2022.

“Businesses have been struggling to cope with a myriad of financial challenges over the past year, including higher input costs, wage costs, and debt servicing costs, exacerbating the rocky footing many have been on ever since the pandemic,” says André Bolduc, Licensed Insolvency Trustee and Chair of CAIRP.

He says interest rates have made borrowing more expensive over the past year and that the CEBA loan deadline put additional pressure on many businesses.

“Many businesses are already on a razor’s edge. The additional costs to service their debts will mean even less room to cover increasing costs of business going into 2024,” he explains. “Some businesses may not be able to manage the increases to their monthly bills, especially if they are already finding it difficult to drum up sales. That strain, combined with any additional financial challenges or setbacks this year could force businesses to shutter.”

Jeff Brown, Head of Commercial Solutions for Equifax Canada, says Canadian businesses are facing a perfect storm of economic pressuresCEBA loan repayment, high input costs, labour expenses, high interest rates, a slowdown in consumer spending. They are all creating a challenging environment.

“These factors are contributing to a growing trend of business failures,” he says. “The sharp rise in insolvencies, representing a 30.3 per cent surge since 2019, underscores the financial pressures faced by businesses. We’re seeing struggles all over the place right now. We haven’t seen growth in insolvencies this large over the past ten years. With this mounting debt and increasing delinquencies, we’re not really seeing any signs of why those insolvency numbers shouldn’t continue to climb.”