Australian small business’ $34 billion problem — and how this pair are staying ahead

Ruth Tate is sitting at the sewing machine in her eponymous boutique in Sydney’s inner west.

Tate is a fashion designer who trained in the United Kingdom and now makes her own clothes from original patterns. But she says turning a profit is getting harder during the current cost of living crisis.

“Rents have gone up 10 per cent this year, as they did last year as well. Fabric costs have gone up, linen in particular,” she said.

“The profit margins are getting smaller. So, yes, it is stressful.”

A woman in a brown jacket sits at a sewing machine in a fashion studio.

Fashion designer Ruth Tate says turning a profit is getting harder during the current cost of living crisis. Source: SBS / Sandra Fulloon

So to beat the cost crisis, the 58-year-old is collaborating with her neighbour Fabio Stefanelli, who owns the restaurant next door.

By day, her store displays original clothing designs. By night, it transforms into an Italian restaurant. It’s a win-win for both business owners.

“Once I close for the night, the restaurant staff come in and move all of my furniture and my racks, the ceramics, the cushions to the back part of the shop,” she said.

“Then tables and chairs that are stored downstairs are brought up, with all their cutlery, napkins, glasses. And the shop becomes a dining room.”

The view through a glass window shows restaurant tables being set up inside a fashion store.

The Ruth Tate fashion store transforms into an Italian restaurant at night. Source: SBS / Spencer Austad

“The collaboration is really good. It brings in new customers, and they are a different group to my usual customer base. So, it works well,” Tate said.

Using the Ruth Tate floor space during the evenings when the store is closed also helps Stefanelli raise extra revenue to better manage rising business costs.

“My restaurant is a very tiny space. That is why Ruth and I have a deal,” Stefanelli said.

“By adding extra tables at busy times, we can bring in more money.”

A man in a colourful shirt extrudes pasta from a small device.

Restaurant owner Fabio Stefanelli says using the boutique space at night helps him earn extra revenue and manage rising costs. Source: SBS / Spencer Austad

They started sharing space in winter this year after securing all necessary permits from the council and say the move has been a hit with customers too.

“It’s certainly the first time I’ve eaten at a restaurant that’s also a fashion store during the day,” customer Trevor Mccann said.

Stefanelli agrees: “When people walk to a table inside the fashion store, they say, ‘Oh wow, this is something new, something special’. And they enjoy the different atmosphere.”

For giving up space at night, Tate is repaid with free catering for events and functions.

“Every couple of weeks, Ruth hosts a private party for fashion designers and we pay her back with our food, we pay with our hospitality, our Italian way to say thank you,” Stefanelli said.

“Many customers also come back the next day and buy some clothes. So, it is a good arrangement.

“Plus, Ruth is a very nice person and I [am] very happy to have the collaboration with this fantastic woman. And I hope lots of other business owners have as nice a neighbour as I do.”

Experts welcome solutions like this as a way for Australia’s 2.5 million small business owners to survive current economic challenges.

A man in a blue suit and tie is smiling.

The latest data from ASBFEO shows requests for assistance from struggling business owners have surged by 50 per cent this year. Source: Supplied / ASBFEO

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Bruce Billson says: “This is just what we need right now, the kind of ingenuity that drives innovation and improvements in productivity.”

“And it is a great example of the ingenuity that you often see from small and family businesses.”

Recent ASBFEO figures reveal a 50 per cent rise in requests for help from distressed business owners this year.

“I am hearing from business owners that this year is as tough as anything they have ever experienced,” Billson said.

“Many small businesses are drawing on their cash buffers to keep their business afloat. And recent surveys have found that nearly one in four have no cash reserves left, while 18 per cent have less than a month’s cash at hand to fulfil their obligations. And costs keep rising.”

The outside of a small restaurant with patrons sitting at tables.

La Favola is among small businesses facing economic challenges this year. Source: SBS / Sandra Fulloon

“Interest rates are up, energy costs are up, rents are up because they’re often linked to inflation. Also, staff costs and wages are rising, and we have seen an uptick in superannuation as well,” Billson said.

“Materials going into manufacturing and produce going into restaurants are also going up. So, this is a real squeeze, and in many cases, owners can’t pass on those rising costs. So, it has become a really, really difficult time in terms of margins and profitability.

“In fact, the latest full year of tax statistics shows that 46 per cent of small businesses are not profitable right now.”

Annual insolvency data from the Australian Securities and Investments Commission shows that more than 11,000 companies entered external administration for the first time in 2023-24. Overall, the number of external administrations grew by 39 per cent compared with the previous year.

Tate knows a lot about managing costs. She has run several businesses since migrating to Australia in 1995 from London, where she also worked in the fashion industry.

A woman in a brown jacket holds a doll in a colourful, floral outfit.

Ruth Tate’s earliest outfits were made for dolls and designed while she was growing up in the West Indies. Source: SBS / Sandra Fulloon

Although Tate’s Newtown store showcases recent styles, her earliest outfits were made for dolls and designed while she was growing up in the West Indies.

“I start by looking at fabric swatches. Then I do all my own patterns, I make the prototype, do the fittings, grade all the patterns to the individual sizes and the majority of the clothes are then made here, in Sydney,” she said.

“I tend to make clothes up as I need them. So that keeps the cost down to spending money on materials only when I need to.”

A man in an orange jumper sits at a table inside a restaurant.

Fabio Stefanelli says running costs have increased significantly since he opened the restaurant in 2019. Source: SBS / Sandra Fulloon

Stefanelli was born in Southern Italy and, like Tate, has pursued his career passion ever since. But he says turning a profit from a Sydney restaurant is harder than ever.

“Our running costs have completely changed,” Stefanelli said. “The electricity has almost doubled in price compared [to] when we opened in 2019.

“Also, produce prices are very, very high. We almost doubled our food cost compared [to] over two years ago.

“If I raise prices too much the customer is not happy. If I keep prices too low it is a problem for me, I cannot pay the rent and the staff.

“This winter was a disaster. Not only for me but I think for many restaurant owners, it was very quiet due to the higher cost of living. In fact, I feel very, very stressed about the economy.”

Failing to pay tax debts is one indicator of business hardship. Credit reporting bureau CreditorWatch recently released data showing that thousands of private Australian businesses have failed over the past six months due to defaulting on substantial tax debts.

A man in a bue blazer and a white shirt smiles at camera.

CreditorWatch CEO Patrick Coghlan says they expect ATO tax defaults to keep rising. Source: Supplied / CreditorWatch

The Australian Taxation Office’s outstanding debt now sits at approximately $52 billion, and of that, around $34 billion is owed by small and medium-sized enterprises (SMEs). The blowout follows a ‘hands-off’ approach to debt enforcement during the pandemic.

“We expect to see ATO tax defaults continue to be registered at larger and larger numbers and, of course, that’s going to have an impact on the number of insolvencies taking place,” CreditorWatch CEO Patrick Coghlan said.

More than 7,000 or one-third of the ATO tax debt defaults — which means businesses with tax office debts of more than $100,000 that are over 90 days late — are private businesses, according to CreditorWatch.

“The industries most impacted are hospitality and construction. We’re seeing a little bit from retail as well. And then size-wise, it’s definitely more skewed to small businesses,” Coghlan said.

Stefanelli has tried many strategies to cut costs.

“I wake up at three or four o’clock in the morning to buy produce direct from the markets and then some nights I close the restaurant at midnight, and we are open seven days a week,” he said.

“So, it’s a hard life, plus I have three kids at home.

“Lots of people think a restaurant is a good business. But it’s very, very, very tough.”

A woman in a brown jacket stands next to a man in an orange jumper in a store.

Ruth Tate and Fabio Stefanelli suggest collaborating with neighbours to cut costs. Source: SBS / Sandra Fulloon

For Tate and Stefanelli collaboration is about more than being good neighbours — they’re becoming good friends, too.

And they have this advice for others who are struggling.

“Be creative and think about ways that you can extend the use of your shop with someone else who might need the extra space,” Tate said.

Stefanelli agrees: “It is something smart for small business. Instead of fighting with your neighbour, why you don’t do collaboration?”

This story was produced in collaboration with SBS Italian.

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