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Toys “R” Bust

The last ten years have been a bonfire for retailers on both sides of the Atlantic as consumer shopping habits have changed and the popularity of big box out of town retail stores has declined.

We’ve seen it in food retail and we are also seeing it in general retail, and today we’ve seen the latest high profile victim of this trend in consumer retail with the news that Toys “R” Us has filed for bankruptcy protection in the US to become the latest casualty in the fight to stay relevant in a market place which puts the convenience of the consumer at the forefront of everything.

Some retailers have adapted to this new Amazon model of doing things quite well and are still around, or have been absorbed into other organisations or other business models, but many more have not, and it seems probable that the bloodletting in the retail sector is likely to claim more casualties in the coming months unless retailers change the way they not only market their products, but deliver them as well.

A lot of Toys “R”  Us woes appear to have been self-inflicted and stem from the amount of debt it took on in 2005 when it was taken into private hands, and which left it little room in the way of manoeuvre to restructure the business, in the same way other major retailers like Nordstrom, Macy’s and Sears have managed to do recently.

This has been its biggest problem for the last 12 years and show why it has failed to deliver a profit in the last four years, particularly given how margins have continued to come under pressure in an age of intense competition from the likes of Amazon, and other US retailers like Wal-Mart.

The firms UK, European and Australian operations aren’t expected to be part of the bankruptcy proceedings at this time given that they remain profitable, however as we saw in the case of the closure of American Apparel’s UK operations last year, after its parent company filed for Chapter 11, in 2015, that doesn’t mean it may not happen at a later stage.

So many companies are finding competing with Amazon an increasingly difficult prospect and the ones that do survive usually have to do it by trying to compete on margins which are much tighter or, as was the case with Argos, being absorbed by a larger brand, drilling down on costs that way.

Either way, Argos has now adapted to offer same day delivery on a number of items in the same way that Amazon does, in addition to the now obligatory click and collect and free delivery options that all on-line retailers have to do now in order to compete.

This ability to adapt is no guarantee of success as the failure of the BBC’s digital store will testify. It is being closed in November this year with purchases made later than November 2015 to be replaced with Amazon vouchers, due to its lack of scale in comparison to Netflix and Amazon in terms of content.

In the UK so far this year, according to data from the Centre for Retail Research, companies in administration so far this year has already exceeded the levels seen in 2015 and 2016, though the number of stores and employees affected has been less, but there has been a consistent pattern of a changing retail landscape since 2008.

The big question as we head towards the end of the year and the retail sector’s busiest time of the year is whether the collapse of Toys “R” Us is a harbinger of further retail weakness, or merely a result of a legacy of bad management in the US, and that underneath there is a decent retail business underneath. The company’s UK retail stores are continuing to trade as normal, with four new stores expected to open here in the UK in the run up to Christmas. That doesn’t sound like a business in trouble, however sentiment can also be very fickle.

We’ve already seen a number of long standing retail businesses disappear from the high street in the last 12 months including BHS, Jaeger and Austin Reed so it wouldn’t be a surprise to see other high profile casualties added to this list, particularly when consumer incomes continue to get squeezed.

In the case of Toys “R” Us its likely that they will still be around a year from now once the company’s long term debts are restructured to put the business on a more stable footing.

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