Toys R Us not alone in facing string of challenges in retail sector

21 December 2017, 11:09

The plight of Toys R Us UK is one that encapsulates many of the woes of traditional high street retailers.

Online retailers have been able to sell toys more cheaply than it has been able to, thanks to not being burdened by overheads such as onerous property leases, business rates and Sunday trading laws, all of which hand online retailers a significant advantage.

In the case of Toys R Us, it has also been hit by the loss in appeal of big out-of-town stores, in favour of smaller premises that can be used to showcase products that can then be bought on a "click and collect" basis.

That is a problem that has not just afflicted Toys R Us but other rivals, notably Tesco, one of the pioneers in the field.

As Steve Knights, the managing director of Toys R Us UK has admitted, the warehouse-style stores that it opened in the 1980s and 1990s, while successful in those days, "are too big and expensive to run in the current retail environment".

Adding to the operation's woes has been the delay to the revaluation of business rates by the Government.

Philip Hammond, the Chancellor, announced in last month's Budget that, from next April, the rise in business rates will henceforth be indexed to the Consumer Prices Index measure of inflation rather than the higher Retail Prices Index.

That reform is expected to save businesses £2.3bn during the next five years, while business rates will now be revalued every three years instead of every five years, making changes to rates less of a shock for retailers - like Toys R Us UK - that have large store estates.

However, according to the property services company Colliers International, if this reform had been announced two years ago, it would have saved Toys R Us UK £17m.

John Webber, the head of rating at Colliers International, told Property Week earlier this month: "The stores in some parts of the country have been forced to pay for the better ones for far too long in terms of business rates.

"Taking the Exeter store as an example, the rates bill should have decreased by around 34%. But because of phasing, reductions have only been a small percentage this year and next. The business therefore will overpay in excess of £800,000 in business rates on that store alone.

"That's a lot of Barbies to sell."

Onto all of these woes can be overlaid the weak state of consumer confidence which, according to the latest figures published by research house GfK, has just slumped to its weakest level since December 2013.

Confidence among British consumers has now been falling for almost two years and trading is said to have been weak across the high street since the rash of "Black Friday" promotions at the end of November.

All this, according to the insolvency advisers Begbies Traynor, has put 43,677 retailers in "significant financial distress" - up by almost a quarter on December last year.

The grocery wholesaler Palmer & Harvey has already gone under, with the loss of 3,000 jobs, while credit insurers - the crucial players that grease the wheels of the retail trade by protecting suppliers in the event of a retailer going bust before they get paid - are said to have reduced or, in some cases taken away entirely, cover for the electricals chain Maplins and the discount retailer Poundland.

In the case of the latter, it is said to be trading well, but confidence among credit insurers has been rattled by problems in its South African parent Steinhoff, whose other UK assets include the furniture chains Bensons for Beds and Harveys.

In the case of Toys R Us, there are also specific factors at play, not least the difficulties of its US parent company.

It has debts totalling $5bn and filed for bankruptcy protection in September.

Earlier this week, it reported that in the three months to October, it made a net loss of $623m after sales fell by nearly 5% - with like-for-like sales in the US down by 7%.

The complex structure of Toys R Us, which has 17 subsidiaries including Toys R Us UK, may have contributed to the group's problems in Britain.

There are said to be numerous inter-company loans in the business - which may help explain loans worth some £584.5m, that have apparently been written off, made by Toys R Us UK to a British Virgin Islands-based based entity.

However, it is being suggested that rather than siphoning off money from the UK, other companies in the Toys R Us Group have been providing financial support to Toys R Us UK in the form of short term inter-company loans.

On top of that, of course, is the pension fund - the issue that has brought to a head the crisis at Toys R Us UK.

The pensions scheme at the business has a deficit of £30m.

But, in order for the scheme to be tipped into the Pension Protection Fund lifeboat, the PPF is requiring Toys R Us UK to make a £9m contribution to the deficit.

Toys R Us UK claims not to have the money while the wider Toys R Us Group claims it is unable to provide it due to its bankruptcy protection process.

The pensions situation is also likely to be an issue hurting other UK retailers.

A decade of ultra-low interest rates and quantitative easing has depressed the yield on UK government gilts - a key measure by which future pension liabilities are calculated.

Pension deficits everywhere have been growing, obliging companies everywhere to pay more into their schemes, something that in particular has hit retailers employing large numbers of people.

Toys R Us is extremely unlikely to be the last British retailer to experience turmoil this winter.