Trading While Insolvent — What Does it Mean for Your Company?
Announced today, Maplin and Toys R Us are entering administration. This article will outline the procedures and background for both companies.
Background to Toys R Us administration
Founded in 1985, Toys R Us was one of the biggest toy retailers in the UK. They traded well through the nineties, but with the rise of the internet and online shopping giants such as Amazon, they were just not able to compete on price. The shops were often enormous out of town warehouses which would attract higher rental costs. This, however, resulted in less business from passing customers with the majority having to make a positive decision to go there, rather than passing by.
In addition to this, the brand of Toys R Us never evolved beyond its original design in the 1980’s. The same cartoon Giraffe has been used the entire time in their advertising campaigns. The layout, decor and style of the stores has also never changed and did not evolve to the demands of the modern day shopper. Whereas large displays of toys used to be the best way to make sales, interactive displays and demonstrations adopted by other retailers have proven far more effective at making sales in recent times.
Toys R Us looked like it could be turned around, having successfully negotiated a company voluntary arrangement (CVA). The company however has been unable to meet its continued obligations under the CVA and has reached the situation where a further £15 million in VAT debt has accrued post-CVA, which the company has been unable to pay. Ultimately, this has now resulted in the company entering administration, and a further question mark over the benefit of Company Voluntary Arrangements (though more on that another time).
Background to Maplin administration
Maplin is an electrical retailer which was originally founded back in 1972 as a mail order business with no branches, before its first store was opened in 1976. Whilst many businesses may use Maplin for on the spot supplies, their main target audience was hobbyists. With the consumer market again looking at online retailers as opposed to local retailers, it has been increasingly difficult for the business to compete in its current form.
Maplin’s chief executive cited these issues as the reason for administration, also suggesting that the weak pound post-Brexit had had an impact, along with the withdrawal of their credit insurance policies. Maplin had various owners over the years and the current owner was seeking a solvent sale of the business to recapitalise it. However, this was unfortunately unsuccessful and accordingly, the directors made the decision to place the company into administration.
What now for Maplin and Toys R Us?
In the short term, both the administrators of Maplin and Toys R Us have stated that the stores will continue to trade and staff should continue coming to work. Whilst they have both advised they are actively looking for buyers for the businesses – as a whole, or in parts – the administrator of Toys R Us has described the process as an orderly wind down of the stores rather than a going concern viability.
As Maplin has tried to do more to keep up with modern markets, it is considered that the brand may be able to survive. In contrast to this it has long been speculated that the Toys R Us brand would not survive administration and unless a buyer can be found who can reinvent and reinvigorate the brand, it is likely Toys R Us will be another name of the past.
What if I’m affected by Toys R Us or Maplin’s administration?
The biggest lesson from the recent string of high street casualties including, Maplin, Toys R Us, BHS, Comet and even as far back as Woolworths, is that you must be ready to adapt your business to current market trends. Sitting back on your original business model is not an option in a rapidly evolving consumer market.
Internet giants such has Amazon have demonstrated a rapidly evolving business model responding quickly to consumer demands and even creating their own trends. Retailers must take note both by embracing the internet, social media and technology along with creating an interactive shopping experience to attract customers. An experience rather than just a store is now necessary to encourage customers to leave their homes to buy a product, rather than just ordering from the internet.
If your business is adversely affected by the Toys R Us or Maplin administration and you feel you need professional advice please feel free to contact one of our business rescue experts for a free, informal chat.