Tuesday, 19 December 2017

Another Famous Brand Faces the End

In this very short post, the focus will be on the difficulties being faced at the moment by the famous ‘Toys-R-Us’ brand, founded almost 70 years ago in the United States. Founded in 1948 by Charles Lazarus, the company would go on to be a huge success, essentially coming to be synonymous with the children’s toys market; the company has since gone on to establish itself in countries all around the world, and today’s post will focus on its U.K. operations, which began in 1985, and the troubles facing the company as a whole.

It was reported earlier today that rather than demonstrate the continuance of this success, the British arm of the Toys R Us Company is facing the prospect of going into administration – the process whereby an administrator takes charge and attempts to rescue the company as a going concern. This negative development will, according to reports, put more than 3,000 British jobs at risk, with the prospect of administration drawing ever closer after an attempt to reorganise the company was blocked by the Pension Protection Fund (PPF), the company’s largest creditor, on the basis that the company is already operating with a £25-35 million shortfall in its pension reserves which, according to the PPF, would be worsened by the proposed reorganisation. Before a company goes into administration, it can enter into what is termed a ‘Company Voluntary Arrangement’ (CVA) which is, essentially, a last ditch effort to reorganise upon favourable terms – it is this that the PPF has refused to enter into. Under the terms of their arrangement, the PPF has the right to enforce a £9 million payment, and whilst Toys R Us UK proposed to pay only £1.6 million, the PPF is standing firm; the impasse comes because, quite simply, Toys R Us UK cannot afford to pay any more. Usually, the obvious resolution would be for the subsidiary to receive assistance from its American parent, but in September of this year the parent company filed for Chapter 11 Bankruptcy protection, with it owing nearly $5 billion. Therefore, regardless of whether the company is suffering because it is ‘dated’, under pressure from online retailers, or mismanaged, it is likely that we will see Toys R Us, in the U.K. at least, go into administration. However, it is worth asking what this really means.

Technically, it means that the company needs to be reorganised, and that a professional administrator, with all the tools they have at their disposal – including being able to institute a moratorium which means an instituting of a freeze on all claims against the company whilst it is being reorganised – is best placed to perform that reorganisation. However, in reality, the processes that Toys R Us are facing are critical junctures in a company’s life-cycle, and ones that not many survive. Research suggests that more than two-thirds of businesses going into administration never make it out, with around 10% surviving and remaining active for an extended period of time; between 2011 and 2016, ‘Company Watch’ found that of just over 2,600 administrative procedures that were completed in that time, 2,344 companies were eventually liquidated, with only 263 using the CVA process to their advantage i.e. surviving the process. Whilst there are some small caveats to these figures – some companies are dismantled and redeveloped through a process called pre-pack administration – the point still stands that the U.K. is about to lose another recognisable brand, and thousands of employees are facing redundancy, just like those of BHS, Jaeger, and the remarkable amount of stores declaring mass store closures across the U.K. and the U.S. The question, then, is whether these ‘rescue culture’ procedures need to be redesigned, or even reimagined.

Ultimately, that is an ongoing development that is being tested all the time as large and recognisable businesses face the onslaught of the post-Crisis environment; despite news of record highs in stock markets and whatever else is being used to declare economic strength, the world does not right itself so soon after such an invasive attack. Unfortunately, it is hard to imagine that Toys R Us will be the last company to fail in the near future, which continues the distress felt by those who usually suffer from the follies of the financial elite – the general public. Whilst the process of rescuing companies needs to be reimagined, if that is even desired, it is likely that any positive effect in that field will not come in time to save thousands upon thousands of jobs, and the most recognisable of brands.

For more on this subject and the continued study of these rescue-culture procedures, please do follow @ChrisUmfreville, a researcher who focuses on developments in this area.

Keywords – Toys R Us, Administration, Business, Company Law, High Street, Companies, Financial Crisis, @finregmatters

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