Amazon and Brexit Take Toll as Toys ‘R’ Us U.K., Maplin Fail

(Bloomberg) -- Amazon.com Inc. and Brexit claimed two more victims on the U.K.’s shopping streets.

Toys “R” Us Inc.’s U.K. unit and electronics chain Maplin collapsed into the British equivalent of bankruptcy protection, deepening a retail crisis prompted by the rise of online shopping and worsened by the pound’s plunge after the vote to leave the European Union.

The latest insolvencies threaten 300 stores and nearly 5,500 workers. While the shops remain open for the time being, Toys “R” Us and Maplin join a growing list of retail failures that includes department-store chain BHS and clothier Austin Reed.

The implosions added to the gloom enveloping the U.K. economy. Brexit talks are in peril after Prime Minister Theresa May said the draft divorce deal that the EU presented to her was one that no British prime minister could ever accept. Meanwhile, separate reports Wednesday showed that consumer and business confidence ebbed in February. A slowdown in spending has huge implications because the consumer was a mainstay of the U.K.’s economic growth.

For Britain’s bricks-and-mortar merchants, that slowdown is exacerbated by the country’s leadership in e-commerce, with 18 percent of retail sales taking place online, compared with 12 percent in the U.S. That has left incumbents like Toys “R” Us and Maplin exposed to new entrants with lower overheads and prices, while the Brexit-driven drop in the pound has inflated sourcing costs.

Read more: Britain’s Amazon obsession has retailers at a breaking point

“Maplin and Toys ‘R’ Us going out of business is hardly surprising, given the shift to e-commerce for retail, but for electronics and toys in particular,” ManMohan Sodhi, professor of operations and supply-chain management at Cass Business School, said by email. “Quite literally, they have been ‘Amazoned’ out of business.”

A weak Christmas season thwarted a rescue plan at Toys “R” Us U.K., which was left unable to meet a 15-million-pound ($21 million) value-added-tax liability due this month. Maplin, which is owned by private equity firm Rutland Partners, unsuccessfully tried to raise new capital to mitigate the effects of the Brexit-weakened pound, jittery consumers and the withdrawal of credit insurance.

Profit Warnings

Poor holiday-season sales also prompted profit warnings from department-store chain Debenhams Plc, carpet seller Carpetright Plc and childrenswear retailer Mothercare Plc. In another potential blow to the country’s downtowns and shopping malls, restaurant operator Prezzo plans to close as many as a third of its 300 outlets, Sky reported.

Concerns over further failures have spread in to the corporate debt market. Sterling-denominated retail junk bonds are one of the worst-performing corners of the bond market, with an index of the securities rising 19 basis points in the seven days through Tuesday and 37 basis points in February as a whole.

Maplin said it entered so-called administration proceedings after trying unsuccessfully to find a buyer. Stores will remain open for now and employees have been paid their February wages, administrator PricewaterhouseCoopers said in a statement.

“The business has worked hard over recent months to mitigate a combination of impacts from sterling devaluation post-Brexit, a weak consumer environment and the withdrawal of credit insurance,” Maplin Chief Executive Officer Graham Harris said in a statement. “This necessitated an intensive search for new capital that in current market conditions has proved impossible to raise.”

For Toys “R” Us, tough market conditions were compounded by its own lack of investment, according to Natalie Berg, founder of consultancy NBK retail.

“The Toys ‘R’ Us experience should have been a magical one with in-store events, dedicated play areas and product demonstrations,” Berg said. “The reality was a soulless shed with very little to draw shoppers in.”

The collapse of Toys “R” Us’s U.K. business followed bankruptcy proceedings for its U.S. parent that began in September. Toys “R” Us buckled under debt that dated from a $7.5 billion leveraged buyout in 2005 led by Bain Capital, KKR & Co. and Vornado Realty Trust, amid increasing online competition.

Simon Thomas and Arron Kendall, partners at Moorfields Advisory Ltd., have been appointed as joint administrators of the British division to oversee “an orderly wind-down of the store portfolio over the coming weeks,” the company said in an emailed statement.

©2018 Bloomberg L.P.

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