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The fun starts here…it’s the Friday Blog!

Published on: September 22nd, 2017

If writing last week’s Blog was complicated, this week’s is arguably even more so. On first sight, this statement may seem counter-intuitive. Last week, Toys R Us had teased the possibility of entering bankruptcy protection, among a range of possible alternative scenarios. There were many possible outcomes, and I did not want to be pre-emptive, nor write anyone’s obituary prematurely. Now we have clarity – of sorts. So, shouldn’t a summary of the latest developments be rather more straightforward? Well…

Suffice to say a lot has happened in the past five days: as the famous social media meme goes: “Well, that escalated quickly.” On Monday, there was talk in the media of Toys R Us filing for bankruptcy protection before Christmas: later the same day, said protection was duly filed. Technically, that is still ‘before Christmas’, but my word how rapidly events unfurled.

So, what happens now? On the positive side, the latest move should offer clarity and reassurance, where there was previously a degree of confusion and panic, especially amongst credit insurers, who had pulled coverage when rumours about possible bankruptcy had first surfaced a few weeks ago, making what happened next largely a self-fulfilling prophesy. More of them later.

The bankruptcy proceedings have been positioned as both the end of an era and, more importantly, the start of a brand new one. Take CEO Dave Brandon’s quote: “We are confident that we are taking the right steps to ensure that the iconic Toys R Us brand lives on for many generations.” According to the official press release: “The company expects this process will enable it to restructure its outstanding debt, which will provide greater financial flexibility to invest in the continued growth of the company.” One analyst commented: “We believe this is a positive event, as uncertainty had led to a pause in shipments from suppliers. We anticipate that the Chapter 11 lifeline will provide suppliers confidence to resume those holiday shipments.”

So, this is all good news. Uncertainty is not great in business, clarity is the key thing – and this announcement provides a credible road map for the way ahead. There is nothing to see here, right? Keep calm and carry on (shipping).

Let us hope so. However, there is an elephant in the room: our old friends, the aforementioned credit insurers. It seems to me that the very companies which tipped Woolworths over the brink nine years ago are inextricably linked with what happens next. According to suppliers, credit insurance was pulled across the board several weeks ago, both in the US and Europe. Without any form of credit insurance available, would suppliers continue to ship inventory? Without inventory, how could TRU continue to trade in the coming months?

As we know, the European, Australian and Asian operations are not part of the bankruptcy protection agreement. Taking that statement at face value would theoretically suggest that these territories have less to worry about than suppliers in the US market. However, while US suppliers are covered by the bankruptcy protection arrangement, and therefore have security in terms of payment, European suppliers are not. Hence the availability of credit insurance is far more critical here than in the USA.

Thus, it is entirely plausible that Toys R Us’ fate in Europe will be as dependent on a small cabal of global credit insurance providers (who are no doubt currently processing the latest developments and assessing the situation) as on the goodwill of their suppliers. The next few days could be crucial. Providing they reinstate credit insurance, it will be a case of ‘onwards and upwards’. The mountain of debt which TRU was lumbered with when acquired by Bain Capital all those years ago may finally be addressed. Indeed, CEO Dave Brandon has outlined his future vision for Toys R Us – which you can read here – which includes the suggestion that once the retailer emerges from bankruptcy protection, it will not be with the same owners whose excessive greed has arguably caused this whole sorry mess. The fact that the vulture capitalists (not a typo) are set to lose billions as their original investment is erased by the bankruptcy offers little comfort, but is still quite amusing.

Sorry if the Blog has become a little mono-focused this past few weeks, but as this is arguably the biggest thing to happen in the global toy market in the past decade, it has become rather all-encompassing. There’s just time to report that Paul McGarry has left Disney after 16 years to set up his own consultancy business, while John Driscoll has joined The Entertainer as commercial director (a great move for both parties).

In another week, I might have had more space to take the mickey out of Harrods Christmas top 10 toy list, which was led by a limited edition £400 soft toy replica of Karl Lagerfeld’s pet cat Choupette (“Oh mummy, pweeeeze can I have one”) or the makers of the Maya The Bee cartoon, who had to withdraw an episode after an eagle-eyed viewer spotted a drawing of a male appendage in the background of one scene (should make the playset interesting…). I might have even had room to talk about Rubies’ Graham Gardiner’s near miss, having been in Mexico City on business this week of all weeks (thankfully he came out unscathed).

But for now, one subject continues to dominate – and far from being done and dusted, this story is only just getting started. As the picture below suggests, I suspect that even TRU themselves know that…

 

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