Back to earth with a bump…it’s the Friday Blog!

Published on: 31st August 2018

Just when you thought the toy industry had come through largely unscathed from the demise of Toys R Us, the sad news that Toy State has ceased trading with immediate effect served to bring the global toy community back to earth with a bump. To say that it came as a shock to everyone – both internally and externally – is putting it mildly. They clearly do things differently in Hong Kong; no hint of a CVA, administration, Chapter 11 or anything that might have given the business a chance to reshape and survive. No, the bank (HSBC) pulled the plug on Friday and that was that. Factories were shut within hours and everyone is now left to deal with the fallout. Perhaps the biggest surprise is the timing; toy companies rarely cease trading just as the peak shipping season is about to commence. January or February has long been recognised as the period when the fate of struggling companies is decided; it is practically unheard of for such a sudden occurrence to take place in August.

With some successful long-term brands (Nikko and Road Rippers) and solid licences (Caterpillar), it is still highly plausible that someone will step in to ensure that the product range at least will live on. However, this unfortunate situation may be an indicator of a trend which could ultimately affect the whole toy community, not just one company; when it comes to toy businesses – supplier or retailer – it seems that the patience and forbearance of lenders may no longer be relied upon.

Speaking to one major specialist toy retailer earlier this year, I suggested that that the demise of Toys R Us presented a golden opportunity for other toy retailers to benefit. He agreed, but pointed out that it could only be done with the support of the financial community; picking up an additional few million pounds of turnover wasn’t the challenge which concerned him – financing the extra stock was more the issue. The speed with which Toy State found itself out of business suggests that banks have gone way beyond erring on the side of caution when it comes to a company they have concerns over.

As much as the TRU fiasco has made banks nervous of the toy business, it has also had an impact on the trust issues between suppliers and retailers, particularly when the retailer is having financial difficulties. I read a fascinating article this week which posits the theory that the ramifications of the demise of Toys R Us will be felt far beyond the toy market – it suggested that it may well have killed the entire US Chapter 11 process, not to mention the debtor-in-possession loan system, as suppliers will be reluctant to trust a retailer in bankruptcy protection ever again. It is too long and detailed to precis the article here, so you can read it in full here. You certainly couldn’t blame any toy supplier for being once bitten, twice shy if they are ever asked to supply a retailer in Chapter 11 in good faith in the future.

In other news, details have emerged of the deal which new House of Fraser owner Mike Ashley has been trying to persuade landlords to sign up to. In some cases, he offered rent deals equivalent to 5% of the store’s turnover, while about 28 stores would not get any rent at all, but have their business rates paid for. He then publicly referred to the landlords as ‘greedy’, just to make them feel even better about the rather one-sided ‘negotiation’ process. No word yet as to how many are going to agree to Mr Ashley’s questionable demands, but if I was inclined to speak in his defence, I might point out that at £4.6m, the bill for business rates on the House of Fraser flagship store on Oxford Street this year is apparently the same at the total corporation tax paid by Amazon in the UK last year – a situation which is quite clearly barking mad.

In the international market, a ban on Sunday trading and intense competition has apparently prompted Tesco to close 13 loss-making stores in Poland, putting about 2,200 jobs at risk, while the sale of the Toys R Us Asian operation has become incredibly complicated, as two groups of hedge funds have locked horns. One side is keen to acquire and run the Asian stores as a going concern, the other side owns the rights to the TRU name and claims that it is worth far more than it is currently being paid for its use. Expect a massive legal battle where the main winners will almost certainly be the lawyers…again.
Back in the UK, there is better news on the Argos / Sainsbury’s front, as it has been announced that the buying teams have finally joined forces as one team in Milton Keynes. The full re-organisation not quite all done and dusted yet, as I gather that a letter sent to suppliers admits that the team ‘org chart’ is still changing on a daily basis! However, it’s certainly a major milestone on the merger journey, which suppliers will no doubt be hugely encouraged by.

With the kids going back to school and Autumn Fair taking place next week, it feels like the summer is just about officially over and the real fun is about to begin. Having said that, media reports have promised an unusually warm September, so if that’s true, we might have to wait a little longer for Christmas to fully kick into gear. If you’d like to catch up with the Toy World team at Autumn Fair next week, do feel free to drop us a line.