What it doesn't mean is that Toys R Us is going out of business. It does mean that they can now borrow more money and they're shielded from claims of non-payment by their suppliers of products they've already received. It gives them space and cash to continue to buy from anyone willing to sell to them. But it puts these vendors in a very tight spot.
While we carry many unique and extraordinary items that TRU doesn't and wouldn't carry, we do share some of the same vendors. And those vendors are scared to death.
“But the immediate cause of the Chapter 11 filing was a crisis of confidence on the part of the company’s trade vendors, which historically has been a risk for retailers, particularly as they build inventory levels for the holiday season,” explained Stephen Selbst, chair of the law firm, Herrick’s Restructuring & Bankruptcy Group.
And when bankruptcy indicators became public, it happened fast. Selbst:
According to the company, the reaction among the vendor community was swift and brutal: within a week nearly 40% of its trade vendors put the company on COD status and many factors and credit insurers withdrew support. Prior to this crisis, Toys “R” Us had experienced an historic average of 60 days of trade credit support; the new terms would have required an immediate infusion of up to $1 billion in new cash, money that Toys “R” Us neither had nor could obtain.
These vendors have already shipped products to TRU in huge quantities for the holidays. And they just learned that they'll have to stand in line to see who gets paid. Smaller suppliers will be hurt most, but all suppliers will feel some of the pain. Meanwhile TRU will remain open with nary a visible scratch.
So the vendors find themselves in a situation that may sink them if they're not toward the front of that line. They cannot survive if they don't get paid for millions of dollars of products they've already shipped. And that's where small independent retailers come in. When vendors are starved for cash and scared that they might not make it, they put additional pressure on stores like ours to prepay for shipments previously ordered at terms worked out months ago.
Castle Toys and Games has always striven to pay our vendors on time. In fact it's not uncommon for the owners compensation to lag while vendors are taken care of. This may seem counter-intuitive, but it shows how important it is to us to make sure our word is kept and our supply lines are short and wide open. When Linda calls for an order she's accommodated quickly and with the best possible terms because she's so good at keeping our vendors happy.
We think we'll be just fine. But if our vendors find it impossible to get products because all of their cash is held ransom at Toys R Us causing their supply to falter, then we'll also suffer. It's a very big deal.
We'll see how it unfolds, but when you see Big Sales this season at the Big Box, don't forget that all of that is being shouldered by their vendors. TRU may not make it. But even if they do, they'll have put a sizeable hurt on plenty of their so-called partners as well as the rest of this otherwise very friendly industry. Stay tuned.