Retail

Toys ‘R’ Us collapse leaves Moose Toys out of pocket: Protecting your business when a distributor falls over

Emma Koehn /

Toys "R" Us

Source: iStock

The bankruptcy of US retail giant Toys ‘R’ Us will have flow-on impacts to one of Australia’s biggest toy brands, with one insolvency expert calling on small businesses to do everything they can to protect themselves against the collapse of distributors.

The US arm of Toys ‘R’ Us filed for chapter 11 bankruptcy protection on Monday, with debts amounting to $US5 billion ($6.3 billion) , reports Forbes.

In a statement, the company explained the application only applies to the United States and Canadian operations of the business, while a spokesperson for the company confirmed to Fairfax that the Australian stores are not affected by the proceedings.

“The Company’s operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing and CCAA proceedings,” Toys ‘R’ Us said in a statement.

The company says its US bricks-and-mortar and online stores will continue to trade and will ramp up towards Christmas. The bankruptcy filing will allow the US company to see “the financial constraints that have held us back will be addressed in a lasting and effective way,” according to chief executive Dave Brandon.

Analysts across the US believe the filing is a warning of more pain to come in the 2017 Christmas retail trade. Closer to home, Australian businesses are also affected: The Australian reports $600 million toy business Moose is a major unsecured creditor to the US business, owed $US9.5 million ($12 million).

Moose Toys is headed up by former EY Entrepreneur of the Year, Rich Lister Manny Stul. The brand has global popularity through products including its small doll range, Shopkins.

A Moose Toys spokeswoman told SmartCompany this morning the business remains confident in Toys ‘R’ Us and Moose will “continue to support them”.

“Toys ‘R’ Us are a vital part of the toy industry and Moose looks forward to maintaining our relationship with the team and continuing to supply them with toys that make children happy,” the spokeswoman said.

There are 40 Toys ‘R’ Us stores in Australia. SmartCompany contacted Toys ‘R’ Us Australia and law firm Gilbert + Tobin, which is reportedly working with the local stores as its parent company negotiates the bankruptcy processs, for comment, but did not receive a response prior to publication.

Suppliers unprepared for collapses

Jamieson Louttit, insolvency expert at Jamieson Louttit and Associates, says news of the collapse of Toys ‘R’ Us speaks volumes about the state of bricks-and-mortar retail globally.

This is what’s happening in the retail environment at the moment, and we haven’t even reached Christmas,” he says. 

When suppliers are owed money as unsecured creditors in cases like this one, they face a challenge in recovering their entitlements because they are “well down the list” behind secured creditors that are owed money, Louttit says.

He observes that while there is not much a business can do but wait when faced with this kind of situation, in general Australian businesses do not prepare themselves for the possibility they might lose out when a big distributor falls over.

He says that for every insolvency, there are around four other entities that are placed under pressure. Sometimes this can create a “self-perpetuating” wave of collapses.

While businesses can’t entirely protect themselves from the effects of another company’s collapse, particularly if the business is an overseas entity, Australian companies can take steps to ensure some protections for the goods they supply, Louttit says.

He observes that many small companies forget about the government’s Personal Property Securities Register (PPSR) scheme, which allows businesses to register goods so they can retain an interest in stock that is in transit.

“It’s a cheap cost, it’s about $9.90 to register, yet there’s a lack of education in Australia about maintaining your rights to recovery,” Louttit says.

Registering goods through the PPSR scheme puts a business in the best position to reclaim those goods if they have been supplied to another party in Australia but no payment has been received, or if they are being shipped and the receiving party has gone broke.

In broader terms, Louttit believes Australian retailers should prepare for tough times ahead as Amazon hits the scene.

“If Australian retail is going to be pressured, it will be pressured on margins,” he says.

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Emma Koehn

Emma Koehn is SmartCompany's senior journalist.

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  • bezbox

    Why doesn’t the Government do the sensible thing and just implement the Personal Property Securities Register (PPSR) scheme into legislation to protect all?

    • Prepagan

      The PPSR is implemented by legislation – the Personal Property Securities Act. However, the Act has made registration voluntary – businesses would be the first to be up in arms if registration was made mandatory.

      • bezbox

        You misunderstand me Prepagan. I never said to make registration mandatory. I meant, why don’t we just legislate that a business cannot “firesale or otherwise” goods they have not paid for when they have gone into Administration. Everyone is protected by default.

        • Prepagan

          The whole point of a business going into administration is to ensure that they can’t just ‘firesale’ everything and run-off with the proceeds – there is an administrator appointed to protect the interests of creditors. The PPSA places rules on the administrator or liquidator to ensure that creditors are paid according to the security they hold and the available collateral subject to that security.

          • bezbox

            Sorry – but your comment is laughable. I can point to dozens of examples where the administrator has sold creditor goods at ridiculously low prices “to clear it out”, and then returned very little to said creditor. They charge over-the-top hourly rates for work that is non-specialised ($140 per hour for filing and photocopying – who gets that in the real world?) and then ridiculous rates for their senior staff ($300+ per hour is not uncommon). I don’t know any other occupation that could claim they are protecting anyones interest other than their own under that scenario. The whole system is broken and needs a massive overhaul.

          • Prepagan

            Apologies, I read your comment to suggest that the insolvent business was conducting a shonky firesale rather than you not approving of the way liquidators conduct themselves. I have no dog in that particular fight.
            However, registration of a supplier’s ROT rights on the PPSR would prevent the liquidator from dealing with their unpaid goods in an inappropriate manner.
            Unfortunately, at the end of the day there will rarely be sufficient assets in an insolvent company to satisfy all of their creditors, PPSR registration or not. The only sensible solution for suppliers is credit insurance.

  • Prepagan

    Aside from Louttit not knowing that a 7 year registration on the PPSR costs $6.80 (not the $9.90 he suggests), I’m amazed that, in an article discussing how suppliers can protect themselves from the collapse of a major distributor, there is absolutely no mention of Trade Credit Insurance.

    Credit insurance is a far more effective form of protection than relying on the PPSR, particularly given that the PPSR only has a narrow window of effectiveness – when your goods have been on-sold your security has effectively gone! PPSR registration has its place and registration should be part of a supplier’s normal business practices but to overlook credit insurance would be a huge oversight.

    Credit insurance can also apply for export business where trading is with countries that do not have a PPSR regime.

    Major oversight in this article.

    • haydn

      Suppliers should include proceeds when registering their supplies on the PPSR and not just the goods.

      • Prepagan

        They should, but claims against proceeds tend to only be effective when proceeds are rec’d *after* the appointment of an insolvency practitioner, anything rec’d before that point will be next to impossible to obtain.