Always look on the bright side of life

Rising costs, supply and labour problems and an unforgiving economic climate mean the toy market is in dire straits. But is there an upside to all this trouble and strife? Former Radica and Corgi MD, Denis Horton mulls things over...
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I was once told that one of the keys to success in the toy industry was managing uncertainty. If that’s the case then, as professionals, we should be much in demand as other sectors struggle to come to terms with the unfamiliar upheavals in the world economy.

Indeed, it is difficult to think of many other sectors which have had so much thrown at them as our own. Whether it be age compression, high profile product recalls, EEC legislation, escalating raw material costs, labour shortages (in China of all places!), factory closures, adverse exchange movements, retailers expecting you to pay for their mistakes as well as your own, licensors changing plans with scant regard for the impact on their licensees, we’ve had to deal with them all.

On top of all this comes the credit crisis. For an industry as seasonal as ours and one where companies often run at a loss in the early part of the year, this is clearly a threat. First money goes out up-front to pay for development, tooling and inventory. Then money comes in later and later as credit insurance cover gets tighter and larger retailers use their position to stretch their payment terms.

Having spent the last 17 months trying to run a business with virtually no cash, I have experienced first-hand the difficulties increasingly being faced not only by both sides of our own industry, but also by many SMEs throughout the economy as the credit crunch bites. One’s focus on controlling and directing the business in the normal way becomes secondary to micro-managing the cash flow and suppliers. Room for manoeuvre is severely restricted and the levers available to make things happen get fewer and fewer.

In an industry where speed of action is required to ensure product is available on time to meet the immoveable deadline of Christmas, and risk taking is an integral part of the game, the treacle-like impact of a shortage of credit is a real threat.

However, I do believe there is the prospect of a healthier industry at the end of this cycle; unfortunately, not for all of us, as there will be a contraction in both numbers of manufacturers and retailers (not exactly a bold prediction, given the news on Woolworths and the recent demise of my own business).

I have long thought one of the weaknesses of the industry has been over-capacity, resulting in declining profitability and erosion of the perception of value for money. We may well see a leaner and fitter version emerge, and one where the internet fundamentally shifts the relationship between manufacturers and traditional retail channels.

This will work to the advantage of the larger players on both sides of the industry and, as usual, it will be those in the middle who get squeezed. But I also believe the players that do survive will be those who have the courage to be most self-critical. To ask what really drives the profit in the business and where the costs are, acting quickly to restructure accordingly.

Over the years, many companies have undergone SKU reduction exercises, recognising there is a direct link between SKU count and overhead. Now is the time to be even more aggressive.

It is also time to critically evaluate industry practises and question the true value of the bottom line of the deals and trading arrangements that have become part of the landscape. Where survival is the issue, protecting the top-line at the expense of the bottom line is not a long term strategy.

While we’re on profitability, let’s take time to understand what that means across the life of an item from manufacture through to consumer purchase. For too long the drive for lowest unit cost of manufacture has ignored downstream costs such as the cost of inventory risk, cost of storage, the cost of capital, time to market and retail exit plans. There also needs to be recognition that the earlier the commitment to production, the weaker the negotiating position and greater the risk of margin erosion.

Structural changes in China, transport costs, and weakness of sterling, not to mention pressures on carbon emissions, dictate a review of manufacturing solutions for the European market. But this is not easy to implement, especially for those with large US parents, and difficult to reconcile with current fears about deflation.

Finally, the lack of predictability in our market makes this is a particularly uncomfortable business for accountants at the best of times. When bad news is the daily diet, my advice is to keep your customers close, but keep your lenders closer. This is a time for keeping all stakeholders in the business fully appraised of what is going on.

The real upside is unfortunately only relative. Historically, the toy market has weathered economic downturns better than many other sectors. This time, that may not be enough for the industry to survive in its current form. Now is the time for swift and radical action and only those that grasp this will be around for the next upturn.



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