The Trouble With Toys

By now you've heard of the Toys R Us bankruptcy. You may be feeding into the media narrative, which tells us that competition is what killed Toys R Us. The rise of Amazon, Walmart getting into toys, even Barnes and Noble selling toys, all doomed Toys R Us.

But none of that is true, or at least completely true. Each of those items was a factor in the Toys R Us bankruptcy, but they were small factors compared to what really killed Toys R Us: capitalism.

The long, slow death of Toys R Us began when financial geniuses bought the company a while back. They did what they call a leveraged buyout, which essentially means they use the value of the company to buy itself. This is sometimes known as vulture capitalism. The people who bought the company paid very little, loaded the company up with debt, then sold it off and reaped profits. Over time the debt load killed the company because they couldn't afford to pay the interest, which by the end of Toys R Us was hundreds of millions of dollars a year.

Now, there's capitalism and then there's capitalism. The first kind is what we usually think about, the buying and selling of goods and services, people making profits, paying taxes, and so on. The second kind is what we see here, when the financial people get involved in doing more than just helping to finance a company. When they start buying and selling companies, they're looking for any kind of profit, and to find them they're willing to destroy the company.

What does this have to do with the power industry? You may know some of these companies. Some of them have bought into the electric industry, and they're trying to reap profits. You may even be able to name some of the investor companies that have done this. These are companies that couldn't care less about the long term health of the industry, or the long-term health of the plants they have purchased. They are happy to put off maintenance to increase their short-term profit, because they won't be there in the long term. This can have a big effect on the plant, the people who work at the plant, and their suppliers.

Think again of Toys R Us. We have seen the news of companies like Lego and Hasbro, who have already announced that they are going to miss their sales targets, simply because of the loss of Toys R Us, one of their biggest dealers. Now think about that in relation to the power industry.

I mean, who does your company supply goods and services today? Are they all financially successful? Will they be, this time next year? How much of your accounts receivables are tied up in companies that may be looking to declare bankruptcy and get out from under a load of debt? Are you aware of how much your company is owed? Is your CEO? Are the companies that owe you money a large chunk of your revenue? Say your biggest client is responsible for a third of your company's revenue (and the 80-20 theory says that is probably true). Now say they declare bankruptcy, and a third of your company's revenue disappears overnight. What's going to happen to your company? What's going to happen to you?

These may sound like questions that aren't that relevant to you. You trust the CEO, you trust the financial guys in your company, you think everything's going to be all right. I hope it is. But I also hope you have a plan, for your future if not your company’s. Where are your retirement funds? Do you control them, or does your company? Are they fully funded? What happens to them if your company gets in trouble? Who has first claim on them? (Hint: it will not be you).

Several years ago I was employed in a company which was hired to do work for another company. That other company had a plan for expansion, and told us that they would be selling one million items by the end of the year. My company made certain commitments, including buying equipment to be able to service those million items, and looked forward to all the profit that was going to come in. A year later the company that had hired us went broke. Instead of selling one million items a year, they sold one thousand. Plans fail sometimes.

Fortunately the commitments my company had made were not make or break commitments. They were enough that we could bring in other new business and not have to worry. We had a short time when things were tight, but it didn't last long, thanks to the foresight of the CEO. He had planned sufficiently well that he didn't put all our eggs in one basket.

I hope your company does the same. I hope your company can weather downturns, or the loss of clients, even your biggest one. I hope you have the ability to market to other clients, to stay diversified, and protect yourself and the other employees of your company.

What do you think?