Richard Gottlieb

Why the Slow Down in Commission Payments to Reps?
August 31, 2008

In my last blog, “Are Toy Manufacturers Feeling Some Financial Pain,” I wrote about my research with independent sales representatives and my finding that 2/3 of reps I contacted reported a slow down in their commission payments.  I took the position that sales reps are typically the last to be paid when a manufacturer is struggling and that they are therefore the proverbial “canary in the coal mine.”   In short, these reports of slowed down payments may mean that there is some underlying economic stress in the toy industry.

So what may be causing this stress and the subsequent  slow payments?  Brian Maggio in his excellent response to my blog, laid out a number of causes:

1.  Retailers are pushing back on manufacturers, asking for free freight, longer terms, and deeper discounts.

2.  Banks are tightening up financing

3.  Raw Materials Suppliers are pushing through very real increases in labor, freight, and plastics

4.  Freight costs between Asia and the US, and again inside the coasts, are going up daily.

I agree that all of these are having an impact but I suspect that the underlying cause is structural.  Many toy manufacturers have built their businesses around retailers buying on direct import from Asia.  This meant that they got their money quickly (some times via letter of credit) and that they did not have to own inventory and if they did, it was minimal and easy to finance through the receivables from direct import. 

This year, however, retailers are risk averse and are hedging their bets by demanding that manufacturers hold inventory for them domestically.  The retailers will then order in smaller quantities and will order later in the year.

Suddenly, manufacturers are finding that their cash flow is, well, not flowing.  They just don’t have the money to finance the receivables; the logistics and warehousing that come with maintaining a domestic program.  What makes it tougher is that, as Brian put it, the banks have tightened financing and money is not so easy to come by.

I am not sure that things are quite as dark as Brian paints them (at least I hope they are not) but I do think that some companies are at risk.  Where I don’t agree with Brian is the notion that these conditions will weed out poor products and make the toy industry stronger. 

I do, as Brian alludes to, believe in creative destruction but what will bring companies down will not be how good their products are but how well financed they are.  We could actually lose some great products, not because the consumer has spoken, but because underfunded, small and start-up companies struggle in tough economic times. 

Can we do something to change this situation?  Maybe!  That will be in my next blog.

Posted by Richard Gottlieb on August 31, 2008 | Comments (1)