Guy Norton in Zagreb -

Anyone looking for the story of the steep decline in Croatia's retail market need look no further than the specialist toy store segment, where former leading companies have recently fallen on very hard times.

While most Croatians were looking forward to receiving warm greetings from their nearest and dearest on Valentine's Day, 130 odd employees of the One2Play toy store chain were greeted with the news that their services would no longer be required. That day, the firm announced it had failed to agree with creditors on the rescheduling of HRK128m (€16.6m) worth of debt and would therefore be closing its stores across the country.

Having once been a high profile retailing story - One2Play was a major press advertiser as well as a main sponsor of popular TV entertainment shows such as Croatia's Got Talent - the firm has witnessed a sharp decline in its financial fortunes over the past couple of years. The country's increasingly cash-strapped consumers have reined in spending at a rate of knots, leaving Croatia's retail sector mired in recession since 2009.

While Croatian GDP has dropped 10% over the past five years, consumer spending is estimated to have plummeted by as much as 30%. The key factor behind that drop in spending has been the increase in unemployment, principally in the private sector of the economy.

One2Play's hapless employees will now join a jobless queue that currently exceeds 380,000, and which is threatening to pass the psychologically important 400,000 mark in the next few months. That's a frightening figure for a country with a population of just 4.3m, and suggests less than 50% of adults in the country are in full-time employment.

Unsurprisingly, with no effective end to the country's economic downturn in sight - the consensus among economists is that GDP will increase by 0.1% at best in 2014. That means there's no real prospect that Croatians will be more disposed to opening their wallets and spending their hard-earned cash on non-essential consumer items such as children's toys.

Toxic toys

Consequently, it was always going to be a tall order for One2Play to convince its creditors of a positive turnaround in the company's finances in the near term. Rather, the future was likely to remain blighted by a toxic combination of declining revenue allied with growing debt and servicing costs. The high fixed cost of its stores, mostly located in prime high street or shopping centres, was only set to exasperate the situation.

Last summer the company initiated discussions with creditors over a corporate restructuring plan under which they were asked to agree to write-off 70% of One2Play's obligations. The remaining 30% of the debt would then have been repaid over the following two years.

One2Play's principal creditors include French-owned Splitska Banka with HRK22m in claims and Austria's Raiffeisenbank, which is owed HRK21m. The company was also in debt to the government for HRK2m.

The rise and fall has been rapid. As recently as 2011 One2Play was widely regarded as a success story, reporting a record HRK137.7m in revenue. Founded in 2000 as a wholesaler, the company later morphed into a retailer, and in 2007 its operations were rebranded under the One2Play name and it recorded income of HRK76m. However, with creditors refusing to play ball, the company will now be consigned to history, following a HRK30m loss last year.

The company's demise was greeted with a degree of shock by retail market analysts as, despite declining by 20% since the onset of recession in 2009, the Croatian toy market is still reported to be worth around HRK400m annually. That however has not proved to be enough to sustain the survival of specialist toy retailers, which have seen market share squeezed by increasing competition from the likes of leading supermarket chain Konzum and kiosk operator Tisak, both owned by Croatia's richest businessman Ivica Todoric.

Tisak, for example, has succeeded in establishing exclusive distribution agreements for toys related to a number of popular TV programmes. Typically, these tend to be low-price items which have proved to be better sellers in recessionary times than some of the high-end goods offered by the specialist stores.

One2Play is not the first victim of the squeeze. One-time rival Magma - established by former economy minister Goranka Fizulic and at one time valued at €150m - effectively went out of business two years ago. Unlike One2Play owners Alen Magdic and Dejan Macesic, Fizulic recently reached an agreement to reschedule HRK537.5m of Magma debt and is now looking to revive his own fortunes pioneering the adoption of 3D printing technology to manufacture toys.

With both One2Play and Magma gone, the only significant Croatian toy retail specialist left standing is Denis, which boasts stores in 11 Croatian cities as well as a presence in Serbia and Bosnia. How long playtime lasts for Denis remains to be seen.