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Tuesday, August 31, 2004 - Page updated at 12:00 A.M.
Bubble bursts on Beanie Babies
By Thomas S. Mulligan
Kelly Cabral of Tracy, Calif., placed the ad recently after coming across a box in her garage crammed with dozens and dozens of Beanie Babies, the floppy little stuffed animals that sparked an international trading frenzy in the late 1990s.
Years earlier, there were days when Kelly and her husband, Dan, would join the early morning crowds laying siege to gift shops that were expecting shipments of Beanies.
Now, she says, "My husband's like, 'Where did we get all these?' Then you realize you spent way too much time on this insanity."
Whether a Beanies collection now resides in a cut-glass display case or the back of a closet may depend on the owner's level of embarrassment. Some former collectors cringe when they think of the plush critters, just as certain investors do when they recall Internet crash-and-burns such as Webvan or Pets.com.
In many ways, in fact, Beanie Babies mania was the dot-com stock bubble writ small.
Both were creatures of a frothy, peacetime economy with low unemployment and towering consumer confidence. Both were abetted by the advent of online trading and the explosive growth of the Internet. Both gave rise to celebrity oracles who seemed able to decode the mysteries of the market. Both spawned fraud and even episodes of violence. And, finally, both flouted all classical notions of investment value. Until they didn't.
Forbes magazine ranks Warner as the 65th-richest person on Earth, worth an estimated $6 billion, ahead of Los Angeles insurance and real-estate tycoon Eli Broad, Staples Center owner Philip Anschutz and Amazon.com founder Jeff Bezos.
Nowadays, Warner is intensely private. He doesn't give interviews and declined to comment for this article. His company is so private it does not disclose sales or production figures, displays no logo or identifying sign on its curvy, glass-walled headquarters, and keeps its phone number unlisted.
In his earlier career hawking stuffed animals for Dakin, the venerable teddy-bear maker, Warner was less reclusive. On sales calls, he'd drive a white Rolls-Royce and wear a knee-length fur coat, a gimmick he once said was calculated to make people curious about what he was selling. Warner left Dakin and started Ty in the mid-1980s with a line of $20 stuffed Himalayan cats.
Warner's killer insight was that the world needed an attractive plush toy that a kid could afford. He designed it himself and brought it to market in 1994.
The secret of Beanie Babies' initial appeal, fans say, is that they were slightly under-stuffed with heavy plastic pellets, giving them a pleasing combination of heft and floppiness. They were hand-sewn in Asia and came with antic names such as Freckles the Leopard, Tank the Armadillo and Pinchers the Lobster. At $5 to $7, they were in range of a child's weekly allowance.
"You don't usually get something in the toy industry at that price range that's very cute," said David Marks, a Westport, Conn., toy-store owner who surfed the Beanies wave.
Strategy to prompt sales
Having produced a lovable item at a popular price, Warner then stumbled upon or cunningly executed, depending on whom you believe a series of moves that made Beanie Baby sales go nuclear.
First, he adopted the distribution model for higher-end plush toys, selling Beanie Babies through specialty gift and toy shops rather than through Wal-Mart, Toys R Us or other giant chain stores. That way, you couldn't find the entire line in one place, and buyers would seldom encounter piles of unsold Beanies enhancing their status as collectibles, not mere commodities.
Not only did Warner keep introducing new Beanie characters, but he sometimes made changes in a line when he wasn't satisfied with the style or color. Thus, an orange Digger the Crab gave way to a richer red Digger after a year.
Suddenly, collectors swooped on the scarcer original version, eventually bidding it up to $600 or more on the resale market perhaps five times what a red Digger might bring.
Warner discovered he could create the same effect by abruptly ceasing production of a character. Without warning, he would announce such "retirements" on the Ty Web site, sending collectors scrambling all over again.
Warner also defended his brand zealously, bringing scores of lawsuits against what he saw as blatant knockoffs or other trademark infringements.
"Our philosophy was we never took any prisoners," said James White, a partner in a Chicago law firm that has represented Ty.
By accident or design, these actions all helped foster an aura of scarcity around the Beanies, even as Ty factories in China were pumping them out by the hundreds of millions.
And the parallels with the contemporaneous dot-com bubble?
Initial public offerings (IPOs) of stock in the most hyped Internet companies created a mad rush for shares. Investors pleaded with brokers for allocations of stock at the IPO price, in hopes of a first-day "pop" that would let them unload their shares at double or triple their money.
New-character introductions were the IPOs of the Beanie Baby market. If you could grab one at retail for $5.99, who knew if it might be the next royal-blue Peanut the Elephant and fetch $3,000 on eBay?
Both the dot-com and Beanie crazes thrived in an atmosphere of uncertainty. Nobody could say whether the Internet might actually live up to its hype as a transforming technology.
As for Beanie Babies, Ty didn't advertise and provided almost no information about the toys, so nobody knew for sure how many characters existed or in what numbers or even where you could buy them.
That's where the gurus came in.
Cheerleaders for Beanies
If the dot-coms had their Henry Blodget and Mary Meeker Wall Street analysts who became star cheerleaders for Internet stocks the Beanies had Peggy Gallagher and Mary Beth Sobolewski.
Gallagher and Sobolewski both hail from the Chicago suburbs where Ty is located and where the Beanie Baby fad first caught on. In the early days, both women recall running up staggering phone bills tracking down scarce Babies. In the process, they formed large networks of collectors and dealers and got to know the products inside out.
Gallagher, who wrote one of the earliest articles about the craze, eventually quit her job as a paralegal at her husband's law office when Beanies became a full-time obsession.
In February 1997, she self-published "The Beanie Baby Phenomenon," a 52-page paperback priced at $24. It sold 77,000 copies.
"I made over $200,000 in a few short months," said Gallagher.
A Chicago publisher approached her in 1997, and suddenly Sobolewski was editor-in-chief of Mary Beth's Beanie World magazine (later renamed Mary Beth's Bean Bag World after some legal prodding from Ty).
Price survey helpful
At its 1998 peak, the magazine was thicker than Glamour or Fortune and was selling 650,000 copies a month at a newsstand price of $5.99. It contained ads from dealers and articles about collectors, but the heart of the magazine was the price survey.
Sobolewski's survey filled the same need for Beanie Babies as "pink sheet" price listings do for obscure over-the-counter stocks: It helped keep the market orderly by giving buyers and sellers at least a reference point for negotiations.
Ty's market maneuverings helped make Beanie mania one of the longest-running toy fads in U.S. history. Still, the fate of a bubble is to burst. In August 1999, Ty shocked the collecting world by announcing that it would stop making Beanie Babies on Dec. 31, 1999.
The company never publicly explained its reasons, but Beanies auction prices had begun to stagnate, so skeptical collectors saw the move as a desperate effort to stoke the fervor. It backfired.
According to Sobolewski, fans who had devoted years to the passion simply decided it was a good time to stop. People sold their collections or, like Kelly and Dan Cabral, packed them away.
Ty soon relented and announced that it would resume production in early 2000 by popular demand, but it didn't reverse the slide. Beanies topped out just about when the Nasdaq did.
Today, a rare Beanie perhaps with a Ty Warner autograph still may fetch more than $1,000 at auction. The toy still is a good seller at retail, but people no longer line up to buy them. Business researcher Hoover's estimated Ty's 2003 sales of Beanies and its other plush toys at $750 million, down from $1.25 billion in 1999.
Now and then, Marks still sees customers who once believed that Beanie Babies would pay for their kids' college educations.
When they ask him what to do with their collections, he offers this advice: "They make great insulation if you stick them in the walls."
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