Summary:
During the housing bubble of the early 2000's, housing prices shot up to very high levels but that did not serve as a warning for people to stay away from purchasing houses. Everyone assumed that house prices would always go up and were shocked to find out that was not the case. In 1990's, people in the US went through a similar experience with internet stocks. This book looks at a similar bubble in Beanie Baby toys for children, just before the dotcom bubble. Throughout the book, people who should have known better, find themselves sucked into putting their hard earned money into Beanie Baby toys thinking their value will hold and even keep rising in the future. At the same time, the book also details the life story of Ty Warner who came up with the Beanie Baby toys and made them successful. He developed his Beanie Baby toys by following his own path in designing and selling those toys. The craziness surrounding the Beanie Baby toys was not started by Ty Warner but once he realized its value, he played his part in prolonging the madness.
Because American economy depends on the consumer, acquiring more and more goods is portrayed as a worthy goal in life. US government and companies try their utmost to encourage people to spend their way throughout their lives. While the spending was balanced by strict rules about lending till 1970's, the deregulatory push championed by both Democrats and Republicans since then, is biased towards making people spend more of their hard earned money without a commensurate increase in policies towards making sure the expenditure is within people's ability to pay. The upshot of it has been repeated instances of people in the US chasing after returns based on hype and lies and realizing their errors after the fact.
Analysis:
Periodically, Americans lose their collective minds - it could be internet stocks, houses or as this book details, Beanie Baby toys. These are small cuddly toys for children that now sell for $5 (even though a search on Google brings up an offer of 4 retired Beanie Babies for $17,700). In 1990's, they were the centerpiece of a manic run on toys that ruined the financial lives of people. Manias are neither recent nor exclusively American. An example would be the tulip mania described in Charles McKay's 1841 book, 'Extraordinary popular delusions and the madness of Crowds'. This book traces the rise and fall of Ty Warner, the creator of Beanie Babies and the wreckage his invention left in its wake.
Stuffed animal toys were invented by a German polio survivor named Apollonia Margarete Steiff in 1885 who came up with the idea of selling stuffed animals after observing demand for her home made stuffed animal pincushions. To keep up with the demand, she employed disabled people in her factory. The spread of industrial revolution in America between 1880 - 1910 had resulted in migration of significant number of people from farms to the cities. As a result, their view of life with animals was a romantic ideal that put stuffed animals at the center of a child's life. Teddy bear was named after the old female bear that was tied and served up as target practice for US President Theodore Roosevelt during his hunting expedition in the South (Louisiana Mississippi border). After returning empty handed after 4 days of hunting, his hosts wanted him to bag at least one animal and arranged for the bear to be shot. However, Teddy Roosevelt became offended and refused to shoot it. The bear was killed by another member of the hunting party by slitting its throat. The story was popularized and romanticized (even though the information about how the bear was actually killed was dropped) by Washington Post with the underlying reason behind Teddy Roosevelt's refusal to shoot the bear becoming an act of mercy rather than of wounded pride. Steiff's company took advantage of the moment and introduced a line of Teddy bears in 1902, generating huge sales. By 1908, the sales had settled on a steady level. By 1950's, Mattel and Hasbro took advantage of the advent of television as a mass medium and became extraordinarily successful by advertising their toy offerings. The companies that did not advertise their products on television saw their sales dwindle while the ones that leveraged television advertising saw their sales skyrocket. By 1980's stuffed animal toys were selling at a steady clip.
The business of selling collectibles operates on the assumption (well founded) that people will buy a trinket for spectacular prices if it is marketed as a valuable item through hype and outright misrepresentation even if there is no intrinsic value attached to the trinket. Joseph Segel was a marketing professor at Wharton School of Business who came up with the idea of selling solid sterling silver medals in very limited editions (100 or so). He formed a society (National Commemorative Society) whose membership would guarantee ownership of one of those silver medals. By using scarcity and potential for future profits, he was able to sell 5,250 memberships. With the price of silver appreciating, people jumped into purchasing these commemorative plates (their name itself was misleading as there was nothing to commemorate). Later, he changed the name of the society to Franklin Mint (the name of Franklin was chosen at random). The success of his company allowed him to list it on the stock exchange. The secondary market for these plates boomed as they were limited edition and people though the future prices of these plates would be high. The high flying company was brought to its knees by an expose done by 60 minutes that threw doubt on the actual silver content of these commemorative plates. By that time, Segel had left Franklin Mint and the industry was taken over by companies that marketed their products more aggressively and without any scruples. By 1993, the direct mail sales of collectibles in the US totaled $1.7 billion. Marketing had replaced the age old process of valuing a collectible. By targeting the behavioral tendencies of investors (erroneous assumptions that past performance is a predictor of future results, endowment effect (things we own are more valuable) and mob mentality (tendency to move in herds)), collectibles industry was able to get people to part with their money for worthless pieces. With the advent of newspapers, collectibles entered into bubble territory - even though newspapers were the supposed guardians of the truth(through investigations), they also had self interest in increasing their paper's circulation(by reporting on the hysteria).
Ty Warner started off as a toy salesman, courtesy of his father who worked in sales, at Dakin company selling a line of plush toys (stuffed animals). His father was later found to have sexually abused his daughter (Ty Warner's sister). Ty Warner's mother was a paranoid schizophrenic. Stuffed animals have become the go to toys for American children when they are developing independence from their parents. The expectation of American culture that children be miniature version of adults has kept the demand for stuffed toys at a high level. The industry that sells these toys is cutthroat and reliant on manipulating the behavior of its consumers (which, to be fair, every consumer product company engages in, to a certain extent). The most successful stuffed animals business people seem to come from broken homes and as such, they rarely, if ever, leave the industry to chase their fortune elsewhere. At Dakin, Ty Warner rose to be come the top salesman and learnt the lessons for a successful toy salesman - obsessive attention to detail, low price, high volume and (as much as possible) selling only to mom and pop shops instead of big box retailers. As Ty Warner became more successful at Dakin, he started soliciting Dakin's customers for his own business, biting the hand that fed him. He was let go once Dakin found out. In 1980, when Ty Warner was fired from Dakin, unemployment in the US was at 13.5% and inflation was climbing steadily. He tried his hand at various joint ventures and in the end, decided to go into stuffed toys business. With the help of a neighbor, Patricia Roche, he started selling stuffed animals under his name Ty. When his father died of a heart attack, Ty Warner sold his father's antique collection (without his mother or sister knowing about it) and used it as his startup capital. He obsessed over making sure Ty Inc's stuffed animals were the exactly the way he wanted them. He went from strength to strength through hard work and very good salesmanship. In later years, he started viewing his success as solely his own creation, eliding significant contributions of others to his success. Because he wanted his products to meet his exacting standards, there was a ceiling on how much toys could be produced by Ty Inc at one time. Most of the stuffed animal companies sold their products to big box stores but that also reduced their leverage. Ty Warner skipped the big box retailers and sold his products via mom and pop shops. That allowed him to exert more leverage in terms of how the toys would be displayed in the store (big fish in a little pond). He focused on the quality rather than the quantity of his products - While Dakin sold 650 - 700 different products, Ty Inc sold less than 100 products. Because he was confident that his toys would sell well, he demanded full payment upfront from his retailers while the general practice in stuffed animal toys industry was full payment within 4 months. His pricing strategy was different from his competitors as well - he sold his toys at 2 price points, $5 and $10 compared to his bigger competitors who had up to a dozen price points. He kept changing his product line constantly which was an outgrowth of his drive to perfect his company's toys. The controlling behavior extended to his personal life that caused some of his relationships to fail.
Ty Warner developed Beanie Baby toy through endless tweaks. He expected it to be a hit and worked to make that happen. His plan was to use Beanie baby toy to up sell his more traditional line of products. He sold his Beanie Baby toys in 12 packs to his retailers who balked and forced him to sell them 6-packs instead. They did not sell well in the beginning but after 2 years, their demand started picking up. A Ty retailer, RBT enterprises (Rich Before Thirty - started by 3 brothers Bryan, Chris, Kevin) pitched Ty Warner on the idea of "retirement" of Beanie Babies - they had seen a business person implement it in their town while growing up. They would tell customers that specific Beanie Baby products were no longer available ("retired"). The scarcity of the product (even if it was a cynical ploy on the part of the business owner) seemed to supercharge the sales of the soon-to-be-retired toy among die hard buyers. Those buyers were willing to pay a premium for the discontinued pieces and treasured them as collectibles. Ty Warner was not happy about the idea as it served to validate the lack of interest in his Beanie Baby toys. However, he also saw the benefits of the strategy - the higher price on the secondary market for Beanie Baby toys would drive the sales of those toys in the primary market. The first Beanie Baby to be "retired" was was Lovie the Lamb. The demand for Beanie Babies took off with the "retirement" of Princess Diana bear (that Ty Inc had introduced a few months earlier). The price of Princess Diana Bears rose to several hundreds of dollars on the secondary market before coming down when Ty Inc increased its shipment of Princess Diana Beanie Baby toys to meet the demand. The action of Ty Inc signaled to the collectors that Princess Diana Beanie Baby toy would no longer be a limited edition toy. By 1996, Beanie Baby toys were selling well among children. It was small enough to fit inside a child's backpack (which also allowed for word-of-mouth advertising) and its increased play value led to steady demand, primarily in the Mid West. Ty Inc continued to "retire" some pieces stoking the prices for those pieces on the secondary market.
It was during this time, "Soccer moms" were gaining in their consumer power (usually mothers who were prodded to look to shopping as a solution to work life balance). As kids are wont to do, they lost interest in their Beanie Baby toys but their mothers picked up the slack and started acquiring them as collectibles. Some of them put a lot of effort into categorizing them based on their release history and specific attributes (which was made more difficult because Ty Inc released different versions of the same Beanie Baby toy in keeping with Ty Warner's obsession with getting every detail correct). A few collectibles store owners realized an opportunity to make a decent profit. Because Ty Inc only sold these Beanie Baby toys to independent retailers and mom and pop shops, they served as evangelists for Beanie Baby toys as collectibles, explaining the concept of "retirement" to their customers and setting the premium on products in the secondary market (which, of course, provided them with a handsome profit). Richard Gernady, a retailer came up with a checklist of "active" and "retired" Beanie Baby toys. This further served to goad the collectors into making sure they had the whole collection. With Beanie Baby toys becoming more popular among collectors, the demand started to increase. Because the demand for Beanie Baby toys started out at a slow and steady pace (first among kids and then among their collector parents), they were only produced in quantities that would make them valuable to collectors in the secondary market.
Collectors started hitting multiple toy stores around the country to fill up their checklists. They also engaged in active trading among themselves. Because of the forced "retirement" of select Beanie Baby toys, collectors were forced to shell out a large premium for rare editions. Early collectors cashed in on the opportunity by charging fees to validate the history of different Beanie Baby toys in their myriad versions. They served as "mavens" (from Malcolm Gladwell's book The Tipping Point) for the Beanie Baby toy craze. As more people started collecting, the value of Beanie Baby toys on the secondary market shot up. Some collectors started magazines catering to Beanie Baby collectors. The magazines served as a semi-official reference for the the prices of Beanie Baby toys on the secondary market (prior to Internet). Even though they did not know it at that time, most of the early collectors of Beanie Baby toys who kick started the craze,lived in Chicago suburbs within 10 miles of each other. They got into the craze for the fun of having an entire collection and did not delve into the psychological foundations of why they did what they did.It also helped that Ty Inc was selling only to independent retailers and mom and pop stores so consumers did not see a massive amount of cookie cutter products in one location. It led them to believe that the toys were scarce. As time went on, Ty Warner came to appreciate the craze for what it was - a supercharged opportunity to make mountains of money while making sure the volume being dispensed to mom and pop stores remained at the low end. By mid-1998, some versions of New Face Teddy Bear were selling for $2000 (the original collectors had purchased it for $25). Some early collectors cashed in on the craze and sold their rare version for huge profit (with some people even paying for their kids' college tuition with those proceeds). Human psychology being what it is, seeing one's neighbor get rich stoked the jealousy and hope that anyone could get rich if only they could time their entry into the market correctly (similar principle applies to gamblers and stock market traders). With lack of reliable fact checkers, everyone applied their own biases to the Beanie Baby toy craze. As is true with most things, people generally ignored the dictum, 'If it is too good to be true, it probably is' preferring to go with the stampeding crowd. People who had a stake in keeping the craze going on, pointed to their success in making a wise choice of investing in Beanie Baby toys. By the end of 1996, Ty Inc's sales had reached $280 million. Ty Warner used his retailer visits to determine which Beanie Baby toys were moving slowly and announce their "retirement". Once the "retirement" was announced, Ty Inc stopped shipping those products to retailers immediately causing prices in secondary markets to shoot up for Beanie Baby toys that were gathering dust in Ty Inc's warehouses.
With the steady growth of Internet, the Beanie Baby toy craze grew even faster. One of Ty Inc's workers, Lina Trivedi suggested setting up a website for the company. Collectors were already using chat rooms and message boards to share information on Beanie Baby toys. When she went to register the Ty.com domain name, it had been taken up by someone whose son was named Ty. Ty Warner agreed to pay $150,000 to acquire the domain name. Lina Trivedi used the website to centralize information on Beanie Baby toys and also as a one stop shop for official company information. She also used the website to collect user information and their preferences on Beanie Baby toys. Collectors obsessively perused the website, looking for hints that a particular Beanie Baby toy would be "retired". Ty Inc also directed customers and collectors to the website for information on which Beanie Baby toy had been retired. Because the prices continued their upward march, everyone assumed the demand would always go up. In early 1997, Beanie Baby toys became a leader among toys on eBay (which had only launched in September 1995). Very quickly, eBay came to rely heavily upon collectors trading Beanie Baby toys to the extent eBay's 1998 annual report to SEC mentioned its reliance on Beanie Baby collectors trading on its website as a risk factor. Auctions are a good way to sell goods of indeterminate value which Beanie Baby toys on the secondary market were. Auctions are difficult for novices to succeed and they usually end up overpaying badly for items. With eBay and Internet, auctions became available to anyone with a modem, computer and a mouse. eBay had difficulty getting Ty Inc to partner with it. Collectors and consumers used eBay as a source for pricing information for the secondary market.As more stories people getting rich off of $5 Beanie Baby toys proliferated, more gullible consumers jumped into the craze in ever greater numbers. By 1998, consumers were stalking UPS delivery trucks and workers were stealing Beanie Baby toys awaiting shipment from warehouses. The runaway success of Beanie Baby toys also gave rise to counterfeiters. Ty Inc did not want them diluting the brand and was aggressive in slapping suits on them. Even with the Beanie Baby toy craze in full swing, Ty Warner did not focus on fulfillment issues that were plaguing Ty Inc and its deliveries to retailers - he saw himself primarily as a designer. As a result, Ty Inc would release new Beanie Baby toys in small runs, creating scarcity and sending the prices on the secondary market soaring. Subsequently, it would follow up with a large run of the same Beanie Baby toy causing the prices to fall back. Collectors and consumers who jumped in and purchased the Beanie Baby toys during the small runs got burned as prices cratered once the large runs commenced. Throughout this period, the fact that Beanie Baby toys were originally designed for children was completely lost on collectors and consumers.
As the new millennium approached, more books on Beanie Baby toys were published stoking the craze even further. Beanie Baby toy price guides, meant to provide authoritative pricing information, themselves became a driver of those prices. The price guides also had self interested motives in keeping the craze going - People usually do not buy price guides if the prices are going down. They usually bought it only if the prices were going up. Just as some books were hyping Dow 36,000 during the dotcom bubble, some books held out the alluring prospect of future price increases for Beanie Baby toys. Some of the books also made it to the top of best seller lists published by reputed newspapers (New York Times/USA Today). Because Beanie Baby toys were made by manual labor in China, it was difficult for Ty Inc to ramp up quickly to keep up with the ever increasing demand. After rejecting offers from a lot of companies, Ty Warner agreed to a promotion deal with McDonald's to sell Teenie Beanie Baby toys with Happy meals. However, he did not make the necessary adjustment to his supply chain strategy to account for the increased demand from the new deal. As a result, McDonald's ran into problems with delivery of Teenie Beanie Baby toys to customers (granted, some of them were crazy enough to place bulk orders of Happy meals with the sole purpose of getting their hands on Teenie Beanie Baby toys, leaving their Happy meals behind) and took out ads apologizing to customers after running out of Teenie Beanie Baby toys. Perversely, the limited life of the promotion meant that Teenie Beanie Baby toys sold for a huge profit on the secondary market. Media coverage reached saturation level as a result of which the prices in the secondary market for Beanie Baby toys shot up even further. Subsequently, Ty Inc tied up with Major League Baseball for a smaller promotion (tens of thousands rather than tens of millions as was the case with McDonald's). With the craze showing no signs of receding, parents were forcing their children to trade their Beanie Baby toys to complete their collection. By March 1998, Beanie Baby toys were selling for hundreds of dollars on the secondary market. This further inflamed the craze as people outside the boom wanted to get in, seeing the high price of Beanie Baby toys. By June 1998, the prices for some Beanie Baby toys on the secondary market had crossed $1000 mark and kept going up. Ty Inc's sales for 1998 came to $1.3 billion.
The start of the new year in 1999 showed signs that the Beanie Baby toy craze was finally cooling off - when Ty Inc usually "retired" the toys before, their value in the secondary market had soared but this time, the price increases were minimal. eBay had allowed people to get their hands on rare Beanie Baby toys even if they paid an arm and a leg for it. It also made the pricing more transparent leading to declining demand for price guides. Ty Inc's production also caught up with the demand so the perceived scarcity of Beanie Baby toys also started to go away. A new toy, Pokemon had started to get the attention of children who moved away from Beanie Baby toys. By 1999, the share of speculators in Beanie Baby toy purchases reached 100 percent. Stories of murders committed in the name of Beanie Baby toys also made the rounds. Ty Inc had always planned for life after Beanie Baby toy craze. The same could not be said about collectors and consumers. UK and Canada offices of Ty Inc also made a lot of profits during the Beanie Baby toy craze. Once the bubble popped, consumers and collectors were left with Beanie Baby toys they had paid thousands of dollars for but were now close to worthless. When they tried to sell, the number of Beanie Baby toys available in the market depressed the prices (Ty Inc had also a large stock of Beanie Baby toys they had in their warehouses after each "retirement" so their release depressed the prices as well). Ty Inc announced that all Beanie Baby toys would be "retired" on December 31, 1999 in the hope of rekindling the craze. It had a temporary effect of increasing the prices on the secondary market. When December 1999 rolled around, Ty Inc reversed course (cynically) and asked collectors and consumers to decide the fate of Beanie Baby toys through voting. While collectors and consumers voted to keep Beanie Baby toys "active", by that time, people had started to move away from the craziness of it all. The end of the craze did not bring about some self analysis on the part of consumers and collectors - they blamed Ty Inc's announcement of "retiring" all the Beanie Baby toys on December 31, 1999 as the reason for the crash in the value of Beanie Baby toys conveniently forgetting their own culpability in spending thousands of dollars for a $5 toy. By the year 2000, Beanie Baby toys were selling at or below $5 in the secondary markets as well. Repeated attempts by Ty Inc to pump up the prices of Beanie Baby toys failed. By the time, Ty Warner had also moved on from his stuffed animal obsession to his new hobby of purchasing and refurbishing hotels. By now, he was a billionaire owing to the craze in Beanie Baby toys. Ty Inc still comes up with new toys (other than Beanie Baby toys) but they sell like other toys in the market. Ty Inc has also bowed to the pressure of the marketplace and started licensing its products (which Ty Warner resisted for a long time). Ty Warner was charged with tax evasion in September 2013 by IRS. He was convicted but got away with a very light sentence - 2 years probation and 500 hours of community service. Some economists argue that bubbles have a good downside in that a large amount of money gets invested in some form of development - after the dotcom bubble, they pointed to the significant investment in laying undersea cables for global Internet traffic.With the Beanie Baby toy craze, people who went crazy during the bubble were left with a bunch of toys that children no longer liked and that the adults could not get rid of.
Other Books for Reference:
A Short history of Financial Euphoria - John Kenneth Galbraith
Irrational Exuberance - Robert Shiller
Manias, Panics and Crashes: A History of Financial crises - Charles Kindleberger
The Tipping Point - Malcolm Gladwell
Made to Stick: why some ideas survive and others die - Chip Heath and Dan Heath
Contagious: Why things catch on - Jonah Berger
During the housing bubble of the early 2000's, housing prices shot up to very high levels but that did not serve as a warning for people to stay away from purchasing houses. Everyone assumed that house prices would always go up and were shocked to find out that was not the case. In 1990's, people in the US went through a similar experience with internet stocks. This book looks at a similar bubble in Beanie Baby toys for children, just before the dotcom bubble. Throughout the book, people who should have known better, find themselves sucked into putting their hard earned money into Beanie Baby toys thinking their value will hold and even keep rising in the future. At the same time, the book also details the life story of Ty Warner who came up with the Beanie Baby toys and made them successful. He developed his Beanie Baby toys by following his own path in designing and selling those toys. The craziness surrounding the Beanie Baby toys was not started by Ty Warner but once he realized its value, he played his part in prolonging the madness.
Because American economy depends on the consumer, acquiring more and more goods is portrayed as a worthy goal in life. US government and companies try their utmost to encourage people to spend their way throughout their lives. While the spending was balanced by strict rules about lending till 1970's, the deregulatory push championed by both Democrats and Republicans since then, is biased towards making people spend more of their hard earned money without a commensurate increase in policies towards making sure the expenditure is within people's ability to pay. The upshot of it has been repeated instances of people in the US chasing after returns based on hype and lies and realizing their errors after the fact.
Analysis:
Periodically, Americans lose their collective minds - it could be internet stocks, houses or as this book details, Beanie Baby toys. These are small cuddly toys for children that now sell for $5 (even though a search on Google brings up an offer of 4 retired Beanie Babies for $17,700). In 1990's, they were the centerpiece of a manic run on toys that ruined the financial lives of people. Manias are neither recent nor exclusively American. An example would be the tulip mania described in Charles McKay's 1841 book, 'Extraordinary popular delusions and the madness of Crowds'. This book traces the rise and fall of Ty Warner, the creator of Beanie Babies and the wreckage his invention left in its wake.
Stuffed animal toys were invented by a German polio survivor named Apollonia Margarete Steiff in 1885 who came up with the idea of selling stuffed animals after observing demand for her home made stuffed animal pincushions. To keep up with the demand, she employed disabled people in her factory. The spread of industrial revolution in America between 1880 - 1910 had resulted in migration of significant number of people from farms to the cities. As a result, their view of life with animals was a romantic ideal that put stuffed animals at the center of a child's life. Teddy bear was named after the old female bear that was tied and served up as target practice for US President Theodore Roosevelt during his hunting expedition in the South (Louisiana Mississippi border). After returning empty handed after 4 days of hunting, his hosts wanted him to bag at least one animal and arranged for the bear to be shot. However, Teddy Roosevelt became offended and refused to shoot it. The bear was killed by another member of the hunting party by slitting its throat. The story was popularized and romanticized (even though the information about how the bear was actually killed was dropped) by Washington Post with the underlying reason behind Teddy Roosevelt's refusal to shoot the bear becoming an act of mercy rather than of wounded pride. Steiff's company took advantage of the moment and introduced a line of Teddy bears in 1902, generating huge sales. By 1908, the sales had settled on a steady level. By 1950's, Mattel and Hasbro took advantage of the advent of television as a mass medium and became extraordinarily successful by advertising their toy offerings. The companies that did not advertise their products on television saw their sales dwindle while the ones that leveraged television advertising saw their sales skyrocket. By 1980's stuffed animal toys were selling at a steady clip.
The business of selling collectibles operates on the assumption (well founded) that people will buy a trinket for spectacular prices if it is marketed as a valuable item through hype and outright misrepresentation even if there is no intrinsic value attached to the trinket. Joseph Segel was a marketing professor at Wharton School of Business who came up with the idea of selling solid sterling silver medals in very limited editions (100 or so). He formed a society (National Commemorative Society) whose membership would guarantee ownership of one of those silver medals. By using scarcity and potential for future profits, he was able to sell 5,250 memberships. With the price of silver appreciating, people jumped into purchasing these commemorative plates (their name itself was misleading as there was nothing to commemorate). Later, he changed the name of the society to Franklin Mint (the name of Franklin was chosen at random). The success of his company allowed him to list it on the stock exchange. The secondary market for these plates boomed as they were limited edition and people though the future prices of these plates would be high. The high flying company was brought to its knees by an expose done by 60 minutes that threw doubt on the actual silver content of these commemorative plates. By that time, Segel had left Franklin Mint and the industry was taken over by companies that marketed their products more aggressively and without any scruples. By 1993, the direct mail sales of collectibles in the US totaled $1.7 billion. Marketing had replaced the age old process of valuing a collectible. By targeting the behavioral tendencies of investors (erroneous assumptions that past performance is a predictor of future results, endowment effect (things we own are more valuable) and mob mentality (tendency to move in herds)), collectibles industry was able to get people to part with their money for worthless pieces. With the advent of newspapers, collectibles entered into bubble territory - even though newspapers were the supposed guardians of the truth(through investigations), they also had self interest in increasing their paper's circulation(by reporting on the hysteria).
Ty Warner started off as a toy salesman, courtesy of his father who worked in sales, at Dakin company selling a line of plush toys (stuffed animals). His father was later found to have sexually abused his daughter (Ty Warner's sister). Ty Warner's mother was a paranoid schizophrenic. Stuffed animals have become the go to toys for American children when they are developing independence from their parents. The expectation of American culture that children be miniature version of adults has kept the demand for stuffed toys at a high level. The industry that sells these toys is cutthroat and reliant on manipulating the behavior of its consumers (which, to be fair, every consumer product company engages in, to a certain extent). The most successful stuffed animals business people seem to come from broken homes and as such, they rarely, if ever, leave the industry to chase their fortune elsewhere. At Dakin, Ty Warner rose to be come the top salesman and learnt the lessons for a successful toy salesman - obsessive attention to detail, low price, high volume and (as much as possible) selling only to mom and pop shops instead of big box retailers. As Ty Warner became more successful at Dakin, he started soliciting Dakin's customers for his own business, biting the hand that fed him. He was let go once Dakin found out. In 1980, when Ty Warner was fired from Dakin, unemployment in the US was at 13.5% and inflation was climbing steadily. He tried his hand at various joint ventures and in the end, decided to go into stuffed toys business. With the help of a neighbor, Patricia Roche, he started selling stuffed animals under his name Ty. When his father died of a heart attack, Ty Warner sold his father's antique collection (without his mother or sister knowing about it) and used it as his startup capital. He obsessed over making sure Ty Inc's stuffed animals were the exactly the way he wanted them. He went from strength to strength through hard work and very good salesmanship. In later years, he started viewing his success as solely his own creation, eliding significant contributions of others to his success. Because he wanted his products to meet his exacting standards, there was a ceiling on how much toys could be produced by Ty Inc at one time. Most of the stuffed animal companies sold their products to big box stores but that also reduced their leverage. Ty Warner skipped the big box retailers and sold his products via mom and pop shops. That allowed him to exert more leverage in terms of how the toys would be displayed in the store (big fish in a little pond). He focused on the quality rather than the quantity of his products - While Dakin sold 650 - 700 different products, Ty Inc sold less than 100 products. Because he was confident that his toys would sell well, he demanded full payment upfront from his retailers while the general practice in stuffed animal toys industry was full payment within 4 months. His pricing strategy was different from his competitors as well - he sold his toys at 2 price points, $5 and $10 compared to his bigger competitors who had up to a dozen price points. He kept changing his product line constantly which was an outgrowth of his drive to perfect his company's toys. The controlling behavior extended to his personal life that caused some of his relationships to fail.
Ty Warner developed Beanie Baby toy through endless tweaks. He expected it to be a hit and worked to make that happen. His plan was to use Beanie baby toy to up sell his more traditional line of products. He sold his Beanie Baby toys in 12 packs to his retailers who balked and forced him to sell them 6-packs instead. They did not sell well in the beginning but after 2 years, their demand started picking up. A Ty retailer, RBT enterprises (Rich Before Thirty - started by 3 brothers Bryan, Chris, Kevin) pitched Ty Warner on the idea of "retirement" of Beanie Babies - they had seen a business person implement it in their town while growing up. They would tell customers that specific Beanie Baby products were no longer available ("retired"). The scarcity of the product (even if it was a cynical ploy on the part of the business owner) seemed to supercharge the sales of the soon-to-be-retired toy among die hard buyers. Those buyers were willing to pay a premium for the discontinued pieces and treasured them as collectibles. Ty Warner was not happy about the idea as it served to validate the lack of interest in his Beanie Baby toys. However, he also saw the benefits of the strategy - the higher price on the secondary market for Beanie Baby toys would drive the sales of those toys in the primary market. The first Beanie Baby to be "retired" was was Lovie the Lamb. The demand for Beanie Babies took off with the "retirement" of Princess Diana bear (that Ty Inc had introduced a few months earlier). The price of Princess Diana Bears rose to several hundreds of dollars on the secondary market before coming down when Ty Inc increased its shipment of Princess Diana Beanie Baby toys to meet the demand. The action of Ty Inc signaled to the collectors that Princess Diana Beanie Baby toy would no longer be a limited edition toy. By 1996, Beanie Baby toys were selling well among children. It was small enough to fit inside a child's backpack (which also allowed for word-of-mouth advertising) and its increased play value led to steady demand, primarily in the Mid West. Ty Inc continued to "retire" some pieces stoking the prices for those pieces on the secondary market.
It was during this time, "Soccer moms" were gaining in their consumer power (usually mothers who were prodded to look to shopping as a solution to work life balance). As kids are wont to do, they lost interest in their Beanie Baby toys but their mothers picked up the slack and started acquiring them as collectibles. Some of them put a lot of effort into categorizing them based on their release history and specific attributes (which was made more difficult because Ty Inc released different versions of the same Beanie Baby toy in keeping with Ty Warner's obsession with getting every detail correct). A few collectibles store owners realized an opportunity to make a decent profit. Because Ty Inc only sold these Beanie Baby toys to independent retailers and mom and pop shops, they served as evangelists for Beanie Baby toys as collectibles, explaining the concept of "retirement" to their customers and setting the premium on products in the secondary market (which, of course, provided them with a handsome profit). Richard Gernady, a retailer came up with a checklist of "active" and "retired" Beanie Baby toys. This further served to goad the collectors into making sure they had the whole collection. With Beanie Baby toys becoming more popular among collectors, the demand started to increase. Because the demand for Beanie Baby toys started out at a slow and steady pace (first among kids and then among their collector parents), they were only produced in quantities that would make them valuable to collectors in the secondary market.
Collectors started hitting multiple toy stores around the country to fill up their checklists. They also engaged in active trading among themselves. Because of the forced "retirement" of select Beanie Baby toys, collectors were forced to shell out a large premium for rare editions. Early collectors cashed in on the opportunity by charging fees to validate the history of different Beanie Baby toys in their myriad versions. They served as "mavens" (from Malcolm Gladwell's book The Tipping Point) for the Beanie Baby toy craze. As more people started collecting, the value of Beanie Baby toys on the secondary market shot up. Some collectors started magazines catering to Beanie Baby collectors. The magazines served as a semi-official reference for the the prices of Beanie Baby toys on the secondary market (prior to Internet). Even though they did not know it at that time, most of the early collectors of Beanie Baby toys who kick started the craze,lived in Chicago suburbs within 10 miles of each other. They got into the craze for the fun of having an entire collection and did not delve into the psychological foundations of why they did what they did.It also helped that Ty Inc was selling only to independent retailers and mom and pop stores so consumers did not see a massive amount of cookie cutter products in one location. It led them to believe that the toys were scarce. As time went on, Ty Warner came to appreciate the craze for what it was - a supercharged opportunity to make mountains of money while making sure the volume being dispensed to mom and pop stores remained at the low end. By mid-1998, some versions of New Face Teddy Bear were selling for $2000 (the original collectors had purchased it for $25). Some early collectors cashed in on the craze and sold their rare version for huge profit (with some people even paying for their kids' college tuition with those proceeds). Human psychology being what it is, seeing one's neighbor get rich stoked the jealousy and hope that anyone could get rich if only they could time their entry into the market correctly (similar principle applies to gamblers and stock market traders). With lack of reliable fact checkers, everyone applied their own biases to the Beanie Baby toy craze. As is true with most things, people generally ignored the dictum, 'If it is too good to be true, it probably is' preferring to go with the stampeding crowd. People who had a stake in keeping the craze going on, pointed to their success in making a wise choice of investing in Beanie Baby toys. By the end of 1996, Ty Inc's sales had reached $280 million. Ty Warner used his retailer visits to determine which Beanie Baby toys were moving slowly and announce their "retirement". Once the "retirement" was announced, Ty Inc stopped shipping those products to retailers immediately causing prices in secondary markets to shoot up for Beanie Baby toys that were gathering dust in Ty Inc's warehouses.
With the steady growth of Internet, the Beanie Baby toy craze grew even faster. One of Ty Inc's workers, Lina Trivedi suggested setting up a website for the company. Collectors were already using chat rooms and message boards to share information on Beanie Baby toys. When she went to register the Ty.com domain name, it had been taken up by someone whose son was named Ty. Ty Warner agreed to pay $150,000 to acquire the domain name. Lina Trivedi used the website to centralize information on Beanie Baby toys and also as a one stop shop for official company information. She also used the website to collect user information and their preferences on Beanie Baby toys. Collectors obsessively perused the website, looking for hints that a particular Beanie Baby toy would be "retired". Ty Inc also directed customers and collectors to the website for information on which Beanie Baby toy had been retired. Because the prices continued their upward march, everyone assumed the demand would always go up. In early 1997, Beanie Baby toys became a leader among toys on eBay (which had only launched in September 1995). Very quickly, eBay came to rely heavily upon collectors trading Beanie Baby toys to the extent eBay's 1998 annual report to SEC mentioned its reliance on Beanie Baby collectors trading on its website as a risk factor. Auctions are a good way to sell goods of indeterminate value which Beanie Baby toys on the secondary market were. Auctions are difficult for novices to succeed and they usually end up overpaying badly for items. With eBay and Internet, auctions became available to anyone with a modem, computer and a mouse. eBay had difficulty getting Ty Inc to partner with it. Collectors and consumers used eBay as a source for pricing information for the secondary market.As more stories people getting rich off of $5 Beanie Baby toys proliferated, more gullible consumers jumped into the craze in ever greater numbers. By 1998, consumers were stalking UPS delivery trucks and workers were stealing Beanie Baby toys awaiting shipment from warehouses. The runaway success of Beanie Baby toys also gave rise to counterfeiters. Ty Inc did not want them diluting the brand and was aggressive in slapping suits on them. Even with the Beanie Baby toy craze in full swing, Ty Warner did not focus on fulfillment issues that were plaguing Ty Inc and its deliveries to retailers - he saw himself primarily as a designer. As a result, Ty Inc would release new Beanie Baby toys in small runs, creating scarcity and sending the prices on the secondary market soaring. Subsequently, it would follow up with a large run of the same Beanie Baby toy causing the prices to fall back. Collectors and consumers who jumped in and purchased the Beanie Baby toys during the small runs got burned as prices cratered once the large runs commenced. Throughout this period, the fact that Beanie Baby toys were originally designed for children was completely lost on collectors and consumers.
As the new millennium approached, more books on Beanie Baby toys were published stoking the craze even further. Beanie Baby toy price guides, meant to provide authoritative pricing information, themselves became a driver of those prices. The price guides also had self interested motives in keeping the craze going - People usually do not buy price guides if the prices are going down. They usually bought it only if the prices were going up. Just as some books were hyping Dow 36,000 during the dotcom bubble, some books held out the alluring prospect of future price increases for Beanie Baby toys. Some of the books also made it to the top of best seller lists published by reputed newspapers (New York Times/USA Today). Because Beanie Baby toys were made by manual labor in China, it was difficult for Ty Inc to ramp up quickly to keep up with the ever increasing demand. After rejecting offers from a lot of companies, Ty Warner agreed to a promotion deal with McDonald's to sell Teenie Beanie Baby toys with Happy meals. However, he did not make the necessary adjustment to his supply chain strategy to account for the increased demand from the new deal. As a result, McDonald's ran into problems with delivery of Teenie Beanie Baby toys to customers (granted, some of them were crazy enough to place bulk orders of Happy meals with the sole purpose of getting their hands on Teenie Beanie Baby toys, leaving their Happy meals behind) and took out ads apologizing to customers after running out of Teenie Beanie Baby toys. Perversely, the limited life of the promotion meant that Teenie Beanie Baby toys sold for a huge profit on the secondary market. Media coverage reached saturation level as a result of which the prices in the secondary market for Beanie Baby toys shot up even further. Subsequently, Ty Inc tied up with Major League Baseball for a smaller promotion (tens of thousands rather than tens of millions as was the case with McDonald's). With the craze showing no signs of receding, parents were forcing their children to trade their Beanie Baby toys to complete their collection. By March 1998, Beanie Baby toys were selling for hundreds of dollars on the secondary market. This further inflamed the craze as people outside the boom wanted to get in, seeing the high price of Beanie Baby toys. By June 1998, the prices for some Beanie Baby toys on the secondary market had crossed $1000 mark and kept going up. Ty Inc's sales for 1998 came to $1.3 billion.
The start of the new year in 1999 showed signs that the Beanie Baby toy craze was finally cooling off - when Ty Inc usually "retired" the toys before, their value in the secondary market had soared but this time, the price increases were minimal. eBay had allowed people to get their hands on rare Beanie Baby toys even if they paid an arm and a leg for it. It also made the pricing more transparent leading to declining demand for price guides. Ty Inc's production also caught up with the demand so the perceived scarcity of Beanie Baby toys also started to go away. A new toy, Pokemon had started to get the attention of children who moved away from Beanie Baby toys. By 1999, the share of speculators in Beanie Baby toy purchases reached 100 percent. Stories of murders committed in the name of Beanie Baby toys also made the rounds. Ty Inc had always planned for life after Beanie Baby toy craze. The same could not be said about collectors and consumers. UK and Canada offices of Ty Inc also made a lot of profits during the Beanie Baby toy craze. Once the bubble popped, consumers and collectors were left with Beanie Baby toys they had paid thousands of dollars for but were now close to worthless. When they tried to sell, the number of Beanie Baby toys available in the market depressed the prices (Ty Inc had also a large stock of Beanie Baby toys they had in their warehouses after each "retirement" so their release depressed the prices as well). Ty Inc announced that all Beanie Baby toys would be "retired" on December 31, 1999 in the hope of rekindling the craze. It had a temporary effect of increasing the prices on the secondary market. When December 1999 rolled around, Ty Inc reversed course (cynically) and asked collectors and consumers to decide the fate of Beanie Baby toys through voting. While collectors and consumers voted to keep Beanie Baby toys "active", by that time, people had started to move away from the craziness of it all. The end of the craze did not bring about some self analysis on the part of consumers and collectors - they blamed Ty Inc's announcement of "retiring" all the Beanie Baby toys on December 31, 1999 as the reason for the crash in the value of Beanie Baby toys conveniently forgetting their own culpability in spending thousands of dollars for a $5 toy. By the year 2000, Beanie Baby toys were selling at or below $5 in the secondary markets as well. Repeated attempts by Ty Inc to pump up the prices of Beanie Baby toys failed. By the time, Ty Warner had also moved on from his stuffed animal obsession to his new hobby of purchasing and refurbishing hotels. By now, he was a billionaire owing to the craze in Beanie Baby toys. Ty Inc still comes up with new toys (other than Beanie Baby toys) but they sell like other toys in the market. Ty Inc has also bowed to the pressure of the marketplace and started licensing its products (which Ty Warner resisted for a long time). Ty Warner was charged with tax evasion in September 2013 by IRS. He was convicted but got away with a very light sentence - 2 years probation and 500 hours of community service. Some economists argue that bubbles have a good downside in that a large amount of money gets invested in some form of development - after the dotcom bubble, they pointed to the significant investment in laying undersea cables for global Internet traffic.With the Beanie Baby toy craze, people who went crazy during the bubble were left with a bunch of toys that children no longer liked and that the adults could not get rid of.
Other Books for Reference:
A Short history of Financial Euphoria - John Kenneth Galbraith
Irrational Exuberance - Robert Shiller
Manias, Panics and Crashes: A History of Financial crises - Charles Kindleberger
The Tipping Point - Malcolm Gladwell
Made to Stick: why some ideas survive and others die - Chip Heath and Dan Heath
Contagious: Why things catch on - Jonah Berger
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