#63 - The Beanie Baby Bubble

Valuable Lessons from Worthless Toys

It’s all about the eyes. If you want to move plush, you need to get the eyes right. Ty Warner, who created Beanie Babies, was controlling and meticulous. In addition to obsessing over eyes, he selected every cut of fabric and every tuft of hair that adorned his stuffed animals. 

From furry beginnings, Beanie Babies became a fad, then a craze, then a bubble. Like all bubbles, it eventually burst. What started as a children’s toy, ended with speculation. Some profited. Many lost. But we’re getting ahead of ourselves.    

Zac Bissonnette’s book The Great Beanie Baby Bubble details the rise and fall of Beanie Babies and their creator. When I first read the book in 2018, it felt dated. eBay was dominant. The dotcom boom was on. So was an impeachment. Reread through the lens of 2021 - stonks, SPACs, another impeachment - it feels prescient. 

Brush a Head to Get Ahead

Warner founded Ty, his eponymous toy company, in 1985. It was a terrible time for plush. The industry was well past its prime. Yet Warner was undeterred. He wanted to create cuter, softer stuffed animals. Through fastidiousness, hard work, salesmanship, and lots of grooming, he succeeded. 

Warner stumbled into Beanie Babies. Initially his toys were full sized. As Bissonnette recounts, Warner insisted his plush look its best. He and his partners brushed every stuffed animal by hand. This beauty routine didn’t scale. As demand grew, Warner needed a low maintenance product.

Beanie Babies launched in 1993. They were smaller and required less primping. Intended as an affordable trojan horse to get toy buyers interested in Ty’s more expensive toys, they eventually became its top seller. 

Warner’s punctilious created the initial conditions for a bubble. While toy companies generally keep best sellers stocked for years, Warner - in search of perfection - frequently launched new products and discontinued or tweaked existing ones, creating scarcity. This product development philosophy introduced random variable rewards to the buying experience. If you think Legs the Frog might be gone next week, you’re apt to buy it this week. 

Through 1994, Ty puttered along. In 1995, supply chain issues forced the company to discontinue Lovie the Lamb, a popular design. Facing upset buyers at the Atlanta Gift Show, a sly Ty salesman announced that Lovie wasn’t discontinued, but instead had retired. Buyer’s moods lifted:

Retailers who were pissed off if you told them you were discontinuing a piece they wanted out of necessity were delighted if you told them you were doing it on purpose.

The Thrill of the Hunt

Things improved after Atlanta. By 1996, Beanie Babies were popular children's toys, especially in the Midwest. At one point, half of all Beanie Babies were shipped to Illinois. They received press in local papers and trade publications, but weren’t difficult to find at their $5 retail price.   

Distribution helped set the table for the bubble. Ty sold through mom-and-pop gift shops and toy stores. Unlike big box retailers, Ty’s sellers moved small volumes. This created the impression of scarcity and provided room to experiment. 

Bissonnette credits Richard Gernady, a merchant in Glenview, Illinois, with realizing the collectable potential of Beanie Babies. Gernady highlighted retired pieces and raised their prices, a practice that wouldn’t fly at Walmart. He also released a checklist of all current and retired Beanie Babies. Checklists are catnip to collectors.

Tabasco the Bull…Market

The fad started locally. In early 1996, everyone trading Beanie Babies was within a ten mile radius of Chicago or connected to someone who was. Several major collectors lived on the same cul-de-sac. While Beanie Babies sold out in Illinois, they were plentiful elsewhere. Collectors fanned out from Chicago in search of rare pieces, spreading the fad. 

The Beanie Baby bubble inflated alongside the dotcom bubble. While day traders clamored for Pets.com and Webvan, collectors searched for Patti the Platypus and Pinchers the Lobster. In A Short History of Financial Euphoria, economist John Kenneth Galbraith observes: 

Speculation...comes when the popular imagination settles on something seemingly new in the field of commerce or finance.

Throughout history, bubbles have been associated with new technologies like railways or telecoms. The internet enabled the Beanie Baby bubble. E-commerce removed the constraint of geography, spreading the craze beyond the Midwest. eBay made it possible to buy rare Beanie Babies without driving anywhere. It also made it easy for new buyers and sellers to pile on. Prices rose, attracting more sellers and buyers, all rooting for more increases. As Bissonnette writes, eBay’s auction mechanism exacerbated this dynamic:

Business school professors have been writing for decades about the tendency of people to overpay at auctions, and the effect is thought to be most profound in novices. eBay brought millions of people into the world of auctions for the first time—and the combination of the newness of the internet and the newness of bidding probably contributed to irrationality.

As Beanie Babies became one of eBay’s top selling products, word spread of money making opportunities, driving FOMO. Returning to A Short History of Financial Euphoria:

There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

Get-rich-quick stories made good headlines. Reports of teenagers flipping $5 toys for sports cars grabbed attention. As euphoria built, so did press coverage. Each story generated new converts, fanning the flames. Like new technology, increased press is another characteristic of bubbles. 

Ancient technology played a role as well. In 1997, less than 25% of American households had internet access. Price guides were a popular source of information for collectors. For example, The Beanie Baby Handbook, self published by Les and Sue Fox was a New York Times Bestseller, selling millions of copies. People want to get rich, so price guides sell the best when prices are increasing, giving publishers a strong incentive to inflate values every year.

Warner fanned the flames too. While retirements started innocently, they morphed into a strategy to keep the craze going. When inventory of a particular design was piling up, Warner would retire it. Occasionally he’d retire hard to find pieces. Retirements boosted secondary market prices and created the impression that no Beanie Baby was safe.

Warner also constricted supply. In 1997, he restricted orders sizes for individual Beanie Babies to 36 or less per month. Unpredictable supply maintained the buzz. According to Bissonnette:

Warner had been in the toy industry long enough to know just how quickly a fad could end. He was devoted to doing whatever he could to make Beanie Babies last.

Meanwhile, demand strengthened. Merchants couldn’t keep Beanie Babies in stock. In 1998, Ty needed to remove its heart-shaped logo from its packaging to prevent collectors from stalking UPS drivers.

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Cubbie the Bear…Market

As is frequently the case, things went downhill after McDonald’s. Beanie Babies were popular with predominantly middle- and upper-class suburban women. Warner wanted broader reach. To get it, Ty inked a deal with McDonald’s adding Teenie Beanie Babies to Happy Meals. The first promotion ran in 1997. Things got out of hand. Fast. Stores were mobbed. Collectors wore disguises to skirt limits on Happy Meal purchases. Planned for five weeks, supply was exhausted after two, cutting the promotion short. The Happy Meal promotion gave Ty mainstream publicity, but the company lacked mainstream distribution. Bissonnette likens this to running a Super Bowl ad for a church bake sale.

No one event demarcates the beginning or the end of a bubble. The trade started to unwind in 1999 when the prices of recently retired Beanie Babies didn’t rise. This shattered the illusion that prices were a one way bet. Bissonnette identifies three influences in bursting the bubble. First, scarcity diminished. Collectors could easily find missing pieces on eBay. Second, pricing became transparent and real-time. eBay provided a daily mark-to-market, diminishing the influence of pricing guides. Third, the supply demand imbalance was corrected. As demand grew, Ty ramped production. Collectors realized that new designs would never generate the same returns as vintage items like Slither the Snake. 

Gradually, then suddenly prices on the secondary market collapsed and collectors threw in the towel. By early 2000, merchants were selling Beanie Babies, including retired designs, three for $10. Two years earlier, rare designs fetched thousands of dollars. By late 2000, Beanie Babies were being sold in dollar stores, discounters, and claw machines as dealers and speculators offloaded inventory. The clock struck twelve and everything turned to pumpkins. 

This Time Isn’t Different

Because human nature doesn’t change, there will always be bubbles. Beanie Babies provide several lessons:

  • Sell picks and shovels. Similar to the California gold rush, the financial winners of the Beanie Baby bubble were the folks selling picks and shovels to speculators. In this case, price guides, tag protectors, and accessories. 

  • Extrapolation is dangerous. In bubbles, inflated prices attract more buyers. Yet few things grow indefinitely. Future demand, not historical trends, determines future prices.

  • Beware of buzz. Innovation can set off bubbles. The press can amplify them. By the time the get-rich-quick headlines are out, its probably too late to profit. As Warren Buffett says, “what the wise do at the beginning, fools do at the end.”

Now if you’d excuse me, I’m going to go buy some Bitcoin on Robinhood.

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