Beanie Babies rode own bubble

THE BALTIMORE SUN

It was just an online classified ad, under Collectibles for Sale, but it sounded like a cry from the heart: "I'm tired of these things now. Please save me from them."

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 violence. And, finally, both flouted all classical notions of investment value. Until they didn't.

Beanie Babies, as aficionados know, are the brainchild of H. Ty Warner, 59, chairman and owner of Ty Inc., based in the Chicago suburb of Westmont, Ill.

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 Jeffrey Bezos.

Warner's fortune was built on Beanie Babies, helping fund his purchases in recent years of New York's Four Seasons hotel, as well as California properties, including San Ysidro Ranch and Sandpiper Golf Club in Santa Barbara.

Nowadays, Warner is intensely private. He doesn't give interviews and declined to comment for this article. His company does not disclose sales or production figures, displays no logo or identifying sign on its glass-walled headquarters, and keeps its phone number unlisted.

In his earlier career hawking stuffed animals for Dakin Inc., 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 Inc. 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 understuffed 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 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.

Sales explode

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 Inc. Web site, sending collectors scrambling all over again.

Warner also defended his brand zealously, bringing scores of lawsuits against what he saw as knockoffs or other trademark infringements. "Our philosophy was we never took any prisoners," said James P. White, a partner in a Chicago law firm that has represented Ty Inc.

By accident or design, these actions all helped foster an aura of scarcity around the Beanies, even as Ty Inc. factories in China were pumping them out by the hundreds of millions.

Parallel bubbles

And parallels with the contemporaneous dot-com bubble?

Initial public offerings 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 Inc. 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.

If the dot-coms had 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 hail from the Chicago suburbs where Ty Inc. 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 Beanies. 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, who treated herself to a new Mercedes with the license plate "BBABIES."

Later, when fake Beanies began to appear, Gallagher helped invent the job category of authenticator. For a fee of $4.95 to $8.95, she would certify that a critter was bona fide. If she couldn't tell a fake by the color or stitching, she could usually spot flaws in the heart-shaped cardboard "hang tag" with the Ty logo or the fabric "tush tag" sewn on the rear end.

Sobolewski, a self-described soccer mom, caught the collecting bug along with her oldest daughter, then in grade school.

"I loved the product, and I loved that it was something I could do with her," she said.

As a former International Business Machines Corp. systems engineer, Sobolewski had the analytical turn of mind needed to produce the market's most influential price list, based on phone surveys of dealers and sale prices culled from eBay and other fledgling online auction sites.

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 Inc.).

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.

The magazine was exciting and lucrative for Sobolewski, but it eventually came to feel like just another job.

"In the early days of the Beanies, everything was so friendly," she said.

Long-running fad

Ty Inc.'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.

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 - may still fetch more than $1,000 at auction. The toy is still a good seller at retail, but people no longer line up to buy them. Business researcher Hoover's Inc. estimated Ty Inc.'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."

The Los Angeles Times is a Tribune Publishing newspaper.

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