20

Peak

McDonald’s pursued Warner for months before they got him to engage with the idea of a Teenie Beanie Babies promotion. Part of this was logistics. In late 1996 and early 1997 he was spending much of his time in China, focused on the enormous task of finding factories that could ramp up manufacturing to meet demand that was increasing tenfold per month.

The cut-and-sew nature of plush creates quality-control problems as volume increases: there is little room for standardization. It costs Lego between $50,000 and $80,000 to create a mold that will produce a single standardized brick, but that one mold can create sixty million perfectly identical Legos before it wears out. An entrepreneur can start making stuffed animals with no money down, and Warner was printing cash by late 1996: the company was buying Beanie Babies from the overseas factories for twenty-five to sixty-five cents apiece, selling them at a wholesale price of $2.50, and paying a 10 percent commission on the sales. Customers paid for UPS shipping, and Warner ran a super-lean operation with no staff anywhere in the United States other than at the company’s headquarters in Oak Brook, Illinois, and at a call center in Texas. He offered no bulk discounts to anyone, ever—a deal breaker with bigger accounts, but it kept anyone from undercutting the mom-and-pops on which he was building his business.

It was easy money except that clones can’t just be stamped out. Some in the toy industry say it’s that cost differential that helps plush attract the strangest characters: people with little money but a willingness to risk it all based on a belief that they can create something with a pair of eyes that will call to a child from a store’s shelf. It’s funny and almost sad to think about someone as persnickety as Ty Warner trying to manage exponentially increasing production on something that had to be sewn by hand each time. That task, combined with his desire to keep Beanie Babies exclusive, deflected his focus from McDonald’s.

Still, Warner knew that McDonald’s could offer him something no one else could. As hot as they were, Beanie Babies were primarily a phenomenon of middle- and upper-middle-class suburban women. McDonald’s could get the Ty logo in front of lower-income consumers who never set foot inside specialty stores and drive them to the gift shops in search of the larger Babies, which were made with better fabric than any Happy Meal giveaway would be and came in more varieties. There was really no other way to bring the mass market to Beanies without messing up the entire distribution strategy that was fueling the craze.

In her unpublished memoir, Faith McGowan writes of another problem with the deal McDonald’s was proposing: “McDonald’s didn’t want to pay anything for it. And, if McDonald’s flooded the market with Teenie Beanies, it might kill the market for Beanie Babies.

“Still, anything with McDonald’s was big money, and Ty and I figured there had to be a way to make it pay. Through a brilliant set of maneuvers and negotiations,” McGowan reports, they made a deal. “The business deal we pulled off would net Ty, Inc. more than $100 million. At the time, we had a hard time comprehending such a sum. But it was only a small fraction of the profits that the Beanie-stalk would produce.” The consummation of the McDonald’s deal marked one of the few times McGowan could remember Warner ever visibly expressing enjoyment of his success. They danced around his Oak Brook house and made champagne toasts.

Expectations were enormous. McDonald’s reported production of one hundred million Teenie Beanie Babies, enough to fill the largest Happy Meal order in history. It was a prediction that there would be enough demand to sell one for every household in America within a span of just a few weeks. The expectation was that the cult following of speculators surrounding a specialty toy could drive greater demand than the Teenie Beanies McDonald’s produced to coincide with the release of mega-budget Disney movies. That should have warned consumers that these were unlikely to be scarce enough to appreciate in value, but it didn’t. Warner had complained to McDonald’s that their production plans would be insufficient, but McDonald’s insisted that, either way, its restaurants were simply not staffed to hand out more Happy Meals than that.

With the mass promotion of Teenie Beanies and the TV advertising that McDonald’s was planning on the way, the obvious strategy was to ramp up distribution for Beanie Babies. That would bring the toy to the masses while McDonald’s brought the masses to a smaller version of the toy. The big-box stores were banging down Warner’s door with enormous orders, but he decided to keep everything the same. “They won’t give us any,” Toys “R” Us’s main buyer for plush toys told a reporter. “I have not been able to get them to return my phone calls. We’re extremely concerned. We’ve been shut out by Ty.”

Bill Harlow, the president of Ty Canada, remembers the incredulous calls from the Canadian heads of major retailers: some screamed at him and most of them swore, but his hands were tied. Warner had decided he didn’t want his product in bins, and that was that. Harlow knew that if he did sell to chains, Ty would somehow find out. And when he did find out he’d stop shipping to Harlow, and Harlow would be out of business.

On April 11, 1997, the first Teenie Beanies landed at McDonald’s stores nationwide. “We’re getting fifteen to twenty, sometimes twenty-five calls every half hour since six o’clock this morning: ‘Do you have the Beanie Babies? Which ones do you have? What time are you going to start selling them?’” the franchise owner of a McDonald’s in Elmhurst, Illinois, told CNN. Some customers ordered a hundred Happy Meals and asked the cashier to keep the food. Stores received hundreds of calls per hour and set up automated recordings for anyone who called. “Good morning. McDonald’s. We have the moose and the lamb,” one Ohio franchisee instructed employees to answer the phone.

When the restaurants started posting per-customer limits, collectors headed to message boards to swap tips on disguises that could be shuffled in the car between runs. Initially, demand in California had been weak, but as people from the rest of the country asked friends to pick them up and curious Californians browsed eBay, West Coast locations sold out within a few days, too. And as the Teenie Beanie demand spread to California, it brought with it demand for the full-size ones. The craze became truly national—and, not surprisingly, more rife with criminality than ever. An eighteen-year-old in Riviera Beach, Florida, was arrested for stealing $6,000 worth of Teenie Beanie Babies from the McDonald’s where she worked and then selling three hundred of them to a coworker.

Two weeks into a planned five-week promotion, McDonald’s took out ads to apologize and announce that it was ending the giveaway early because it had run out of product. As for the TV commercials promoting Teenie Beanies, the company canceled those after just a couple of days, worried that massive crowds were putting employees’ safety in jeopardy. “The stores were just devastated by it,” one former executive remembers. “It really created a frenzy. The customers become deranged.” McDonald’s employees were given pins that read “I survived the attack of the Teenie Beanie Babies.”

“When I talk to my former colleagues, all I have to do is just say, ‘Teenie Beanie Babies,’ and we all just go, ‘Oh my God, shoot me,’” says Jane Hulbert, who by then was running public relations for McDonald’s after her initial sighting of the Beanies at the Wellness House. “There were reporters who, for ethical reasons, would not let me take them for lunch in New York City who were calling me and saying ‘Don’t tell anybody, but do you think you can send me a press kit with them?’” She wasn’t sure why they wanted the press kits. At first she assumed the reporters were acting on behalf of their kids, but then it occurred to her that at least some of the requests were being made with an eye toward resale.

Miraculous as it was, the speculators were proven right. In the short term, at least, one hundred million pieces was a limited-enough edition to leave anyone who’d spent two weeks staking out drive-throughs with a tidy profit. The hoarding was driving up prices. Everyone thought their values would keep rising, so there were too few sellers to accommodate the buyers. Oxford Bank of Chicago bought one thousand Teenie Beanies on the secondary market to bait people into opening savings accounts. The pitch was simple: open an account with at least $1,000 in it and you get a Teenie Beanie. A penalty was added if you withdrew the money in less than a year: “We didn’t want people opening the account just to get the Teenie Beanie Baby and then closing it,” the company’s vice president of retail banking and marketing told a reporter.

The McDonald’s promotion brought massive mainstream buzz to a product with distribution only outside the mainstream. It’s a combination that hardly ever happens, and it amplified an already enormous imbalance between demand and supply—the equivalent of buying Super Bowl ads to promote a church bake sale. Most products that are on the receiving end of large-scale publicity are also part of a large-scale distribution system. Yet Warner hadn’t changed his distribution even a little bit in anticipation of the response.

Media coverage of Beanie Babies soared, bringing in still more new collectors. That made the toys harder than ever to find at retail, which only increased their perceived value. Zany Brainy, now defunct but then the largest of the national specialty-toy chain stores, had its clerks answering the phones this way: “Thank you for calling Zany Brainy. We do not have any Beanie Babies in stock right now.” The McDonald’s promotion and ensuing publicity also marked the beginning of a true frenzy in Canada—monthly wholesale orders soared from a little over $1 million to $7 million.

As new collectors entered the market in the United States and abroad, secondary-market prices skyrocketed—and anyone who had gotten into the Beanie game pre-McDonald’s was sitting pretty. On May 11, 1997, just after the Happy Meal promotion ended, Ty posted a new retirement announcement on its Web site. Flash the Dolphin and Splash the Whale instantly shot up to $25 to $50 each on eBay, and as collectors scrambled to find the last remaining Flashes and Splashes on store shelves, the company introduced ten new Beanie Babies. The new releases instantly sold online for five or more times their retail value.

Warner was on top of the world and decided to make an exception to his ban on partnerships for one more entity: Major League Baseball.

Warner had been a great outfielder in high school, but the connection ran deeper. His father had named him after Ty Cobb, the early-twentieth-century Detroit Tigers star. While Cobb still holds the major league record for career batting average, his off-the-field conduct earned him a reputation as the meanest man in baseball. Violently racist and with a reputation for injuring competitors on purpose, he wasn’t an obvious choice for a namesake, but so it was: Ty’s full name was H. Ty Warner—the H, an initial that didn’t stand for anything, was an affectation his mother had insisted on.

On May 18, three days after the McDonald’s giveaway ended, the Chicago Cubs were in the midst of one of the worst seasons in team history. They’d lost their first fourteen games, with average attendance well below 20,000, but they had a special event that day: a Beanie Baby giveaway that 37,958 paying spectators showed up for. It was the first sellout crowd the team had had in a long time, making Cubbie the Bear, the Beanie given to the first ten thousand fans, a bigger draw for the team than Sammy Sosa. “Beanie Babies Sure Winner for Hapless Cubs,” ran the Chicago Tribune headline. Aside from the Cubs’ first home night game in 1988, the team said, the giveaway had done more to drive ticket sales than any event in its history.

Other teams followed. Major League Baseball took in $2.5 billion in revenue in 1998, the year Sammy Sosa and Mark McGwire broke Roger Maris’s all-time home run record in the midst of a chemically fueled bubble that had taken over baseball—just as Internet stocks and Beanie Babies were doing their work on the rest of the culture. Yet steroid-enhanced sluggers weren’t even the league’s most exciting draw that year. At games that included a Beanie Baby giveaway, attendance rose by an average of 37.4 percent. Sporting News named Glory the Bear, given out at the 1998 All-Star Game on July 7, the one-hundredth-biggest person in sports, just below Don King.

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As Ty’s sales grew, Warner sometimes neglected the operational side of the business. His lack of focus on logistics hampered distribution—which inadvertently helped the craze grow by exacerbating supply shortages and driving up secondary-market prices. As the market heated up and the company’s facilities became inadequate for the sales volume, Warner resisted the idea of expanding his warehouse beyond the one he had attached to his office. Faith McGowan remembers that Warner “could not separate himself from his office and his distribution. He couldn’t fathom that in his mind.” Even though it was obvious that a company doing Ty’s volume couldn’t function with a small distribution center tacked on to a corporate headquarters, Warner dismissed the idea of expansion as “goofy.” McGowan scouted locations by herself, and eventually Warner agreed to shell out $1 million per year for 270,000 square feet of off-site distribution in Bolingbrook, Illinois.

He also broke ground on a new 75,000-square-foot, $14 million headquarters just down the road from the old office—with plans that there was to be no signage of any kind and certainly no colorful allusions to Beanie Babies. The company’s mailing address remained a post office box in Oak Brook; the mystique was preserved. Warner had a giant fish tank installed in his office but then had it removed when he decided he didn’t like it. The CEO’s suite was under constant renovations for years after the rest of the building was complete, but Warner never used it. He preferred to work in a conference room where he could see everything that was going on in his building.

Finally, in November 1997 he hired Bob Ricciardi, a gift industry veteran, to serve as president and focus on the management tasks Warner wasn’t interested in. Prior to meeting with Ricciardi to indoctrinate him into the Ty Warner method of business, Warner made notes on a legal pad—beginning, as he always did, with what he’d learned from his days at Dakin. “Be a company that predominantly has classics such as Teddy Bears, cats, dogs, [and] bunnies,” he wrote. “Stick to smaller stores . . . Don’t sell to stores where shoppers are price checking (mass merchants). The WORST mistakes in business are made in good times, not in bad times. Run a TIGHT SHIP—hold down OVERHEAD. Keep [Beanie Babies] on tight supply to keep them in demand. You want kids fighting for them.”

One of Ricciardi’s first tasks was to inform the sales force that the commission on Beanie Babies was being cut from 10 percent to 6 percent. In 1997 the account executives earned an average of more than $120,000 ($170,000 in 2012 dollars), with many of them working part time. Even for full-timers, little talent was required. Retailers were having as many Beanies delivered as possible, and Ty saw the account executives as glorified order takers. “I didn’t start my own business to make other people rich!” he once bellowed at them.

The increasing delegation at Ty also created problems for Internet guru Lina Trivedi, the company’s twelfth employee. She was used to reporting to Warner and his information technology head. When another layer of management was added, she clashed with her new supervisor. Trivedi approached Ricciardi with her request for a salaried position following years of making no more than $12 per hour; she now wanted $120,000 plus $60,000 for her younger brother. Ricciardi, however, felt that her demands were excessive. Warner had wanted her to stay, she says, and had promised her a plush office at the new headquarters, but he didn’t intervene when the negotiations broke down. Trivedi and her brother walked. At the age of twenty-five, she sold ten thousand dollars’ worth of rare Beanie Babies she’d accumulated and started her own business. “We’re going to be the Microsoft of Web design,” she told a reporter.

Ricciardi left after less than six months of being limited to little more than slashing commissions and hunting for minor cost-saving measures. Warner wasn’t ready to relinquish any serious control; he hadn’t even shown Ricciardi the company’s financial statements. Ricciardi had left a secure career at Enesco for the job, and while he bears no ill will toward Warner, others say that his stint at Ty torpedoed his career. “The Ricciardi events had an effect on my perception of Ty,” McGowan wrote. “I began to see that he could be ruthless and callous in his dealings with the people who were helping him. The thought crossed my mind that it could happen to me.”

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By 1998 a USA Weekend poll found that 64 percent of Americans owned at least one Beanie Baby. The second McDonald’s giveaway in May 1998 was even more successful than the first—partly because by that point, complete sets of the 1997 Teenie Beanies were selling for close to $200, or about ten times the total cost of the Happy Meals it took to acquire them. Warner was ambivalent about all this: he knew the secondary market was making him rich, and he knew that keeping it going was important. However, Beanie Babies were supposed to be a toy; if children could no longer buy them, the craze’s days were numbered. It was a delicate balancing act: fuel the secondary market while still keeping it popular with kids—two goals that were intrinsically at odds with each other.

“We firmly believe that the recommended $5 ‘magic’ retail price point has contributed to the success of the BEANIE BABIES phenomenon,” he wrote in an April 1998 letter to retailers. “BEANIES are cute, limited, well-made and affordable. Well, guess what, now in far too many cases, they’re not affordable.” Warner said that he would discontinue sales to retailers who weren’t marketing his products in accordance with his “pricing philosophy,” and he set up a hotline for consumers to report price gouging. Yet it was like the arcade game Whac-A-Mole: Warner was largely helpless to police the more than ten thousand gift shops selling his toys.

Emblematic of the conflict between Beanie Babies as toys and Beanie Babies as investments is the story of what happened to Nancee Biank’s therapy group at the Wellness House. Once the Teenie Beanie promotion she’d inspired began and the speculative market continued to soar, there was a problem. When the eight-week programs came to an end and each child had a chance to bring home a Beanie Baby, they arrived for the last meeting armed with instructions. “My mom told me to make sure I take Squealer the Pig because it’s going to be worth a lot of money,” a boy might tell her—and then another kid would explain that he had received the same instructions from his father. Arguments about Beanie Babies shattered the therapeutic atmosphere that Beanie Babies had once been central to creating. “The parents,” Biank says, “actually ruined the whole thing.”

As popular as Beanie Babies were, Biank had to stop using them for therapy. These particular stuffed animals were now too valuable to be given to children whose parents were dying of cancer. It had gone from cute to heinous, and there was no good way for it to end.