The Toy That Will Kill Christmas

With the holiday shopping season about to boost into overdrive later this week, I decided to get an early read on the hottest toy trends at Amazon.com (Nasdaq: AMZN  ) .

Regardless of your thoughts on Amazon's valuation -- lofty on an earnings basis but much more reasonable on a free cash flow scale -- the leading online retailer is a great resource for taking the pulse of where shoppers are spending their money. Amazon.com updates its best-seller list hourly, and that's free investing research ripe for the picking.

What I discovered in eyeing the hottest-selling playthings over the weekend was initially unsettling. Four of the five best-sellers in the e-tailer's toy and games category were Zhu Zhu battery-operated hamsters. The rest of the list is loaded with add-on Zhu Zhu accessories -- fun-house habitats, exercise wheels, and even cars -- that complete the fake -rodent experience.

Every season has its share of hot toys that find parents clawing at one another for the final item on a retailer's shelf or outbidding one another to ridiculous extremes on eBay (Nasdaq: EBAY  ) .

It's different this time.

This hamster has its sights set on destroying Christmas.

This critter will eat you out of house and home
There are so many things wrong with the Zhu Zhu craze, it's hard to know where to begin.

As investors, let's start with the company that makes them. This isn't Mattel (NYSE: MAT  ) or Hasbro (NYSE: HAS  ) with their hands on this season's must-have toy. Cepia, a tiny St. Louis-based company with roughly three dozen employees between here and China, is the mastermind behind the Zhu Zhu Pets toy line.

Feel free to applaud Cepia's success, but since the company is privately held, it's not as if investors can ride the toy's coattails. At least investors could buy in during the 2007 holiday season, when JAKKS Pacific's (Nasdaq: JAKK  ) EyeClops Bionic Eye sat atop Amazon's best-seller list for weeks.

It gets worse, though.

When the hamsters were available at Toys "R" Us and Wal-Mart Stores (NYSE: WMT  ) this summer, they were selling for $8 to $10 apiece, and the accessories fetched between $10 and $20. The small toymaker is having a hard time arming retailers with reinforcements, so pitiful supply and unbelievable demand are combining to create cottage industries on Amazon and eBay.

The four hamsters on Amazon's best-seller list are being sold by third-party providers for nearly $70 each. Of course, the accessories are getting marked up as well. As of yesterday, a search for "Zhu Zhu" on eBay unearthed nearly 19,000 items. The completed auction prices were running about half the price of Amazon's, but still several times above their actual retail price.

See the problem? Even Cepia isn't making as much on these things as the resellers are. This also creates a problem for Mattel, Hasbro, and every other toymaker out there. If parents are budgeting to spend $100 in toys this season on a child, instead of spending $25 on a hamster and a fun house, they'll have to blow $100 in the aftermarket, and there won't be money left for anything else from the other toymakers. This is going to crush rival toymakers, regardless of how many sane shoppers sidestep the hysteria.

Retailers will also feel the pinch. The websites of Wal-Mart, Toys "R" Us, and Target (NYSE: TGT  ) are fresh out of these critters, too. Even folks who placed preorders several weeks ago have had their requests cancelled. Toys "R" Us is promising a fresh in-store shipment in time for its Friday morning rush, but anyone hitting the sites of the major retailers are eventually going to make their way to Amazon and eBay -- the only two publicly traded companies that will truly profit from Zhu Zhu mania.

The audacity of rope-a-dope
There is a more sinister investing play, naturally. You can don Ebenezer Scrooge's robe and short the toymakers. You can even bet against the retailers.

The one caveat is that an Amazon best-seller list full of rodents may not necessarily be indicative of their actual appeal. Folks are hitting up Amazon and eBay because these are the only places they can find the hamsters at any price. A breakthrough toy is a top seller at all retailers, not just the ones serving as open marketplaces.

There's one more nugget for optimists to drop into their stockings. Cepia, rival toymakers, and retailers aren't cashing in on the premiums that panicky parents are paying. But what about the enterprising folks who have enough time on their hands to secure the hamsters and mark them according to market demand? At a time of double-digit unemployment and recessionary strife, the money that's leaving the pockets of those able to overpay for the motorized beasties is going into the pockets of people who may be out of work, or perhaps it's going to stay-at-home parents who will probably pour their profits right back into the economy.

So maybe this same Zhu Zhu that's frustrating holiday shoppers and surely denting the ability of Mattel and Hasbro to bounce back this year will be just the ticket to rekindle the fledgling economy. Zhu Zhu may be killing Christmas in one sense but saving it on an entirely different level.

Roll on, Chunk, Num Num, Pipsqueak, and Mr. Squiggles.    

Amazon.com, eBay, and Hasbro are Motley Fool Stock Advisor picks. Wal-Mart is a Motley Fool Inside Value selection. The Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. Now that's window shopping!

Longtime Fool contributor Rick Munarriz has been shopping online since the early 1990s, even before Amazon.com was around. He owns no shares in any of the stocks in this article and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 23, 2009, at 3:42 PM, PhulishMortal wrote:

    Zhu Zhu?

    Gesundheit!

  • Report this Comment On November 23, 2009, at 5:10 PM, miteycasey wrote:

    1) Tickle me Elmo

    2) Ferbee

    3) zhu zhu

    There is one every year.

  • Report this Comment On November 23, 2009, at 5:19 PM, TMFBreakerRick wrote:

    Casey, the difference here are twofold:

    1. Tickle Me Elmo (Tyco -- and now MAT) and Furby (HAS) were the handiwork of major toymakers.

    2. Buying a Tickle Me Elmo or even a Furby was a one-off deal. You may have had to overpay for one, but that was it. Zhu Zhu is a complete ecosystem. A hamster isn't enough. You also have to overbid on exercise wheels, fun houses, car garages, etc.

  • Report this Comment On November 23, 2009, at 5:39 PM, miteycasey wrote:

    I disagree.

    1) The major companies limited production, intentionally or not. People were paying more than new price on the secondary market.

    The maker of the toy doesn't matter as much as the quantity they produce. It happens every year. If it wasn't for the limited supply demand wouldn't be as great.

    I made a few hundred dollars during college each year on several of these items.

    Add webkins and tamagotchi to the list as well.

    2) instead of wheels, houses, etc. Furbies and Elmo had 'friends' you needed to buy. Each kid wanted two Furbies so they could talk to each other.

    Just because a private company came out with the 'hot' toy this year doesn't mean it's a bad thing.

    And if people feel bad for unemployed parents who have to tell their kids 'no' when they can't afford one then you need to lose the entitlement attitude.

    There are bigger issues in their lives.

  • Report this Comment On November 23, 2009, at 5:43 PM, wolfhounds wrote:

    Gee, this is world shaking news. But since none of my children have mentioned this thing for my grandchildren, I'll think I'll hold on to my HAS stock.

  • Report this Comment On November 24, 2009, at 11:03 AM, michaelaknight wrote:

    @wolfhounds

    +1

  • Report this Comment On November 24, 2009, at 4:07 PM, pondee619 wrote:

    "What's a Zhu Zhu? Honestly. I didn't know about this craze until I read this article.

    246 votes - 74%"

    Kinda says it all. What's a Zhu Zhu? Why is the fool making a deal of it?

  • Report this Comment On November 24, 2009, at 4:07 PM, pondee619 wrote:

    90

  • Report this Comment On November 28, 2009, at 10:20 PM, TMFBreakerRick wrote:

    Well, even Jimmy Kimmel is talking about Zhu Zhu now:

    http://www.youtube.com/watch?v=tJWwBjJsc8A

  • Report this Comment On December 08, 2009, at 4:38 PM, A6EIntruder wrote:

    I think the question here is: how many people who can't buy a hamster are going to not buy other toys? Not that many people I know, even the parents looking for Num Num, et al., are throwing up their hands and saying, "It was zhu zhu or nothing". They'll spend their money elsewhere, likely on products that are made by companies that you can make money on.

    As to the third party sellers on eBay: God bless 'em. They can only have bought so many, so think in absolute terms: the $120 profit I make on selling the two hamsters is really not all that much, and has satisfied very little absolute demand. There just aren't enough of them around to have any real effect on the overall market, unless we're counting the dewy pairs of eyes on Christmas morn. Father Christmas can't keep them all satisfied...

  • Report this Comment On December 08, 2009, at 4:38 PM, A6EIntruder wrote:

    I think the question here is: how many people who can't buy a hamster are going to not buy other toys? Not that many people I know, even the parents looking for Num Num, et al., are throwing up their hands and saying, "It was zhu zhu or nothing". They'll spend their money elsewhere, likely on products that are made by companies that you can make money on.

    As to the third party sellers on eBay: God bless 'em. They can only have bought so many, so think in absolute terms: the $120 profit I make on selling the two hamsters is really not all that much, and has satisfied very little absolute demand. There just aren't enough of them around to have any real effect on the overall market, unless we're counting the dewy pairs of eyes on Christmas morn. Father Christmas can't keep them all satisfied...

  • Report this Comment On December 09, 2009, at 10:38 AM, A6EIntruder wrote:

    I think the question here is: how many people who can't buy a hamster are going to not buy other toys? Not that many people I know, even the parents looking for Num Num, et al., are throwing up their hands and saying, "It was zhu zhu or nothing". They'll spend their money elsewhere, likely on products that are made by companies that you can make money on.

    As to the third party sellers on eBay: God bless 'em. They can only have bought so many, so think in absolute terms: the $120 profit I make on selling the two hamsters is really not all that much, and has satisfied very little absolute demand. There just aren't enough of them around to have any real effect on the overall market, unless we're counting the dewy pairs of eyes on Christmas morn. Father Christmas can't keep them all satisfied...

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