Ask any American who lived through the 1990s to list the most popular toys of that era, and chances are Beanie Babies would be near the top. But at the same time, why the plush toys were such a massive success remains a mystery to many people -- that is, until you take a deeper look at how their creator, Chicago-based billionaire Ty Warner, accomplished the feat.
Warner did not meet such great success without hitting bumps in the road. After working as a sales rep at Dakin Toy Company for roughly a decade, he was fired for selling his own competing products alongside those of his employer. In retrospect, that turned out to be a great -- albeit less than ethical -- decision that allowed him to humbly launch his namesake company, Ty, from the basement of his home.
And just last year, Warner narrowly escaped a prison sentence for tax evasion after he was caught stashing over $100 million in a secret Swiss bank account. He voluntarily paid a civil penalty of $53 million in addition to his back taxes, while at the same time lamenting, "I never realized the biggest mistake I ever made in life would cost me the respect of those most important to me."
With a net worth estimated at $2.5 billion, however, Ty Warner remains one of the richest businessmen in the world. And his indiscretions notwithstanding, his approach to business offers some valuable lessons.
1. The importance of simplicity
First, Beanie Babies were deceivingly simple. The key, Warner once told People magazine's Joni Blackman, was that Ty purposefully under-stuffed the toys with small PVC beads. "At first everyone told me I was cheap," Warner noted. "They didn't get it. The whole idea was it looked real because it moved."
By comparison, other stuffed toys on the market were stiff and rigid, offering Beanie Babies a delightfully easy way to differentiate themselves while allowing for lower costs. This decision, in turn, enabled Warner to sell his first Beanie Babies for a low price of $5 apiece. He elaborated to People, "At that time, there wasn't anything in the $5 range that I wouldn't consider real garbage."
That is not to say this approach can be applied to any product. But for investors and entrepreneurs, it is worth pondering how anything we are doing at any given time can be simplified. It is no wonder, then, that Bill Gates once said the best advice he ever received from Warren Buffett is to "keep things simple" -- a mantra Buffett follows in everything from clearing his calendar to analyzing whether a particular business is worthy of investment.
2. Understanding supply and demand
Second, Warner had a keen understanding of supply and demand as Beanie Baby fever took hold. Ty never disclosed specific sales figures, but rather than manufacture as many as possible, Warner would roll out each Beanie Baby variety in limited quantities only to retire them shortly thereafter.
"The strategy here," according to a 1996 Forbes article, "is empty shelves -- the deliberate creation of scarcity, which pumps up word-of-mouth demand to a frenzied level. [...] Warner knows that the harder his toys are to get, the more people want them and the longer his fad will last."
Consequently, that allowed many Beanie Babies to be considered collectibles. And although their popularity ultimately waned in the mid-2000s, driving the value of most Beanie Babies down to just $0.50, dozens of the rarest versions are still estimated to be worth between $500 and $2,500.
Other industry titans launching retail products regularly use this approach. For example, many tech industry analysts speculated that Apple purposefully manufactured limited numbers of its Apple Watch, at least in part for the same reason ahead of its recent launch (though actual manufacturing bottlenecks were likely at play). This approach would make sense, as initial Apple Watch supplies largely sold out within minutes when online pre-orders opened in April. That sellout notably included limited quantities of the luxurious $20,000 "Apple Watch Edition" models in China, which -- apart from their limited bands and gold exteriors -- contained the same internal components as the cheapest Apple Watch models.
That is not to say Apple Watch will be a fad, and I am certainly not implying Apple took direct cues on well-known supply-and-demand concepts from Ty. But if anything, these are perfect illustrations that combining clever marketing and inventory management with the right consumer-oriented product can yield staggeringly positive results.
3. On diversification
Finally, it is no mystery that Ty Toys has expanded from just Beanie Babies to create dozens of other varieties of plush toys, including well-known licensed product lines ranging from Hasbro's My Little Pony to characters in Disney's Frozen franchise. Warner also struck other agreements from time to time, including recurring deals to include his toys in McDonald's Happy Meals.
But if astutely expanding his product line and distribution was not enough, keep in mind that plush toys are not Ty Warner's only revenue stream. Warner has also amassed supplementary investments in real estate to form Ty Warner Properties, which currently encompasses several large hotels, resorts, ranches, and golf courses.
Of course, most individual investors do not have the luxury of purchasing hotels and golf courses to diversify. But it speaks volumes that Warner would dedicate time and resources outside the business that made him rich in the first place -- and one in all likelihood he still considers his baby. So however enticing it may be to keep all your eggs (and expertise) in one basket, the importance of diversification cannot be overstated.