ALL BUSINESS: Economics 101, by way of toy hamster

By RACHEL BECK

posted: 8 DAYS 22 HOURS AGO

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NEW YORK -In a world full of economic indicators, the best one during the holiday season may prove to be a furry toy hamster.

Zhu Zhu Pets are the must-have hit for the holidays. They're out of stock in lots of places, and retailers are flying in the robotic hamsters from China in a desperate attempt to replenish their store shelves.

This is about much more than the next Tickle Me Elmo. The Zhu Zhu Pets' craze tells us a lot about the state of the economy.

The Zhu Zhu Pets' cheap price — $8 to $10 at most — shows how Americans still are extremely focused on price and value. This toy mania also illustrates how stores are keeping inventory levels low — so low that a sellout of a given product doesn't necessarily mean soaring demand and a stronger economy.

Economists are watching holiday sales for indications of how robust the economic recovery will be. While many believe the recession is technically over since the economy grew 3.5 percent in the third quarter, there aren't any signs that a truly strong recovery has begun.

Forecasts for overall spending during the all-important Christmas period are lackluster. The National Retail Federation, the world's largest retail trade group, predicts total holiday sales will drop 1 percent for the combined November and December period from last year's already weak spending. Other groups are estimating slight gains over a year ago.

Zhu Zhu Pets' popularity appears to be a bright spot. Parents are scrambling to find the toys, bombarding stores for updates on new shipments and then buying out any new stock as soon as it arrives.

Some enterprising consumers are already trying to capitalize on the Zhu Zhu Pets mania. More than 14,000 Zhu Zhu Pets' related items are for sale on eBay, many going for double the retail price or more.

Part of what's driving the success of the robotic hamsters has to do with the price. The cost was set deliberately low by Zhu Zhu Pets' creator, toy-industry veteran Russell Hornsby and his small company, Cepia LLC of St. Louis.

There are five pet hamsters on the market right now, as well as accessories for them like tunnels and slides, a garage and a funhouse. The hamsters move around and make sounds appropriate to where they are playing.

Hornsby set out in January to get retailers interested, but the economy was in shambles at the time and merchants resisted. Toys R Us and Walmart agreed to test the products in limited markets last spring. After getting good results, they placed orders for stores nationwide. The toys are now sold at other retailers including Target and Amazon.com.

Every Zhu Zhu Pets' item sells for under $20. Hornsby told The Associated Press in an interview that he recognized the kind of economy he was launching this toy in, and knew that affordability mattered.

Today's consumers are cash-crunched and can't easily get loans. On top of that, the U.S. economy is still bleeding jobs, with the unemployment rate at 10.2 percent and 15.7 million Americans out of work. Those with jobs generally aren't getting raises.

Jim Silver, a well-known analyst who works at the toy-focused Web site Timetoplaymag.com, said keeping prices low has been the winning strategy for the toy industry in 2009.

"The best-selling toys this year have very low starting prices, and then consumers can build on them if they want," Silver said.

That's something to note because low prices tend to leave retailers and manufacturers with thin profit margins, which will keep them from adding new jobs or expanding their facilities or production.

At the same time, the demand for Zhu Zhu Pets might not be all that it seems.

Last Christmas, retailers found themselves with too much merchandise after consumers cut back their spending in the weeks after the financial meltdown. Stores had to slash prices to move out goods, hurting profit margins. Last year retailers suffered their worst sales declines in at least three decades.

This year, merchants are being extra careful. Inventory levels — the amount of goods stores keep on hand — are expected to drop as much as 13 percent, according to Ken Perkins, president of the consulting firm Retail Metrics LLC. When inventories are kept so thin, that means new production of goods is limited.

That helps explain the Zhu Zhu Pets frenzy. Retailers were conservative in their orders before the holiday season, and Hornsby said he had to be, too, in what was manufactured.

"You don't want to oversupply or undersupply. That's the danger of the beast," Hornsby said.

Now Cepia is racing to get more merchandise into stores. It has stepped up its production to 220,000 units a day, 10 times what it was last winter. Retailers are flying in the toys from China instead of waiting for them to arrive by boat.

There's no denying Zhu Zhu Pets are a holiday hit. But the ultra-low pricing strategy and razor-thin inventory levels that got them there actually may be signs of weakness in the economy.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

2009-11-20 13:58:37