All Business
Mark Lennihan  /  AP
Zhu Zhu Pets are the must-have hit for the holidays. In a world full of economic indicators, the best one during the holiday season may prove to be a furry toy hamster.
updated 11/24/2009 9:26:48 AM ET 2009-11-24T14:26:48

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 Wal-Mart 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.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Retailers hoping for a holiday miracle

  1. Closed captioning of: Retailers hoping for a holiday miracle

    >>> the american economy . as we all know this week marx the holiday shopping season but the bigger question is will people really be spending in this economy? again, big question. our own john yang with us from chicago with more on that. good evening.

    >> good evening, brian. this stretch of michigan avenue is known as the magnificent mile , one of the biggest shopping streets in america and after a year of recession and stingy consumer spending , this holiday shopping season is more important than every to retailers' bottom lines what we're going do today is pretty much simulate what black friday is going to look like.

    >> at a best buy in downtown chicago --

    >> this day is is especially important.

    >> a rehearsal for black friday and what retailers hope will be a big crowd of eagler bargain hunters .

    >> starting 5:00 a.m . friday.

    >> starls at 4:00 a.m .

    >> doors open at 3:00 a.m ., don't miss it.

    >> reporter: economists say the recession may be over but consumers are still worried. i'm looking for something to keep up with the times but be easy on my wallet.

    >> unless it's a really good deal, i'm not going to do it.

    >> reporter: americans said they expect to spend $390 on gifts thus holiday season , that's down from $418 last year just as the economy was collapsing. another report shows the average outstanding credit card balance dropped $100 in just three months to a little over $5600, a sign consumers want to pay down debt not add to it.

    >> a high unemployment rate doesn't make many more people want to go out and crease their spending.

    >> reporter: to get their share of the scarce shopping delay, retailers aren't waiting for black friday to begin the holiday hoopla and big sales.

    >> this wednesday, we're calling it white wednesday, we're starting with buy one get one free sweaters.

    >> reporter: analysts say this year isn't about conspicuous consumption , it's about smart consumption.

    >> one of the stronger categories will be apparel where the price tag isn't quite so offputting. we're calling it the cheap thrill christmas.

    >> reporter: take this battery operated ham sister, zhu zhu pet, already stores are struggle to keep up with demand, even though the list price is $7.99, websites are offering them at ten times that.

    >> when the consumer was not opening their wallet, as a result, i just don't think there's going to be that much merchandise out there.

    >> and that means that as christmas approaches, some of those hot items and big discounts could be getting scarce. brian?

    >> john yang in the miracle mile in chicago tonight . thanks.

    >>> there was this bit of

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com