IMHO, it was because he has misguided principles that he was a weak character. There was very little ‘real motivation’ for him to act the way he did, but simply because he made an assumption/misinterpreted a situation/etc.
A great villain is either one who does the evil acts on purpose (Frollo, Scar, Dr Facilier, Hopper) or because they were compelled to and that the ‘morally-good’ decision will be disadvantageous to their desires (The Prospector, AUTO, Charles Muntz).
Lotso was mean to others simply because he felt like imposing his world view on everyone else. I personally find such characters kind of weak, because there is nothing to gain in a tangible sense (like the evil-acts-on-purpose villains) or nothing to lose (like the compelled-to villains).
This is why I found Syndrome from The Incredibles, Two-Face from The Dark Knight and Nigel from Rio weak from a character-motivation point of view, because they got ‘burned’ in the past and take revenge on the whole world simply because they believe everyone should follow their worldview. They don’t gain or lose anything except personal satisfaction. Well, I suppose Syndrome gets money from being an arms-dealer, Two-Face gets his revenge for the conspirators in Rachel’s death (which actually is a pretty strong motivation, come to think of it), and Nigel gets the adoration from his animal-smuggler owner that he didn’t from his TV show-fans. And sure, Lotso gets to avoid being played by the Caterpillar room kids, so that is a personal side-effect perk from his rigging the system.
But these aren’t as powerful motivations as say, I became a villain because I want to take your money even though I know it is wrong, or because someone is holding my family hostage and is forcing me to rob a bank or something. I got betrayed in the past, and because of that, everyone has to suffer. Why do I pick on you, Mr Millicent Bystander? Because I feel like it. Weak motivation.
But that’s my opinion. From a deceptive personality and voice-acting standpoint, he’s one of Pixar’s better villains.