I’ve had bits and pieces of a rant about TOMS shoes rolling around in my head for some time, but the stars aligned tonight perfectly, and I decided it was time. So, before I commence ranting, a couple of disclaimers. First, this is not meant to offend, attack, or otherwise speak poorly of anyone who has ever purchased a pair of TOMS. Having studied it for just a semester, I’ve already found that helping people improve their economic situation is a much more complicated task than I ever believed possible. However, I suspect I have a number of friends are currently purchasing or are contemplating purchasing a pair. This post will hopefully shed some light on the harsh realities of the “buy one give one” (BOGO) model. Disclaimer number two is that much of the information contained herein has been sourced from a number of other blogs, youtube videos, etc. I will cite those as much as possible.
Ok, commence rant. TOMS shoes burst on the scene in 2006 as “the new hotness” of the business/philanthropy world. The amalgamation of a for-profit business with nonprofit-like tendencies seemed to defy classification at the time. The idea that the simple act of buying a pair of shoes could directly help a child in need was compelling, and the company quickly grew due to press coverage from such sources at the LA Times and Vogue. College campuses were a prime target for the business, filled with young, trendy would-be activists just waiting for a way to stylishly help young Argentinian children avoid hookworm. Finally, a company seemed to have the right idea about how to be not only socially-conscious…but socially-active. Soon alpargatas-style shoes with a TOMS tag began to fill college campuses in a way that only Ugg-lovers could understand. I had my doubts about TOMS from the beginning, and not just because I thought they were painfully ugly. So, I did some reading…forgot about it…remembered a year later…did more reading…forgot about it…and so the cycle continued. However, I recently took a class focused on studying the burgeoning field of social enterprise where business and charity collide. I also found myself teaching a class on nonprofit management, which included a healthy dose of ethics. Upon asking my class to identify a socially responsible company, TOMS topped their collective lists. So, I took up my study again, put TOMS under a microscope of economic theory and pseudo program evaluation, and found that the fairy-tale story, sadly, does not add up.
Question #1: how much does it cost to make two pairs of shoes, ship one pair to the U.S., and another to Argentina? If I had to venture a guess, it wouldn’t be $44…the cost of the cheapest pair of shoes TOMS offers. I did a little digging, and found Alibaba, a great website for buying products from other countries. On their site, I found some alpargatas-style shoes from China, which is one of three places where TOMS manufactures their shoes. So, after a five minute search, I came upon the “Casual hemp brazil alpargatas” shoes. I considered posting a picture here, but they don’t like their photos taken, and I don’t want a copyright fight. Though not an exact match, they look suspiciously similar to a number of TOMS models. So, how much do these beauties cost? Well, if you buy 500 at a time, the website prices them at 6.5 RMB, which is the Chinese currency Renminbi. When converted, that is roughly $1.06 per pair. Well…that’s awkward.
Wait, you say, that’s just purchase price…what about shipping? Well, let’s pretend our headquarters is in Atlanta…a challenging destination since we’re shipping from China. Alibaba has us covered there as well. Shipping from Ningbo, China to Altanta, Georgia for $150/m3? Check. I’d imagine 500 pairs of shoes wouldn’t take more than 3 cubic meters no matter how poorly packed. So, distribute that $450, and we have…$1.96 per shoe in the U.S. From there, we unpack, sort, repackage, and ship direct to your home. Thankfully (for my sake), TOMS charges you separately for shipping, so I don’t have to include that calculation. The final step is to calculate getting another box of shoes to Argentina to the child who so eagerly awaits. So, back to Alibaba we go, and I found shipping to Argentina. This one is even cheaper than to the U.S., coming up at $30/m3. I assume it’s somewhat costly to get from the port in Argentina to the children, so we’ll pad that with a conservative $5. There are also import dues, but I can’t find anything close to a number on those, so I’m going to eyeball them pretty low (especially given the fact that I can buy Chinese-made beach flip-flops for $10).
So, here we are. The production cost to TOMS for two pairs of shoes being delivered to you and a child in Argentina? Somewhere around $10, given my estimates. I actually assumed TOMS was getting much better discounts than my numbers show as they buy in greater bulk. However, after doing some digging, I stumbled upon a CNBC report in which the cost of a pair of TOMS was stated to be “about $9 per pair” (just after the 19 minute mark). Apparently I should start selling shoes, since in my estimates I’m beating their costs by half.
We’ll go with their number…even though I think it likely too high. TOMS charges $44 (for the cheapest model), and it costs them $18 to get the shoes. Where does the other $26 go? That, my friends, is the $26 question. We have no idea. Why? As TOMS is a privately-owned for-profit company. They are not legally required to tell us anything. I’m sure some of it goes to overhead (paying U.S. employees, website expenses, etc.). However, once again, the CNBC report comes through for us, stating that company is “clearing $17 per sale.” Though that wording is vague, it sounds a lot like net income per sale. Assuming CNBC already factored in interest, taxes, and the like…40% profit margins aren’t bad ($17/$44). This number declines a bit if taxes, interest, and such have not been included. However, of note is the fact that this video is a bit dated…TOMS now selling some models for upwards of $98.
So, question #1 answered…in quite an unsettling fashion. Question #2: how much good does giving shoes away to children for free do? This is another complicated question. Instead of spending another two paragraphs building an argument, I’ll turn to an excellent Youtube video that provides some insight into the question.
This video raises some tough questions. Are free shoes really an effective solution to the problems countries like Argentina face? Does giving free shoes away hurt local retailers who sell shoes? This video would seem to say TOMS is causing more harm than good, and I would tend to agree. It is hard for local retailers to compete with free, and there’s a chance they could be forced to shut down. In addition, there is very little sustainability to this model. If TOMS disappeared tomorrow, either due to economic struggles or blog posts like this, what would come of the Argentinian children?
While I admire the sentiment that led to TOMS shoes, I don’t believe individuals living in the developing world need shoes handed to them, but they could really use jobs. In addition to China, TOMS says some of its shoes are manufactured in Argentina and Ethiopia. This is great. I would love to see TOMS abandon the BOGO model and instead sell their shoes at half price, allowing them to open even more factories in the developing world and provide jobs to those who have none. Instead of giving away a pair of shoes for free, perhaps use the extra money to run public awareness campaigns about the importance of wearing shoes or to pay your factory workers higher wages. Help existing local vendors expand their own retail networks, providing them an incentive to work with you. Perhaps even develop a better model of shoes to sell to Argentinians that are affordable. When that day comes, I might buy a pair of TOMS. In the meantime, I’ll keep my $26 to myself…or perhaps use it to support an organization that seeks real, lasting change in developing nations.
If you would like to read more about this topic, you can visit the website of the creators of the video I used in my post. They have links to a number of blogs that are similar to this. If you’re more scholarly inclined, check out this paper from Garth Frazer at the University of Toronto on the negative impact of clothing donations to the developing world. For the entrepreneurial-minded of you, check out this critique from a couple of months ago by Fast Company.
That said, TOMS has a full impact evaluation forthcoming. We’ll see how it turns out. I could be completely wrong. Perhaps I will buy a pair of TOMS eventually. Time will tell.
I recently had a conversation with a co-worker about the current state of the U.S. economy. This is always a fun topic, as he is working on his master’s in economics and is pretty well-read in the subject. After a long, serpentine discussion on the Gramm–Leach–Bliley Act and complex derivatives, our conversation happened upon the collapse of the internet and housing “bubbles” in the late ’90s and early 2000′s and their role in the current economic challenges. This topic prompted me to cite an article1 I had read that week referring to a potential “higher education bubble” in the United States. After much discussion, my coworker and I decided that a higher education bubble probably does exist in some form. Upon that discovery, our discussion turned to why that bubble might exist and ways to avoid having that bubble burst in your own life. That conversation led me to do a little bit of research. Here is a short compilation of my thoughts coming out of that conversation and what I’ve found thus far. This post will be made in 2 parts, the first of which will make the case for a “bubble” and the second of which will provide means of avoiding the bubble.
What’s a “Bubble?”
For a long time, I didn’t have a strong grasp of what exactly was meant by an economic “bubbles.” If you’re in that situation, it’s a pretty simple concept (at least as I understand it). The basic idea is that a “bubble” is created when large volumes of a particular good or service are sold/traded at prices that are much higher than they should be. Buyers/investors during the .com and housing bubbles were working under the assumption that internet startups and homes were worth the money they were paying for/investing in them. This assumption was supported by the thousands of similar transactions taking place around them. When the “bubbles burst” in the late 90′s and early 2000′s, the values of assets (shares in .com companies and homes) fell drastically. In some cases, this left buyers/investors with no value at all or negative value (more debt than equity). In retrospect, economists say the “intrinsic” or “real” value of these assets was much lower than the amount paid for them. This was due to a number of factors which I will not even attempt to begin delineating. The short of it is, there were “bubbles,” they “burst,” and thousands of people were out thousands of dollars.
To illustrate, let’s suppose an investor put $100,000 of his own cash into Pets.com back in 1999 for shares of stock/ownership. The fact that he was one of thousands of investors doing the same thing made it seem quite the reasonable thing to do. At some point shortly after that investment, the company discovered it had a non-existent business model and was selling pet supplies for less than it cost to buy them and ship them. The company went bankrupt and was dissolved…and those stocks are now worth $0. Thankfully, the investor does not have any debt and therefore must simply eat the loss. Sadly, he same is not true for a hypothetical couple who purchased a home in 2001 with a $250,000 loan. Everyone else in the neighborhood was getting their homes at a similar price, so why not? However, the massive demand for housing and the ridiculous availability of credit had pushed the home to that price from an actual value of $180,000 one years before. When the “bubble burst,” the home dropped back to its actual value. Now, even if the couple is able to sell the house for its full value of $180,000, they’d have to find $70,000 in cash to pay off the rest of the loan. They have negative equity…and are “underwater” or “upside down” on their mortgage.
Economic bubbles can ruin the best plans and intentions, and often come as a surprise since so many people made the same decision. So, is there a higher education bubble? Are hundreds or thousands of people paying more for college than they should be? I think there might be…in some circumstances. Why? Well, here are some “findings.” Hopefully they will help you get an idea of the current situation.
The Education “Bubble”
Apart from intangible benefits (the “friends” I’ll have for life that I met there), the intrinsic value of a college degree is determined by how much money the degree allows an individual to earn than he or she would otherwise not earn without it. Basically, using our house example, it’s the degree’s “resale value.” The question at hand, then, is whether the amount paid for a college degree exceeds the amount of money that will be earned by obtaining that degree. To make a fair evaluation, those numbers must be determined. That, however, is a sticky calculation fit for an actual economist. As I am not one, I’m going to use some average numbers I found from a number of varied sources to try to get a rough idea of what the actual numbers might look like.
So, how much does college actually cost?
The tuition costs alone to attend college span a vast array of possible numbers depending on the type of school, its reputation, the student’s residency status, and a number of other factors. The College Board website cites numbers ranging from a few thousand dollars a year for a public, 2-year school to upwards of $40,000 a year for a private, nonprofit school. However, tuition is just the beginning of the equation. One has to add in room and board for on or off-campus living, book costs, student fees, moving expenses, transportation costs to-and-from campus, parking, and, of course, ramen noodles. Also, as I’m sure my aspiring economist friend would tell me, one must factor in the opportunity cost of the wages missed out on due to spending one’s time in a classroom instead of in a job. When it comes down to it, there’s not an easily-determined across-the-board number to represent the cost of college. However, there is a number available that I believe is usable for this particular endeavor.
A CNN article2 last fall cited numbers provided by the Project on Student Debt12 showing that the average college student pursuing a bachelor’s degree at a public or nonprofit private college or university graduates with $24,000 in student loan debt. This sounds about right given the average tuition numbers cited by The College Board9 and the ratios of public to private to 2-year students given by the National Center for Educational Statistics10. Though it may not include many of the aforementioned factors, this number provides a somewhat startling picture of how college costs can affect a graduate long after a degree has been obtained. I will use this number moving forward as a reference for argument’s sake.
What is the value of a college degree?
Now that we’ve gotten a rough idea of the cost burden of college on a recent graduate, we can contrast this $24,000 number with a New York Times article from last month3 that cites a Rutgers University study8 that found the average college student graduating with a Bachelor’s degree earns just $27,000 annually in their first job. This number may surprise some (though not me…my first job out of college wasn’t too far from there) given the oft-quoted Bureau of Labor Statistics number which states that Bachelors Degree holders make, on average, around $1,000 a week ($52,000/yr). However, given that the Census Bureau11 reported the average age of Americans being 36.8 in 2009, the $52,000 number is slanted towards a mid-career holder of a bachelor’s degree.
So, graduates make $27,000, right? Well, this assumes that all graduates immediately find jobs. The Bureau of Labor Statistics reported last year4 that the unemployment rate among all people with Bachelor’s degrees is 5.5%. Comparatively, the aforementioned CNN article2 pegged the rate among recent graduates at 8.7% in 2009. I would venture a guess that it is higher now, given that in the UK, it’s currently at 20% 5,6,7. When all these things are considered, the argument for an education bubble begins to take shape.
Where does this leave us?
I don’t currently plan on doing any net present-value calculations to provide an actual number for comparison, but I think these rough numbers send a strong message. It’s hard to get rid of $24,000 in debt making $27,000 a year. Whether we like it or not, market forces have combined in such a way that the value of an undergraduate degree just isn’t what it used to be. Simultaneously, the cost of one continues to increase. So, should you abandon college altogether? Well, the main redeeming factor is that things are worse for those who don’t have a college degree. That same Bureau of Labor Statistics report4 shows that, on average, unemployment nearly doubles and wages are cut in half for those without a degree. I tend to browse the job markets a good bit just to keep apprised of what’s out there, and it’s hard to find a job that doesn’t require at least some college. So, the looming questions are “Can I get a college degree, but still avoid the bubble?” and “If so, how?” Well, those are pretty open-ended question…and I’ll be attempting to tackle it in my next post, so check back soon!