Why I’ll (Probably) Never Buy a Pair of TOMS

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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.

Ask Questions First, Donate Later

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“Ask not what I can do for your nonprofit if you’re not ready to be asked what your nonprofit can do for me.” – Cory Watson

I was on my way back to the office from lunch today when I was hailed by a tall, nicely dressed man holding a colorful folder. I usually politely nod and walk right by these individuals, but I decided today to hear his spiel, as the cover of the folder prominently featured some happy-looking children. Who doesn’t like happy children? It turns out this individual was a representative from a lesser-known international relief organization and was trying to get people signed up as sponsors for impoverished children. His pitch was pretty good, and I’m sure he’s been the source of a lot of admirable work being done around the world. However, I’m not sure he got quite what he was expecting with me.

The problem that Mr. Smith (that’s what we’ll call him) ran into today is that he decided to chat up an aspiring nonprofit scholar whose focus is on US-based international development organizations. If he had asked me for anything more than my name, he might have found this out. However, he was so focused on selling his organization’s services that he skipped this crucial step of learning about me. This caused his entire pitch to be mis-directed. He was interested in me becoming a child sponsor. I have no interest in becoming a long-term sponsor through any other organization than World Vision. However, I would have definitely considered making a small one-time donation to his organization had he even mentioned the possibility. However, sadly, he did not suggest that possibility. For that and other reasons, he missed a potential sale.

It may surprise you to think about a charitable organization “selling a product” to you. It may even bother you to think of a child sponsorship as a “product.” However, having studied charitable organizations intensely for two years, interned with them, and worked for them, I’m convinced that they are just as much sales-based organizations as for-profits. The main difference is that the “products” charitable organizations offer usually consist of one person paying for them in order that another might receive the benefit of them. I pay for medicine, and it is consumed by a child in Tanzania. I pay for a social worker, and said social worker counsels a child in the foster care system. What do I get out of it? Well, some might say nothing really…except the knowledge that I have helped another individual (or an animal, the environment, the arts, etc).  So…I give money, I help, I feel good, right? If only it were that simple!

The problem is that I look at donating to a charity like investing. I invest in a stock because I trust that the company can get better returns on my money than I can. I have studied the company and feel that it has a competitive business model, sufficient resources, and a history of success. Therefore, I can invest $100 in a share of their stock instead of investing $100,000 to try to start my own company. In the same way, I donate to World Vision, Care, or a similar organization because I believe that organization can make more of a positive impact in an impoverished Mosotho child’s life if I give them $1,020 than if I paid $1,000 to get to Lesotho to hand $20 to said Mesotho child (Mesotho is what people in Lesotho refer to themselves as). Those organizations are better suited to do that work than I am, and they do it extremely efficiently.

So, should I support World Vision, Care, or this other organization. Well, when I donate to a nonprofit, I believe I’m really donating to an idea as much as to an organization or an individual. Every well-run nonprofit organization has a vision statement and a mission statement. The vision is the organization’s opinion of an ideal situation. The mission is the set of practices that will get them there. By supporting that organization, I’m joining with them in their mission in an effort to see their vision come to pass. However, even that is an oversimplified view, as it is not so much what a company/charity says as what it does that matters. The vision of a hypothetical organization might be “All women everywhere living empowered lives.” and the mission might be “Creating programs that help empower women through the building of character and life skills.” However, if all the organization’s resources go towards planning beauty pageants…one has to ponder if the organization is really moving towards or away from its vision and mission. It is this combination of vision, mission, and actions that one supports when one donates to a charity.

So, now we turn back to my conversation on the street. Upon finishing his pitch, Mr. Smith pulled out photos of three children I could sponsor. Perhaps he expected me to choose one and fill out the paperwork. Perhaps he expected me to decline the opportunity and walk away. However, I’m almost positive he didn’t expect me to start asking him very pointed questions about the organization. I went easy on the guy, as he seemed really nice. However, had I wanted to go all out, here’s a list of what I would have asked him. You can use this as a guide to help you in making your own charitable investment decisions.

First off, some quick filter-style questions to determine if the organization is legitimate and how large it is.

  • Is the organization a registered 501(c)3 not-for-profit organization to whom donations are tax deductible?
  • What are the organization’s vision and mission?
  • How long has the organization been in existence?
  • How many clients did it serve last year?
  • Where is it headquartered?
  • How many employees does it have?
  • Who is the current CEO/Executive Director and what is his/her background?
  • Is the organization affiliated with a specific religion, people group, or other entity?

Next come the financials. These serve as great comparison points that can help you judge between organizations and can also help you determine if an organization will survive. If 85% of the organization’s income stems from a single grant that expires in 6 months…you might reconsider investing.

  • What was the organization’s income in the previous year?
  • How much of that income went to programs and how much was overhead (administrative and fundraising costs)?
  • Did the overhead percentage increase or decrease in the past year? 5 years?
  • What percentage of the organization’s income comes from grants, gifts in kind, interest on investments, and individual donations?
  • Does the organization carry debt? If so, what are its debt to equity ratio and debt to income ratio?
  • How much does the CEO/Executive Director earn annually?

After financials come program-specific details. This is where having an understanding of the specific “industry” the organization is in comes in handy. As the organization in question did international development, these questions are tailored to that industry.

  • How many countries does the organization have a presence in?
  • Does the organization have international regional offices, or is all administration handled inside the US?
  • Is the objective of the organization to build into a community to help future children, or to pull children and their families out of the community and place them elsewhere?
  • If the organization is religiously affiliated, how does that play into decision-making and service delivery?
  • Are the international staff hired from the country/region they serve in (natives), or are they mostly from the US?
  • How long do projects in a specific area last? Do you have a withdrawal strategy for pulling out of a specific area?

In the case of Mr. Smith, I opted to ask about the overhead percentage first, as it is one of the biggest deciding factors for me. It turned out that Mr. Smith’s organization has a 23% overhead rate. As there are organizations out there that do identical work with rates of 14% (World Vision) or even 9% (Care), I told him I was a supporter of a similar organization and couldn’t take on a child sponsorship at this time. If I’m going to invest my money to buy aid for another individual, I’d prefer that they see at least 80% of what I give. For me, I prefer World Vision, even given the higher overhead rate. I believe in their mission and vision and feel that they are accomplishing it well. I would strongly encourage you to consider supporting the work they do helping children around the world.

For anyone considering supporting a nonprofit, always remember this: whether you are standing on the street with a rep, watching a heart-wrenching commercial, reading a brochure, or staring at a banner ad, you are the investor here…and you are in control. Ask every question you can think of about the organization. If two organizations seem identical, but one puts 90% of income towards programs while the other puts only 70%, you might want to ask where that additional 20% goes. If one pays its ED $350,000 while another pays only $70,000, it might be worth asking about. If the organization isn’t 501(c)3 certified, it’s definitely worth asking about. While this may seem like a lot of work, most of it can be accomplished via a single phone call to the organization, a trip to their website, or through other services such as Guidestar.

With just a little work, your support for charitable organizations can make a huge difference in the world around you. I hope this is a helpful resource. Happy investing!