The Bain of Toms’ Existence
Toms' business model, while undeniably successful, is not without its flaws; however, it will find a hard time fixing them anytime soon.
“We are not in the business of poverty alleviation.” In a single sentence, Sebastian Fries, Chief Giving Officer of Toms Shoes (Toms), seemed to validate the slew of ongoing speculations that the company’s philanthropic intentions were misdirected. The premise of the business is a charitable one – Toms is built on the buy-one-give-one (BOGO) model, which originally promised to donate a pair of its shoes to an impoverished child for every pair sold, and now operates a slightly altered business model for glasses, coffee, and bags. Toms has not only been an industry success, but a true anomaly. Since its inception in 2006, the company has donated over 35 million shoes to 70 countries with the help of 100 different “Giving Partners.” In 2014, it was valued at $625 M on top of selling 50% of its stake to Bain Capital, and in 2015, Toms founder Blake Mycoskie was even presented with the prestigious Next Generation Award from Harvard’s School of Public Health for his leadership and commitment to public healthcare.
Despite financial success, Toms’ BOGO model has drawn a fair share of criticism from international development experts, who contend that it does not do as much good as it purports, and can actually be harmful to certain degrees. These remarks are important considering the business of “giving” that Toms operates in, which claims to value corporate social responsibility (CSR) as a new measure of success, not solely financial return. Businesses have been pioneering responsible practices for decades, but modern consumers have become more engaged with socially mindful companies. In fact, a 2013 Cone study found that 89% of consumers were very likely to switch brands to one that is involved in a good cause, given similar price and quality, compared to 66% in 1993. On top of this, Toms has inspired the creation of nearly a hundred BOGO start-ups in the wake of the company’s tremendous success, and the Stanford Social Innovation Review predicts that this model will proliferate. This upsurge becomes problematic, however, as adequate metrics to audit global corporate activity do not currently exist, leaving the lay-consumer reliant on the company’s own reporting. Without any legitimate regulatory body, BOGO practices have the potential to cause undue harm to the communities in which they operate. As Toms resides at the forefront of this issue, it needs to initiate new thinking into the operation of “giving.”
What Actually Happens?
It would be a stretch to claim that BOGO companies like Toms do not genuinely care for the communities they service, but the growing cynicism is not wholly unfounded either. Toms purports that shoelessness encourages the spread of diseases and infections such as hookworm, and in some cases shoelessness even bars children from attending school. A pair of shoes would therefore remove these barriers. The same criticisms about this solution have been reiterated countless times by international development and foreign aid practitioners: 1) shoe donations en masse simply postpone disease – if Toms seeks to eradicate it, a donation of funds to the appropriate health organization would be more effective; 2) shoelessness is not always a major problem to begin with, an oft-cited study conducted in 2008 having found that 88% of Toms receivers in El Salvador already owned two or more pairs of shoes; and 3) shoe donations (especially on the large scale of Toms) displace local markets by dumping free goods into the economies. While the third point is arguably the most common critique of the BOGO model, it is also the most contentious one – the amount of research does not yet exist to validate its claim. The same 2008 study found that there was actually no meaningful correlation between in-kind transfers and the performance of that local market. Some critics have pointed out that the conductors of the study did not leave enough time for their results to solidify, having only been there a few months – people do not purchase shoes that often, after all. In addition, those findings cannot be generalized to markets in other countries.
Despite these dubious facts, what remains the crux of the issue is that the BOGO model reinforces structures of dependency by developing nations on developed ones, perpetuating a “savior” trope that degrades and patronizes receivers of the charity. While many contend that “something is better than nothing,” this adage is not necessarily true. The large-scale, non-finite giving model implemented by Toms disincentivizes local governments from developing sustainable solutions to their community’s problems. If the responsibility for shoelessness, eye care, water quality, and maternal health lies with Toms, then the well-being of those communities will suffer if Toms decides to remove a product line or if the company folds. This dependency, while appropriate for quick and short-term solutions to immediate problems, is not in the best interest of communities attempting to tackle structural-level issues like poverty.
On a more tangible level, this uncontrolled flow of goods has the tendency to oversaturate certain countries with donations at the expense of others. It is often the mainstream or “sexy” causes that receive most of the attention. The unregulated nature of charity on a global level thereby renders individual efforts counterproductive. Many development experts have already called for the establishment of strategic collaboration efforts in which the communities, as well as the “giving” organizations, undergo a process of selection, reporting, and continuous engagement. Otherwise, the inefficiencies not only appear in the redeployment of limited resources, but also in overhead costs. In other words, organizations are being asked to focus on what they can do with communities rather than what they can do for them, or else these issues will continue to snowball. It is not just Toms – the global corporate charity model simply needs an overhaul.
Toms has attempted to address some of this critique. In seeking to resolve the claim that shoe dumps damage local markets, it has committed itself to moving a third of its manufacturing to the countries to which it donates to by 2015. The rationale behind this is that the shoe dumps will not negatively affect the economy if members of that community are employed as a result of it. While this was well intentioned, it still does not address the issue at its core – that the business model itself encourages a dependency and inefficiency that is dangerous to local social and economic development. The company’s website now even includes a “Toms Marketplace” that features multiple BOGO start-ups it supports and promotes, further indicating a commitment to the model and proliferating the issue. Whether consumers are unaware or just apathetic about these concerns, there are few financial incentives for Toms to change its practice given its mainstream success. While Bain Capital promised to keep the giving part of the business intact, it would be erroneous to say that it would prioritize philanthropy over profit. Still, Toms remains a clear authority figure in the charity world, and is probably one of the only major players with power enough redefine CSR, if it so chooses.
Toms needs to re-evaluate its giving model by thinking less about giving and more about engagement. It needs to form an alliance with other stakeholders involved and extend the responsibilities of its current Giving Department to maintain those relationships. Ideally, this alliance should include as many of the organizations currently giving to the same geographical areas and those in the same sectors of charity as possible, on top of the communities they wish to service. Using clothing donations to El Salvador as an example, Toms would pair up with the major charities and organizations in the clothing donation business, as well as the local community. This will generate a dialogue not only between Toms and the community, but also among the companies interested in tackling similar issues. This lays the groundwork for establishing more appropriate amounts of giving, making it easier to ensure that shortages are addressed and surpluses are avoided. If the alliance has found that a community in El Salvador has been over-saturated with shoes, they could redirect those resources to satisfy a need in another community or country. This would require a new set of stakeholders to govern that decision-making process. Dependency in this case will then shift away from the vacillating purchase patterns of consumers to the quotas that the serviced communities have a hand in establishing. Establishing a sustainable amount of giving must remain a continuous process with a constant feedback loop. Control will then be given back to the communities whose long-term strategies for nation building can be kept at the forefront.
Toms’ collaboration with over 100 Giving Partners indicates that some lines of communication currently exist and suggests the company has the ability to create more. However, the comprehensive strategies of national and local governments for tackling poverty are not often imparted to the public. While initial connections with local governments may be difficult to establish, particularly in corrupt nations, continuous development of these relationships will allow Toms to become well-versed to these strategies so that it can be as useful and as harmless as possible across multiple countries.
Fortunately, there is already precedence for this kind of mobilization at a large scale. The UN’s Principles for Responsible Investment (PRI) initiative, for example, encourages signatories to adopt more sustainable approaches to investment, given the environmental, social, and governance (ESG) factors at stake. The onus has been placed on investors to take into account the long-term health and stability of the market, recognizing that long-term returns depend on well-governed social, environmental, and economic systems. A year after its inception, this initiative had already achieved over 1380 international signatories representing over $59 trillion in assets, indicating an interest in these global issues. The initiative is extensive, including rigid reporting and assessment processes, codes of ethics, and publications for new research. Toms can spearhead a similar initiative specifically for BOGO-style enterprises. Given its strong brand identification and loyalty as an authority figure in the corporate charity world, it has the unique power to introduce and enforce these changes.
Similar to the Fair Trade certification system, Toms should create its own certification label for other BOGO-based companies that form strategic alliances in their relevant industries. Fair Trade is certainly not immune to criticism, but it does set a good example of stakeholder engagement. Not only that, but consumers are quickly warming to socially conscious products and companies, a mentality that has allowed Fair Trade to flourish. Sales of Fair Trade certified products increased 15% worldwide from 2012 to 2013 – peaking at €5.5B – and continue to grow. Studies also show that certification labels are perceived as trustworthy, with 71% of consumers believing that third-party certifications are the best way to verify a product’s claims. With many millennial consumers becoming increasingly skeptical about brand claims, suggested by a study that showed 46% of millennials checked online comments about a brand before a purchase, a Toms certification could combat any rising levels of skepticism via its focus on sustainability. The certification label associated with a big brand like Toms will incentivize BOGO companies to form these alliances with other giving organizations and local communities, all while supporting and growing Toms’ own brand.
Toms can look to either the UN PRI initiative or Fair Trade in developing and implementing its own standards. Very broadly, certification institutions have two key components: a set of rules or guidelines and a monitoring mechanism. Toms needs to create a committee of international development and foreign aid experts who will create these certification standards. Toms then needs to ensure that it itself adheres to these new standards by forming stakeholder relationships in each of its communities, a process that can be smoothed out by capitalizing on its existing relationships to its Giving Partners in these spaces. Once Toms has solidified its new giving model, it will need to create a new, permanent division to run its certification process. This new division will oversee the logistics of monitoring the success of the program and the issuance of certificates to complying organizations. It can even establish an Implementation Support (IS) team similar to that of the PRI initiative to provide guidance to those seeking to adhere to the certification standards. The monitoring and reporting process itself, however, must be done by a third party to preserve the label’s legitimacy. This organization could also assist with ensuring parties involved are not over-donating, with it having access to such data from those involved. Bain Capital will have to contract out a separate organization (or create a new committee) to follow through with the auditing procedure. For-profit organizations that seek to legitimize the charity component of their business can then adhere to the developed standards and capitalize on being associated with the Toms brand. Every few years, the standards committee should undergo a review of all standards to ensure they are reasonable and, more importantly, effective.
The difficulty with this venture lies in its potential for return. Despite Tom’s philanthropic business model, its current financial success offers little incentive to change. In addition, with Bain Capital expecting a return on its purchase, the company is likely looking to cut costs rather than increase investment. By comparison, however, the PRI Initiative is funded primarily via an annual membership fee payable by all signatories. With signatory fees ranging between £430 and £12,500, the venture is able to function on income between $1M and $26.9M. While Toms and its BOGO counterparts would not be expected to raise this much capital (first, start-ups are usually tight on capital, and second, potential members would cap at 100 compared to PRI’s 1380), this venture could be paid in part by member organizations through a fee. The existence of Tom’s marketplace showcases that similar BOGO brands are willing to pay to be associated with and gain access to Tom’s customer base, and could be inclined to pay a fee to be involved with a similar certification. This income could help offset the cost of hiring a third party monitor, as well as the initial investment (office space, employees, strategic development) of the venture. Still, the company is not likely to see a significant return, considering that the certification system is not meant to drive profit; the membership fees must then remain reasonable. This leaves only gains from extending the Toms brand to offer a return – a chance that Bain is likely unwilling to take.
There is no doubt that Toms has made history as a social enterprise. Its small beginnings have no bearing on the trailblazer it has now become. Nevertheless, its good intentions are no excuse for ignoring consequences. Toms may not be in the business of poverty alleviation, but its position as a global player entrusts with it a responsibility to ensure that its business does not interfere with the poverty alleviation efforts currently in existence. With Bain Capital attempting to bolster the company’s financial value, however, the potential for an adjusted BOGO model is likely years away, if at all. Still, if Toms’ intentions are indeed good, it must adopt the necessary foresight to recognize that its actions do not exist in a vacuum. They have real and long-term effects. Determining where among these competing interests Toms’ allegiance lies – and whether they are reconcilable – is certainly no simple task. How Toms responds to this struggle will determine the kind of legacy it leaves behind.