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How Toms went from a $625 million company to being in massive debt

Following is a transcript of the video.

Narrator: Chances are, you once owned a pair of these. That’s because TOMS had the perfect product. Its one for one donation model made buying one of it’s iconic canvas shoes an act of charity. And for a while, that really worked. By 2013, TOMS was reportedly making 250 million dollars in sales a year and had donated 10 million pairs of shoes since it’s launch. Just one year later, the company was valued at 625 million dollars.

Russ Winer: It was a brand that resonated with a lot of, especially younger people at the time that were looking for brands that were not sort of traditional corporate kind of brands.

Narrator: Entrepreneur, Blake Mycoskie, started the company in 2006 because he wanted to give back. Yeah, Blake, not Tom. There was never actually a Tom behind TOMS shoes. The company was originally named Shoes For Tomorrow then Tomorrow’s Shoes and then shortened to TOMS. Mycoskie, who you might recognize from season two of The Amazing Race, was inspired to start the shoe company after a trip to Argentina. The story goes that Mycoskie wanted to help all the kids he saw without shoes. While he was there, a shoe design caught his eye. The Alpargata. Comfortable and affordable, the Alpargata is an everyday shoe for many Argentinians. A local shoe maker helped make an updated version for TOMS and came up with a buy one, give one model. Soon, the shoe was everywhere.

Russ Winer: It got some publicity and just grew very rapidly. It had a huge amount of demand at the beginning. Hollywood stars started wearing the shoes and there’s all this buzz around the shoe and they grew into what it is today.

Narrator: TOMS slip on canvas shoes, became synonymous with the brand turning into what marketing pros call a hero product.

Russ Winer: A hero product is a product that is the archetypal brand, all right, for a company, the one that’s the most successful that people think of when you think of the company. So, for example, like Nike, it could be Air Jordans, for Porsche, it might be the 911.

Narrator: It’s like how when you see Hermes, you think of the Birkin bag or associate Heinz with Ketchup. For TOMS, it was the original shoe, based on the Alpargata. Paired with its charitable giving model, TOMS seemed unstoppable.

Russ Winer: TOMS branding and marketing was very effective because it was one of the first companies that used this buy one, give one kind of philosophy to try to appeal to not only consumers that liked good looking shoes, but also were interested in companies that had some kind of corporate social responsibility angle.

Narrator: People saw it’s logo and immediately thought of it’s shoes and its charity work for kids. Which could explain why people were willing to spend anywhere from $48 to $78 on a pair of TOMS canvas shoes. But it turns out, having a hero product can backfire.

Russ Winer: The hero product for TOMS shoes is the Alpargata variant or model of the shoes and they relied on that one model too long. The hero product can become stale at some point if it’s not rejuvenated.

Narrator: Not to mention, TOMS slip on shoe design was easy to copy. So, competitors did and they sold them for much cheaper. Skechers even named it’s version BOBS and donated two pairs of shoes for every pair sold. All this made consumers question whether TOMS was even worth the price. So, just as quickly as it had become a staple, TOMS became a fad. Even though TOMS had expanded it’s product line, people just couldn’t see beyond its original canvas shoe. While TOMS shoe donation program had been innovative and interesting when it launched, it became almost mainstream, copied by so many other brands. People also started questioning whether TOMS shoe donations were actually helping anyone. Something that TOMS had contacted an outside research team about looking into back in 2010. The research team found that the program wasn’t actually that significant.

Bruce Wydick: TOMS was really quick to take the results of the study into consideration so they talked to us about giving away the shoes as a reward for school attendance so kids actually feel like they earned them and they began to develop more alternative kinds of shoes that would last longer.

Narrator: TOMS continue to grow its giving program to be more effective. In 2011, TOMS expanded its brand to include sunglasses. Sales from sunglasses went directly to people in developing countries, for treatments like cataract surgery.

Bruce Wydick: As a person that has pretty high prescription glasses, I can attest to the fact that, personally, like a lot of people, this is a really impactful intervention for many people. Cataract surgery can restore a life.

Narrator: In 2014, Tom started TOMS Roasting Company. It said it would donate a week’s worth of clean water for every bag of coffee it sold. The next year, TOMS teamed up with anti-bullying organizations with a line of backpacks. But despite all these changes, when most people saw TOMS, they only thought of it’s original product and program. So, TOMS had a hard time growing beyond its hero product and its sales struggled. The company had a harder time regaining control over its business because it had relied so much on wholesale when it first started out. Doing this had helped TOMS build it’s brand recognition even faster because its shoes were sold at big department stores like Macy’s and Bloomingdale’s and even at Whole Foods. But a direct to consumer model has a lot of long term advantages. You have more control over your marketing and inventory and most importantly, over prices. All this can help you control your profit margins. Something that’s kind of important when your sales are starting to slump. But instead, TOMS didn’t pivot its business model as quickly or strongly as it should have. Its outlook continued to decline in 2019. TOMS had a 300 million dollar loan due in 2020. Credit rating agencies expected it wouldn’t be able to pay up. So, is this the end for TOMS? Well, in late 2019, a group of TOMS creditors officially took over the company from Bain Capital and Blake Mycoskie in exchange for debt relief. When Business Insider reached out to TOMS, a representative said that, quote, “The new owners support TOMS future growth and are investing 35 million dollars into the company.” Unquote. So, TOMS is definitely looking to rebuild itself. But is there a place for it?

Russ Winer: TOMS biggest obstacle right now is just the fact that there is so much competition in the shoe business and some brands have in fact gone bankrupt. If you look at brands like Rock Port, right? Which is a well known brand, take a look at Pay Less Shoes which is a retailer. There’s just a lot of competition in this market and very difficult to make a sustainable business.

Narrator: So, what should TOMS do?

Russ Winer: I think the smartest strategy for TOMS right now actually is to focus less on the corporate social responsibility angle and focus more on product. I think they need to develop more product variety, styles, colors that consumers want to buy and I think that’s the area they should focus on.

Narrator: And Winer says there’s something else TOMS needs to work on.

Russ Winer: A lot of successful brands that started as direct to consumer like Warby Parker, like a Casper, like others, Bonobos for example, started only direct to consumer, went to retail, gave their customers a chance to again experience the brand and today, brand experience is extremely important for consumers to have a strong affinity of the brand. I think TOMS has to do more of that.

Narrator: But even if TOMS isn’t able to recreate it’s original success, it still made a lasting impact on the worlds of business and fashion. Brands having a social mission might be commonplace today, but TOMS was the one that made it mainstream. Despite everything, TOMS might still be the best at it.

Bruce Wydick: I’d say TOMS is one of the most nimble organizations that I’ve worked with as a development economist. They have a whole department that’s devoted to impact evaluation.

Narrator: In November 2019, TOMS announced that it would be evolving its one for one giving model. TOMS will now be donating one dollar for every three dollars it makes. According to the company, this creates a more flexible and sustainable way of giving.

Bruce Wydick: I think TOMS is a learning organization and when it comes to development and poverty interventions, trust me, we’re all learning. That’s the key.

Narrator: So, who knows? With the right product, TOMS could be the next big thing again.

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