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Categorized | happenings

Is Wal*Mart really a Girl Scout stomping big blue meanie?

$20 bill
Beating up on sweet little Girl Scouts? Or a multimillion dollar, ruthless, hardball-playing corporate revenue machine?

I have said it repeatedly in this blog that social networking and word-of-mouth is a two-edged sword that can not only cut both ways, but can very frequently stab you in the back. While an endless stream of books and wannabes peddle the endless rainbows of social media marketing and WOM, every day brings us new disasters suffered by even the best in the business. The biggest danger, of course, is that you are subject to the whims, misinformation, and downright mendaciousness of online bloggers, tweeters, and Facebook friends; so any WOM or social media campaign requires careful planning. And so we turn to an excellent case study that erupted in the last couple days, the recent brouhaha stirred up by Advertising Age when it decided to take an angry mommy blogger seriously.

Wal*Mart, a company that normally knows better, attended this year’s BlogHer conference with a magnificent and rich display of new products. As part of their WOM and social media marketing, they wanted to introduce mom bloggers to their new products in the hope of generating some payoff in blog reviews and word-of-mouth. Now, mom bloggers are a fairly potent group of “influencers,” to use marketing jargon, and they have been wined, dined, and sent on cruises by many a powerful company. It seems, though, that two of the new products they were introducing in their Great Value grocery line were very close imitations of the two hottest selling Girl Scout cookies: Thin Mints and Tagalongs. While the whole of the BlogHer conference participants either didn’t notice or let this fact run off their backs, one mom blogger, who had a history of helping Girl Scouts sell cookies, went thermonuclear, angry that Wal*Mart was encroaching on a major source of Girl Scout funding. Not only did she post. Like most bloggers, mad mom C.V. Harquail vented her emotions with incomplete, exaggerated, and sometimes false facts (it’s the Bill O’Reilly influence on blogging and Huffington Post is the prime practitioner), but that didn’t stop Advertising Age from spotlighting the blog entry without criticism or background. And from there, the whole thing is going viral — again, without any perspective, background, or fact-checking. And if Wal*Mart doesn’t get its act together, it’s going to end up having to cancel its two new cookie products and take all the embarassment and revenue loss as a result of the bad PR.

Money quote from C.V. Harquail herself:

The exclusivity of Girl Scout cookies is what makes the cookies really sell. But now, Wal-mart is shoving itself in front of these little girls, and knocking on your door to sell you their almost-as-good fake Thin Mints and Fake Tagalongs, whenever you want them.

There goes the Girl Scouts’ exclusivity. There goes the Girl Scout cookies’ special allure, and there go the profits that fund the Girl Scouts’ programs.

Okay, I like bashing Wal*Mart as much as the next person in line. I’ve seen too many clients wrung on the Bentonville rack to have any fondness for the kind of white knuckles hardball Walmartians play. But is Wal*Mart really a Big Blue Meanie out to bash eager little Girl Scouts? Is Harquail being fair or factual? When the media and the blogosphere take up a viral rant, is the lack of perspective, background, or fact-checking fair to the target? Is it simply enough to “report” a rant without any real effort to gauge the truth? Whatever your views on this matter, there are some critical takeaways about social networking and word-of-mouth marketing that should give you pause. But, before we get to these takeaways, let’s explore the fairness of mad mom Harquail’s attack on Wal*Mart.

Let’s start with her claim that no-one has yet knocked off Girl Scout cookies, especially their bestsellers. In fact, there are plenty of Thin Mint and Tagalong knock-offs. And one of those knock-offs is made by the company that owns one of the bakeries that manufacture Thin Mints. Little Brownie Bakeries (the other Girl Scout cookie manufacturer is ABC) is owned by Keebler Corporation which, it happens, makes a near exact knock-off called Grasshoppers. Keebler also manufacturers a knockoff of Samoas, a Girl Scout cookie also manufactured by LBB, but, like Grasshoppers, the recipe is slightly different based on consumer testing. (The recipes for Thin Mints, Tagalongs, and Samoas have changed several times over the last few decades — there are those who swear that the best Thin Mints were manufactured back in the 1960′s by Salerno.)

Here’s a little gem I found buried deeply (like Marianis Trench deep) on the Web from a former Keebler marketing executive, Jim Bobus, about how Keebler copied Thin Mints directly and why they changed the recipe:

I spent 15 years working with the Elves in the Hollow Tree and was the Marketing Director for Cookies when we launched Grasshoppers. . . . Keebler has always been #1 when it came to fudge covered cookies. We were in an ideation session to see what we could add to the line that had top sellers like Fudge Stripes, Deluxe Grahams and Fudge Sticks. It happened to be around the time of year when the Girl Scout cookies were coming out and someone said “they sell a ton of Thin Mints — we should come out with a fudge covered mint cookie.” Genius!!! (it wasn’t me by the way). Back in those days, we had no access to Girl Scout sales and probably should have come out with them years earlier. As far as the formula, we purposely emphasized the chocolate delivery and toned down the mint based on consumer research (the mint flavor in our original formula was found to be too overpowering). Since we were one of the companies that annually bid for the Girl Scout business, we were also cognizant of not tyring to knock off their proprietary formulas exactly (you have no idea how nasty those Girl Scout Marketing folks can be if you cross them!!!). Frankly, the reason why we did not advertise this product is that we had somewhat limited advertising funds that were reserved for our largest brands at the time like Soft Batch, Chips Deluxe, E.L. Fudge and Pecan Sandies.

So, where are the angry mom blogs about Keebler?

Some of the knock-offs are even better than the Girl Scout version. If you ever find yourself in Wisconsin, look for a positively heavenly, ten-times-better Thin Mints knockoff manufactured by Rippin’ Good Cookies. And then there is, of course, the Dove Chocolate version. Sure, it’s bigger and square, but it certainly qualifies as a knock-off of a higher rank.

Which leads us to a very important question. Who’s manufacturing Wal*Mart’s version of Thin Mings? Is it Keebler? Since Harquail had access to the packages and the product, why didn’t she find out who the manufacturer was and track down the parent? It’s very likely that the company is either a Keebler subsidiary or an Interbake subsidiary — Interbake owns ABC, which is the other Girl Scout cookie manufacturer, and also manufactures a number of store-branded crackers and cookies for Wal*Mart. Since the general consumer trend is away from branded products and towards generics and in particular store-branded generics, it was just a matter of time before some store (Safeway, Kroger’s) ripped off Grasshopper and thusly Thin Mints, probably at the instigation of a manufacturer.

More relevantly, Wal*Mart’s entire Great Value brand has recently been rethought and reengineered to go head-to-head with major grocery brands. While typical store brand branding and packaging emphasized dullness (you ain’t paying alot, so we ain’t promising alot), Wal*Mart is going all out to equal the branding, packaging, and quality appeal of major brands, a particularly brilliant move in a recession. In this, Wal*Mart is leading a trend, so you can expect fancier, more appealing branding and packaging throughout the entire store-brand universe.

And while it is true that Tagalongs — a chocolate-covered, peanut butter filled shortbread cookie — have no copycats in the branded cookie world, Family Dollar discount stores offers a copycat at half the GS price. Since both LBB and ABC make some version of Tagalongs (ABC calls their version “Peanut Butter Patties” and they use a different recipe), so, again, the question arises as to who is manufacturing the Family Dollar and Wal*Mart versions of Tagalongs. Wal*Mart’s current peanut butter cookies — there are three products — are manufactured by Ralcorp (which owns the brands Post, Ralston, and Bremner). However, Interbake (the parent company of ABC) is also a major supplier of Wal*Mart branded cookies and crackers. Hmmm.

(As a footnote, Ralcorp got caught using some of that salmonella-laced peanut butter, forcing Wal*Mart to deshelve all its peanut butter cookies. Both LBB and ABC sourced their peanut butter from a salmonella-free vendor.)

But does Wal*Mart really threaten the financial livelihood of the Girl Scouts. Are they throwing these poor little girls to the wolves?

Let’s start with a couple quotes from mad mommy Harquail:

Every cookie fan in the US knows that the Girl Scouts in the USA make all of the money to run their organization from their annual cookie sales . . .

The fact that Wal-mart has seen fit to knock off the Girl Scouts and threaten the Girl Scouts’ ability to fund their programs makes me wonder just how much- or how little- Wal-mart really cares about the communities where its stores are located.

This is the real meat of the matter. Even if there are knock-offs, Wal*Mart is threatening Girl Scout sales by seriously underpricing them. And since “all” Girl Scout funding comes from the sale of cookies, well, that’s going to rile up Harry, Louise, and all their neighbors.

This despite the fact that the GSA has repeatedly said that Thin Mint knock-offs have had exactly no effect whatsoever on Thin Mint sales. Can Wal*Mart do what Keebler can’t?

How, in fact, are the Girl Scouts funded? Where does the money from Girl Scout cookie sales actually go? While Girl Scout polemicists claim that all the money goes to local councils, a significant part ends up in the hands of the national organization. What do they do with the money? And the portion that goes to the local counsels, what do they do with the money? Is the money really going to “Girl Scout programs”?

Let’s start with the national GSA and their 2008 Consolidated Statement of Activities (click here for a larger version):

Girl Scouts Annual Report 2008: Consolidated Statement of Activities

$33 million, the majority of GSA funding, comes from membership dues and another $17.9 from net sales of merchandise, which include things like uniforms and licensed merchandise as well as Girl Scout cookies (sorry, GSA does not report total cookie royalty revenues — never have, never will). Total merchandise revenues are as follows as reported in their 2008 Annual Report (again, click here for a larger version):

Girl Scouts Annual Report 2008: Merchandise Sales

So the GSA sells $49 million in merchandise but nets only $17 million after deducting $31 million in expenses (a 34% margin). What are these “merchandise sales”? Uniforms, equipments, books, and licensing royalties (GSA licenses the GSA name and brand to several manufacturers, among them Little Brownie Bakeries and ABC Bakeries — the GSA does not, however, separately report itemized royalty income).

So what about those cookie royalties? Typically, 70% of a cookie purchase price goes to the local GS council and 30% goes to the manufacturer, who pays royalties to the national organization out of that revenue. While we are not privy to any of the licensing deals, we do know that the GSA is one tough cookie when it comes to business negotiations and I have heard through back channels that the royalties are close to 30% (so almost 10% of the purchase price goes to the national GSA).

A back-of-the-napkin calculation seems to bear this out. A generic branded box of similar cookies can be had for less than a couple bucks (Family Dollar’s Tagalong rip-off sells for $1.75 and has more cookies than the GS version). That puts the wholesale cost of a box of GS cookies at somewhere around $0.70 to $0.80. At a price tag of $3.50, that means that the manufacturer makes $1.05, freeing up anywhere from $0.25 to $0.35 as royalty payments while still preserving normal wholesale margins (and there’s no evidence that LBB and ABC are getting normal margins — GSA, like Wal*Mart, plays hardball with its vendors). And I’m willing to bet the wholesale cost is a whole lot lower than the numbers above.

So when someone tells you that all the money goes to local councils and zero to the GSA, that’s just not true. A good, educated guess is that somewhere around 10% of the purchase price is going to the GSA ($0.35). And when you factor in the fees that local councils pay (like all that meeting/training revenue below, cost of equipment, etc), which are majority funded by cookie sales profits, the GSA percentage share climbs higher.

How does the GSA spend this money?

On the expenses side, $29 million is devoted to “service delivery to local councils” (whatever that means) and $25 million to “program development and training” (whatever that means). Here’s where you get into serious problems trying to understand Girl Scout financials, both at the national and the council levels. And this problem is not unique to the GSA; you encounter the same obfuscation in most non-profit financial statements.

On the surface, “service delivery to local councils” and “program development and training” sounds like money spent on the little girls, right? In the same way, local councils publish financials where they group 80% or more of their expenses under the expense line, “Programs.” Again, they’re spending money on the little girls, right? You know, campfires and marshmallows and renting classrooms for crafting, no?

To really understand what these expenses are, you have to find some accounting for functional expenses. And you find them in the GSA Annual Report under Consolidated Statement of Functional Expenses: (again, you may want look at a much larger, clearer version):

Girl Scouts Annual Report 2008: Consolidated Statement of Activities

Here, you find out that “Service delivery to local councils” consists of $14 million in salaries/benefits, $1 million in non-staff services, and $2.7 million in professional services (like consultants and ad agencies) — a whopping $17.7 million of the $28 million total. In other words, net sales of all merchandise essentially pays the human staffing costs of only one of the major activities of the organization.

Program development and training has similar bloated staffing: $7.4 million in salaries/benefits, $3 million in non-staff services, and $2.7 million in professional services, eating up $13.1 million in staffing costs alone (remember: GSA collects about $5.4 million from “training/meeting revenue,” so it’s not like program development/training is free to local councils or leaders).

Total salaries and benefits total to about $30 million (that is huge, eating up most of the total inlays from membership dues). Communications alone (that’s PR and advertising) eats up about $3 million in salaries and $1 million in professional services (the latter is reasonable, but $3 million for salaries?)

Compare all these staffing costs to the fundraising staffing costs: a paltry $600K for fundraising staff (but $3.5 million for management alone) and, get this, $31K for professional services. The average college spends $600K in development staffing costs in one quarter and the average big university eats up that kind of development staffing costs in one month. $31K? That’s the kind of money a small business might spend in professional services related to marketing.

Why is the GSA staff so bloated, but fundraising so neglected?

Because the GSA is a revenue machine. And, in the world of nonprofits, revenues are great because they come with no restrictions. You can spend the money as you see fit. Donors, however, frequently place restrictions on their money. When you “donate” to the Girl Scouts by buying a box of cookies, the councils and national organization can spend that money any way they please — on salaries, trips, better health insurance for themselves. When you gift $1,000 to the GSA, you typically want to ensure the money actually goes to benefit the little girls, so you specify its use for scholarships or what-not.

Non-profits hate restricted funds. They take them, but they hate them. So the GSA instead has created this massively powerful revenue machine in the form of membership dues, merchandise sales, licensing, and training/meeting fees. And this revenue machine has made them enormously “profitable” for the last few decades. The 2007 “surplus” — nonprofits are not allowed to state “profits” — was $23 million, of which nearly $4 million was operating surplus on $85 million of revenues. Both “surpluses” are impressive from a profit standpoint. (2008, because of the depth of the recession, posted a $42 million dollar loss, of which $2 million was an operating loss — the rest were losses in endowment and pension investments.)

Which explains the bloated overhead of the organization. The GSA is, for all practical purposes, a fully functioning for-profit business, but without the profit distributions. They are staffed to generate the lion’s share of their revenues through sales rather than donations and, like most nonprofits, they have grown into their revenues in terms of staff size, pay, and benefits (note that GSA employees receive fixed-benefit pensions, which are an enormous financial benefit, rather than fixed-contribution retirement funds, which the rest of the working world is stuck with).

And just in case you want to draw attention to the $4 million in scholarships (whatever these consist of) — since this is money that is going to the little girls — odds are that most if not all of this money is coming from restricted donations. In other words, GSA is paying out $4 million in scholarships because donors demanded it. (I’ve seen this a million times in nonprofits.)

So what does your cookie contribution to the GSA pay for? It pays, it seems, for a bloated organization with corporate types making some pretty good salaries and benefits.

But, you say, 70% of the purchase price goes to the local council to fund Girl Scout activities. So when you plunk down your $3.50 for a box of Samoas, you know (if you do this kind of thing in your head) that $2.45 is going to those hard-working girls developing leadership and teamwork (I’m not being facetious here).

Again, let’s see if a sample local council annual report bears this out. It took some doing, but I had to find an annual report that broke out functional expenses since the typical local council annual report lumps all operational expenses under one rubric, “Programs and services,” which makes it sound like, yes, the money is going back to the actual girls. But you don’t know where the “programs and services” money is being spent unless it’s itemized into functional expenses.

Since a typical council gets somewhere around 60% – 85% of its revenue from merchandise sales (mainly cookies) and spends about 85% of its revenue on “programs and services,” it looks like Harquail is right about the girls getting “all” their funding from cookie sales, at least at the local level. But, as any finance professional can tell you, numbers lie all the time. Here’s an annual report that breaks out those “program and services” expenses and, as a typically-sized council, can be rationally assumed to be average:

Local council annual report

Here about $3 million comes from product sales and the families of the girls pitched in about $1.5 million in fees and net of merchandise purchases (the actual gross was probably three to four times higher). But salaries, professional fees, and service fees make up about $3.5 million in expenses. In other words, the majority of “program expenses” (about 70%) are salaries or wages (more if “office support” includes staffing). “Food and program materials” and “travel & transportation,” which are the only expenses that seem to be related to actual Girl Scout activities (well, insurance), come out to a piddly $400,000. It seems, then, that the bulk of the cookie profits go towards overhead, not the actual girl scouts.

Which also makes sense. Every local council annual report I read shows an operating surplus — in other words, the local councils, like the national GSA, are revenue machines. This council has an operating surplus of $582K on revenues of $6.1 million, an enviable 9% margin. This is typical for every council report I could lay hands on. Which, of course, explains the heavy-duty overhead in terms of salaries. These local councils, like the national GSA, are running themselves like standard for-profit businesses, trying to maximize their income from fees and sales rather than donors. Which necessitates an overhead-heavy, highly compensated staff.

So what are you paying for when you buy Girl Scout cookies?

Overhead.

If — and I understand the gravity of the assumptions I’m making — if this council is typical, then when you buy a box of cookies for $3.50, your “donation” to the Girl Scouts probably breaks down as follows:

$0.70 to $0.80 goes to the manufacturer.
$0.25 to $0.35 (or more) goes to the national GSA as royalty payments
$1.60 goes to pay salaries and benefits to management and employees of the local council
$0.45 goes to pay for offices and office expenses for the local council
$0.18 – $0.20 goes to the little girls as programs, scholarships, rentals, or equipment

Put another way, for every $3.50 you spend on a box of Girl Scout cookies:

$0.70 – $0.80 goes to the manufacturer
$2.50 – $2.60 goes for overhead
$0.20 goes to “those enthusiastic girls organized into local troops, learning about leadership and being resourceful”

And mad mommy Harquail is peeved at Wal*Mart?

What is all that overhead buying? It’s buying management and staffing of a sales- and fee-based operation, that’s what. If you truly wanted to support the Girl Scouts, you would take all that money you spend on Girl Scout cookies, purchase knock-offs at Wal*Mart, and donate the remainder with restrictions (for equipment purchases or hall rental only) to your local council. The more you buy Girl Scout cookies, the bigger, more bloated, and better compensated the GSA managers and staff become at both the local and national level.

So is Wal*Mart beating up on little girls? Or a powerful, corporate-type revenue- and profit-machine? The issue, it seems, is much more complex than bilious blogger Harquail would have it.

So why is anyone taking her seriously? Why does Advertising Age deem her to be a worthwhile source? One deserving of a national audience?

The problem with blogging and social networks is that anyone with a gripe and several pounds of misinformation, disinformation, and non-information, can start an online tidal wave that defies facts, reason, and fairness. Media outlets, such as Advertising Age, are not trained in the fine points of business, branding, financials, marketing, or manufacturing; as a result, they’re prone to suck up misinformation without subjecting it to any kind of analysis (remember the whole madness about Sarah Palin’s daughter, Trig?).

In the end, Wal*Mart may end up killing these products because they did not respond fast enough and clearly enough to Harquail’s itchy blogging finger as the rant began to catch fire on the Internet.

Wal*Mart made the incredibly stupid decision — not by knocking off Girl Scout cookies — but by bringing those cookies to the BlogHer convention hoping to generate some Web 2.0 and WOM marketing without considering that someone might turn the tables on them because the cookies were too similar to Girl Scout cookies. Wal*Mart needs to present is Great Value line as distinct products, not cheaper imitations. “These are not Girl Scout cookies” should have been written all over the display. But that big, bad Wal*Mart is stomping all over innocent little girls — well, we’ve seen that this just isn’t the case. If they’re stomping on anything, it’s the bloated staffing and salaries of the GSA organization.

Part of Web 2.0, social networking, and WOM strategy is to consider all the dark and thorny paths that consumer response can travel. It’s the path you haven’t considered that will burn you.

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2 Responses to “Is Wal*Mart really a Girl Scout stomping big blue meanie?”

  1. Deborah Davis says:

    Wow. As a long-time volunteer Girl Scout leader, I found your article eye-opening. I have often felt that my local council did not provide enough services and enough value to justify its share of the cookie and other revenue.

    In fairness, however, I don’t think it’s enough to say that money allocated to programs is “buying management and staffing of a sales- and fee-based operation” without getting more specific. Were you able to tell how much of that overhead is related to the items below?

    - developing an educational/recreational girl development program. Do the sales of books and badges underwrite the research, writing and publishing, or does some of that come out of overhead?

    - maintaining camp properties and staffing day and summer camps. Are camp fees sufficient, or does this claim some of the overhead?

    - creating and maintaining websites for girls and leaders.

    - arranging travel opportunities and overseas programs for girls.

    If some of the “overhead” is spent on these items, I submit that girls do benefit, and I would class these as legitimate “program” expenses. Perhaps the scouts need to be more detailed in their statements. so we can more fairly judge.

  2. Thanks, Deborah, for the wonderful comments. And I agree with you exactly that some GSA national and local council moneys are spent in ways that provide value — I certainly didn’t mean to imply all moneys were solely devoted to fee- and revenue-based activities (so the best I can do is lump all that under “overhead”). I’m not trying to bash on the GSA, just report that the issue is more complex and that we just don’t know. It doesn’t look like the money “goes to the girls” as simply and directly as Harquail and the press repeating her blog would have it.

    However, I have dealt with dozens of nonprofits in my career as a consultant. Some nonprofits look and feel like what we would call a nonprofit — with significant donations which are in part (20%-70%) translated into real services, like feeding the poor, advocating for political causes, or providing health care to children. These non-profits, if their revenues are unsteady enough, operate in a culture that keeps overhead as low as possible — the spirit of volunteerism goes all the way to the top.

    And there are non-profits (such as the non-profits that transport organs for surgical transplant) that are, for all practical purposes, for-profit businesses without the equity ownership or profit distribution. They support themselves entirely from fees, make significant profits (which by law they have to call a “surplus,” but a “surplus” and “profit” are really the same thing in terms of money), devote a significant amount of resources towards overhead in terms of marketing, administration, and so on, and pay high salaries and generous benefits (for instance, the owners of “non-profits” that transport organs — by fedeal law organ transportation companies cannot be for-profits — often get ridiculously high, six- to seven-figure salaries, which is allowed, rather than profit distributions, which is not).

    The GSA financials look more like the latter than the former. But, in reality, I don’t know exactly who gets paid what and for what. You’re right. I did much research on this article, but the best I could find were rumors and innuendos, so I ignored them. The GSA and the local councils keep that information and their real organizational activities tightly locked up (which would be harder to do if they were more dependent on donations). I don’t know how much the president of GSA is compensated, even though I and you do know how much Ken Lewis and Steve Jobs make). The problem with a nonprofit relying on donors, is that the donors who contribute sizably want to know and control things like this. The problem with relying on fees and sales, which the GSA does, is that it requires considerable — and well-compensated — resources be devoted to generating those fees and sales. That’s just reality.

    I would love to know the organizational structure of the GSA and its councils, especially how much of the money that goes to these organizations translates into direct benefits for the girls. If anyone from the GSA national organization or any of the councils wants to wring my neck on this, I’d be more than happy to hear more precise financial breakdowns (in fact, I’d love to hear that the majority of cookie sales revenues actually ends up accruing to the girls and the volunteers in real, tangible benefits).

    My experience with the GSA, however, leads me to the same conclusion that you begin with, Deborah: that the lion’s share of real value to the girls comes from the volunteers and families at the lowest rungs of the organization, not from the councils and the GSA and the moneys that go there. Which is why I conclude with advocating donor support that directly impacts that volunteer level (through restricted donations or direct donations of equipment or services), not the national or council level, where cookie sales profits go. At least that way you know for sure that your money is going to the girls and the volunteers.

    But, in the end, the issue is more complex than any of us can know, as you point out and as I’m trying to say (imperfectly, I grant you) in my article.

    Thanks again! I loved the comments and the needed balance.

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