Barriers to entry

All areas with what one might call unearned advantages; if a temple tells you that Buddha endorses that temple and worshiping elsewhere might condemn you to the hell or rebirth as a hungry ghost, they probably didn’t earn that endorse on the free market with really good homiletics and especially effective philanthropy. If a construction company has been building the local Shinto temples for the past couple centuries, they’ll go on getting business regardless of whether they’re doing an efficient job. The candies produced near Ise will go on selling well despite transgressions like selling expired frozen goods as fresh and forging the documentation. When King Henry VIII expelled the Catholic Church and seized monastery assets, he seized something like $\frac{1}{4}$ of the entirety of England²; one has to wonder if the monasteries were that good at agriculture & business. Modern corporations have seamy underbellies even if they seem utterly unobjectionable³.

So if one sees an old corporation, one is justified in asking how it has survived so long - does it have some sort of unique stable niche it alone can fill, or an unfair advantage? It might be a simple case of luck. With millions of corporations over the years, surely a few will simply happen to survive a long time.

But it seems to me that if this were the case, one would expect to see such corporations shifting niches and surviving in competitive areas for long periods; but instead, if one looks at examples like the former oldest corporation in the world, Kongo Gumi, one sees a story which runs more like this: they lived in a protected niche for an extremely long time and then they died shortly after venturing into more competitive areas; and indeed, Kongō Gumi was founded in 578 AD as a temple construction company and went bankrupt after it tried to expand into general real estate in the middle of a bubble.⁴ Gumi illustrates another failure mode: a single leader can draw on the accumulated capital (financial & social) of an ancient institution. How did Gumi, a relatively small construction company in a shrinking business, have enough credit to hang itself? Perhaps because it was such an ancient institution. The folly of one generation can be fueled by the prudence of many generations.

Charities are usually corporations, incidentally, with curious spending patterns.⁵

That is all background for the main question.

Cookie prices

On a boardwalk in San Francisco, we passed some Girl Scouts selling the famous cookies. We bought 1 box of thin mint Girl Scout cookies. It cost $4. (I asked around, and they’re going for $4 in San Diego too.)

$4 is a lot, really, compared to some things. I could get a nice meal of smoked trout for twice that, or buy a bunch of used books, or host my website for a few months. All of those would last longer too - a box of thin mints could disappear in a few minutes. As well, they’re pretty good cookies, but they aren’t many times greater than similar chocolate cookies. If they weren’t from the Girl Scouts, a bona fide charity giving money to which makes a good person, I wouldn’t have spent the hundreds of dollars that I have.⁶

And it wasn’t always a solid $4. It used to be a nice $2.50, easy to explain: 8 boxes for a Jackson, 4 for a Hamilton, 2 for a Lincoln. And before that it was $2. And that wasn’t that long ago either; I was selling cookies (with my sisters) at those prices in the ’90s.

Judging charities

Presumably we would blame a leadership if it was failing to accomplish its publicly claimed goals and serving itself instead (the fancy economics term for this is the principal-agent problem). A charity focused on character-building and recreation is a bit harder to judge than one trying to stamp out polio; the latter can just point to falling death-rates.⁸

There are a number of criteria we could try to judge Girl Scouts on:

1. Is the administrative overhead growing or decreasing?

   Computerization and general technological developments means that the necessary bureaucracy ought to be more efficient than, say, in the 1950s.

2. Is the enrollment of Girl Scouts as a fraction of the young female population increasing or decreasing?

   If Girl Scouts is shrinking, then the good the organization can do is necessarily also shrinking. It’s hard for Girl Scouts to help a lot of young girls learn self-discipline or character if they’re all fleeing.

3. Are camps being more or less utilized, or worse, being closed?

   Camping and the outdoors are one of the key aspects of any Scouting organization and in a sense, what makes them more than a club for arts & crafts⁹. If they are going unused, then it’d be like a library no longer lending books - it may still be doing something useful, but one wonders what exactly.

How can we judge Criterion 1? Easily, it turns out. Girl Scouts is a charity, charities are nonprofit corporations, corporations keep records of spending, and often make them public; as an IRS-recognized charity, Girl Scouts is obligated to make Form 990 financial reports public, and some Googling then turns up GuideStar as a source for the reports, at which point it’s easy to download their PDF and finally answer the question - what does Girl Scouts spend its money on? (That charity filings are publicly available seems to be generally unknown; people routinely ask questions about charities that could be answered by looking at the Form 990s.)

Criterion #2 is harder, but total enrollment is public information, as is US census data about how many young girl there are.

Criterion #3 is difficult to research; it seems unlikely that camp attendance or closing data is easily found online, and it is possible that not even Girl Scouts National (GSUSA) knows the answer. We’ll punt on #3, and see how far we can get on #1 and #2 without looking at the tax filings.

Here are some facts to consider. Girl Scouts was founded in 1912 and is a century old. The GSUSA leadership is apparently unelected. And the current era is well-known as one of stratospheric executive compensation, which would be as easy to justify in charity as anywhere else (shouldn’t our managers get a fair living wage? You don’t want the Girl Scouts crippled by headhunters poaching it.) Particularly troubling are the cookie sales themselves. At first glance, they seem almost designed to concentrate control & money, rather than decentralize it:

• The council probably control the cookie sales through standard methods like copyright or trademark or trade secrets
• prices and availability reportedly are now set nationally for each area. This is a very recent development.
• Cookies have been official fundraisers and sold since the 1920s; they were commercialized in 1934, and commercial bakers used nationally in 1936
• Competing would be hard because so much of the value is in the brand (and brands are so prized by manufacturers because they are a license to print money).
• Economies of scale discourage alternatives; there are 2 official bakers in 2011, compared to 14 bakers in 1961.
• There are few fundraising alternatives: Girl Scouts sometimes sell calendars or magazine subscriptions or nuts or popcorn, but the sales of those are peanuts and most only sell cookies.
• Returns of cookies are forbidden

Cookie costs

How much are the cookies worth? Let’s do some guessing, then look it up. A Girl Scout troop can run around 10-20 girls. Most of them will sell cookies. A reasonable guess from my own cookie-selling experience is that the average number of boxes sold is ~80.¹⁰ Each box is $4, so each girl sells $320, and a troop $3,200-6,400. (If this sounds high, a large council might have 4 or 5 girls who sell over 1000 boxes each, which is >$16,000 in sales right there. The all-time record is at least 17,238 boxes.) With around 2.4 million girl members, that works out to around 184 million boxes sold annually; in 1992, 175 million were sold, and in 2007, around 200 million were sold - so our guess was off only by ~8%.

200 million boxes is, of course, $800 million in sales. Quite a bit.

How much of that would be profit? Hard to say.

A box of Thin Mints is around 7oz of cookies. (Or less. Aside from the price increases, the cookie count has been reduced, so the previous figures about inflation understate the true price increases.)

A consumer can buy 5 pounds of flour for $4 currently, or 80 cents for a pound, or 40 cents for half a pound (8oz) of flour. Chocolate commodity prices aren’t so easy to figure; but 36 1.55 oz Hershey Milk Chocolate costs $21.30 in 2011 (they have also cost $33.62 in 2011 or $24.15 in 2009), which is 2.62 ounces per dollar ($\frac{36\times 1.55}{21.3}$), or 38 cents an ounce. This is roughly 3 times as much as the bulk cocoa itself, but sugar & milk aren’t free¹¹. The chocolate layer on Thin Mints is thin¹², so 1 ounce may be an overestimate. Let us generously add the 8oz of flour to the 1oz of chocolate; our cost per box is 78 cents. Let’s throw in 22 cents more to cover the flavoring and cooking oil and baking process, giving us $1 a box.

A cross-check on this $1 manufacturing cost estimate is looking at Walmart’s knockoff Great Value: Fudge Mint Cookies, which are 10oz for $2.49¹³; 3oz represents a 42% increase, so we scale our Girl Scout cost estimate to $1.42 to compensate, and we see Walmart has only $1 of margin. So our estimate can’t be too erroneous - obviously it couldn’t possibly cost >=$2 to make the cookies because then Walmart would be unable profitably to offer 42% more for $2.49.

And the other $3 are apparently pure profit. How is that distributed?

The official Girl Scout website says

With every purchase, approximately 70% of the proceeds stays in the local Girl Scout council to provide a portion of the resources needed to support Girl Scouting in that area, including the portion that goes directly to the group selling the cookies. The balance goes directly to the baker to pay for the cookies.

So the baker is supposed to get 30% of the $4 a box. The baker gets $1.2 per box? What? That makes no sense - we deliberately used highly conservative assumptions (consumer prices for flour & chocolate rather than wholesale, 2oz of additional material, an arbitrary 22% fudge factor, etc.). And we’re supposed to believe that our estimate was still low by 20%?

Something stinks here. But surely everything is kosher - I mean, GSUSA is specifically not getting a cut.

Revenue streams (other than cookies)

But how are they being funded, anyway? Their FAQ also says:

Girl Scouts of the USA is paid a royalty for use of the licensed trademarks by its licensed vendors based on gross annual sales volume. Girl Scout councils do not provide any portion of their cookie revenue to Girl Scouts of the USA. No other revenue from cookie sales goes to Girl Scouts of the USA. Girl Scouts of the USA provides contractual services and approves all educational materials developed by the bakers, as well as providing coordination and training for national media, safety standards, leadership programs and sale guidelines.

That’s sensible. Let’s move on.

At this point an economist is slapping his head somewhere. Money is fungible. What matters is the whole system, not arbitrary labels and divisions. If you give Kim Jong-Il $50 worth of rice, you just freed up $50 for his nuclear weapons program. If the 2 bakers are paying GSUSA a licensing fee, that fee is coming from somewhere. TANSTAAFL. It’s coming from the cost of the cookies! The license fee must be built into the cost structure. If the councils & troops are charged $1.20 for a box and the baker then pays 20 cents to GSUSA, you could change the arrangement to the baker having no license fee, charging $1 a box, and then GSUSA taking 20 cents. Everyone makes the same amount of money in the end, but suddenly no longer are 70% of proceeds staying in the local Girl Scout council.

There may be innocent reasons for these wording choices, but the more cynical know what they think: GSUSA is hiding its rake by blaming it on the 2 scapegoat bakers. Fascinatingly, if the $1 figure is a ceiling, GSUSA could be getting a figure comparable to the individual troops, since the troops only get around 10% or 40 cents; if the true cost of baking is <80 cents and the licensing makes up the other >40 cents, GSUSA would be getting more!

The other 60% goes to the local council, which apparently covers all the little rewards and incentive programs for the girls.¹⁴

Are there any stats breaking things down further? The Seattle Times mentions that

Girl Scouts USA doesn’t share in the local councils’ cookie proceeds, though it does get a 2 percent royalty from the commercial bakers’ net sales.

Net sales presumably means the full $800 million, or to put it another way, 2% of each $4, which would be 8 cents, which brings the bakers’ $1.20 down to $1.12. That’s more reasonable. $16 million is a lot but it wasn’t the hundreds of millions we feared. One Girl Scouts leader comments that the bakers get $0.90 of each $4.00 (22.5%), which is smaller than our conservative estimate of 20 cents more.

Staying honest: predicting before the experiment

So, before we peek at the tax filings, what predictions would we make? It’s important to predict before we look at more data; there are too many cognitive biases which let you decide that the results confirm your theory or beliefs (even if you were just lied to). If your theory can account for any result, then it’s a pretty worthless theory. (If your predictions don’t eliminate outcomes as possibilities, then you wind up holding weird beliefs like WWII sabotage confirms the existence of Japanese saboteurs and the absence of sabotage also confirms the existence of said saboteurs, or that confessing to witchcraft confirmed you as a witch and not confessing also confirmed you. Which is obviously daft.)

See also

• Charity is not about helping -(examining Folding@home with an uncharitable eye)

External links

Looking at financial filings for charities can be interesting from the points of view of sustainability and efficiency. Here are some links where people attempt lay analysis similar to the foregoing:

• ALCOR: Mike Darwin, The Armories of the Latter Day Laputas, Part 5

• JSTOR

  1. myself
  2. Andrew Gray
• SIAI: SIAI - An Examination, Brandon Reinhart
• Edge Foundation, Inc: myself, Case Study: Reading Edge’s financial filings

• Lifeboat Foundation: myself (short)