Tea And Sympathy
There are Two Percent Clubs and there are Five Percent Clubs, select organizations of civic-minded corporations that contribute those percentages of their pretax profits to charity. Except for the fact that he would be the only member, Ron Schultz could start a One-Hundred Percent Club.
Schultz's company, Medicine for Children Inc., sells a special blend of tea called Christmas Spice. Last year was the fledgling enterprise's first selling season, but even so, it earned a respectable 20% return on sales of roughly $100,000. And, yes, it donated all of these earnings to one carefully chosen charity, as it plans to do this year, next year, and the years after that.
"A fascinating idea," observes Lucinda Lee of Flynn & Steinberg, the prestigious California accounting firm that has offered its services to Schultz free of charge.
"Novel indeed," says Ernest Acosta, a spokesperson for the Internal Revenue Service, which may be wondering how Schultz plans to get around the tax code's 10% ceiling on corporate charitable contributions.
"A very, very lovely gesture," opines a spokesperson for Thomas J. Lipton Inc., makers of Lipton tea, which competes with Schultz in roughly the same manner that General Foods competes with a specialty bakery. "But," he adds, with just a trace of condescension, "American business certainly couldn't survive by duplicating [Schultz] on a Xerox machine."
Ron Schultz himself scarcely expects American business to leap to imitate what he calls his "altruistic corporation." Still, it was his business experience more than anything else that led him to invent a new kind of connection between making money and giving it away.
The making part, of course, came first. Ten years ago, Schultz was nearing 30, and was disenchanted with his various careers in academia, pharmaceuticals, and the Army. Visiting Seattle, he noticed a lot of spice tea on store shelves. He knew there was nothing like that back in the San Francisco Bay area, despite the growing popularity of specialty coffees and teas.
Six weeks later, with $3,500 in savings, he opened a tiny store in a Los Altos, Calif., shopping center. There, amid a variety of gourmet foods, he sold his own newly mixed product, a tea he called TN Spice, packaged in a quaint brown bag. Within a month, the aromatic cinnamon blend had caught on, and in six months Schultz sold the store, moved to a windowless warehouse, and began to market his tea. Two years later, he incorporated the burgeoning company as Delphin Corp.
Competition was not far behind: Soon stores were filled with cinnamon spice blends virtually identical to Schultz's, most of them even packaged in similar brown bags. To survive, Schultz had to take an on-the-job crash course in business. Working 16-hour days, seven days a week, sleeping in his warehouse and eating from a hot plate, he learned about tax codes and sales representatives, about shipping and accounting. Obsessively scrutinizing all expenses, he shipped his goods in secondhand cartons and kept heating and telephone bills to a carefully monitored minimum.
For most of this time, Schultz was giving money away more or less routinely -- $5,000 or $10,000 a year to worthy causes of one sort or another. "Like most donors, I gave to someone I knew or liked," he says now. "To the Academy of Sciences because I got a degree in math and physics, to the mentally retarded, that sort of thing. Charities themselves never really excited me; they seemed mostly hype and PR." Four years ago, however, Delphin's sales hit the $1-million mark, and Schultz found himself able to give away some $30,000, considerably more than ever before. The relatively hefty donation, in turn, started him thinking. Perhaps he should know a little more about the organizations to which he contributed; indeed, maybe he should learn more about charities in general. He began to scrutinize nonprofit organizations, much as he had his own business, to see how efficiently they were using their resources.
Another idea was beginning to take form in his mind as well, something that had more to do with his sense of purpose in life. How, he wondered, would an entrepreneur provide money to charity? "I knew how to be entrepreneurial when it came to making money," he reflects. "Heck, a lot of people can do that. But an even greater challenge, it seemed to me, lay in being just as entrepreneurial in giving money away."
The answer, he realized, was to put the two together. "How would an entrepreneur invent charity?" he asked himself. "Hell, he'd make a business out of it, work for his money. He'd develop a product at fair market value, form a company, give everyone a salary, and use the money to do what he wanted." Since Schultz knew tea, he would go into the tea business again. But this time it would be with a wholly separate company, designed solely to provide money to the right charity.
It was pure, it was simple, and it was so unusual that when Hugh and Marty Downey got a call a year or so ago from a California businessman named Ron Schultz, they didn't exactly take seriously his offer of free money. For 20 years, the Colorado-based husband-and-wife team had worked nights, weekends, and holidays to send volunteer medical professionals and medicines to the Sudan, in northeast Africa. Their organization, Lalmba Association, was then operating on a budget of $120,000 a year, scarcely more than the average doctor might earn in the United States, yet it was treating from 4,000 to 8,000 people a month in three Sudanese refugee camps. Schultz learned of the Downeys' work through an acquaintance of theirs, who had read of him in a newspaper article and, on a hunch, had called him up. Schultz, in turn, called the Downeys. They, not surprisingly, wondered who the fellow on the other end of the line thought he was.
"Here was this man, calling out of the blue, telling us he was selling a product with a three-month shelf life that would bring in $40,000 profit during its first season," Hugh Downey remembers, "and he wanted to give all the earnings to Lalmba. Skeptical? You bet I was skeptical, because people don't do this type of thing. We've been running this organization for 20 years, and we have to work hard for what we get. No one walks up and says, 'Hey, I want to give all my company profits to Africa.' " Marty Downey had a similar response. "First reaction? Well, is this guy nuts, or is he nuts?"
One year later, the Downeys still don't completely get it -- but Ron Schultz, they discovered, wasn't kidding. Flicking on the light in his chilly garage, Hugh Downey illuminates cartons filled with medicines piled ceiling high. All were purchased, he explains, with a portion of the money Schultz has given Lalmba. The rest of Schultz's money this year will be used to improve a nutrition program in the Sudan and help develop a clinic there for children under five years of age.
When Hugh Downey rejected Schultz's initial $40,000 offer, Schultz felt certain that Lalmba was the most effective outlet for his money. A bit stunned by the windfall, the Downeys weren't sure they had the resources in place to use all of Schultz's money effectively in just one year. So they agreed to accept $20,000 instead. Schultz immediately reduced his sales projections by half, claiming that he didn't want to make money any faster than he could substantiate what was happening to it.
The money came from Christmas Spice Tea. Last Christmas, 45,000 bags of the red-and-green-packaged spicy sweet blend hit the marketplace, enough to ensure its availability in at least a few stores in most states. It sold well, although whether because of its gustatory appeal or its social message no one is sure. The writing on the back of the bags of tea tells the buyer that he or she is "no ordinary consumer," because Medicine for Children is "no ordinary company." But it also urges the consumer to buy the tea "because you like it -- not because the profits go to charity." Recognizing that a cause-linked product limits the consumer pool to sympathetic buyers, Schultz wants his tea to stand on its own.
Distinguishing his product from his philosophy not only expands Schultz's potential market, it also permits him the autonomy he considers essential to running a successful business. "The failure of many charities to perform efficiently stems precisely from their lack of autonomy," he argues. "But since how much money I get isn't directly linked to how excited I can make someone about the cause I choose to support, I can be comfortable knowing that people would have bought my product no matter what I do with their money. So if I make mistakes, if I give my money to what I later discover is an inefficiently run organization, I can admit to it, and start over." An organized charity, he points out, doesn't have this luxury. Dependent upon the beneficence of others, a charity is under pressure to assure its donors all is going well.
Will Medicine for Children wash with the IRS? This year, at least, juggling the taxes won't be difficult for Schultz. For starters, the corporation gets its 10% write-off. Of the remaining pretax profits, Schultz hopes to write off about 50% as what the IRS calls "goodwill" advertising. If the company gave all that away directly, it would have to pay roughly $900 in corporate income taxes. Instead, it pays the earnings to Schultz, who works on a contract basis, in effect giving him a salary he doesn't need. Schultz in turn gives the money away, and takes a deduction under the IRS provision allowing up to 50% of income to go to charity. "It's when the profits from Medicine for Children exceed more than half my personal income that the tax game will get fun," Schultz says. He projects an $800,000 profit within the next several years.
Schultz's enterprise has already caught the fancy of other businesspeople. "When you're talking about a successful entrepreneur, what matters to me is that he wants something to happen," says Andy Berliner, former president of Magic Mountain Herb Tea Co., the first herbal tea to penetrate the supermarkets. Berliner, who now owns a frozen-pizza business, agreed to help Schultz market his Christmas Spice Tea even before the venture was under way. "After a successful business, you want to expand your energies, find more fulfilling ventures," he says. Both Berliner and Schultz believe that there are a lot of entrepreneurs who, having made plenty of money, want to do something more meaningful with their lives as they grow older.
As Medicine for Children has gotten off the ground, Delphin has shrunk, from peak sales of $1 million to its present level of roughly $250,000 a year. For Schultz, who draws what he calls a "comfortable" salary from Delphin, that is big enough. The reason is simply that some things are more important than others.
"It's a nice life," he says, gazing around his well-appointed home in Petaluma, "a good life. I like things. I appreciate them.
"But it's not everything, you know, being rich."