Santa Clause: The Hidden One-Man Manufacturing Powerhouse
By Nicholas Haberling and Lexor Adams
For those who believe, in the most distant reaches of the North Pole there exists a land where a jolly old man employs elves in a vast manufacturing empire. The government categorically denies the existence of Santa Clause despite the North American Aerospace Defense Command actively monitoring his movements. However, even if you do not believe in Santa, one must admit how strange it is that every year hundreds of millions of children wake up on Christmas morning to find presents left behind after this man broke into their homes. Most importantly of all, how much does it cost for Santa to build all these toys?
Toy Production Cost
The first step in figuring out how much it costs Santa to produce Christmas presents each year is determining the cost of toys. To do this we have to figure out the typical cost of a present. If we were to assume Santa buys his presents from Amazon, this would significantly increase his visibility on the world stage. Plus, we all know Santa produces his own toys. Yet, Santa isn’t magical. He must produce these toys somehow. The North Pole likely has its own fully functioning manufacturing sector. To determine the typical cost to produce a toy we began with the retail price of a toy.
This was calculated by using the “Top 100” Toy List on Amazon, which spans all ages/toy types (it tries to make sure there’s something children of all ages—which made it a good broad spectrum look at typical Christmas gifts Santa gives). Ironically, the “Top 100” Toy List only had 74 toys on it at the time of our research. This was likely due to some toys going out of stock or perhaps just an error on Amazon’s part. Nonetheless, the average price of these 74 toys was $62.73 and the median of the prices was $41.23. We decided to utilize the median price in order to eliminate the impact of high end toys in our analysis. Santa might give these sometimes; but, they are likely reserved for only the “very nice” children, which, if you’ve ever been around children, you know makes up a very small portion of the general child population.
Median toy price = $41.23
To identify the price the typical toy actually costs to produce we decided to “back out” this number from the median toy price. This begins with figuring out how much a retailer actually pays for a toy when buying from a producer. There is an easy way to do this. Publicly traded companies must release quarterly and yearly financial statements (called 10-Qs and 10-Ks respectively), which the SEC publishes. Included in these statements is both their total sales and how much those sales cost, also known as Cost of Goods Sold. For a retail company, this cost of sales is primarily the inventory cost. We had to make a decision of whether to use Amazon’s financial statements or a competitor's. We opted to use another company's because it seemed likely that looking at how much Amazon pays for inventory would distort the calculations since this number includes all their market segments, not just toys. The obvious choice to get a specific look at cost for toys was Toys-R-Us. This does introduce the possibility of error compared to using Amazon; but, we decided to assume their toy prices and cost of inventory are similar enough to allow for a calculation.
The approach is to figure out for each dollar of sales Toys-R-Us makes, how much of that dollar was originally spent on inventory. Toys-R-Us Cost of Sales includes: the cost of merchandise acquired from vendors, freight in, provision for excess and obsolete inventory, shipping costs to customers, provision for inventory shortages, and credits and allowances from our merchandise vendors. While this introduces some variability, the cost of merchandise acquired should make up the vast majority of the Cost of Sales numbers. To come up with a more accurate number and account for possible year to year differences we took a three year average of sales and Cost of Sales of the last three years for Toys-R-Us.
% Cost of Sales is of Inventory = Cost of Sales / Sales
Avg % Cost of Sales is of Inventory for Last 3 Years = 64.25%
This means for every dollar of sales Toys-R-Us makes, somewhere around 64 cents of that dollar went to purchasing the original inventory. We can now calculate approximately how much a retailer pays a producer for the typical toy based on our previously calculated typical toy retail cost and the percentage of the final toy cost that a retailer purchases the goods for.
Price Retailer Pays Toy Manufacturer for Typical Toy = Median Toy Price * COGS as % of Retail Prices Sales = $41.23 * .6425 = $26.49
This approach works because we can assume the percentage Cost of Sales makes up of Sales overall is approximately the same percentage Cost of Sale (inventory price) is on average of the Retail Price for an individual toy. The reason we can assume this is if you were to add up the retail price of every individual toy Toys-R-Us sold in a period you would get the same Sales number as is on the income statement and if you were to add up the inventory cost to Toys-R-Us of all those toys you would get Cost of Sales. The cost of sales percentage calculated above thus reflects the average percentage of a toy's retail price that is paid to the manufacturer of the toy (if it makes more sense intuitively, we've essentially calculated the average gross profit for each toy, the inverse of which is how much Toys-R-Us is paying manufacturers for toys).
Using the same approach, we can back out how much the toys cost producers to make. The important difference between a toy manufacturer and a retail company in terms of cost of sales is that a toy manufacturers’ cost of sales will include the labor that went to producing those goods as well as materials. Assuming a full North Pole economy exists, it’s likely Santa pays the elves comparable to toy manufacturers (albeit in Candy Canes instead of dollars). The reason we can’t just use the price the typical toy costs a retailer to purchase (which is the revenue a toy manufacturer receives) is this price includes a number of items that aren’t relevant to Santa: the manufacturer is selling the toys to retailers at a profit and the manufacturers have operations like marketing that Santa doesn’t have. The same approach we used to figure out how much retailers pay toy manufactures for a typical toy works for toy manufacturers as well. Utilizing cost of sales and overall sales, we can figure out the percentage of every dollar of sales a toy manufacturer collects that goes toward producing the toys. We picked Hasbro and Mattel as the two most well-known toy companies (outside of perhaps LEGO, which is a family owned company and based in Denmark meaning they don't have to report to the SEC). We again used an average of the last three years for both companies.
COGS % Of Sales = Avg. Cost of Sales for Last 3 Years / Avg. Sales Last 3 Years
Combined Average of Hasbro and Mattel = 49.22%
Based on this we can then use the price a manufacturer gets for the typical toy being bought wholesale by a retailer ($26.49) and the percentage that is actually going to producing the good (49.22%) to determine how much the typical toy costs a toy manufacturer to produce.
Cost of Production for Typical Toy = COGS % of Sales * Price Retailer Pays Toy Manufacturer for Typical Toy = .4922 * $26.49 = $11.899
In summary, the typical toy costs a manufacturer about $11.899 to produce. We calculated this by beginning with the median retail price of the top toys this holiday season based on Amazon’s top 100 list. We then assumed that Toys-R-Us toy prices and how much they pay toy manufacturers would be similar to Amazon’s. Following, we took Toys-R-Us Cost of Sales (which is primarily inventory) and divided it by their sales to determine what % of every sale they make goes to inventory. It follows that this percentage multiplied by the price of an individual toy would approximate how much that individual toy cost Toys-R-Us (or Amazon) to buy from a producer. The same procedure was followed for the Toy Manufacturers: dividing their Cost of Goods Sold (which includes inventory and direct production costs) by their sales. This percentage should reflect how much their sales (which are primarily to retailers) goes to producing the toys. Multiplying this by the typical toy cost retailers pay to producers gives us the cost to produce a typical toy. While there is obviously room for error in this calculation, it should be approximately correct. The typical toy costs Santa approximately 11.899 USD to produce (or 11.899 North Pole Currency given the 1 to 1 exchange rate we assumed earlier).
Number of Presents Delivered
Now that we know how much it costs for Santa to produce a toy we need to find out how many toys are built at Santa Inc. There are a number of factors that come into play with the first being how many children there are in the world. Statista.com. reports that in mid-2017, twenty-six percent of the world’s population was comprised of children ages fifteen and under. This would mean that 1.976 billion children inhabit the Earth today.
However that is not the end number. Santa only delivers presents to those who truly believe in him so we needed to separate the total population of children in the world into individual age brackets. Obviously there are going to be some differences between age groups but without that data available we simply divided 1.976 billion by sixteen to get 123.5 million children per age group (0-15).
1.976 Billion Children / 16 age groups = 123.5 Million Children per group
Courtesy of The Atlantic
Next, we had to assign belief percentage values to each age group. Our source cited belief percentages for the ages of three, five, seven, and nine. Clearly there were some important data points missing. To fill in the gaps we simply took the midpoint difference between the data points we had and added or subtracted depending on the trend in belief. Belief in Santa topped out at 83% for five year olds before being wiped out after age 11 which had a measly 3% believing in St. Nicholas. Since ages 0-2 aren’t developed enough to have a belief in Santa we assigned them zero value.
But wait! What about the Naughty List and cultures that don’t celebrate Christmas? Unfortunately the Naughty List is classified beyond the highest levels of our government and we don’t have access to it. It is rumored among conspiracy theorists that you will learn about the existence of aliens among us before seeing the Naughty List. As for cultures that don’t celebrate Christmas, we don’t have the time to breakdown demographics in every country detailing who would likely celebrate Christmas or not. This is a theorized maximum number of presents Santa would deliver before Christmas morning.
With that in mind we hypothesize that Santa Clause will be delivering 577,362,500 presents on Christmas 2017 assuming each child only gets one present from Santa.
Delivery costs
Some have said that Santa uses modern distribution systems to get toys out to the children in time for Christmas but of course this is simply a massive disinformation campaign started by the Russians. In fact, recently declassified archival footage from The Santa Clause 3 reveals that Santa has a deep understanding of the space-time continuum.
“This should've been in stores weeks ago.” Exclaims a bewildered visitor who believes he is in Canada and not the North Pole.
“Oh. No worries. We have a unique distribution system here.” Answers Curtis the Elf.
“In order to distribute this stuff you're gonna have to freeze time.”
“Manipulating the space-time continuum for one-night global delivery is the easy part.”
While there is certainly a dollar value attached to this impressive manipulation of time and space, it is simply impossible for us to quantify using our primitive abstractions. However, here is an interesting article that details how Santa might be manipulating time.
The Total Cost
Assuming our toy production costs are accurate and we are within the ballpark of the number of presents being delivered this year, the amount of money Santa spent in 2017 to build these toys is a fairly straightforward calculation:
$11.899 per toy X 577,362,500 toys = $6,869,929,738.93
But that answer isn’t good enough. We need to figure out how much money Santa has available to pay for this year’s presents and every year in perpetuity. For that we need to do a perpetuity calculation. Our formula for this calculation is as follows:
PV of Perpetuity = (Dividend / Discount Rate)
The dividend in this case is the amount of money Santa spends each year on production costs. The discount rate will be determined by subtracting annual population growth of 1.1% from the annualized-inflation adjusted return for the stock market of 7%. This leaves us with a discount rate of 5.9%.
PV of Perpetuity = ($6,869,929,738.93 / 5.9%)
PV of Perpetuity = $116,439,487,100.52
This means that Santa Clause has at least 116.439 billion dollars invested around the world, earning him a respectable return so he may donate 6.869 billion dollars’ worth of presents to children every year. The fact that Santa is able to be the richest individual on the planet while keeping his donations a secret is certainly an impressive accomplishment. To do this it is very likely he has various pseudonyms attached to offshore bank accounts that allow him to discreetly move his fortune around.
Conclusion
While we have made a best-effort attempt to reveal the intricacies of the Santa Empire, in truth it is impossible to put an exact dollar value on his elusive operation. Because for every variable we attempt to understand, another surfaces to muddy the water again. Does Santa infringe upon toy patents or does he have a secret backroom deal with the industrial toy complex? How did he acquire this vast sum of money? And is this unregulated manufacturing center in the North Pole the real culprit behind the melting ice caps? Until Santa Clause comes out of the shadows we will never truly know. But until then the Nerd Econ team wishes you a Merry Christmas and Happy Holidays.
