The Economics of Scale (or, the high cost of low prices)

I often see tweets like this decrying wealth inequality:

It follows the formula of “big company keeps large chunk of money to itself, but workers don’t get raises.”

But this is just scratching the surface. Dig more into the math and it’ll start to really enrage you.

Kroger has upwards of 450,000 employees. Just doing some back of the napkin math, it would cost a lot of money to give all these workers a raise. With that $1 billion, they could give each worker roughly a $1/hr raise for a year and that would basically burn through all that money.

In other words, Kroger has about half a million employees, and they only were able to turn that into profits of $2.8 billion (source), and the best they can do to generate wealth is just give a third of that money to shareholders in the form of stock buybacks.

Walmart takes this to the absolute extreme. They made a profit of about $13 billion in FY ’21 on gross revenue of almost $560 billion. Sure, that sounds big, but factor in that Walmart has 2.3 million store associates, meaning that if Walmart wanted to raise wages from $11/hr to $15/hr, assuming their workers work an average of 30 hours a week (I think it’s actually more but let’s be conservative), that would cost $13.8 billion. Walmart’s working on very slim margins here. That $13 billion profit sounds great but it took minimizing pay for literally millions of people to scrape up that profit (and I’m just thinking of store associates, not even the employees of Walmart’s thousands of suppliers who they notoriously pressure for lower prices).

In fact, there have been past years where US taxpayers spent more money on assistance programs supporting Walmart employees than Walmart earned in profits for the same year.

This is the vicious cycle of pursuing scale. Walmart literally fueled their growth over the years with aggressive price reduction. You couldn’t run a small, independently-owned grocery store if you were only making about 5 grand in profit for each employee. But a behemoth like Walmart can because they can make it up in volume.

So in reality, scale isn’t really that good at generating wealth; it’s just good at generating wealth inequality. The amount of resources Walmart and Kroger need to earn their profits is massive.

These companies (Walmart especially) love to tout their low prices, and to their credit, they do work hard to keep prices low (again, Walmart is super good at this). But low prices, especially at scale, are bad at generating wealth. Maybe a few Walmart execs and shareholders might disagree, but millions of non-wealthy employees sure won’t.

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