North Pole Inc.? An economist offers advice to Santa Claus

Santas work is done for another year. He andhis team of reindeer safely and successfully brought joy to children around the world on Christmas morning. But the challenges of the 21st century are reaching all corners of the global economy, and the North Pole is no exception. Santa is facing rising costs. He doesnt charge for his services. But he still enjoys annual revenues in the billions thanks to royalty payments from the use of his image. Can his operation stay viable?

Like any CEO, Santa is facing pressure

Producing toys for some two billion childrencosts,on average, about $10 dollars per gift cheaper than what youd pay in the stores, but that puts Santas overall expenses at a whopping $20 billion.

The single biggest expense for Santa is labour costs. Hiselves, though they work for free, still need food and shelter. And while theyre generally a pretty happy bunch, theyve lobbied hard for improved health benefits. One cost-cutting option is tooutsource thetoy manufacturing to China. But, because Santa is a jolly old soul, hed never lay off any of the elves. Neither outsourcing or downsizing would be considered. So, Santa will continue to see expenses for 500,000 elves on staff are running close to $10 billion.

Input costs

Next, theres the cost of purchasing the materials used to make the toys. Total input costs of raw materials run Santa just over $3 billion per year and thats been growing by about 5 per cent every year. Wooden toys were phased out years ago, replaced by cheaper plastics. Even cheaper materials, such as paper or straw, could be used. A doll made out of wheat husks or a cardboard bicycle would be just as fun for the childrenand would save Santa $500 million.

Restructure the operation

Another way Santa could make his operation more financially viable is to incorporate. Since he lives at the North Pole, there are no corporate taxes to pay (although if politicians had their way, that would change!)Making full use of tax-free status by incorporating would give him the benefits of limited liability, stock options for both himself and Mrs. Claus, and a board of directors. An influential board of directors would bring some much needed oversight to the operation.

Then theres the skyrocketing cost of the reindeer, which tallies up to another $1 billion. Rudolph has been using his popularity to push for more candy canes and a bigger role in decision-making. Moving to less expensive creatures to pull his sleigh, perhaps donkeys or mules, could shave another 5 per centoff total costs.

New delivery model

Global toy distribution is another huge expense of about $4 billion. Taking a cue from Canada Post, Santa could end chimney-to-chimney delivery and set up community gift delivery depots at the end of every block. Instead of waking up Christmas morning and running to the tree, children would have to put on coats and boots and trudge through the snow with a key to their delivery box.

Add onto this insurance costs, electricity and other miscellaneous expenses, Santas annual operating expenses are close to $20 billion, making him one of the largest global manufacturers and distributors in the world. Cardboard toys, outsourcing to China, ending home delivery, and using donkeys to pull his sleigh could conceivably reduce total operating costs by 10 to 20 per cent, and maybe make Santa Inc. more solid moving forward.

The Bottom Line

Still, Santa wants none of this. Toys should be fun and not make out of straw. Elves need their jobs. Mules just arent as cute as tiny reindeer. But in order to keep the magic of Christmas happening, Santas only option is to increase revenues. So this Christmas, kids, tell your moms and dads to leave extra helpings of milk and cookies by the tree. Santa needs every crumb he can get!

Todd Hirsch is ATBFinancials Chief Economist and author of the book, The Boiling Frog Dilemma: Saving Canada from Economic Decline. His Twitter handle is @ABeconomist.