>...then Walmart could double their profit now by raising prices. I doubt this. ...
>If you assume revenue goes up without an increase in costs, then yes, but there's little reason to assume that.
Well, let's review, and please check out my math below. I did some more googling and copy-pasted what I found.
(copy-paste:) Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
Hence revenue is an amount independent of costs. Two ways to raise revenue, by definition, is to raise prices or increase sales.
(copy-paste:) Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.
Hence profit (and not revenue) is the amount that is dependent on costs. Note that net income is often considered the same as profit.
Raising wages raises costs. Without a respective increase in revenue, profit is impacted.
(copy-paste:) Profit margin represents the percentage of revenue that a company keeps as profit after accounting for fixed and variable costs. It is calculated by dividing net income by revenue. The profit margin is mainly used for internal comparisons, because acceptable profit margins vary between industries.
So I was suggesting that increased labor costs could be balanced with increased revenue brought about by increased prices. For example, a 4% increase on a 10-pack of white socks that was $7.50 at Walmart is now $7.80. A 14% increase on a Big Mac that was $4.00 (http://www.fastfoodmenuprices.com/mcdonalds-prices/) is now $4.56. With some market research maybe we can figure out how many fewer socks and burgers get sold. But hey, at $4.56 a Big Mac it's still cheaper in the US than in Sweden and Norway (http://www.economist.com/content/big-mac-index).
An alternative to price increases is to accept a lower profit margin. Let M=Profit Margin, R=Revenue, C=Costs; hence M = (R - C)/R, straight from the definition of Profit Margin. We can show with some algebra that we can take R and C on a per-employee basis and M = (R - C)/R still works with per-employee numbers. Also, M = 1 - C/R. Via algebra, we can find the per-employee costs: C = R(1 - M).
Let W be whatever increase in labor costs to be considered (per employee).
Let C1 = C + W, the new cost from the increase in costs from labor.
Let M1 be the new profit margin after the more expensive labor takes it hit. Again via algebra, M1 = M - (W/R).
To keep the math easy, we'll consider a W where the hourly cost of labor increases $1 for the year (per employee): $1/hr 35 hr/wk * 50 wk = $1750. Now, a $5/hr increase to the employee would mean $5 plus FICA taxes etc. to the employer. So let's then consider a total increase of $6/hr of labor costs too.
For Walmart, then, every dollar to labor is a $1750/$209,622 hit to the profit margin, or barely one basis point (0.835 bps).
For McDonalds, it's $1750/$60,507, or 2.89 bps.
So if Walmart doesn't want to budge from their spot on their supply-and-demand curve (whatever that may be), i.e. doesn't change prices, then in absorbing an additional $6/hr labor cost would mean settling for a profit margin of 3.45% (=3.5 - 6 * 0.835 / 100).
And now McDonalds, for them it would be 18.8% (=19 - 6 * 2.89 / 100).
I concede my math is off. The algebra is good, the arithmetic bad, right at the part I was declaring basis points. They're not bps, they're straight percentage points (making the profit margin reductions off by a factor of 1/100 - d'oh!).
For the giggles, I then went I calc'd on price increases (putting aside supply-and-demand considerations) to cover $6/hr increase. PM and Markups came to 3.3% and 5% for Walmart; 16.2% and 17.4% for McDonalds. These are gross overestimations to be sure, since the approach is akin to giving every employee a huge wage boost, but really we need to know what proportion of employees would get the increase to meet some minimum wage level. Study at https://www.purdue.edu/newsroom/releases/2015/Q3/study-raisi... puts it around 4.3% for restaurants.
>If you assume revenue goes up without an increase in costs, then yes, but there's little reason to assume that.
Well, let's review, and please check out my math below. I did some more googling and copy-pasted what I found.
(copy-paste:) Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
Hence revenue is an amount independent of costs. Two ways to raise revenue, by definition, is to raise prices or increase sales.
(copy-paste:) Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.
Hence profit (and not revenue) is the amount that is dependent on costs. Note that net income is often considered the same as profit.
Raising wages raises costs. Without a respective increase in revenue, profit is impacted.
(copy-paste:) Profit margin represents the percentage of revenue that a company keeps as profit after accounting for fixed and variable costs. It is calculated by dividing net income by revenue. The profit margin is mainly used for internal comparisons, because acceptable profit margins vary between industries.
For Walmart, quarterly profit margin is about 3.5% (https://ycharts.com/companies/MCD/profit_margin).
For McDonalds, about 19% (https://ycharts.com/companies/MCD/profit_margin).
So I was suggesting that increased labor costs could be balanced with increased revenue brought about by increased prices. For example, a 4% increase on a 10-pack of white socks that was $7.50 at Walmart is now $7.80. A 14% increase on a Big Mac that was $4.00 (http://www.fastfoodmenuprices.com/mcdonalds-prices/) is now $4.56. With some market research maybe we can figure out how many fewer socks and burgers get sold. But hey, at $4.56 a Big Mac it's still cheaper in the US than in Sweden and Norway (http://www.economist.com/content/big-mac-index).
An alternative to price increases is to accept a lower profit margin. Let M=Profit Margin, R=Revenue, C=Costs; hence M = (R - C)/R, straight from the definition of Profit Margin. We can show with some algebra that we can take R and C on a per-employee basis and M = (R - C)/R still works with per-employee numbers. Also, M = 1 - C/R. Via algebra, we can find the per-employee costs: C = R(1 - M).
Let W be whatever increase in labor costs to be considered (per employee).
Let C1 = C + W, the new cost from the increase in costs from labor.
Let M1 be the new profit margin after the more expensive labor takes it hit. Again via algebra, M1 = M - (W/R).
To keep the math easy, we'll consider a W where the hourly cost of labor increases $1 for the year (per employee): $1/hr 35 hr/wk * 50 wk = $1750. Now, a $5/hr increase to the employee would mean $5 plus FICA taxes etc. to the employer. So let's then consider a total increase of $6/hr of labor costs too.
For Walmart, then, every dollar to labor is a $1750/$209,622 hit to the profit margin, or barely one basis point (0.835 bps).
For McDonalds, it's $1750/$60,507, or 2.89 bps.
So if Walmart doesn't want to budge from their spot on their supply-and-demand curve (whatever that may be), i.e. doesn't change prices, then in absorbing an additional $6/hr labor cost would mean settling for a profit margin of 3.45% (=3.5 - 6 * 0.835 / 100).
And now McDonalds, for them it would be 18.8% (=19 - 6 * 2.89 / 100).
So how'd I do?