The Economics of Toilet Paper

(Photo: Chris Waits)

You never know what kind of useful information will turn up in your in-box. From a reader named Darin Haselhorst:

Steven and Stephen,

Thought this might be right up your alley.  An analysis only a true cheapskate could love.

I get very frustrated trying to compare prices on “paper products” at my local supermarket, Safeway.  They have various marketing terms meant to confuse the average consumer, regular, double, mega etc., making nearly impossible to compare prices on the spot.  So, I threw together a little spreadsheet (attached).

The price as Safeway was not all that surprising until you compare it to the price for which Amazon is willing to deliver it to your front door.  The Amazon Subscribe and Save program is about 30% cheaper than going to the store.  Not too bad.  If you have Amazon deliver 5 items on automatic delivery, they will take an additional 20% off the entire delivery.  A deal any true economist simply cannot pass up.

Its surprising to me that Amazon is willing to deliver to your door for approximately half the price Safeway has on their shelf.

There must be a story out there about the rise of places like Amazon and Walmart.com attempting to replace your local vendors for everyday items.  I know Walmart is toying with same day delivery and Amazon is testing delivery to neighborhood 7 Elevens for pickup. The infrastructure investment these companies are making must be incredible, just to bring me cheaper toilet paper.

Keep up the good work.

TAGS: ,

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 43

View All Comments »
  1. BatterB says:

    I think the analysis fails fully recognize the number of rolls purchased. To get to a point of savings, you have to buy three times the number of rolls than at Safeway. Buying in bulk is normally cheaper wherever you do it. There are hidden costs in 48 rolls, like storage space.

    Well-loved. Like or Dislike: Thumb up 42 Thumb down 4
    • Joaco says:

      This is spot on.
      All companies would buy in bulk if it was actually as cheap as it sounds. There is a breaking point where (bulk (48 rolls) + storage) > 16 purchases x(3 rolls).
      This was a concept developed by Toyota [TPS: Toyota Production System] (also refered to in Lean Manufacturing).
      The idea came when the Japanese came over to the US to see how they were producing products for mass consume in the western world (specifically US due to the large population and density). When they went into the supermarkets they saw how ‘efficient’ the repository system was. Everytime a shelf was emptied, there was an employee who went back to the storage and filled the shelf with products again.
      What if you could keep a constant flow (or adjustable) to the flow of output.
      Instead of “pushing” my product out of my factory, produce by “pulling” that is by what the market requires.
      Yes, producing 150 for $5 is cheaper for you, but unless you sell those 150, you are not gaining an advantage by buying materials in bulk. You will be paying around 10% of the item price in storage, so the 5% discount you got buy incresing your production from 120 to 150 you lost it at storage.
      This is more severe when the storage requirements are more strict, like frozen food or perishables, for example meat, yoghurt, surgical instruments, computer components (dust free atmosphere).

      Thumb up 1 Thumb down 0
  2. Kdogg says:

    It would be interesting to see how Amazon compares to Costco. Similar to GasBuddy, I think there needs to be a TPBuddy.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 0
  3. James says:

    The other factor is the amazing amount of price markup most supermarkets seem to have. I do most of my grocery shopping at a western US chain called WinCo, mostly because they have a) an amazing amount of things in bulk bins, like about 20 different kinds of flour; and b) no effing Muzak! But after comparing their prices to other places (even WalMart) I can only conclude that either the other places are raking it in, or they’re a secret money-laundering operation.

    Thumb up 3 Thumb down 1
  4. Enter your name... says:

    I think it’s going to depend on:

    * where you are (Amazon will beat most brick-and-mortar prices in high-priced areas)

    * how much storage costs you (if you’ve already got the space, or if you’d be buying it in bulk anyway, then it costs nothing extra to fill it with a huge box of toilet paper from Amazon)

    * what brand/type you prefer

    * whether you carefully watch the sales (the local store’s sale price might beat Amazon’s everyday price)

    Well-loved. Like or Dislike: Thumb up 5 Thumb down 0
  5. Kevin says:

    Another consideration here, as was mentioned with previously with bulk savings and the hidden cost of storage, is the fact that selling in bulk is a form of price discrimination. It allows each consumer to reveal their willingness to pay based upon purchase method and price.

    Thumb up 4 Thumb down 0
  6. Cinderella says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 17 Thumb down 27
    • J1 says:

      I’m not convinced carbon footprint is an issue here. Your Amazon delivery isn’t the only thing the delivery truck (normally UPS, at least on my orders) is delivering, so there is greater efficiency there. The delivery truck would probably create a lower carbon footprint than driving your car to the store regardless, and many delivery trucks are hybrids or run on natural gas, both of which are much cleaner than your car (even if it’s a hybrid itself).

      Well-loved. Like or Dislike: Thumb up 21 Thumb down 0
      • Philo Pharynx says:

        Well put, J1. In addition, there are fewer trips. For the grocery store, there is a trip from the supplier to the grocery chain’s regional distribution center, then another trip to the sotr, then a third trip to your house.

        With Amazon, there’s one trip from the supplier to the regional distribution center and then another trip to your house.

        Thumb up 1 Thumb down 0
      • James says:

        Though of course this in turn depends on whether you make a special trip to the store (and how long that trip is), or simply stop by on the way to/from somewhere else.

        Thumb up 2 Thumb down 0
    • Enter your name... says:

      Given that I’ve already got an Amazon subscribe-and-save order arriving every month for a couple of things that the local stores don’t carry, then the CO2 footprint of adding another item is basically zero. It wasn’t much to begin with, since both FedEx and UPS already make a daily pilgrimage to my building anyway. If you lived in a rural area, rather than a larger urban multi-family building, the calculation would be quite different, but then all the calculations are different under those circumstances.

      Thumb up 2 Thumb down 0
    • Sal's Dad says:

      Carbon Footprint –

      While I understand the concept of “Carbon Footprint”, I still “just don’t get it”. Why don’t we also discuss “Labor Footprint” and “Capital Footprint”?

      In a perfect world, all the inputs, including the downstream costs of carbon, are included in the cost to the consumer. Granted, we are very far from this ideal. But rather than adding a new layer of vague and voluntary costs to the decision process, shouldn’t we be working to include the downstream effects into the streamlined decision system we already use in every transaction?

      Until energy is priced to include all its costs, I have a very difficult time taking this concept seriously.

      Well-loved. Like or Dislike: Thumb up 9 Thumb down 1
  7. RZ says:

    Part of the reason for price discrepancy also has to do with the type of consumer. Someone who is stocking up ahead of time can order toilet paper from Amazon on a flexible schedule, whereas someone who waits until they are out or almost out of toilet paper will make a supermarket run to get some more. That’s why Safeway can charge more – they are catering to the group of consumers who need the product quickly.

    Well-loved. Like or Dislike: Thumb up 8 Thumb down 0
  8. Paul in VA says:

    The Problem with buying so Many rolls is not only the storage space, it CASH FLOW and Opportunity cost. Buying so many rolls so far in advance ties up your money, and prevents you from having money for other things.

    This is something that all businesses have moved away from in the past 10 years or so. Any amount of “inventory” is actually “money” sitting on a shelf. This is why so many places have gone to various versions of just-in-time manufacturing and Just in time delivery. The somewhat higher cost per piece is off-set by huge advantages in cash flow, and lower overhead cost for warehouse space, etc..

    Well-loved. Like or Dislike: Thumb up 12 Thumb down 4
    • Steve Cebalt says:

      Hi Paul: Excellent point, even if this is on a very micro level (toilet paper). When investing in a large quantity of an essential product (toilet paper, essential supplies for a business), opportunity cost must be weighed against savings. I consider it an investment to pay my office rent a full year at a time in exchange for no rate increase and a 5% discount. That’s a guaranteed 5% return on investment, without putting my money at risk in the market.

      Thumb up 2 Thumb down 1
      • Sal's Dad says:

        Your ROI might be closer to 10% (annual): you are paying your rent 6 months in advance – on average.

        Thumb up 3 Thumb down 0
      • Steve Cebalt says:

        Thanks, Sal’s Dad: I am keenly interested in your reply. I use this strategy a lot but I am not a math whiz. Can you explain the “6-month in advance” average and the 10% ROI? Very much interested in understanding this, thank you!

        Thumb up 0 Thumb down 0
      • Sal's Dad says:

        Steve, I wrote a detailed explanation, but the internet gods decided it wasn’t worthy.

        You are paying January rent (say $100) when due. February: one month in advance…December: 11 months in advance. On average, you are paying 5.5 months early, the equivalent of lending $550 for a year, for $60 in interest.

        You can use a spreadsheet to calculate Internal rate of Return: You shell out $1140 now, and get an immediate benefit of $100 (January) plus a benefit of $100 on the first of each month thru December. IRR works out to a bit under 12%.

        12% risk-free return? sounds good to me!

        And the return can be much much higher on consumer goods: If you save 10% buying quarterly instead of monthly… well, running the numbers, looks like I must have made an error, Excel says the IRR is 271% ??

        Thumb up 3 Thumb down 0
      • Steve Cebalt says:

        THANK YOU, Sal’s Dad! I appreciate your clear and enlightening tutorial very much. Very insightful, very much appreciated! Steve.

        Thumb up 0 Thumb down 0
      • Sal's Dad says:

        I am still troubled by that 271% IRR from a 10% discount. But I’ve checked my work…. I assumed you can pay $100 on the first of each month, or $270 on the first of each quarter.

        So, all you numbers geeks – have I made an error? If not, it turns Paul’s observations about “opportunity cost” on their head.

        If the return on bulk buying can be so high, why doesn’t the concept get more attention?

        Thumb up 1 Thumb down 0
      • Sam says:

        Your numbers are right. One way to make that huge number sensible (or to explain it without IRR math) is to think that it only takes you 2 1/2 years (10 quarters at $30) to recoup your entire investment.

        I would say it doesn’t get much attention because of two reasons: 1) this kind of discount is usually only applied to something small where most consumers can’t be bothered 2) people are stupid.

        If you think about it, using this method for only 2 1/2 years will effectively give you free TP for life! With a $10 a month dividend!!!

        Thumb up 0 Thumb down 0
    • Enter your name... says:

      If your household economy would actually benefit from spending $5 a week on toilet paper instead of $20 at the start of the month, then your household budget has some serious problems.

      Thumb up 5 Thumb down 1
    • Philo Pharynx says:

      I work in a company that has experimented with just-in-time purchasing. When there’s a delay or other problem, it shuts down production. Stock on the shelf may be sunk money, but a certain amount is a hedge against supply chain interruption.

      The equivalent issue with toilet paper is a very messy situation.

      Well-loved. Like or Dislike: Thumb up 11 Thumb down 0