The world’s biggest retailer proves the New Economy isn’t just for tech companies.
To be at the leading edge of the New Economy, a company doesn’t have to make semiconductors or optical networking components, or even map the human genome. As much as anything else the New Economy is about new business methods — and those new methods can be applied in any industry.
So technology stocks aren’t the only way to invest in the New Economy.
Consider the case of Wal-Mart. From its earliest origins it was a play on New Economy demographics, recognizing underserved exurban and suburban markets, and the hollowing out of smaller downtown centers. But as Wal-Mart grew, it became a state-of-the-art laboratory for modern retail logistics management, and for optimized distribution partnerships with manufacturers of branded consumer goods.
But there’s another element to Wal-Mart’s use of New Economy business methods that may hold the key to their continuing dominance: their mastery of the precious market information that naturally flows from their far-flung retail empire. And last week Wal-Mart announced that it would no longer share that information with anyone.
With over 2600 stores, Wal-Mart’s scope as a retailer is vast. But it’s not just the number and dispersion of its stores — there’s the number of its customers, the volume of its traffic and the variety of its merchandise. And for years Wal-Mart’s been capturing, storing and analyzing highly detailed real-time information about every transaction. Armed with this information, there is probably no other retailer — and surely, there is no government statistical bureau — that possesses as much high-quality information about the buying preferences of the American public.
This information gives Wal-Mart a substantial edge in negotiating with suppliers, optimally pricing merchandise, stocking the goods that its customers want when they want them, and keeping inventories low. It’s a superlative and deadly competitive weapon — and, as a corporate asset, a potential source of significant “hidden value.”
Previously Wal-Mart had made this data available to manufacturers, competitors, Wall Street analysts, and anyone else who might be curious, through various third-party data vendors such as ACNielson and NPD Group (who paid Wal-Mart a fee for the right to distribute it).
Quoted in the New York Times on Saturday, a Wal-Mart spokesman said, “We did receive a payment. But we decided that despite that payment, we didn’t get as much out of it as our competitors did.”
Wal-Mart is waking up to the fact that, in the New Economy, market information and information systems can be the most valuable assets a company has got. For example AMR Corporation, the parent of American Airlines, recognized this when it spun off its Sabre reservation system as a separate company. Today Sabre Holdings Corporation has a market cap of $6.5 billion, while AMR’s market cap is only $5.7 billion. The information about the airline turned out to be more valuable than the airline!
We own Wal-Mart, as advisor, because we think it’s in a particularly interesting position right now in these uncertain times — it’s set up to win whether or not the economy recovers from here. In a recovery led by demand-side stimulus-oriented monetary and tax policies, all the retail stocks should do well. But as a super-efficient discounter, Wal-Mart’s also a great recession play. For these reasons it’s one of our three favorite retailers, along with Target and Home Depot.
Now this news of Wal-Mart’s increasing awareness of the true nature and power of its competitive advantage in the New Economy makes us like it even more.
