Wal-Mart: A New Economy Play

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 (WMT Quote). From its earliest origins, it was a play on New Economy demographics, recognizing underserved ex-urban 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 its continuing dominance: its mastery of the precious market information that naturally flows from its far-flung retail empire. And last week, Wal-Mart announced that it would no longer share that information with anyone.

The Wal-Mart Edge

Wal-Mart's scope as a retailer is vast. But it's not just the number and dispersion of its more than 2,600 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. Probably no other retailer -- and surely, no government statistical bureau -- possesses as much high-quality information about the American public's buying preferences.

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."

Wal-Mart had previously made these data available to manufacturers, competitors, Wall Street analysts and anyone else who might be curious through various third-party data vendors such as ACNielsen and NPD Group (which 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."

The Value of Information

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. For example, AMR, the parent of American Airlines, recognized this when it spun off its Sabre reservation system as a separate company. Today Sabre Holdings 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 itself.

We own Wal-Mart 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 of the retail stocks should do well. But as a super-efficient discounter, Wal-Mart is also a great recession play. For these reasons, it's one of our three favorite retailers, along with Target (TGT Quote) and Home Depot (HD Quote).

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.