Navigating the Off-Ramps of the Information Superhighway

Last month’s In Focus article, “Get Your Clicks on Route 66,” introduced the idea that the rise of the Internet during the current macroeconomic long wave is analogous to the construction of the National Highway System during the immediate postwar era (for a detailed explanation of Long Wave Macroeconomic Theory, click here).

While a few small fortunes were made from building the highway system itself, a lot of huge fortunes were made by companies that understood the value of being positioned near the off-ramps to the highway where most of its commerce would be conducted, including McDonalds, Marriott, and a host of other travel-related businesses.

Of course, this time around a company does not have to acquire sufficient capital to buy land and then build a store for each location. But it does need to assemble a set of features that make it the vendor of choice for travelers along the information superhighway.  If you don’t like what you see on one vendor’s website, many more are only a click of the mouse away.

What usually comes to mind when we think of technology companies today are networking companies like Cisco or Juniper, or system builders like Apple and Microsoft. These are companies that make microprocessors, write computer programs and build new systems. In other words, they are the builders of the information superhighway.

Companies such as these do not define the universe of tech companies today, or in the past for that matter. Industries can evolve and spawn a tech company from a sector that was not originally technology-focused. All industries benefit from the advancements that the technology industry creates, but that does not make all of them tech companies per se.

Also, tech companies from the past – which are now no longer viewed as tech companies – were considered leading tech companies in prior tech waves. For example, utility companies were considered leading edge tech in Wave Three while auto manufacturing companies were leading edge in Wave Four. General Electric and General Motors are two companies that few perceive as tech companies today, but they were at the center of their tech wave’s universe.

Technology companies should not be put into “canned” and stale definitions, as a great deal of investment information is missed by drawing hard lines for an industry like tech which is more fluid than all others. Case in point – let’s look at the retail industry to see what it can tell us for market direction.

In the prior tech wave, the retail industry was remade, as all others were. There was not a tech company in retail at that time despite the fact that both Sears Roebuck and Woolworths were included in the thirty DOW Jones Industrials (DJI) companies in the first half of the prior tech wave.

Sears Roebuck was essentially a mail order catalog company, similar to Montgomery Ward. The catalog that Sears published was so vast that a customer could actually order prefabricated houses! What Sears understood was that the leading tech industry of the day was automobile and mass production manufacturing companies.

The growth of the industrialized economy produced goods at such a significantly lower price that many consumers could suddenly afford them. The world’s largest middle class had been created in the United States as a result of the output from the last tech wave.

Furthermore, with the creation of new roads, cars and trucks, the goods created by mass production could now reach consumers where they lived more cheaply than at any other time in history.

Sears leveraged the new paradigm created by the tech industry of its day by selling anything that could be mass produced, from hats to houses. Woolworth’s took advantage of this shift by setting up brick and mortar stores wherever there was enough population that could reach their stores.

Woolworth’s five and dime stores featured inexpensive goods where the company leveraged the buying power that economies of scale create. As the chain grew larger it was continually able to reduce the prices of many of their goods to 5 cents and 10 cents – hence the name “Five & Dime.”

Companies like Sears and Woolworth’s were able to do this simply because mass production and a burgeoning middle class had never existed before. However, neither Sears nor Woolworth’s would have been called tech companies in the 1900s, or today for that matter.

The family classic Christmas movie “Miracle on 34th Street” exemplified the effect technology had on retail for the second half of the prior wave. Department stores such as Macy’s and Gimbel’s came into existence and flourished after World War 2.

Department stores began to supplant the catalog and five & dime retailers as mass production continued to grow after the war. There were more goods accessible for sale at every price point then had ever previously been available. As the prior leaders had done in the retail industry, the department stores leveraged their size to further drive down prices as well.

During the 1950s the suburbs were created by a mass housing boom as a result of new roads and the affordability of automobiles. These roads, cars and cheap gas also created the construction starting in the 1950s of malls, which were anchored by department stores.

Even with the huge growth in malls and department stores, no one would have categorized the retail industry as tech companies in the prior wave. That all changed with the onset of the current tech wave that began started in the 1970s as a result of the invention of the microprocessor.

With the onset of the current tech wave, retail was again remade, but this time very differently. Two types of stores emerged and began to push the traditional department stores aside.  Department stores had been general by definition. You could buy pants or lawnmowers at department stores. Some department stores such as Sears and Macy’s continue to survive today.

However, department stores are under enormous pressure and the future of giants like J. C. Penney is very much in doubt. The cause was twofold: First, the rise of category killer stores – so-called because they specialize in specific types of consumer merchandise –  such as children’s toys sold by Toys R Us and denim jeans sold at the Gap.

The second cause was the rise of the big box discount houses like Price Club, Costco, Home Depot and Lowe’s. These chains used their size to drive prices lower because they were purchasing specific types of merchandise in bulk and could therefore price lower than the department stores could.

However, the rise of big box and specialty stores transitioned the retail industry from an industry that benefits from the booms in these tech waves to companies which now began to consume and change technology directly.

Stores like Walmart not only drive down prices due to bulk sales but also use extensive computer data mining in order to understand exactly how much product is needed, where it should be, and exactly when it needs to be there. Merchandise sitting in warehouses and on storeroom shelves can cost retail companies a lot of money. The faster the inventory is turned over, the more revenue and profit a retail chain can generate.

Walmart, Home Depot and the Gap began to utilize computer technology to manage their supply chains to get the best price, and to optimize cost and revenue simultaneously. If a retail chain is not actively engaged in computer data mining, modeling and analysis, then they are headed for extinction. The leaders of today’s retail industry are in reality very much tech industry-type companies.

Now please do not misunderstand what we are saying: Companies in the retail sector consume technology like every other industry does. They purchase computer servers, PCs, tablets, registers and scanners to run their operations. However, this tech wave has changed retailing forever, and in ways that are only now becoming evident.  For investors, understanding which companies will ultimately dominate this space could be very lucrative, just as it was for the early investors in the first businesses to acquire the best real estate along the off-ramps of the National Highway System.