Stocks finished a bit lower in a quiet session yesterday. Treasury yields slipped to the bottom end of the recent range, aiding the tech sector.
You have heard me say many times that pandemics accelerate change. They accelerate change more than create it. Video conference has existed for years but took off during the pandemic. The raison d’etre gained in importance. The same can be said for home food delivery, online shopping, and video streaming. Pandemics can accelerate change in the opposite direction. Restaurants ill-equipped to handle take out or outdoor dining shut their doors. Retailers without an online presence suffered. Movie theatres closed. While many have since reopened, the trend away from the silver screen to the TV screen is inevitable. The only question is how fast.
Just as humans have life expectancies, so do businesses. It is hard to find businesses more than 100 years old. None of the original Dow Industrial components are still in the Average. GE was the last to be dropped. Technology fosters change. No more milkman or ice man coming to your house. Minicomputers replaced mainframes; PCs replaced minis. To a large extent, smartphones have usurped the computer itself. Film cameras gave way to digital camera, and once again phones took the place of cameras.
But it isn’t just technology, or least it isn’t pure technology. We eat more prepared foods, matching our lifestyles. We buy online because it offers a better value equation, not just price, but convenience. The Internet has put a focus on price because it enhanced price discovery. To compete, full service retailers had to sacrifice one-on-one service to cut costs and stay competitive. You now check yourself out in many stores, eliminating the cost of a clerk.
The pandemic accelerated change. So has technology. The burden on existing companies to adapt has only increased. Legacy companies often face two huge dilemmas. First, they are saddled with fixed costs already in place to serve an old economic model. Big stores bear the cost of expensive real estate for instance. Often, they also see competitive attacks against their most profitable businesses.
Let me offer two examples; the department store, and the traditional telephone company.
I’ll start with the department store. In the mid-19th century, department stores as we know them today began to emerge. By 1870, three prominent chains in Paris, Bon Marche, Printemps, and Samaritaine were all open. They all still exist today. The first American department store, Arnold Constable, opened its doors near Wall Street. The chain lasted until 1975. In 1858, Rowland Hussey Macy opened a store, the start of the Macy’s chain. Marshall Field’s opened a bit earlier in 1852, and here in Philadelphia John Wanamaker opened in 1877. As time went on, their assortment of goods changed but they were mostly built around apparel and a smattering of hard goods. Wide assortment and first class service were hallmarks.
The predecessor to online shopping, the mail order catalog, also dates back to the 19th century. Tiffany’s issued its first Blue Book in the 1840s. By the turn of the century, Montgomery Ward and Sears were offering tens of thousands of items for pick up at local distribution centers. Both even offered prefabricated homes that the buyer could assemble. A few such homes still remain. One catalog, the Hammacher Schlemmer book, started in 1848, still exists today. But express delivery and the arrival of the Internet doomed the mail order catalog business. Montgomery Ward is long gone, while Sears and JC Penney are recent casualties. Now even the department store is in jeopardy. But like their mail order predecessors, it will take a long time for them to die. The reason they will ultimately die is that what was once so cherished, broad assortment and one-on-one service, no longer is valued as it once was. All our early enclosed malls were built around department store anchors. They were the draws that fed the interior stores. Now, with few exceptions, the anchors rely on the interior stores, restaurants, gyms, and even health centers to bring traffic to them. Overall, they were slow to compete online. They are online now, but mostly in a cumbersome fashion. The gap between what Amazon offers its customer and what Macy’s offers is only widening. Today’s post-pandemic surge in activity will buy the department stores some more time. And maybe one or two will find a way to adapt and survive, but most will simply disappear.
The days when you plugged your phone into the wall with funny plugs at both ends are long gone. Today’s landline phones are increasingly Internet based, and most of us use our cell phones as our primary phones. If you are under 40, you probably don’t even have a landline phone. For decades, phone lines have been used to transmit data. Decades ago, businesses used T-1 lines for robust data transmission. Businesses paid the phone companies a fat fee from which they earned a fat profit. But then came DSL lines. They were much cheaper and quickly became ubiquitous. How did the phone companies react? They made the classic mistake that often is made at times of technological change. They decided to defend their fortress, the high profit T-1 lines, for as long as they could. As a result, they lost massive data share, first to DSL providers like AOL whose users only needed an inexpensive dial-up modem, and then to the cable companies whose fiber optic cables could carry much more data at much lower costs. While Verizon ultimately entered a few dozen metro markets with FiOS, the major telcos fell way behind. Technology changed everything. Paying for long distance calls disappeared. With the Internet apps today, one can dial anywhere in the world for free. The phone companies, of course, did adapt cellular technology. That saved them. Now, however, as the world moves to 5G, the major telcos are scrambling to adjust to a new environment. Verizon’s forays into tech services like Yahoo and AOL have been discarded. AT&T has aborted its efforts to get into the media business. Both are now focused on regaining share in a composite universe that contains voice, data, and streaming. Where their platform was once voice over twisted-pair wires, they now compete against a wide variety of businesses offering broad and integrated voice, data and video services. While they still lead in cellular, they lag in other areas and are trying to catch up, always a tough task for legacy companies.
As investors, the old names have storied histories. Just as we all rooted for Phil Mickelson to win the PGA golf championship at age 50, our nostalgic minds want our old favorites who rewarded us for years to flourish once again. But they are running uphill and they are doing it against companies that move faster, are burdened with less legacy costs, and appear to have a better feel for where to position themselves in today’s world.
I used telephone companies and department stores as examples. I could have mentioned canned soup, the US Post Office, or old line drug companies. President Trump tried to help the coal and steel industry by introducing tariffs on foreign imports. It didn’t work. These were doomed industries. Just as older adults slow down, so do most older companies. And tastes change. How many restaurants do you know that have been around for 50 years? Of course, not all the upstarts survive either. Great ideas still need great management. Amazon didn’t invent online retailing and Apple didn’t produce the first smartphone. My Zenith TV, my Bowmar calculator, and my Commodore computer have long been discarded.
Some of us own old-line legacy company stock at very low cost. No one likes to pay taxes but you won’t get rich watching your old favorite waste away. That’s why you always have to watch what you own.
The world is changing. Pandemics and technology accelerate change. A post-pandemic surge will help all. It may give you the perfect opportunity to trim some of your portfolio dead wood and upgrade.
Today, Lenny Kravitz is 57. Stevie Nicks turns 73.
James M. Meyer, CFA 610-260-2220