What it means
The phrase became popular in the late 1990s, when internet companies were soaring in value and traditional firms looked dull by comparison. Old economy companies were said to make things, move things or sell things in physical form, while new economy companies sold information and software.
The split was always blurry, and most businesses today combine both. Old economy businesses tend to be capital intensive, which means they need a lot of money invested in factories, stores, vehicles and equipment to earn their revenue.
Growth is often modest and tied to the wider economy, and profit margins can be steady but rarely spectacular. Many pay regular dividends because they cannot reinvest all of their cash at high rates of return.
Valuation reflects those traits. Investors often value old economy companies on earnings, cash flow and asset values, with lower price-to-earnings multiples than fast-growing technology firms.
A business with a long record and tangible assets is easier to measure but is also easier to see as ordinary. The label can mislead because many traditional firms have changed.
A modern manufacturer may run on sensors and software, and a bank may earn most of its fees through digital channels. Meanwhile, some technology companies now own huge warehouses, data centres and delivery fleets, which are very old economy assets requiring heavy and continuing capital spending.
For managers, the useful point is not the label but the economics behind it. Capital intensity, cyclicality (sensitivity to the economic cycle) and the ability to price products all shape how a business should be financed and how it should be judged.
Applying the wrong yardstick, such as expecting software-style growth from a steel mill, leads to poor decisions. The term also carries a social meaning.
Old economy industries are often large employers in particular towns and regions, so their decisions about closing or expanding a plant affect local jobs, tax revenue and suppliers. Lenders and governments therefore watch them closely, even when their share prices attract little attention from growth investors.
In practice
Real-world examples.
Example
A family-owned steel fabricator with 300 employees invests $12 million in new cutting machines to win a long-term contract. Returns come slowly over many years, and the bank lends against the equipment itself. The owner thinks of the business as classic old economy.
Example
An investment fund screens for companies with steady dividends, tangible assets and low debt. It ends up holding a regional utility, a food distributor and a railway. The fund manager describes the portfolio as old economy value rather than growth.
Example
A retailer with 200 stores builds an online shop and a mobile app to reach younger customers. Its leaders insist that the business is no longer purely old economy, though the stores, stock and supply chain still account for most of its costs.
Case study
Seen in the real world.
Ashford Mills is an illustrative, fictional textile manufacturer that was long regarded by analysts as a classic old economy business. Its share price lagged the market for years, and its leaders worried that the company would struggle to raise money.
The chief financial officer reframed the story for lenders. The business had low debt, steady cash flow and a factory that produced goods under long contracts, and she showed how investing in automation at a cost of $9 million would cut labour costs by $2.5 million a year.
Lenders were persuaded by the cash flow rather than the label, and the plant was upgraded on schedule. The payback on the automation project was 9 / 2.5 = 3.6 years, which was short enough for a plant with a twenty-year life. The illustrative lesson is that an old economy business can be a sound investment when its numbers are strong and the capital is spent where it earns a return.
Watch out
Common mistakes.
- Assuming old economy companies are failing, when many are stable, profitable and well run.
- Treating the old economy and new economy as two separate worlds, when most modern businesses combine physical assets with software and data.
- Using technology-style growth targets to judge a capital-intensive business, which leads to unrealistic expectations.
Questions
People also ask.
Where does the term come from?
It became widely used in the late 1990s during the dot-com boom to describe traditional industries in contrast with internet companies, which were then attracting enormous attention and very high valuations from investors.
Are old economy stocks always cheaper?
They often trade on lower multiples than technology stocks, but the price depends on growth, profitability and risk, so a cheap-looking company can still be poor value.
Can an old economy company become part of the new economy?
Yes, many have adopted digital tools and new business models, which blurs the line and is one reason the label is used less precisely today.
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