Over the last couple of months, the economic news has been pretty bleak in the U.S. Talk of a recession, dropping consumer confidence, daily analysis on statistics showing the looming slowdown that is upon the U.S.

Going into Christmas, the news was particularly bad as you had a focus on product safety as well, and as a result a lot of retailers felt the pinch.

What is interesting is that if you just look at Wal-Mart, this was a good news bad news scenario, and depending on how you look at things… Walmart’s good news cycle will probably last longer than others, and defiantely longer than the bad news cycle.

Let me explain….

Last summer, the ONLY topic in the news was product safety. Everyone, including myself, was covering it in some way, and going into Christmas I saw Wal-Mart’s association to China as something that could lead consumers away from WalMart. Nothing new here, their production lines are deeply rooted in China and other low cost countries, and I think a lot of the news media showed WalMart more than anyone else. It was not good news for the firm that has been shown to have done so much to help consumers reduce their monthly expenses.

At the same time, you had clouds forming on the horizon of an economic slowdown the in the U.S. It wasn’t high priority in the media until the subprime market started crushing the U.S. banks, but once that happened it highlighted the fact that a lot of people had been getting crushed before that… and so the news cycle kicked into full force. Talk of over-extended consumers loosing confidence in the economy were at the top of the news hour, and questions of how this could impact retailers begun coming out soon after the holiday shopping season started.

Where I saw this as good news was that Wal-Mart has built a model of providing the lowest price points in the retail industry for many items. It is an issue that has been cast in a negative light by many, but the reality is that consumers really don’t care. If their pocket books are tight, it is a 5 minute ride in the family war wagon to the nearest Wal-Mart.

Target on the other hand has always tried to be a notch above, perhaps a couple notches above, Wal-Mart in terms of product placement… and price. Target usually puts more into the stores, and the demogaphics of the typical buyer will reflect this…. when the market is on the way up.

Bringing this all together, it is once again Wal-Mart’s investment in China that really saved them, and the news cycle of product safety bring trumped by the economy. with some experience working with big box retailers, one of the most interesting phenomonon I have seen is that while Wal-Mart has invested so much, and made so much money from that investment, others have yet to really take the same steps. Instead, they chose to continue working through the traders in Chicago, NY, LA, etc who will purchase from a trader in HK/ TW… who will buy from a trader in China… who will buy from a factory in Suzhou.

In an up market, when consumers are not worried about making minimum payments this works, but in a down cycle these intermediate steps become insurmountable in a couple of ways. first, the ability of a group like Target, who operates through more trading firms than through direct relationships, cannot bring their prices down to the level of Walmart - even for the same goods because all those traders who are in the middle need their take too.

2 years ago, I saw this firsthand as I visited a factory in South China. At this single factory, all of the tools in one category were being sold to more than 4 name brands, and as luck would have it I knew the person responsible for one of the brands. when I told him that I found the factory, he was a bit shocked but admitted that since 75% of his products were coming through trading relationships, he wasn’t surprised that he was paying 40% more than we would have charged him.

the second big problem with traders, is that pricing aside the jump from a trading model to a direct model cannot be made fast. Sure, in a few categories they jump can be made, but in a store that has hundred of thousands of SKUs, it takes years of investment in people, warehouses, relationships, etc to make this happen, and it cannot happen in 6 months.

So in my mind, for Wal-Mart, their investment has paid off and will continue to do so as worries of a U.S. slump continue because, for right or wrong, their efforts to invest into the China market (and surely others) has not only saved them a lot of money.

It has saved their customers a lot of money.

Stumble it!