Market Share – One Critical Leg of a Three Legged Stool

Here’s a quote from BBC Business News on 31st January 2012: –

“In the 12 weeks to 22 January 2012, Tesco’s market share dropped to 29.9%, the lowest since May 2005, research firm Kantar Worldpanel said. Tesco has described its Christmas trading period as “disappointing”, after like-for-like sales fell 2.3%. In contrast, Sainsbury’s and Iceland both gained market share. Sainsbury’s edged up from 16.6% a year ago to 16.7%, its strongest hold since March 2003. Iceland’s share rose from 1.9% to 2.1%, its best share for 10 years.”

One of the key measurements of success for supermarkets is market share. In this quote, we see Tesco under pressure because it has lost market share during the last Christmas trading period; and Sainsbury’s and Iceland glowing because they’ve gained market share.

Supermarkets allocate large budgets to researching market shares and they have very sophisticated data capture systems to provide them with detailed market share information. They look at market shares by product, by time frame, by region, by store and probably by many other criteria as well.

They don’t do it for fun; so why do they do it?

There are, no doubt, a myriad of reasons ranging in importance; but there are really three key measurements of business performance and sustainability. These are: –

  • The Profit & Loss Account (P&L)
  • The Balance Sheet
  • Market Share

The P&L tells us how much money was made or lost over a specific time frame; a month, a quarter, a year etc. By implication, it tells us how effective and efficient we are as a business and it helps us identify areas of operational strength and weakness.

The balance sheet tells us how strong we are financially; our working capital, our gearing, our net worth etc. If we’re making profits our balance sheet is building and we can use it to help us make decisions about future investment, growth, development etc. If we’re losing money, it helps us understand how long we can sustain those losses and what financial resources we have to help achieve a turnaround.

Market share tells us how well our business strategy is working. If we’re losing market share, we lack competitive advantage, our competitors are outperforming us and our strategy clearly isn’t working. If we’re increasing our market share, we have created competitive advantage, we’re outperforming our competitors and our strategy is working.

Sales growth or decline and market share should not be confused. If the market is growing and your business is also growing, you will still be losing market share, unless your growth is equal to or greater than that of the market. If you’re growing but losing market share on a rising market, you’re benefiting from the growth of the market, but you’re still under performing, relative to your competitors and, as soon as the market turns and starts to fall, which it will do at some stage, your rate of decline will be greater than that of the market; and, as I’ll show later, this could be catastrophic.

Similarly your sales could be falling but, if the market is falling even faster, you’re still in a position of having competitive advantage; and this could put you in a strong position, when the market stabilises or, in extreme circumstances, it could give you more time than your competitors to develop a diversification strategy.

Strategically, the relationship between the P&L, the balance sheet and market share is all important and the messages coming back from each need to be considered together, if you’re going to make the best decisions for your business.

If you have a strong balance sheet, your P&L is showing very healthy profits and you’re gaining market share, then your business is in pole position; but realistically only a minority of businesses achieve this and maintain it for very long. At the other extreme some businesses have very weak balance sheets, are incurring significant losses and are losing market share. Realistically, many of those are heading for collapse. Most businesses lie somewhere between those two extremes; but in tough trading conditions, businesses are pushed down the scale and in buoyant conditions, they are pushed up the scale.

Consider a few scenarios.

Scenario 1: Take a business that has a strong balance sheet and is very profitable, but which is losing market share on a rising market. Its P&L suggests that, operationally, it is efficient and well managed. Its balance sheet suggests that it has plenty of resources for investment and development. However, its loss of market share suggests that its strategy isn’t delivering; so, despite a strong financial performance, all is not well. No business can survive indefinitely if it continues to lose market share. But because it has a strong balance sheet, this particular business can afford to invest in a detailed review of its strategy as well as the development and implementation of a new or reconfigured strategy. And that is what it should do.

Scenario 2: Let’s take an almost identical situation except, this time, let’s assume that the balance sheet is much weaker. The problem is the same. The strategy isn’t working; but the ability of the business to fund a major strategic rethink and change programme is much more limited. If no strategic change is brought about, the business will ultimately fail; that’s inevitable. But the weak balance sheet means that the resources available to fund the change programme are much less, as is the room for error within the change process itself. The rate, at which change can be achieved, is also likely to be much slower. So the risk to the business is much higher than is the case in scenario 1; and, although it doesn’t mean this business can’t be returned to long term sustainability, it’s going to be much more difficult than it will be for the business in scenario 1.

Scenario 3: Consider a business that has a reasonable balance sheet, is gaining market share but is delivering very low profits. Is this the “busy fool syndrome”? Is this business buying business? Is it simply selling too cheap? If it didn’t know what was happening to its market share, how could it answer those questions with confidence? The answer to this last question is that, “it couldn’t”.

These three scenarios illustrate how the P&L, balance sheet and market share data can be used together to understand the performance of a business and help identify if and where strategic change is needed.

I now want to describe two real examples. These are based on fact; although I am not identifying the businesses for reasons of confidentiality.

I’ll call the first business “Company A” and will describe it as a significant player in the home improvement market. It was very profitable and operationally well managed. It also had a strong balance sheet. I undertook a market share analysis and found that, for a number of years, it had been gaining market share on a rising market; so during that period its strategy was working well. However, its increasing market share then reached a plateau, after which it started to fall. But, for a time, the decline in market share was masked because the market continued to grow and Company A also continued to grow, but at a lesser rate than the market. During this period, the business continued to make healthy profits; but the warning signs were there. The strategy that had worked so well in the past was no longer providing the competitive advantage that the business needed to stay ahead of its competitors. At this point there needed to be a fundamental strategic review and the development of a new strategy, capable of recapturing the lost market share and then gaining further share beyond that. This didn’t happen; the market then started to fall and Company A found itself losing market share on a falling market. Despite its operational efficiency, sales volume fell, to the point where there was insufficient critical mass, and the business eventually went into administration.

The real point of this story is that the main focus was on the P&L and balance sheet, both of which remained strong for a considerable time, while market share was declining. The business was balancing on a two legged stool that eventually toppled over, rather than sitting on a three legged one, which would have had a much greater chance of remaining upright.

My second example is another home improvement company, which I’m calling Company B. Company B is a successful and profitable regional player. The business had been using local radio as a means of advertising for several years. However, its trading area didn’t fit easily into any of the broadcasting areas of the available local radio stations. This meant that it had to utilise several local radio stations rather than just one or two; and furthermore, there were large gaps with no radio cover at all. The costs were high and the cover not complete; as a result, Company B decided to analyse the sales that it could attribute to local radio advertising. Its conclusion, based on this analysis, was that local radio advertising wasn’t cost effective. However, before the business withdrew from radio advertising, I was asked to consider whether there might be other ways of measuring the results.

I used published market data and found a way to calculate Company B’s market share, based on relevant postcode delineation. I then overlaid this with the local radio stations’ broadcasting areas. The results were interesting because, whilst the original sales analysis showed relatively few sales directly attributable to radio advertising, Company B’s market shares were much higher in those areas covered by radio advertising than those that were not. In principle, this wasn’t unexpected but the differential between the hotspots within local radio broadcast areas and the cold spots, where there was no radio advertising was substantial.

In this example we see market share information being used more tactically than strategically; but without it, the wrong decision could have been made. In the event, Company B continued to use radio advertising.

Now let’s go back to the supermarkets. They put so much resource into market share analysis because they need to be able to measure the effectiveness of their strategies and tactics at very regular intervals. They can then make informed decisions at an early stage and, by so doing, optimise their financial performance and identify problems at the earliest possible opportunity.

Most large FMCG organisations rely heavily on this type of analysis and research. But as businesses move away from FMCG, there tends to be less emphasis on market share research and analysis. In the SME sector there is often very little. However, for the reasons I’ve outlined, most businesses need to have a reasonable fix on their market shares and, if they are to optimise their financial performance and remain sustainable in the medium and long term, they need to respond to the messages that are conveyed.

In many markets, where market research is much less sophisticated and much less frequent than is the case in FMCG markets, it is usually possible, with a little thought and ingenuity, to use published market research data to provide a reasonable basis for market share calculations. It won’t be as detailed or as sophisticated as that used by the supermarkets, but it will be enough to keep the business secure on a three legged stool rather than falling over on a two legged one.

One thought on “Market Share – One Critical Leg of a Three Legged Stool

  1. Couldn’t agree more. I once did an analysis of the market for a small UK company which sold through agents across Europe. The agent in each country got a discount based on their turnover. The agents in Germany and Italy sold the most, so they got the largest discounts, although they did very little to promote the company’s products and were really riding on the back of having large markets.
    I developed a method of measuring a ‘market penetration’ quotient. On this measure the German and Italian agents dropped down the rankings and their discount was reduced. Needless to say, they weren’t very happy about this, but they accepted that the new measure was fairer and both were incentivised to increase their ‘market penetration’ – or ‘market share’ in their own market.

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