Market Share Gold Rush:

Stake Your Market Share Claim to Maximize Your Profits.

Reprinted from SEMA News magazine, October 2003

by Jon Hedges

What's your market share? Like prospectors during a gold rush some managers charge forward to stake their market share claim to strike it rich, while others move more cautiously. Some managers make it a goal to grow their market share thinking it holds the key to higher profits, but many times managers that chase market share end up empty-handed.

What's the appropriate market share strategy? What offers the greatest chances of success for your company? And what if the gold rush days in your market segment are over?

This article will show you how to recognize where your company and your competitors fit into the marketplace, and depending on how market share is divided, how to maximize the profitability of your company.

The history of the specialty equipment aftermarket as well as just about any other industry can teach powerful lessons in how forces in the marketplace affect business growth and profitability. Smart managers and business owners can learn the unforgiving rules of market dynamics to lead their companies to growth and prosperity.

The Rule of Three

In mature industries or major market segments, where growth and market share have stabilized, three competing companies dominate market share. History shows this to usually be true whether it is a service industry, retailing, or manufacturing. It can involve products as different as shoes, airlines, beer, automobiles-as well specialty automotive products. In fact, this pattern is so well researched and documented over time, if three competitors don't dominate market share, that is usually a predictor of things to come. It can mean an industry is due for a shakeout or consolidation.

When three companies dominate an industry or market segment, they usually have common characteristics. They will typically be broad line companies, who serve many market segments and customers. If these companies are distributors or manufacturers, they probably have high volume customers that have a lot of leverage. Retailers, distributors and manufacturers in this category sell a lot of commodity type products and are often forced to compete on price. These companies will also usually make most of an industry's profits-and have to because of their high cost structures. The largest company typically earns the most profit dollars, followed by numbers two and three.

Market experts have disagreed for years why three companies end up dominating a market. One theory holds that consumers choose on average between three companies when making a purchase.

But what about the competitors that aren't one of the top three in an industry? Industries are full of mid-sized and small companies that run the range of product offerings, market share, and profitability.

The most profitable (as a percentage of sales) small companies in an industry or market segment, with the greatest return on investment, are those who have found a niche, and focus on markets they can specialize in. These specialized companies are recognized by their customers as experts in their field. Smaller retailers compete on service or quality, not price. They're agile and quick to recognize-or create-new trends within their field. Companies on this end of the market also tend to sell specialized products, not commodities.

So if the most profitable companies are either the ones that dominate market share with broad product or service offerings, or smaller companies that specialize in market segments, is there a common characteristic to unprofitable companies?

Companies that lack profits and have lower returns on investment are usually those between the large companies and the small, nimble specialized companies. In other words, they're stuck in the middle. They are mid-sized companies that want to compete with the giants with a broad product line, but don't have the resources or the broad distribution of the larger companies. They can be mid-sized companies that started out smaller but have tried to grow via acquisitions or new markets that don't fit strategically. Some are smaller, specialized companies that have been successful in one market segment, then tried to expand the business into new segments forcing them to compete as a newcomer against other established experts as they try to grow into a broad line company.

This brings us to the law of market dynamics: Within a given industry, companies with the best bottom lines and return on investment tend to be on one end of the scale or the other. They can be one of three companies with broad product lines and the largest market share, or one of several companies with very little market share but that specialize within a market segment.

But what about an industry or market segment that doesn't have three dominating competitors? That can indicate several things. For example, it could be a sign of an industry undergoing rapid growth, or perhaps a new industry altogether, and the market leaders have yet to be developed. In a more mature market, it can also be a sign of an upcoming shakeout or industry consolidation. Industry shakeouts can occur in as short of time as one year, or can last for several decades, which is what has been happening with the automakers and airlines.

Number One, a Tough Place to Be

In business, companies strive to be number one, but market leadership doesn't ensure a company's position. In fact, studies have shown being a market leader is a precarious place to be. Two research studies, one by economists and another by Cambridge University, looked at dozens of industries from 1950-1975. The researchers showed more than half of the companies who were market leaders lost the number one position to a competitor during that 25-year period. If you think about it, that should make some sense, because when you're number one, you're everybody's target. Everyone can remember former market leaders who lost their place due to increased competition, a disruptive new technology, a change in the market, or bad mistakes: Remember Xerox copiers, IBM PCs, and the Sears catalog?

If staying number one is so difficult, does a company have any advantage being first to market? Unless there are patents or exclusive technologies, many times a company that is first to market does not have an advantage in the long haul. In fact, many companies have been very successful using a "second but better" strategy with products or services. These companies are happy to let an industry pioneer make all the mistakes so they can learn from them. After all, if first to market was such an advantage a lot of us would be driving Duryea cars to work, and booting up Altair computers when we got there.

Let's look at the evidence of these market forces at work in other industries.

Case Study: The U.S. Brewing Industry

There are few industries that illustrate these market dynamics at work better than the U.S. beer industry. It should be obvious to the average SEMA member, or NHRA or NASCAR fan, who the market leader is in this industry: Anheuser-Busch, the world's largest brewer, is firmly entrenched at number one with nearly 50% of the U.S. market. The Budweiser, Busch, Michelob, and O'Doul's brands, along with investments and partnerships with Modelo/Corona and Bacardi, make Anheuser-Busch a marketing powerhouse, which brought in $2.9 billion in pre-tax profits in 2002. Miller Brewing (now ironically a British company) is number two in U.S. market share with just under 19% of the market, followed by Adolph Coors at just under 11%. All the other beers combined in the United States split the remaining 21% of the market-less than half the volume of market leader Anheuser-Busch.

The brewing companies that were caught in the middle over the past several decades include notable names like Heileman and Stroh's, now owned by Pabst. They could not compete with the large breweries, and many had cost structures too high to specialize or they lacked distribution. The industry went through decades of consolidations and shakeouts-in fact, Miller Brewing was only the seventh-largest brewer in the U.S. in 1970, before making its grab at market share funded by new owner Philip Morris. In the brewing industry, hundreds of breweries went down the drain so to speak during the 20th century.

On the other end of the scale, the current emergence of microbreweries also shows that small, specialty breweries can prosper, too. The success of Boston Beer Company's Samuel Adams and hundreds of local and regional labels shows that if a small brewery specializes on a narrow market segment-in this case defined by taste preference, snob appeal or geographical location-it can prosper even when Anheuser-Busch, Miller and Coors control almost 79% of the U.S. market. Boston Beer claims U.S. market share of only 0.5%. And as more evidence of consolidation, that sliver of market share qualifies them as the nation's seventh largest brewer-the same position Miller had in 1970!

The lesson to be learned should be coming clear for SEMA-member companies: either hold on to market share and be one of the top three, or be small and specialized. Don't get caught in the middle.

Detroit vs. the World: The "Big Three"

GM, Ford, and the automaker formerly known as Chrysler are still referred to as the Big Three. But now, the New Big Three in terms of units sold worldwide are GM (#1 with 8.50 million units sold in 2002, and falling), Ford (#2 at 6.82 million units and falling), and Toyota (#3 at 6.17 million and coming on strong). In fact, Toyota will be close to displacing Ford as number two worldwide in 2003. DaimlerChrysler AG is a distant number five at 4.54 million units, even behind number four Volkswagen AG.

With a U.S. automaker at number five, doesn't this violate the premise that three competitors must dominate a market, in this case, the U.S. market? Not at all-20 years ago the Big Three dominated what used to be primarily a U.S. market, but automobile manufacturing is now a global market with global companies. After all, how could you look at the Chrysler Group, now controlled from Germany, and not acknowledge this as a global market? On the flip side, look at Ford's ownership of Europeans Jaguar, Land Rover, Aston Martin and Volvo, and their control of Japanese Mazda. And remember when Japanese "imports" were really imported and not made in the USA?

Looking at the other end of the market, smaller companies like BMW with unit sales around one million can thrive serving small market segments with BMW, Mini, and Rolls Royce, without having to compete on price. In fact BMW's operating income last year was 7.4%, the fourth highest in the world for an automaker. It is easy to identify the remaining automakers caught in the middle, like Mitsubishi, Kia, Suzuki and others.

The rules of market dynamics predict several things: First, the automakers will continue to consolidate over the next decade until three globally dominant companies remain, and right now it looks like those three will be GM, Ford and Toyota. But there is a lot of turmoil in the auto industry right now, and don't rule out profitable partners Nissan and Renault. As the "Renault-Nissan Alliance" they shipped 5.1 million units worldwide in 2002, giving the "alliance" a claim to the number four spot, ahead of Volkswagen.

Second, GM and Ford will be forced to continually compete on price across broad markets with rebates and other incentives--something Toyota will be able to avoid until customers perceive GM and Ford as equals in terms of product quality.

Third, to maximize profitability in the long run, DaimlerChrysler and Volkswagen must specialize and compete in smaller segments, and not attempt to compete head to head with the New Big Three: GM, Ford and Toyota. DaimlerChrysler certainly has the ability to do that with marques like Mercedes Benz, Jeep, and now Maybach, and vehicles like the Dodge Viper. Volkswagen can do that with specialty vehicles like the New Beetle, the unfortunately named Touareg, and the $250,000 Lamborghini Gallardo.

Fourth, the companies in the middle, like Mitsubishi, Kia, or Suzuki need to specialize to survive, and may be acquired by the top three (GM already owns 20% of Suzuki).

Like the brewing industry, the 20th century is littered with the wrecks of hundreds of automakers that couldn't compete in the middle of the market.

Don't feel sorry for "little" Honda, with only 2.88 million units sold in their last fiscal year (2002), a mere third of GM's annual unit volume. Their unit sales were up nearly 13% in the first half of 2003, and they're the market leader in the U.S. motorcycle, ATV and scooter market with a 29% market share shipping more than eight million units worldwide. In the U.S. that puts them ahead of number two Harley-Davidson (25%) and number three Yamaha (19%). Nine major motorcycle manufacturers and dozens of imports and small volume specialty shops split the remaining 27% of the pie, yet another example of the rule of three.

Lessons for Your Company

SEMA-member companies can learn a lot from all of this. First, managers need to make an honest appraisal of their position in the specialty equipment market, as well as that of their competitors. Does your company have enough market share to be considered a market leader? If so, have a strategy to strengthen your position there. If not, is it realistic to become one of the top three leaders or would a better strategy be to specialize in a narrow segment?

Second, learn from the laws of market dynamics, and if your market segment lacks three clear-cut leaders, understand why. Maybe the market is new or rapidly growing, and you need a plan to become one of the market leaders. Maybe the market is more mature and overdue for a shakeout, and you need a plan to acquire or be acquired. Have a strategy in place and be prepared. Don't get stuck in the middle.

Third, learn from mature industries where consolidation has taken place and don't be surprised in the next 20 years to see the largest SEMA-member companies and SEMA itself become truly global.

Copyright 2003 Jon Hedges, all rights reserved. Limited reproduction crediting the author is permitted. Jon Hedges is not affiliated with or performing services for any of the companies or organizations mentioned in this article.