The connect between Market leadership and Wealth creation
Does it pay to invest in companies that enjoy high market share? How to measure the effect of market share?
In the online media communications industry, Google has a market share of 40%. Tencent Holdings has a market share of only 7%. Both have created extraordinary wealth to their shareholders. Google stock returned 20% annualized and Tencent 31% annualized during the last five years.
Wal-Mart enjoys an astonishing market share of 57%, but returned only 4% annualized in terms of its stock performance, while Costco with a market share of less than one-third that (18%) has provided 18% annualized return.
So, does it pay to invest in a market leader?
The top 15 market leaders, in general, seem to have delivered value as measured by their stock price annualized return. Only two (Gazprom and HP) seems to have deleted value. Despite being the world’s largest extractor of natural gas and possessing the world’s largest gas transport system (158,200 milometers of gas trunk lines), Gazprom declined in value over the last 5 years. Similarly, HP headquartered in Palo Alto, California provides a variety of hardware and software products to a diverse range of customers and has significant brand pull. Nevertheless, it ended up on the losing side, on the stock price appreciation metric.
Barring the two, most of the others in the list boast of excellent performance proving the connect between market leadership and wealth creation. Notable among them are Google, Amgen, Costco, Microsoft, Intel, Starbucks, Gilead Sciences and American Express. Google derives profits mainly through Adwords (an online advertising service that places ads adjacent to search results and on blogs and other webpages). Google has moved beyond from just being a search engine, to commanding a chain of products through innovation, acquisitions and partnerships. For example, it partners with major electronics manufacturers in the production of its Nexus devices. Amgen is the world’s largest independent biotechnology firm, and its largest selling product lines are drugs related to preventing infections in patients undergoing chemotherapy (Neulasta/Nuepogen). Costco is the second largest warehouse, after Walmart, operating on a membership-only basis and has extensive reach within US, as well as other countries, such as Canada, UK, Australia, Mexico, Taiwan, South Korea, and Japan. Starbucks is the largest coffeehouse company in the world, with nearly 23,000 stores in 65 countries.
And does it hurt to invest in market laggards?
It appears that there is cost to having low market share. Four out of bottom 15 in terms of market share witnessed decline in stock value over the last 5 years. (HP, China Shenhua Energy, Nippon Steel, and Sinopec). Also, 10 out of bottom 15 seem to have underperformed the MSCI world index. Low market share could also imply a crowded market and therefore the pressures of such a system could be affecting the performance. Prudential financial, AXA and Allianz asset management seems to be the exceptions to the trend, and have provided positive value growth to their investors over the last 5 years.
Market Leaders as Wealth Creators
Significant wealth creators also enjoy good market share in most cases. Notable among them are Google, Amgen, Gilead Sciences, Starbucks, Costco, Toyota, Boeing, etc. Gilead Sciences tops the wealth creator list with an impressive 40% annualized return to its shareholders during the last five years. The American biotechnology company that discovers, develops and commercializes therapeutics, concentrates primarily on antiviral drugs to treat patients infected with HIV, hepatitis B, hepatitis C, influenza and pulmonary diseases. It is followed by Starbucks, with an annualized return of 35%. The Internet media sector, which is dominated by Google, has also produced another significant wealth creator in Tencent Holdings (China), which provided an annualized return of 30% with only a 6.6% market share. The company represents the Asian face of internet boom by providing media, entertainment, internet and mobile phone value-added services, and it also undertakes online advertising services in China.
Market Leaders as Wealth Destroyers
Wealth destroyers mostly come from bricks and mortar industry spanning across sectors such as steel, coal mining, chemicals, machinery and energy. IBM and HSBC are the exceptions, with the former being a software company and the latter a banking company. Arcelor Mittal’s share price plunged the most in this study, with a negative return of 27%, followed by Guodian Technology in the renewable energy industry. Both command a market share of 6% and 5%, respectively. Arcelor Mittal is the world's largest steel producer, with an annual crude steel production of 98.1 million tons as on 2014, which is 10% of the world’s steel, and Guodian is one of the five largest power producers in China, engaged in development, investment, construction, operation and management of power plants.
The No.2 Syndrome
Sometimes, the second largest market share holder can actually rank better in terms of wealth creation than the leader. Such trend cuts across several sectors. For eg., though Wal-Mart enjoys a dominant market share of 57% as compared to Costco, the warehouse group with the second highest market share of 17.8%, the annualized stock price performance of Costco is 21.5% compared to 5.3% for Wal-Mart. Similar things can be observed with Google Vs. Tencent, Amgen Vs. Gilead, P&G Vs. Unilever, Las Vegas Vs. SJM Holdings, Bank of America Vs. Wells Fargo, Coca-Cola Vs. Anheuser, Boeing Vs. Airbus, etc. In all these cases, the company with the second highest market share performed better than the sector leader in terms of wealth creation. There is apparently a discount for being the leader in some cases!
In trying to relate market leadership to wealth creation, we can see three categories:
Clear Winners (Best): Those that enjoy very high market share/leadership and have created excellent wealth for their shareholders (Amgen, Google, Costco, Microsoft)
Clear Losers (Worst): Those that have low market share and have created the least wealth or even destroyed wealth for their shareholders (Nestle, Siemens, Conco Philips, etc)
In-betweens (Better, Good, Hmm, Bad): Instances of high market share coupled with low wealth creation and vice-versa.
It is important to translate market leadership to wealth creation. In the absence of that association, sometimes market leadership can be more of a burden than a benefit.
PS: The author thanks Nivas Lakhminarayanan, Karthik Ramesh and Murtaza Patherwala for their assistance.