How Can a Company Grow Market Share?

Date

January 29, 2025

Date

January 29, 2025

Date

January 29, 2025

By Caroline Grimont

Earlier this year, we offered up 4 money tips to start 2025 on the right note. Of the four, the one that caught a lot of investors’ eyes was the final one – picking the right investment, and many questions we got were around picking not just the right investment, but the right stock.

Today, we decided to talk about that. How should you pick the right investment, sector, and yes, stock? To our mind, it’s less about the stock, and more about the business behind it. Don’t take that from me. In his 2022 letter to his shareholders, legendary investor Warren Buffett agreed with this sentiment, saying, “Our goal…is to make meaningful investments in businesses with both long-lasting favourable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.”

Lest you think this is a relatively recent occurrence, in his 1988 letter to his shareholders, Buffett wrote: “In fact, when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.  We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behaviour to cutting the flowers and watering the weeds.”

So then, the question changes, to what makes a “good business” or a “good company”? Or put another way, how do you know that a company will continue to grow, and gain market share, and eventually grow your portfolio along with it?

Why Growing Market Share Matters

Simply put, market share is the percentage of an overall market that a company controls. For example, there are more than 80 banks in Canada, but the “Big 5 Banks” control over 85% of the market share. (If an investor wants access to even larger and more diversified banking market, they could consider investing in a fund like the Harvest US Bank Leaders Income ETF, ticker HUBL.)

Investors like companies and businesses that have large market shares, as a Morgan Stanley report on understanding competitive advantage through market power notes. “These companies are often said to be surrounded by an economic moat that preserves profitability and keeps competitors at bay. Of course, investors need to be sensitive about the price they pay. But businesses with a sustainable competitive advantage can be attractive because their value grows over time,” the authors write.

This is backed by research. In 1975, the Harvard Business Review published an article about the findings of a project carried out at the Harvard Business School, that found a positive correlation between a company’s return on interest and its market share. It found, “Specifically, as market share increases, a business is likely to have a higher profit margin, a declining purchases-to-sales ratio, a decline in marketing costs as a percentage of sales, higher quality, and higher priced products.”

How Do Companies Grow Market Share?

Generally speaking, companies can grow their business and market share in two ways

Organic Growth

Growth through existing and internal businesses, such as introduction of new products, or getting new customers, and,

Inorganic Growth

Buying market share, by using measures like mergers, or acquisitions.

What Are Some Examples of Organic Growth?

Companies try and grow their business organically in a number of ways. Here are some examples.

Expanding Customers, Old and New:

Just like someone trying to save money on their grocery budget by eating in more, companies also start by shopping their pantry – or trying to get existing customers to buy more. The assumption here is that your existing customers have already tasted your cooking and (presumably) like it. So they would be willing to buy more of it. Businesses also could use tactics such as cross-selling, or loyalty bonuses, to retain and grow existing customer base. And then, there are new customers. Businesses could grow their customer bases by getting referrals, or expanding their reach by better marketing (more on that later) or even getting into newer markets. Here’s an example. Have you been to the LCBO recently? If you have, you’d have noticed a bunch of new non-alcoholic options, including a non-alcoholic Corona beer, which I tried, and trust me, I couldn’t tell the difference. It’s an example of how its parent company, AB InBev, is trying to capitalize on the fact that Gen Z is drinking less and less alcohol.

Exploring the Globe, One Country at a Time:

Tim Horton’s recently opened up in India. That’s an example of geographic expansion. But it didn’t just take poutine to New Delhi. No, Tim Horton’s in India offers a butter chicken croissant – which doesn’t just sound delicious and make me crave one here in the GTA, but also is an example of how a brand, business and company needs to localize in order to stay relevant.

Developing New Products, or Innovation:

This is the primary way in which businesses grow. Take for example the pharmaceutical industry – drug development is a core part of any medical business. Clinical researchers are always trying and testing new drugs to bring to market. Sometimes, the result of these tests could be blockbuster new drugs like Wegovy, or Ozempic. Investors who want to take advantage of the innovations in the pharmaceutical space, and also get the benefit of a regular monthly income, could consider looking at an exchange traded fund like the Harvest Healthcare Leaders Income ETF, ticker HHL.

Using Price-Points to Drive Growth:

Sometimes, especially when a company is a first mover in a market, it could price a product higher, and then later reduce prices – this is called price skimming. On the other hand, when a company senses that it is losing market share to a competitor, or feels that a new entrant might take some market share away, it could drop prices on its existing product line, in order to appear more attractive to customers. Businesses could also use dynamic pricing – or changing the price according to market conditions. 

Marketing:

We are living in the age of the internet, and most, if not all, businesses are at least in some ways online. As a result, traditional marketing as seen in the days in which the TV Show Mad Men is based, are unlikely to work. Businesses have to embrace new and ever evolving marketing strategies, including search engine optimization, or SEO, and social media. It’s not just that – businesses can ignore e-commerce at their own peril. And if you think that e-commerce is only for cheap drop-shipping from China, think again. Did you know you could buy a house on Amazon?

What Are Some Examples of Inorganic Growth?

Inorganic growth could be among the fastest ways in which companies and businesses can grow their market share – by simply purchasing it. Here are some examples of inorganic growth:

Mergers and Acquisitions (M&A)

One of the most commonly known types of inorganic growth are mergers and acquisitions, also called M&A, and also known as the first career choice of most recent-MBAs. Companies could merge with – or acquire – their peers, their competitors, their suppliers, or even companies that are in their upstream or downstream. Anything that could help them improve their own business cases. A Canadian example of M&A would be the 2014 acquisition of Shoppers Drug Mart by grocery giant Loblaws for a little over $12 billion. This acquisition allowed Loblaws to expand into pharmaceuticals, while also gaining an even healthier retail presence.

Partnerships

Businesses often get into partnerships with other companies to either access new markets, or to gain access to new systems, or technologies. You can think of a partnership like an M&A-Lite, or as dating before a marriage. The two partners don’t necessarily need to merge everything, just need to work together and see if it sticks. One example of a strategic partnership was Telus’ data modernization project with Google Cloud, which completed in 2024.

Joint-Ventures (JVs)

JVs form when two or more companies together create a new corporate entity, usually with a new goal, often to create a new product, or expand into new markets. For example, remember MillerCoors? MillerCoors was a beer brewer in the U.S., which formed as a JV between SABMiller and Molson Coors. The JV was formed back in 2008, and was acquired by Molson Coors in 2016.

What Can Investors Do?

Going back to Warren Buffet’s ideas, market share is one way in which he finds a truly great business, that must have an enduring “moat” that protects excellent Returns on Invested Capital.

As he said in his 1993 letter to his shareholders, “Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market.  Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power. Moreover, both Coke and Gillette have actually increased their worldwide shares of market in recent years.  The might of their brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles. The average company, in contrast, does battle daily without any such means of protection.”

For us investors, our portfolio is our economic castle. Picking companies with a strong competitive advantage –such as a high market share – is one way in which we might keep our castles secure.

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