How does market share affect a company's stock performance?

Gains or losses in market share can have significant impacts on a company's stock performance, depending on industry conditions. Market share is essentially the percentage of an industry's total sales that the company earns. Changes in market share have a larger impact on the performance of companies in cyclical industries where there is low growth.

In contrast, changes in market share have less impact on companies in growth industries. In these industries, the total pie is growing, so companies can still be growing sales even if they are losing market share. For companies in this situation, the stock performance is more affected by sales growth and margins than other factors.

In cyclical industries, competition for market share is brutal. Economic factors play a larger role in the variance of sales, earnings and margins, more than other factors. Margins tend to be low and operations run at maximum efficiency due to competition. Since sales come at the expense of other companies, they invest heavily in marketing efforts or even loss leaders to attract sales.

In these industries, companies may be willing to lose money on products temporarily to force competitors to give up or declare bankruptcy. Once they gain greater market share and competitors are ousted, they attempt to raise prices. This strategy can work, or it can backfire, compounding their losses. However, this is the reason why many industries are dominated by a few big players, such as discount wholesale retail with stores including Sam's Club, BJ's Wholesale Club and Costco.

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