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Published: November 25, 2009
If you couldn't tell from a quick scan at
your local supermarket, it's not uncommon for a handful of
companies to dominate a specific product category.
Companies talk about all types of business objectives, from R&D
spending to supply chain initiatives to product development. But
at the end of the day, most have the exact same overriding goal
in mind -- to steal market share from rivals and grab a bigger
piece of the pie.
Whether it's an entrenched brand, a one-of-a-kind technology, or
just plain old-fashioned economies of scale, strong players will
always feast on the weak -- acquiring the most desirable rivals
and killing off the rest one by one. And with Darwinian
capitalism always at work, the biggest gains will accrue to the
fittest.
But a company doesn't have to be a runaway leader playing for
huge stakes. Even in a $5 billion industry (relatively small by
Wall Street standards), just a 3% or 4% pickup in market share
by an up-and-comer can translate into hundreds of millions in
additional sales. And market leaders generally enjoy bargaining
power over suppliers and other perks, which can fatten the
bottom line even more.
Two Favorite Category Killers
The collapse of rivals like Circuit City and Rex has freed up
more than $8 billion in annual sales, and Best Buy (NYSE: BBY)
has rushed in to fill the void.
The company continues to expand internationally with an
ambitious plan to introduce big box superstores in the U.K. as
early as next spring.
There aren't too many companies that can claim to have picked up
market share for 15 consecutive quarters like Best Buy. The
company has had to pare back prices to woo some customers, and
slimming margins have weighed on the shares.
But my staff and I are always pleased to see forward-looking
management sacrifice today in order to reap bigger rewards
tomorrow. Best Buy's leadership position appears unassailable --
if not for its commitment to service, then for an unmatched
selection of merchandise that is broad enough to please even the
most ardent technophile.
Now that the worst of the recession appears to have passed,
Best Buy's future looks bright.
After assimilating the assets (and customer bases) of over a
dozen rivals, Cal-Maine Foods (Nasdaq: CALM) has become
the undisputed king of the shell egg business. The firm has
established relationships with nearly every major food retailer
in 28 states. Last year it sold 678 million dozen eggs -- about
one-in-seven consumed nationwide.
That growth has propelled the stock to a prodigious 4-digit gain
in the past decade.
How to Find the Next Up-and-Comers
Of course, there are plenty of other examples. Ceradyne
(Nasdaq: CRDN) has delivered a +1,000% return during the
past decade thanks to its dominance in the military body armor
market. Prior to the downturn, CarMax (NYSE: KMX) shares
had been racing alongside a growing number of used car
superstores. We could say similar things about companies like
Monsanto (NYSE: MON).
It's obviously best to look for businesses with room to grow
rather than those whose market share is nearly maxed out. And be
cognizant of margins, as companies that slash prices to gain
customers usually sacrifice profits to do so -- such growth
isn't sustainable.
Finally, keep overall industry economics in mind. Grabbing a
larger share of a fixed pie is nice, but if the industry itself
is expanding as well, then the rewards can be twice as sweet.
-- Nathan Slaughter
Editor
Market Advisor
Half-Priced Stocks
The ETF Authority
P.S. -- I've identified another top "category killer" that I
added to my "Growth" portfolio in the October issue of
StreetAuthority Market Advisor. Get the name of this
pick when you subscribe, plus get get my exclusive report: 11
Surprising Investment Predictions for 2010.
Click here to learn more. |
