Should You Fight for Market Share?

Walmart has been on a buying spree. It started with Jet.com in September 2016 for $3.3B to buttress its e-commerce presence. January of this year saw the purchase of ShoeBuy, a competitor to Zappos. In the last two months, Walmart has acquired Moosejaw and ModCloth, two specialist-clothing retailers.

These are tangible signs that Walmart does not plan to cede retail territory to Amazon without a fight. It may come as a surprise, but Amazon is already second place in apparel. Number one? Walmart. According to Barron’s:

“Amazon is quickly gaining traction in apparel: 46% of surveyed consumers purchased clothes on Amazon over the last 12 months, the second highest in the survey, trailing only Walmart Stores (WMT) at 60%.”

It isn’t exactly a secret that Walmart and Amazon are vying for control of retail. Marc Lore, former Jet CEO and now head of Walmart’s online operations, doesn’t mince his words:

“The acquisition strategy is being driven largely by Mr. Lore, who wants to take on Amazon directly and grab market share faster. Asked at an industry event Monday if Walmart would be happy as the second-largest U.S. online retailer after Amazon, Mr. Lore responded, “winning is winning.”

Winning may be winning, but is market share winning?

Intrinsic Business Value

Market share is, of course, a common point of comparison between companies. It’s a rough guide to comparative firm size, and it feels nice to be the biggest in the market. Many firms, therefore, value a high market share.

In moral philosophy, the concept of value is divided into two types: intrinsic and instrumental. Something that has intrinsic value is an end goal, in and of itself. The item’s value is intrinsic to the item. Something that has instrumental value, however, is not an end but only a means. An item has instrumental value only if it helps you get an item with intrinsic value.

Market share is not intrinsically valuable. In the world of business, good profit dollars are what has intrinsic value. Profit dollars, earned by serving customers, are the existential purpose of a firm. Anything else is merely instrumental.

Now, Walmart is right that strong market share is of instrumental value to the company. Being a large presence in the market allows it, famously, to negotiate very strong deals with suppliers, partners, and distributors, therefore increasing its profits.

Amazon plays the same game, only occasionally showing a profit in order to expand as far as possible. As The Economist puts it, “Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020.”

But Mr. Lore’s quote should be worrisome, and it is not a path to follow for many companies.

What Do You Value?

Be honest: in your industry, does increasing your company’s market share enable it to capture more profits? If not, then market share does not even have instrumental value, let alone intrinsic value. It is a vanity metric, pure and simple.

Outside of industries with large network effects, market share has little value. In fact, the pursuit of market share often has negative value to the true, long-term goals of any firm: profit dollars.

Samsung has the highest market share in smartphones, but only a tiny share of profits. Apple, on the other hand, earns at least 91% (and perhaps over 100%) of smartphone profits despite its much smaller market share. Consumers and investors, consequently, reward Apple, by being the most valuable company in the world.

Beyond a certain tipping point where consumers and app developers take you seriously, market share has little to no value in the smartphone industry.

The Bottom Line

Is your industry more like Amazon and Walmart’s or like Samsung and Apple’s? Even if it’s the former, market share at best is an instrument to earn profit dollars down the road. Amazon’s valuation is based on its ability to leverage market share into profits in the future.

The purpose of firm is to serve customers profitably, and the only definitive measurement of that is profit dollars. Do you have a plan to translate market share into profits? If not, stop chasing it.