In the news this week, Chipotle is still having a tough time recovering from blows to its reputation caused by food-bourn illness back in 2015. One indicator that Chipotle is doing badly is that it has had to expend exorbitant amounts of money in order to try to regain market share from competing restaurant chains, making a big dent in the company’s bottom line. This begs the question: why is market share so important?
A company’s market share is an indicator of how well it is doing in relation to its competitors. Simply put, market share is a comparison of a company’s total sales in relation to sales in that industry, usually in a particular country or region, over a specified time period. For example, if hypothetical company Bob’s Burrito’s sold $20 million worth of burritos domestically in 2016, and all the burrito restaurants in the US together sold $100 million worth of burritos, Bob’s share of the market would be 20% for that year. As stated earlier, market share is usually measured in relation to a particular geographic area. Though domestic market share is very important for US companies, many also look at market share in emerging markets like China as a key indicator.
Image Credit: Madison Rosenbaum (CC by 3.0)
When investors look at market share, they not only look at the size, but also how that company is performing in relation to the industry as a whole. So if the market for burritos grew in a given year, than the burrito company would be expected to grow as well in order to maintain its share of the market. Investors also look at growth in market share in relation to competitors; a company with growth in market share will be growing revenue faster than other firms in the same industry.
The most common ways companies try to grow market share is by appealing to larger or different demographics, lowering prices competitively, and by increasing advertising. In Chipotle’s case, the burrito chain has largely gone for the latter option, increasing marketing and sales promotion by ten base points according to its latest SEC filings. This increase proved too much for many investors, causing a 3 percent drop in shares Monday evening.
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