Creative destruction


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

When it recently announced its preliminary results for 2010, Severfield Rowen observed on more than one occasion how its market share has more than doubled since 2007 - and yet, over the same period, the construction company, which specialises in structural steelwork, has seen sales fall by a third.

So market share is not growing on the back of an aggressive sales strategy - indeed it is almost for the opposite reason. Four years ago, Severfield could point to 30-odd companies with which it competed on some level. Today almost two-thirds of those have gone out of business.

That is a stark example of how, if as a consequence of, for example, the quality of its balance sheet, a business can negotiate a tough recessionary period such as the one the UK is experiencing now, the competitive environment it finds on the other side can be a lot more attractive.

So Severfield should emerge from this recession with a market share of at least double its 2007 level, with the potential to take further share because, through the downturn, it has been able to invest more in maintaining cutting edge factories than its surviving competitors.

A similar thing happened a couple of years back when MFI went bust, allowing competitors such as Home Retail Group, through Homebase, and Travis Perkins, through Wickes, to report much stronger sales of kitchens. Likewise, as the number-one player in UK electrical retailing, Dixons might expect to increase its share of this market as many of its peers downsize or look to exit.

Many sectors, be it retailing, banking, construction or whatever, experience difficult periods when capacity, and hence competition, are taken out of their markets from time to time. But whilst they may be painful in the short term, these periods can accelerate the exit of weaker competitors from a market and help protect the long term profitability of the companies that remain. Investors are often quick to identify the short term pain whilst ignoring the potential long term gains. The process of 'creative destruction', as the economists call it, can be very beneficial for those companies able to stick around for the long term - not to mention their investors.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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