Air Express Wars: The New Meaning Of Market Share

Includes: FDX, UPS
by: Victor Cook

Why is market share of revenues a strategic benchmark while market share of value is not even measured? There are several possibilities. Make a mental check of the following reasons that apply to your answer to this question:

_____ Market value is a financial metric
_____ Market share is a marketing metric
_____ Market value is too volatile
_____ Stock markets are efficient
_____ I haven't thought of it before
_____ All of the above.

Chances are you checked several if not all of the above. That's why I decided to begin this new series. For the next few posts the goal will be to compare the performance of the top international air express carriers with the fundamental metrics introduced in my book Competing for Customers and Capital -- beginning with the new meaning of market share. Why look at air express wars? Because the results are both timely and unexpected.


In its 2007 annual report Deutsche Post World Net listed four companies in its peer group: "TNT, FedEx, UPS and Kuhne+Nagel." You may have not seen these five companies on the same page before, because three of them are less known in the U.S.

Deutsche Post is listed on the Frankfurt exchange [XET: DPW]. In the U.S. we know the company as DHL (which stands for the last names of its founders: Adrian Dalsey, Larry Hillblom and Robert Lynn). TNT is a Dutch company listed on the Amsterdam Stock Exchange [AEX: TNT], while Kuhne+Nagel is a German company listed on the Swiss Exchange [SWX: KNIN].


The financial metric that links sales revenues to market capitalization is the value/revenue [v/r] multiple. It is a revealing metric. All the more so to me since I found the long-run expectation for the v/r ratio from 1950 through 2005 is nearly equal to 1:

The sum of market values over the 56 years was $244,850 billion USD. The sum of sales revenues over the period was $222,805 billion. The long run VR ratio was 1.10.

If you're interested in the details see The Value/Revenue Ratio: A Semi-Long-Wave Marketing/Accounting Metric.

The following table reports sales revenues and market value for the top five international air express carriers and for the group as a whole in 2007. This is not a picture of a high-value industry. Without their indexed fuel surcharges the performance of these companies might look a lot more like air passenger carriers.

United Parcel Services (NYSE: UPS) is the only company in this table with a value/revenue ratio greater than one. For the group as a whole the that ratio was just under 0.80. As revealing as these data are there is a more powerful metric for assessing the relationship between market value and sales revenue.


The value-sales differential [VSD] is the difference between a company's share of value [SOV] and share of revenue [SOR] in a peer group. Here's the critical distinction between the v/r ratio and the value-sales differential. The v/r ratio is a meaningful metric with regard to the company as a stand-alone enterprise. The VS differential is a meaningful metric with regard to the company as a member of a peer group. The two are not highly correlated.

The sum of value-sales differences across a sample of companies in the same time period is zero. That's because it's based on the difference between two numbers in sets that all sum to 100. No matter how large or small the differential is for any given company, the sum of the differences for a cross-section of companies always will be zero.

In short, the value-sales differential is an interval scaled (whole numbered) index of a firm's tangible and intangible market value relative to its peers. If you want a quick overview of the theory behind (and properties of) the VSD you'll find one in my 18 minute audio slide show Y'all Buckle That Seat Belt. If you're interested in the details behind this metric you can download my MSI paper Marketing's Impact on Firm Value.


The following chart reports the share of revenue [SOR] in the left-hand bar and share of value [SOV] in the right-hand bar for the top five air express carriers in 2007. The value-sales differentials appear between the bars with plus or minus signs. The green bars represent those companies where SOV is greater than their SOR. The red bars are for those companies where SOR is greater than SOV. The numbers in this chart were calculated from the data in the table above.

Investors awarded UPS with +20.5 point differential advantage over its peers: the company captured only 22.9% of the revenues and created 43.4% of the shareholder value in the group. The value created by UPS management was nearly double its sales churn.

Investors punished DPW with a -20.3 point disadvantage: the company generated 44.7% of the revenue but created only 24.4% of the value in this group. The sales churn generated by DPW management was almost double its value creation.

Meanwhile, FedEx (NYSE: FDX) was neither rewarded nor punished by investors: management generated 16.3% of the revenue and created 16.2% of the value. FDX sits on the sidelines. TNT was awarded a small premium while Kuhne+Nagel was discounted to a similar degree.


Market share is not just a marketing metric. It measures performance in both the sales generation and value creation domains. And the two interact in subtle but revealing ways. Here are some of the questions raised by the analysis of value-sales differentials in the air express carrier market:

1. How is UPS able to outperform its peers?
2. Why the disappointing results from DHL?
3. What left FDX sitting on the bench?
4. How can TNT and KNIN move ahead?

If you're not interested in the air express wars you might want to see how companies in which you own stock stack up against their peers. The calculations are simple. The implications may be more challenging.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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