203-What Happens When Giants Rumble?
Over the last few years, Allstate Corporation, the big insurer of homes and automobiles, has concentrated its management efforts on producing industry-leading profitability. Profits have increased but the stock price has gone nowhere. And Allstate is losing market share.
Part of this market share loss is due to higher pricing than its key competitors. A look at market share changes suggests this fact. Both Geico and Progressive, who are known for aggressive pricing, have gained market share. (See the Symptom & Implication, “Large competitors are maintaining price levels as smaller competitors discount” on StrategyStreet.com.) Allstate’s market share has fallen, as have the shares of the smaller property and casualty insurers. The leader in the industry, State Farm, has gained market share.
Allstate is now altering course. The company’s top management has stated a goal to become the number one property and casualty insurer within the next ten years. At a minimum, this means Allstate’s market share must rise from today’s 10.5% in automobile insurance premiums to State Farm’s 18.6% market share, tough to do in a market growing only 3% a year. Allstate’s first priority is to stem the loss of current customers and then to find a way to develop programs that will enable them to gain market share. (See “Audio Tip #40: The Components of Market Share Change” on StrategyStreet.com.) A substantial part of these initiatives will involve more aggressive pricing.
This new pricing posture has begun to emerge. In Illinois, Allstate’s home state, the company recently offered a 5% discount to Geico customers who would switch to Allstate. In addition, the company is offering a one time bonus to customers who will agree to buy directly from its web site.
These are opening salvos in a price war. Price discounting begun by the second ranked competitor in the industry is going to effect every other competitor. Prices are going down, margins are going down and no one can avoid the battle. (See the Symptom & Implication, “As large competitors match low prices, other competitors face difficulties” on StrategyStreet.com.) As long as State Farm avoids the Leader’s Trap, the competitors who are likely to suffer most will be the industry’s smaller players. These companies will suffer mightily in a price war. They manage cost structures that do not enjoy the economies of scale of their much larger competitors.
These smaller competitors are likely to begin to fail in the marketplace. As they do, they may become acquisition candidates for Allstate. Acquisitions may, indeed, be a profitable route toward Allstate’s market share goal.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.