Market cannibalism is defined as the negative impact a company's new product has on the sales performance of existing products. This is best illustrated by the "Cola Wars" -

the marketing fight between Pepsi (NYSE:PEP) and Coca-Cola (NYSE:COKE), which lasted most of the 1970s and 1980s. The soft drink rivalry pushed Coca-Cola Co. to make one of the most famous marketing blunders in financial history. In the process of creating Diet Coke, the company's chemists discovered a new formulation for Coke. The new concoction was sweeter and smoother than the century-old formula upon which Coke had been built. In fact, it was similar to Pepsi - the drink that was eating away at Coke's domestic market share.

On April 23, 1985, Coca-Cola Co. announced that New Coke was on its way. Because of a strong preference for New Coke in consumer taste tests, Coca-Cola decided to pull the old Coke formula from the shelves. Essentially, the company was throwing away a century of branding by favoring the new, relatively unknown formula over the one that consumers had grown up with. For Coca-Cola executives, this made sense. Much like with software companies that pull old versions from the shelf when a new one is released, they didn't want their old product line to keep consumers from buying their new one. Unfortunately, this bold move backfired horribly.

Consumers rebelled and flooded Coca-Cola with angry letters and phone calls. Coke's stock and market share took multiple hits and Pepsi even proclaimed victory in the Cola Wars now that Coca-Cola had copied its taste. The influx of complaints led to a "We've heard you" marketing reverse. On July 11, 1985, mere months after its sudden exit, the old formula was re-introduced with "Classic" added to the title - probably better than "Old Coke". Coca-Cola Classic quickly ate up the sales of New Coke in a textbook case of market cannibalization, but the company's stock did recover for the most part. The marketing blunder may not have been as much of a disaster as it appears. The controversy and media attention attracted some fence-sitting consumers back to the Coca-Cola brand.

Nevertheless, the saga of New Coke turned off many investors and resulted in Coca-Cola becoming an undervalued wallflower that nobody wanted to touch. Due to the strong international presence of Coke, however, investing sage Warren Buffet started buying significant amounts of Coca-Cola stock in the late '80s, which proved to be one of his most profitable buys. Despite its flirtation with a branding disaster and market cannibalization, Coke remains one of the world's strongest brands and a stalwart company to boot.

(For more on this topic, read Warren Buffet: The Road to Riches.)

This question was answered by Andrew Beattie.

  1. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  2. How does a long tail become profitable?

    A long tail becomes profitable because the costs to produce, market and distribute a product or service in a niche are low, ... Read Full Answer >>
  3. How do companies with a large product portfolio use BCG Analysis?

    BCG analysis is used to evaluate an organization's product portfolio in sales planning and marketing. It is specifically ... Read Full Answer >>
  4. What are the similarities between product differentiation and product positioning?

    Product differentiation and product positioning are important elements in a marketing plan, and most marketing strategies ... Read Full Answer >>
  5. Why is product differentiation important in today's financial climate?

    Product differentiation is essential in today's financial climate. It allows the seller to contrast its own product with ... Read Full Answer >>
  6. What are the major categories of financial risk for a company?

    There are many ways to categorize a company's financial risks. One possible perspective is provided by separating financial ... Read Full Answer >>
Related Articles
  1. Entrepreneurship

    3 Ways You Can Support Small Business Growth

    Discover a number of different options available to support small business growth, including crowdfunding campaigns and shopping locally.
  2. Professionals

    Advisors: Do You Need to Tweak Your Marketing?

    Advisors use a variety of marketing techniques to attract clients, but they don't all work. It may be time to evaluate what is, and isn't, successful.
  3. Stock Analysis

    Are the Brands Millennials Love a Good Buy?

    Millennials make up a very big — and thus important —c onsumer generation. So if they love a brand, its stock is likely to outperform, right?
  4. Entrepreneurship

    10 Ways You Can Make Money as a Blogger

    Obtain helpful information about the top 10 techniques that professional bloggers utilize to generate their incomes from blogging.
  5. Economics

    Understanding Electronic Commerce

    Electronic commerce is the buying and selling of goods and services over an electronic network.
  6. Markets

    Impacts of a 1-Star Yelp Review on a Company

    Learn how a 1-star Yelp review impacts the rating of a small business and how Yelp users interpret 1-star reviews given by customers.
  7. Entrepreneurship

    How to Pick a Winning Name for Your Business

    Many entrepreneurs are big picture people and have a hard time choosing a company name. Here are two major strategies for naming a business.
  8. Fundamental Analysis

    Yahoo, Google Back Together in Search Deal

    Google and Yahoo have signed a search deal yet again. The question is whether this one will stick.
  9. Investing Basics

    Impact of a 5-Star Yelp Review on a Company

    Learn the impact that a 5-star Yelp review can have on small businesses and how Yelp influences local competition between businesses.
  10. Personal Finance

    Pinterest To Launch Its New Cash Cow: A Shopping Section

    Pinterest started out looking like a pinboard or aspriational photo-sharinng site. Now they've opened a curated online shop.
  1. Trademark

    A recognizable insignia, phrase or other symbol that denotes ...
  2. Brand

    A distinguishing symbol, mark, logo, name, word, sentence or ...
  3. Brand Identity

    The components of the brand are created by the business itself, ...
  4. Negative Option Deals

    A dubious business practice that involves supplying a typically ...
  5. Drip Pricing

    A pricing technique in which only part of a product or service’s ...
  6. Quick Response (QR) Code

    A type of bar code which can be read by a digital device, and ...

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center