A:

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.

RELATED FAQS
  1. How much of the global beverage industry is controlled by Coca Cola and Pepsi?

    Examine the global nonalcoholic beverage industry, and learn what percentage of the market is controlled by the two major ... Read Answer >>
  2. Why did Warren Buffett invest heavily in Coca-Cola (KO) in the late 1980s?

    Discover why Warren Buffett found Coca-Cola an attractive investment in 1987. One criteria of a Buffett stock pick is a moat ... Read Answer >>
  3. How does brand image and marketing affect market share?

    Building a positive brand image is a must for companies that want an edge over the competition. Learn how marketing and branding ... Read Answer >>
  4. What are some examples of companies or products that have outstanding brand equity?

    Brand equity is the heart of reputation building for companies and products. With solid equity, the quality of a service ... Read Answer >>
  5. What is Warren Buffett's largest holding?

    Coke? IBM? American Express? Buffett's Berkshire Hathaway has a stake in several major companies. Find out which company ... Read Answer >>
  6. Are Social Security benefits adjusted for inflation?

    Learn how the Social Security Administration adjusts benefit amounts for inflation, and how 1970s inflation triggered this ... Read Answer >>
Related Articles
  1. Investing

    The Real Thing is Adding Ginger to its Recipe (KO)

    Coca-Cola wants to test adding ginger to its drink in certain parts of the world. Can we expect it soon in North America?
  2. Financial Advisor

    What Makes the 'Share a Coke' Campaign So Successful? (KO)

    Understand how Coca-Cola implemented the successful "Share a Coke" campaign. Learn about the top three reasons why the campaign was successful.
  3. Investing

    Coca-Cola Evolves Popular Loyalty Program

    Going digital, customers will no longer manually enter codes for the My Coke Rewards program.
  4. Investing

    Big Data is Helping Coke with Product Development

    The launch of Sprite Cherry is just another instance of Coke using big data to up its business.
  5. Investing

    Coca-Cola Earnings: A Surprise in the Making? (GMCR, KO)

    Coca-Cola (NYSE: KO) reports earnings tomorrow, with Wall Street anticipating both its top and bottom lines falling below last year's performance as soda consumption continues to slide. Yet ...
  6. Investing

    Coke Taking Steps to Improve Its U.S. Production (KO)

    Coca-Cola (NYSE: KO) has taken a major step toward streamlining its production in the United States. Coke has formed National Product Supply System, a company whose goal will be to "facilitate ...
  7. Investing

    Is Coca-Cola on the Road to Recovery? (KO)

    It may finally be time for investors to have a Coke and a smile as Coca-Cola (NYSE: KO) appears to have reversed its flagging fortunes. Of course, no amount of good news will get CEO Muhtar ...
  8. Investing

    Buying The World A Coke Through Its Bottlers

    Coke may be a classic portfolio play, but its international bottlers are where the action is.
  9. Investing

    Analyzing Porter's 5 Forces on Coca-Cola (KO)

    Read about how to use the Porter's five forces model to evaluate the competitive landscape and how a large company such as Coca-Cola still has rivals.
  10. Small Business

    3 Great Business Battles

    Here are some U.S. companies that have historically competed with one another for market supremacy.
RELATED TERMS
  1. Market Cannibalization

    The negative impact of a company's new product on the sales performance ...
  2. Corporate Cannibalism

    An act of self-infringement upon market share by corporations ...
  3. Driver

    Anything that could materially affect either a company's earnings ...
  4. Roger Enrico

    A former CEO of PepsiCo from 1996 to 2001, chairman from 2001 ...
  5. Brand

    A distinguishing symbol, mark, logo, name, word, sentence or ...
  6. Cost-of-Living Adjustment - COLA

    An adjustment made to Social Security and Supplemental Security ...
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center