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

    Understand how financial advisors can legally pay a referral fee to someone for soliciting business, and learn the regulations ... Read Answer >>
  2. How does a long tail become profitable?

    Understand what the long tail concept is and who pioneered it. Learn how a company using a long tail strategy becomes profitable. Read Answer >>
  3. How do companies with a large product portfolio use BCG Analysis?

    Understand what BCG analysis is, and learn how companies use the BCG Matrix to analyze the performance of their product portfolios. Read Answer >>
  4. What are the similarities between product differentiation and product positioning?

    Learn how two marketing strategies, product differentiation and product positioning, are similar and work together to effectively ... Read Answer >>
  5. Why is product differentiation important in today's financial climate?

    Learn the importance of product differentiation and how businesses today are utilizing it to set themselves apart from the ... Read Answer >>
  6. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    The Top 3 Convertible Bond ETFs for 2016 (CWB, ICVT)

    Obtain detailed information on the exchange-traded funds (ETFs) available for traders seeking ETF exposure to convertible bond investments.
  2. Economics

    How Can Companies Increase Market Share?

    Companies that increase their market share enjoy a competitive advantage. They receive better prices from suppliers, and they’re able to produce goods faster.
  3. Your Practice

    Advisors on the Air: Tips for Hosting a Radio Show

    Hosting a radio show is a great way for financial advisors to reach new clients. Here are some tips on how to generate quality leads on air.
  4. Your Practice

    Grow Your Referrals from Pros with These Tips

    Getting referrals from other professionals can be one of the best ways to grow your business. Here are five ways to do it.
  5. Stock Analysis

    Meerkat: How it Works and Makes Money? (TWTR, FB)

    Discover how the video streaming app Meerkat came to be, what the developers are doing to monetize the app and how it threatens existing businesses.
  6. Stock Analysis

    Salesforce Vs. SAP: Comparing Top CRM Providers (CRM, SAP)

    Learn about the different CRM offerings by Salesforce and SAP. Understand each company's past and what kind of futures the differences indicate.
  7. Economics

    What are Business Activities?

    Business activities are any actions in which a company engages to make a profit.
  8. Fundamental Analysis

    Niche: How it Works and Makes Money? (FB, PG)

    Find out how Niche is revolutionizing the advertising industry by connecting corporate brands with social media stars on sites such as Vine and YouTube.
  9. Fundamental Analysis

    Is Ford's Emoji Marketing Method Successful? (F)

    Learn how Ford used emoji-based marketing to promote its 2015 Focus model, and find out about the performance of the campaign and its effect on unit sales.
  10. Fundamental Analysis

    How to Make Money in Augmented Reality

    Discover how advertisers use augmented reality content to engage consumers and boost sales. Augmented reality allows consumers to view real-life, real-time ads.
RELATED TERMS
  1. Brand Identity

    Brand identity is the way a business wants consumers to perceive ...
  2. Trademark

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

    A distinguishing symbol, mark, logo, name, word, sentence or ...
  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. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center