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. 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 >>
  4. 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 >>
  5. 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 >>
  6. Why is brand equity considered an intangible asset?

    Brand equity is an intangible asset because the value of the brand is not a physical asset and is instead determined by consumer ... 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

    Coke vs. Pepsi Earnings Recap

    Shares dipped as Coke lays off 20% of its corp. staff while Pepsi struggles with declining volumes.
  4. Investing

    New CEO: Coca-Cola Has 'Outgrown' Namesake Drink

    Coke's support of WHO standards falls in line with larger initiative to reshape its health image.
  5. Investing

    Why Coke's Diet Soda Strategy Beats Pepsi's

    More consumers are cutting their consumption of carbonated soft drinks these days; sales volumes of the beverages declined last year 1.2%, an acceleration over 2014 when they fell less than ...
  6. Investing

    The New Plan from Coca-Cola's New CEO

    A new CEO's bold moves include giving employees the OK to say Coke isn't their favorite soda brand.
  7. Small Business

    The Evolution Of The Coca-Cola Brand

    Coke recently retired its 6.5 ounce returnable glass bottles. What other changes has Coke made throughout its history?
  8. Investing

    Coca-Cola Looks to Add Fiber to Drinks

    Coke CEO Quincey says the beverage giant wants to add 'functional beverages' to its offerings.
  9. 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.
  10. Investing

    Coca-Cola Beats Earnings Despite 14% Drop In Profits (KO)

    While KO shares won't move sharply to an upside on these numbers, the downside -- for now -- seems limited.
RELATED TERMS
  1. Market Cannibalization

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

    Anything that could materially affect either a company's earnings ...
  3. Cost-of-Living Adjustment - COLA

    An adjustment made to Social Security and Supplemental Security ...
  4. Brand

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

    Brand identity is the way a business wants consumers to perceive ...
  6. Brand Loyalty

    When consumers become committed to your brand and make repeat ...
Hot Definitions
  1. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets in a year, calculated by dividing sales by assets.
  2. Book Value

    1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  4. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  5. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  6. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
Trading Center