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. 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. Markets

    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.
  2. Markets

    For Coke, Going Small Is Good For Business (KO)

    Coca-Cola's small format bottles and cans have led to an increase in volume sold, despite their much higher price.
  3. Markets

    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 ...
  4. Markets

    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.
  5. Markets

    If You Had Invested Right After Coca-Cola's IPO (KO)

    Discover how one $40 share, with dividend reinvestment, over 90 years ago in the Coca-Cola Company would have made you a multimillionaire today.
  6. Markets

    What to Expect From Coca-Cola Earnings (KO)

    Coca-Cola -- one of Warren Buffett's favorite holdings -- isn't going anywhere. But that's been the case with KO stock for almost two decades.
  7. Markets

    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.
  8. Markets

    The Top Non-Soda Companies Owned By Coca-Cola

    Coca-Cola has turned to acquisitions for growth and diversification, becoming a nonalcoholic beverage conglomerate that now owns, licenses and markets more than 500 beverage brands.
  9. Markets

    Coca-Cola's 3 Key Financial Ratios (KO)

    Get insight into why some of Coca-Cola's financial ratios are not as good as those of its peers, especially PepsiCo's, and explore how it may do better.
  10. Markets

    Looking to Invest in Coca-Cola? Here's What to Expect (KO, PEP)

    Learn about the Coca-Cola company as well as the industry in which it operates. Understand what its investors should expect of the company.
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. Product Portfolio

    Investopedia explains: A Product Portfolio is the collection ...
  4. Driver

    Anything that could materially affect either a company's earnings ...
  5. First Mover

    A form of competitive advantage that a company earns by being ...
  6. Brand

    A distinguishing symbol, mark, logo, name, word, sentence or ...
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center