What is 'Market Cannibalization'

Market cannibalization is the negative impact of a company's new product on the sales performance of its existing and related products. It refers to a situation where a new product "eats" up the sales and demand of an existing product, potentially reducing overall sales, even if sales of the new product are increasing. This can negatively affect both the sales volume and market share of the existing product.

BREAKING DOWN 'Market Cannibalization'

Market cannibalization is also referred to as corporate cannibalism and only arises to a self-induced decline in sales, meaning the loss of market share arising from competition is not included in market cannibalization. Therefore, market cannibalization occurs when a new product intrudes on the existing market for an older product, rather than expanding the company's market base. Instead of appealing to a new segment of the market and increasing market share, the new product appeals to the company's current market, resulting in reduced sales and market share for the existing product.

Example of Market Cannibalization

If it is not intentional, market cannibalization can have a negative effect on a company's bottom line. This forces an existing product's life to end prematurely because sales shifted to the new product, rather than tapping into a new market as intended.

However, at times, market cannibalism is used as a positive strategy, called a cannibalization strategy. If, for example, a company wants to increase its market share, it can do so in such a way the introduction of the new product harms its competitors more than it harms itself. Additionally, it can be positive if the new product is far superior to an outdated product that is reaching maturity. Market cannibalization occurred in a positive situation when Apple introduced the more feature-rich iPhone and iPods that ate up sales for its lower-end iPods, including the Nano, Shuffle and Classic series.

Market Cannibalization as a Function of Growth

Sometimes market cannibalization is a necessary evil of growth. Many large companies, such as national chains, end up cannibalizing individual store sales by placing multiple locations in the same market. This is viewed as a negative for analysts.

For example, Shake Shack Inc. was given a bearish analysis by Wedbush on July 6, 2016. The financial institution believes Shake Shack's valuation is too high, citing specifically it expects the fast-casual food company to have future market cannibalization. The report points to recent openings of new Shake Shack locations in markets where there is already a current location. Wedbush believes the new openings could drag down the sales of same-store comparisons in the area, cannibalizing sales.

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