What is Market Cannibalization?
Market cannibalization is a sales loss caused by a company's introduction of a new product that displaces one of its own older products rather than increasing the company's overall market share. The term also is used to refer to a loss of customers in a chain store or fast food outlet due to another store of the same brand opening nearby.
How Market Cannibalization Works
[Important: Market cannibalization can be a deliberate strategy for growth.]
Also referred to as corporate cannibalism, market cannibalization occurs when a new product intrudes on the existing market for an older product. By appealing to its current customers instead of capturing new customers, the company has failed to increase its market share while almost certainly increasing its costs of production.
If it is not intentional, market cannibalization can hurt a company's bottom line.
However, market cannibalization can be a deliberate strategy for growth. A supermarket chain, for example, might open a new store near one of its older stores, knowing that they will inevitably cannibalize each other's sales. However, the new store will also steal market share from nearby competitors, even driving them out of business eventually.
This strategy is generally frowned upon by stock analysts, who see it as a potential drag on short-term profits. When looking at the fast expansion of chains such as Starbucks or Shake Shack, they constantly weigh the opportunities for sales growth with the risks of local market cannibalization.
Apple is an example of a company that has ignored the risk of market cannibalization in pursuit of larger objectives. When Apple announces a new iPhone, the sales of its older iPhone models immediately drop. However, Apple is counting on its new phone capturing competitors' current customers, increasing its overall market share.
Companies often risk market cannibalization is hopes of gaining a bounce in overall market share. For example, a company that makes crackers may introduce a low-fat or lower-salt version of its own brand. It knows some of its sales will be cannibalized from the original brand, but it hopes to expand its market share by appealing to health-conscious consumers who otherwise would buy a different brand or skip the crackers altogether.
When Market Cannibalism Is Unavoidable
Sometimes, market cannibalism cannot be avoided. Every major department store now operates an online store, knowing full well that its sales can only cannibalize its brick-and-mortar business.
Their only other choice is to allow internet retailers to continue taking market share away from them.
Macy's, as of 2019, is in the process of closing 100 brick-and-mortar stores nationwide. Meanwhile, Amazon is busy opening a chain of convenience stores called Amazon Go. Will this cannibalize the website? No. Amazon Go sells just about the only items that can't be purchased on the website, namely ready-to-eat fresh meals.
- Market cannibalization is a loss of sales of an old product to a new product from the same company.
- Market cannibalization is sometimes a deliberate strategy to blow out the competition.
- In other cases, it's a failure to reach a new and larger customer base.