What Is Market Cannibalization?

Market cannibalization is a loss in sales caused by a company's introduction of a new product that displaces one of its own older products. The cannibalization of existing products leads to no increase in the company's market share despite sales growth for the new product. Market cannibalization can occur when a new product is similar to an existing product, and both share the same customer base. Cannibalization can also occur when a chain store or fast food outlet lose customers due to another store of the same brand opening nearby.

Key Takeaways

  • Market cannibalization is a sales loss caused by a company's introduction of a new product that displaces one of its own older products.
  • Market cannibalization can occur when a new product is similar to an existing product and both share the same customer base.
  • Market cannibalization is sometimes a deliberate strategy to blow out the competition while other times, it's a failure to reach a new target market.

How Market Cannibalization Works

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.

Marketing cannibalization is often done unintentionally when the marketing or advertising campaign for new products draws customers away from an established product. As a result, 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.

Cannibalization as a marketing strategy is generally frowned upon by stock analysts and investors, who see it as a potential drag on short-term profits. As companies design their marketing strategies, marketing cannibalization needs to be avoided, and individual product sales need to be closely monitored to determine if cannibalization is occurring.

For example, when looking at the fast expansion of chains such as Starbucks or Shake Shack, these companies constantly weigh the opportunities for sales growth with the risks of local market cannibalization.

Special Considerations: 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 the new stores cannibalize the website? It's not likely since Amazon Go only sells items that can't be purchased on the website, namely ready-to-eat fresh meals.

Examples of 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 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.