What is Market Cannibalization
Market cannibalization is the negative impact a company's new product has on the sales performance of its related products. In this situation a new product "eats" up the demand for the current product, potentially reducing overall sales. This downward pressure can negatively affect both the sales volume and market share of the existing product.
BREAKING DOWN Market Cannibalization
Also referred to as corporate cannibalism, market cannibalism causes a self-induced decline in sales. This loss of sales equates to the loss of market share and comes from inside, not from competitive pressures. Therefore, market cannibalization occurs when a new product intrudes on the existing market for an older product. By appealing to current clients instead of capturing new clients, this product cannibalism will decrease market share.
If it is not intentional, market cannibalization can hurt a company's bottom line. Market cannibalism forces the premature end of an existing product's life. Sales shift to the new product rather than tapping into a new market as intended.
Using Market Cannibalization to Steal Share
However, at times, market cannibalization can be a positive strategy used to grow market share. Referred to as a cannibalization strategy, it may help one company capture market share of a competitor.
Apple is an example of this strategy in action. As Apple releases a new iPhone, the sales of older versions of iPhones will drop. However, Apple's new phone will capture new customers in the market for a new phone, thereby decreasing the share of competitors. Additionally, if the new product is far superior to an outdated product that is reaching maturity, it can capture share. As Apple introduces new technology and feature-rich products, it attracts the sales of lower-end competitor products.
Adverse Effects of Market Cannibalization on Localized Markets
Sometimes, market cannibalization is a necessary evil to promote growth. Many large companies, such as national chains, cannibalize individual store sales by placing multiple locations in the same market. By placing numerous storefronts in a market, a company may drive out competitors but will add stress to their stores, which must compete against one another. Analysts view this strategy negatively.
For example, Wedbush gave Shake Shack Inc. a bearish analysis on July 6, 2016. The financial institution believes Shake Shack's valuation is too high, citing specifically they expect the fast-casual restaurant to have future market cannibalization. The report points to recent openings of new Shake Shack locations in local markets where there is already a current location. Wedbush believed the new openings could drag down the sales of same-store comparisons in the area, cannibalizing sales.
The growth of e-commerce has caused the cannibalization of many brick-and-mortar storefronts. Existing stores may find a new competitor in the mother company as they compete with the online store. Toys "R" Us provides an illustrative example. Toys "R" Us began selling online in 1998. As of 2011, online sales had grown to $1.1 billion. The pressure put onto storefront businesses was unsustainable. In March 2018, Toys "R" Us announced the closing of all their stores in the United Kingdom and the U.S.