"EFFECTS OF CANNIBALIZATION: CASE STUDY OF COCA COLA, PEPSI AND TTCL"
UNIVERSITY OF DAR ES SALAAM BUSINESS SCHOOL MBA EVENING PROGRAM MK: 600 THE EFFECTS OF CANNIBALIZATION: CASE STUDY OF COCA COLA, PEPSI COLA AND TTCL Term Paper IRENEY, ZACHY HD/TP.2116/2007 November 2009 Table of Contents A. INTRODUCTION 1. Preamble 2. Defining Cannibalization: Its General View 3. What is Cannibalization in the marketing context? B. CANNIBALIZATION EFFECTS: SELECTED CASE STUDIES 1. Cannibalization effect : Case Study of Coca Cola 1.1 Company Profile and Background Information: Coca Cola 1.2 Cannibalization among Coca Cola Products 1.3 Effects of Cannibalization among Coca Cola Products 1.4 How Coca Cola Manages the Effects of Cannibalization 2. Cannibalization effect : Case Study of Pepsi Cola 2.1 Company Profile and Background Information: Pepsi Cola 2.2 Cannibalization among Pepsi Cola Products 2.3 Effects of Cannibalization among Pepsi Cola Products 2.4 How Pepsi Cola Manages the Effects of Cannibalization 3. Cannibalization effect : Case Study of TTCL 3.1 Company Profile and Background Information 3.2 Cannibalization among TTCL Products 3.3 Effects of Cannibalization among TTCL Products 3.4 How TTCL Manages the Effects of Cannibalization C. CONCLUDING REMARKS D. Reference 2 3 INTRODUCTION 1. PREAMBLE The need for studying the effects of cannibalization and its importance has been established in several literatures, especially, since an assessment of possible cannibalization effects of a new product can help in deciding on suitable times for new product introduction and promotions. However, quantitative measures that can be easily monitored and interpreted are not commonly available. This study uses parametric measures to help identify and investigate the effects of cannibalization. It bases its assessment on the three selected case studies used to investigate the effects of cannibalization. Case studies with real data from the consumer beverage companies and a telecommunication company are used to illustrate the practical experience of those companies with regard to the effects of cannibalization. While precise statistics are unavailable, it seems likely that a high proportion of product introductions involve extensions to current product lines rather than completely new products. Many examples are there to justify this concept, they include such cases as the Coca Cola’s and Pepsi Cola’s extended lines through varied flavours under the same core brand such as Coke and Pepsi, Toyota Landcruisers with their annual versions, Miller’s Lite beer, Azam’s fruit flavoured yoghurt and so on. Line extensions typically share a large number of attributes in common with the firm’s parent products; moreover, they are usually advertised as part of the product family, for example Fanta Orange, Passion, Pineapple and Fanta Blackcurrant all appear under Fanta as a brand. One of the principal risks in introducing line extensions is the potential cannibalization of current products’ sales. Ideally, one would like to design a line extension that draws business solely from competitors’ brands while also enhancing the sale of the firm’s current products. Such cases are rare, however, as automobile producers know only too well in their design of specific models within a line. 4 Sources of Line Extension Sales The introduction of a new line extension can draw sales volume from four principal Sources, these are: 1. Brand switching of competitive brands to the line extension, competitive draw. 2. Brand switching from the firm’s parent brand(s) to the line extension, cannibalization. 3. Increased usage among current brand users, additions to users’ brand repertoires. 4. New customers to the product class, attracted to the specific characteristics of the line extension. It is an empirical matter as to how much of the line extension’s sales come from each of these sources. In some cases, however, line extensions do not increase total product class sales significantly. In such cases, the problematic primary issue is that one of competitive draw and cannibalization. 2. DEFINING CANNIBALIZATION In a general sense, the term CANNIBALIZATION refers to an act of taking parts of one machine to use in another with the aim of repairing it. For example we can say a truck was cannibalized for parts. In maintenance of mechanical or electronic equipment, "cannibalization" refers to the practice of obtaining the spare parts, or whole sections of a system, necessary to repair one device by removing them from another similar device, rather than from a pool of spare parts. The device used as a source of spare parts is often crippled as a result, if only temporarily, in order to allow the recipient device to function properly again. Cannibalization can usually occur only with devices that use interchangeable parts. 5 In marketing and strategic management, cannibalization refers to a reduction in the sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. Cannibalization is a key consideration in the product portfolio analysis. Types of Cannibalization Cannibalization can take different forms such as Cannibalization between Similar Brands of the Same Company: For example if Coca Cola were to introduce a similar product (Diet Coke or Cherry Coke), this new product could take some of the sales away from the original Coke. A second common case of cannibalization is when Similar Outlets or Sales Points of the same company cannibalize each other, for example if a particularly retail company opens outlets too close to each other. Much of the market for the new outlet could have come from the old outlet. The potential for cannibalization is often discussed when considering companies with many outlets in the same area, such as banks (NBC Limited) or mobile telecommunication providers like Vodacom with several Sales and Customer service centres close to each other. 6 Another form of cannibalization is when a retailer creates a promotion like 20% discount for one item (say Pepsi). The tendency of consumers is to buy the discounted item (Pepsi) rather than the other items with a higher price. However, when the promotion event is over, the regular drinker of Coke will resume buying Coke. By this behavior, there is a temporary cannibalization happening due to a promotion event. Cannibalization can also occur when a company introduces a new distribution channel or medium of distributing and selling its products to the same market to operate alongside the existing one. For example, when British Airways introduces a more convenient way of availing, booking and selling flight tickets online (e-ticketing) alongside the traditional manual ticketing through visiting their Sales Points. Many customers with access to internet will tend to move to the new arrangement and abandon the old one hence cannibalization between the two co-existing sales avenues. In project evaluation, the estimated profit generated from the new product must be reduced by the earnings on the lost sales. 7 Why cannibalization does occur? There can be several arguments that can be put forward on why a business adopts the strategy of cannibalization. We often observe that there are two stores owned by same owner operates is close locations. Here, the psychology of the owner can be that the size of market is large enough to support two stores and they can afford drop in sales as long as their total sales are in upward trend. Cannibalization may also happen as a by product of a company’s efforts to satisfy or meet customers’ needs through extending its product line thus having a new product eating up the sales of the existing product of the same company. Sometimes it may happen that any company in order to push out a competitor off market launches a revised version of its own product. Introducing a revised version of own product definitely leads to reduction of sales of the old version but it also lowers the market share of the competitive product Therefore, Cannibalization in the marketing context and for the purpose of this paper is defined as the negative impact a company's new product has on the sales performance (volume and revenue) or the market share of the existing products of the very same company. 8 B. CANNIBALIZATION EFFECTS: SELECTED CASES 1.0 CANNIBALIZATION EFFECTS: CASE STUDY OF COCA COLA 1.1 Company Profile and Background Information: Coca Cola Coca Cola Worldwide Coca Cola was invented by a pharmacist Dr. John Stith Pemberton on May 1886. Dr. Pemberton mixed the combination of lime, cinnamon, coca leaves, and the seeds of a Brazilian shrub to make the beverage. As time went, Coca Cola became popular thus making Coca Cola Company successful. Just like most companies become successful in the first place due to a successful marketing campaign, the success factors for Coca cola as a product and world firm depend upon the effectiveness of the ‘marketing mix’. Some of these factor attributable to the success include dynamics such as endorsement, merchandising, product placement, exhibitions, public relations, sponsorship and of course one of the biggest parts to marketing advertising. Coca-Cola is a well-known beverage company since a pharmacist, Dr. John S. Pemberton, founded Coca-Cola in 1886 in Georgia, U.S.A. Today, Coca-Cola is sold in about 200 countries all over the world, and becomes a world wide brand-named beverage. It was the 41st on the list of the 100 Largest Economic Entities in 2001. Until 1905, the soft drink, marketed as a tonic, contained extracts of cocaine as well as the caffeine-rich kola nut. By the late 1890s, Coca-Cola was one of America's most popular fountain drinks. With another Atlanta pharmacist, Asa Griggs Candler, at the helm, the Coca-Cola Company increased syrup sales by over 4000% between 1890 and 1900. Around the same time, the company began selling syrup to independent 9 bottling companies licensed to sell the drink. Even today, the soft drink industry is organized on this principle. For the sake of convenience and efficient management of the study, Coca Cola Kwanza Limited (CCK Ltd), a local bottling company located in Mikocheni, Dar es Salaam has been selected as a case study for a closer observation of the cannibalization problem facing Coca Cola. The study aims at examining the existence, extent, effects and measures taken to curb the problem. The roots of Coca-Cola Kwanza (CCK), as we know it today, can be traced back to a warm Christmas Eve in 1952 when the first Coke bottled in Tanzania rolled off the production lines. Aris Cassolis, a Greek businessman, owned Tanganyika Bottlers, as it was known at the time. In 1964 Cassolis changed the name of his plant to Tanzania Bottlers, after the union of Tanganyika and Zanzibar. Shortly after independence, Tanzania embarked on a socialist path in the hope of creating equitable distribution of resources amongst its people. The economic policies espoused by the government at the time did not create an environment conducive to growth and development for the still infant private sector. The economic hardships of the time forced Cassolis to sell Tanzania Bottlers to Yogesh Manek and Jalal Jamal. In spite of the difficult economic times, Manek and Jamal were able to revive the sales of Coca-Cola and to make it competitive in the beverage market - albeit for the next decade or so only. By the early 10 1990's Coca-Cola sales had dropped to an all time low and a major revamp was required to restore the beverage to its rightful place. In 1994, after the implementation of new economic policies, new opportunities emerged for foreign investors. SA Bottling Company (SABCO) acquired majority shareholding in the then ailing Tanzania Bottlers Ltd. which comprised Afri Bottlers in Mbeya, Sykes Bottlers in Tanga, Mtwara Bottlers in Mtwara and Zanzibar Bottlers in Zanzibar. The name of the company was then changed to Kwanza (meaning 'first' in Swahili) Bottlers. SABCO initially injected over US$35 million into the new company to enable it to produce high quality products using state-of-the-art technology. A new ultra-modern facility was set up in Mikocheni and officially opened in 1997 by Tanzanian President Benjamin William Mkapa. As it upgraded its equipment, Kwanza Bottlers also invested in the development of local Tanzanians by providing them with the necessary training and exposure required to profitably run and manage a carbonated soft drink industry. The company also embarked on a programme aimed at providing basic business skills to dealers, so as to enable them to run their businesses in a profitable manner. To date over 6,000 owners of small-businesses have attended these training sessions. The company's name later changed to Coca-Cola Kwanza and it has become an active member of the community, with a solid reputation as a good corporate citizen. This is evidenced by the many community causes. 11 Since 1995, the company has grown tremendously both in brands and packs. It has a total of eight packs sizes in operation: 200ml, 275ml, 300ml, 340ml, 350ml, 1l, 0.5l and 1.5l. It also has a total of 14 brands on the market namely Coca-Cola, Coke Light, Fanta (Orange, Passion, Pineapple), Sprite, Krest (Soda Water, Tonic, Stoney Tangawizi, Bitter Lemon), Sparletta (Citrus and Pinenut), Appletiser and Dasani bottled water1. The company has greatly taken into consideration the aspect of affordability, as it has retained the price of TSH 200 per bottle from 1997 to 2002, and then merely increased it to TSH 250 per bottle. Currently the price stands between 400 and 500 per 350ml bottle. Availability is also a key factor, as the company has a total of 338 manual distribution centres within three plants, which are evenly distributed across the territory and employ more than 3’000 people directly. Coca Cola Kwanza Limited has a Consumer Base of 37 million with a GDP per capita (purchasing power parity) of US$ 1,100. Coca Cola Kwanza has three bottling plants located in Dar-Es-Salaam, Mbeya, and Zanzibar. It directly employs about 1,000 people while the job creation - multiplier effect is ± 10.0002. 1 www.ccsabco.co.za 2 www.ccsabco.co.za 12 Country Manager: Murray Loggie Sales & Marketing Manager: Herbert Nuwamanya Supply Chain Manager: Rian Hurter Human Resources Manager: Flora Lupembe Finance Manager: Elizabeth Burns Public Affairs & Communication Manager: Jovith Muhandiki3 Figure 1: Three Bottling Plants operated by Coca Cola Kwanza Limited in Tanzania 1.2 Cannibalization among Coca Cola products 3 ibid 13 Coca-cola has a wide range of products, which represents their product mix or product portfolio. Product lines are a group of products that are similar and this is what a product portfolio is made up of. Coca cola worldwide has about 500 brands and 3000 products which are too many to evaluate accurately, therefore we will only use their top name brands which generate them the most turnover. Here are a few of them: 1. Coke (Diet coke, lemon coke, cherry coke, lime coke, caffeine free coke, vanilla etc.) 2. Dr. Pepper (recently purchased brand from Cadburys Schweppes) 3. Oasis (Summer fruits, Berry and Apple, Citrus Burst, Oasis Light) 4. Dasani (various flavours of bottled drinking water) 5. Sprite (lemon and lime carbonated soft drink) 6. Fanta (Pineapple, Tropical, Diet, Berry burst, fruit twist, apple splash.) Judging by the amount of differentiation shown, Coca colas top brand names seem to have had a large amount of extension strategy added to them, may be to boost them when they have started to reach the end of their maturity stage and go in to decline. From this data we can see that the brands from which Coca-cola receives most of its turnover, are either reaching the end of their product cycle or too popular to allow stretch. However, when you speak to Coca Cola top officials, they promote a different perception of their operations and products. 14 Here are some comments from some of the Coca Cola senior officials (quoted) to help us know more about Coca Cola company. They said many positive things, what they did not reveal is the fact that they are fighting a fierce war against cannibalization of their own products and projects. Here are the excerpts, unedited. “In one way, you've known us all your life. Perhaps you even think of Coca-Cola® as an old friend. But old friends can grow in new and exciting ways. Surely you have. And so have we”. ”We are on a new journey of growth, building on our most formidable assets: our brands, our financial strength, our global reach, our unrivaled distribution system and the strong commitment of our management and employees worldwide”. ”Our journey focuses on leveraging these strengths to become a truly sustainable growth company and, ultimately, one of the most respected companies in the world”. ”The time is now. In our more than 120-year history, there is no better time to be at The Coca-Cola Company than right now” Interviews with several top Coca cola officials revealed more detailed information about the firm. Some of the claimed details include the following: We, the Coca Cola are the world's largest non-alcoholic beverage company, a market and marketing leader with innovative products and an unrivaled distribution system. We own 4 of the world's top 5 nonalcoholic sparkling beverage brands. We rank No. 1 worldwide in sales of sparkling beverages but we’re also No. 1 in juice and juice drinks, No. 2 in sports drinks and No. 3 in bottled water. 15 Our global portfolio of more than 3,000 beverages continues to expand far beyond traditional soft drinks to include waters, juices and juice drinks, teas, coffees, sports drinks and energy drinks. We operate in over 200 countries and employ 92,400 associates. In 2008, our net operating revenues grew by 11 percent to $31.9 billion and operating income grew 16 percent to $8.4 billion. “People enjoy our beverages at a rate of nearly 1.6 billion times a day, thanks to our unparalleled distribution system and ever-expanding portfolio of beverage choices that energize, relax, nourish and hydrate”. “The soft drinks market is in high demand of healthier alternatives to some of the market leading brands, such as Coke and Dr Pepper, which are in their maturity stage and have been for the past few decades”. “Marketing is about understanding the customer and ensuring that products and services match existing and potential customer needs” As discussed earlier, the issue of product portfolio has been positively viewed by the Coca Cola management and has been portrayed as an indicator of growth and company’s ability to meet varied consumers demands. However, a closer study on the same aspect revealed a serious brand portfolio management problem, cannibalization. With a portfolio of more than 3,000 beverages, from diet and regular sparkling beverages to still beverages such as 100 percent fruit juices and fruit drinks, waters, 16 sports and energy drinks, teas and coffees, and milk-and soy-based beverages, Coca cola variety spans the globe. A cross section of some of the key brands is as follows: Brand Name: Fanta Drink Type: Soft Drink Fanta: Available in Europe since the 1940s, Fanta was introduced in the United States in 1960. Consumers around the world, particularly teens, fondly associate Fanta with happiness and special times with friends and family. This positive imagery is driven by the brand's fun, playful personality, which goes hand in hand with its bright color, bold fruit taste and tingly carbonation. Beginning in 2009, the U.S. markets get Fanta as Fanta Regular Orange, Fanta Zero Orange, Fanta Apple and Fanta Grapefruit in 100% natural flavors. Fanta is available in the following flavors: Aloe Vera Muscat, Apple, Apple Grape, Apple Kiwi, Apple Peach, Apple Vanilla, Apricot, Banana, Banana Fermented Milk, Berry, Berry Blackcurrant, Berry Cherry, Berry Orange, Birch Beer, Bitter Herbal, Bitter Orange, Bitter Water, Blackcurrant, Blackcurrant Blueberry Raspberry, Blackcurrant Lemon, Blueberry, Blueberry Salacider, Bubble Gum, Cherry, Citron, Citrus Blend, Club Soda, Coconut Pineapple, Cranberry, Cranberry White Grape, Floral Lemon, Fruit Punch, Fruit Punch Orange, Ginger Ale, Granadilla, Grape, Grape Lime Strawberry, Grape Pineapple, Grapefruit, Grapefruit Lemon Lime, Grapefruit Lime, Grenadine, 17 Guaraná, Herbal, Honey Lemon, Kiwi Strawberry, Lemon, Lemon Lime, Lemon Lime Mint, Lemon Passion fruit, Lime, Lime Peach, Lychee, Lychee Soursop, Mandarin Orange, Mandarin Orange Mint, Manderin Tangerine, Mango, Mango Melon, Mango Orange, Mango Passion fruit, Mango Pineapple, Melon, Melon Orange, Melon Vanilla Cream, Mint Orange, Mint Raspberry Strawberry, Orange, Orange Passion fruit, Orange Peach, Orange Tangerine, Orange Vanilla, Passion fruit, Peach, Peach Strawberry, Pineapple, Raspberry, Root Beer, Sangria, Strawberry, Strawberry Cream, Strawberry Milk, Strawberry Pineapple, Tamarind, Tangerine, Tropical Fruit Punch, Tutti-Fruti, Unflavored, Vanilla Cream, Watermelon and Wild Berry Lemon. Coca Cola products in Tanzania Out of a portfolio of more than 3,000 beverages and 500 brands marketed under Coca Cola, Coca Cola Kwanza produces and markets only 14 of them, namely Coca cola, Light Coke, Fanta (Orange, Passion, Pineapple, Blackcurrant) Sprite, Krest (Soda Water, Tonic, Stoney Tangawizi, Bitter Lemon), Sparletta (Citrus and Pinenut), Appletizer and Dasani bottled water. 18 When asked whether there exists cannibalization at CCK brand portfolio, the answer from the management was, “Yes, there is cannibalization at Coca-Cola Kwanza in terms of sales volume, market shares, positioning, sales turnover and preference”. According to Coca Cola Kwanza Limited, the product which experiences intense cannibalization is Fanta Orange. Brand Name: Fanta Drink Type: Soft Drink Fanta is available in Tanzania since the 1960s and is now in the following flavours; Fanta Orange, Fanta Passion, Fanta Pineapple and Fanta Blackcurrant. Fanta Orange is packed in glass bottles as well as in tin cans. The cannibalization is within the Fanta flavours, that means the sales volume, market share and sales turnover of Fanta Orange(traditional Fanta flavour) are greatly affected by the other Fanta flavours (passion, pineapple and Blackcurrant) which came to be introduced in the market later. Fanta Orange is one of the core brands which have high market share. The rest of the flavours, when introduced in the market, cannibalize this core brand by taking some of the Fanta Orange customers together with its market share thus negatively affecting its sales volumes and turnover.When introducing these new Fanta flavours, Coca Cola 19 aims at meeting varied customer needs in terms of tastes and preferences, however in the course of satisfying those wants, an inside enemy to the existing brands is created. The Coca cola management felt that the new offers were necessary because the original product, while quite profitable, was losing market share and might never penetrate certain customer segments. 20 Also new products with new flavours are introduced with the aim of fighting competition, blocking competitors from entering the market through unattended customer needs such as varied soft drink flavours. These new products such as Fanta Passion and Pineapple succeeded indeed in attracting these elusive customers, but the new flavours also lured some established customers away from the mature product, Fanta Orange. 1.3 Effects of Cannibalization among the Coca Cola products Continuous new product development is the driving force for economic growth and the social welfare improvement. Firms introduce new products or brands to crowd the product space so as to cannibalize market share and profit from rival firms and to deter the potential entry, while consumers benefit from having more products with difference attributes to meet their demand and from the lower price on existing brands due to new product introduction. The effects of a new product introduction on the existing products are referred to as Cannibalization effects. Effects of cannibalization can be felt on the market competition and consumer welfare change in the soft drink industry in Tanzania, both at the household level (Coca Cola) and at the industry/market level. The overall competitive effects are decomposed into two parts: the effect on the prices of existing products from increased competition, and the effect of having additional product variety. 21 As a result of the internal wars between Coca cola’s own products, the following side effects occurred:- i. Gradual decline of sales volumes of other Coca Cola brands, especially Fanta Orange. The shelf take off movement of Fanta Orange slackened in response to the newly introduced Fanta flavours. Many fans of Fanta Orange dared to taste new brands, some of them decided to abandon their favourite old Fanta Orange for the new flavours hence drop of sales volumes by Fanta Orange. ii. Sometimes it may happen that any company in order to push out a competitor off the market, launches a revised version of its own product. Introducing a revised version of own product definitely leads to reduction of sales of the old version but it also lowers the market share of the competitive product. This happened to Coca cola as it fights Pepsi Cola’s Mirinda variations(Pineapple and fruity). Alongside the sales decline came the drop in overall market share by Fanta Orange4 as a brand. The market share enjoyed by Fanta Orange declined as a result of new variations being introduced. The new Fanta flavour variants namely Passion, Pineapple and Blackcurrant drew part of their sales volumes and market share from Fanta Orange hence a market share fall5. iii. Bitter company – customer relations as a result of unsatisfied customer demands. As a result of cannibalization, some strategies to combat it involve starving the market of some products hence bitter feelings caused by product unavailability. In case of glass scarcity priority is given to Fanta Orange, ignoring other Fanta flavours. 4 Table 2-2. Customer Shifts – First Run, Corporate In Focus 2006 Coca Cola SABCO -Tanzania 5 ibid 22 iv. A percent of sales of Fanta as a brand is lost to competition or other substitute products such as juice when the already accepted flavours such as passion are scarce, not available to the already existing customers. Some customers will opt to go for the same flavour from other companies or opt for juices with the same flavour. v. Loss of loyal customers as a result of unstable supply of preferred brands and reduced marketing activities. A Customer Shift Matrix suggests that costumers tend to migrate, some permanently, from the existing to the newly introduced brand, especially when the product attributes between the two brands are somewhat similar or address the same needs. This loss of customers may lead to loss of market share and reduced sales volume. vi. Low brand growth especially to the cannibalized brand (Fanta Orange) and those newly introduced brands with limited or very low marketing activities like advertisements. This leads to unhealthy brands which can easily be defeated by competition. vii. Business economic losses to the company in case of failed brand or discontinued production of a particular brand. All costs incurred during R&D, production, initial launch and the funds spent to procure initial raw materials are wasted when decisions are made to stop production or withdrawal of a particular product. For example, Fanta Blackcurrant is hardly produced these days. viii. Due to the priority given to Fanta Orange the rest of the brands (Passion, Pineapple and Blackcurrant) have known to have low sales and poor sales turnover because they lack activation and marketing back-up such as advertisement or sales promotions. As a response, the market, distributors, retailers and consumers do not take these brands seriously. This move also kills the marginalized brands. 23 Figure 2: Table 2-2. Customer Shifts – First Run 2006 Brand Name Market Share Market Share % Drop Or Comment Before After New Gain of Introduction Brand Market share Introduction Coca Cola 53% 51% -2% Slight effects of (Coke) cannibalization Fanta Orange 35% 25% -10% Brand Highly cannibalized Sprite,Krest, 9% 7% -2% First run slight Sparletta cannibal. effects New 0 15% +15% Drew their sales brands(passion, volumes pineapple, Market share blackcurrant) from F/Orange Stoney 3% 2% -1% Tangawizi 24 1. How Coca Cola Manages the Effects of Cannibalization Deciding how aggressively to push the new additional brands alongside existing products prove to be difficult. The existing company – customer relationship allows marketers to pinpoint the extent of the cannibalization soon as it occurs. The retailers can quickly tell when customers drift from old product A to the newly introduced product. 25 Yet the data analysis may give you the extent as well as the implied simplistic recommendations such as abandoning the new products without regard for their strategic importance. Company management must explore the trade-offs between market share and profitability to decide on the fate of a cannibalized or cannibalizing brand. Indeed, they have an incentive to do so since each product is organized and managed as a separate SBU, competing for business with its own sales targets. In efforts to contain cannibalization among its products and the resultant effects, Coca Cola Kwanza has taken certain stern measures. They include the following:- Giving priority to the core brand Fanta Orange when it comes to marketing plans, sales promotion programmes and schedules. Recall the Bamboucha promotion which featured Fanta Orange exclusively. Allocating more funds to the traditional Fanta Orange flavoured brand. This means that only Fanta Orange has the budget for marketing. The remaining flavours such as Fanta Passion are denied funds for marketing activities. There are no advertisements or promotional programs specifically made for the newly introduced flavours. The idea is to control cannibalization through limiting growth of the cannibalizing brands (SBUs) Several Consumer promotions such as those involving final consumers and those which influence sales volumes tend to exclude new brands cannibalizing other core brands. Such strategies aim to control their popularity, especially 26 when the cannibalized brands have higher marginal contributions or are key corporate brands such as Coke or Fanta. The Coca Cola management plans to drop one Fanta flavour variant by year 2010 in order to protect their core brand, Fanta Orange. 2.0 CANNIBALIZATION EFFECTS: CASE STUDY OF PEPSI COLA 2.1 Company Profile and Background Information: Pepsi Cola Pepsi Cola Worldwide Pepsi-Cola, originally called "Brad's drink", was first made in New Bern, North Carolina in the United States in the early 1890s by pharmacist Caleb Bradham. On August 28, 1898, "Brad's drink" was changed to "Pepsi-Cola" and later trademarked on June 16, 1903. As Pepsi was initially intended to cure stomach pains, Bradham coined the name Pepsi from the condition dyspepsia (stomachache or indigestion). Coke still outsells Pepsi in almost all areas of the world. Saudi Arabia and the Canadian provinces of Prince Edward Island, Newfoundland and Labrador, Quebec are some of the few exceptions. Due to rumours of the use of cocaine, Coke was banned for a long time in India. Recently that ban was lifted, however, Pepsi had maintained a commanding market share. In 2005, Coca-Cola India's market share was 60.9%. 27 Pepsi had long been the favourite drink of Canadian Francophones and it continues to hold its dominance by relying on local Québécois celebrities to sell its product. Other regions where Pepsi outsells Coke are in central Appalachia, the state of North Dakota, the region in and around the state of Utah, and the city of Buffalo (by a 2-1 margin), all in the United States. More importantly, Pepsi outsells its rival in grocery and convenience stores in the U.S. Pepsi's total market share was about 31.7 percent in 2004, while Coke's was about 43.1 percent. In Russia, Pepsi has had a larger market share than Coca-Cola, and also spends more on marketing. 28 Pepsi-Cola Brands PepsiCo International Inc. has been marketing, making and offering refreshments to its customers and consumers for over 100 years. PepsiCo International Inc. is boasting of the broad spectrum of beverages offered worldwide. Some of the brands have an international appeal while others are regarded as domestic or local brands marketed and availed in specific local markets. PepsiCo North America, one of the refreshment beverage unit of PepsiCo, Inc. in the United States and Canada, has the largest brand portfolio which includes brands such as Pepsi Cola (flagship brand) which also has several variants under it. Other brands include Mountain Dew, Aquafina, Sierra Mist, IZZE, SoBe, Mug, Tropicana Twister Soda, Tropicana Juice Drinks, Dole and Ocean Spray single-serve juices. The company also makes and markets North America's best-selling ready-to-drink iced teas and coffees, respectively, via joint ventures with Lipton and Starbucks. Well known domestic and international brands under PepsiCo Inc. include the following: • Pepsi: Pepsi, Caffeine Free Pepsi, Diet Pepsi, Caffeine Free Diet Pepsi, Diet Pepsi Max, Jazz Diet Pepsi, Diet Pepsi Lime, Diet Pepsi Vanilla, Pepsi Wild Cherry, Diet Pepsi Wild Cherry, Pepsi ONE, Pepsi Lemon , Pepsi Max, Pepsi Light 29 • Mountain Dew: Diet Mountain Dew, Caffeine Free Mountain Dew, Mountain Dew Code Red, Diet Mountain Dew Code Red, Mountain Dew Live-Wire • Manzanita Sol • Mirinda • Mug Root Beer : Diet Mug Root Beer, Mug Cream Soda, Diet Mug Cream Soda. Others are the Sierra Mist and Sierra Mist Free. PepsiCo Inc. also makes and markets the following brands in its domestic and international markets. They include AMP energy drink, Dole juices and juice drinks (License), Dole Plus fortified juices (License), Ethos Water (License), Fruit Works juice drinks, Lipton Brisk (Partnership), Lipton Iced Tea (Partnership), Lipton Pure Leaf (Partnership), No Fear Mother-load, Sugar Free No Fear Mother-load Ocean Spray juices and juice drinks (License), Frappuccino ready-to-drink coffee (Partnership), Starbucks Double shot (Partnership), Starbucks Doubleshot Energy (Partnership), Starbucks Iced Coffee (Partnership), SoBe juice drinks, dairy, and teas, SoBe Lean diet juice drinks, dairy, and teas, SoBe Life Water, SoBe Synergy, SoBe Adrenaline Rush, Tropicana lemonade and punches, Tropicana Light lemonade and punches, Tropicana Twister sodas International Brands, 7UP (International), Kas, Teem, Paso de los Toros, Fruko, Evervess, Yedigun, Shani, Fiesta, D&G (License), Mandarin (License), Slice and Radical Fruit. 30 Brand Name: Pepsi Cola Drink Type: Soft Drink Pepsi Cola has been bringing fun and refreshment to consumers for over 100 years. This is the flagship brand of PepsiCo International Inc. There are many types of Pepsi- Cola all differing in taste, price and appearance. Diet Pepsi is one of the most popular variations of the drink, containing no sugar and zero calories. Other popular variations of the drink are Pepsi Max and Pepsi ONE, both sugar-free colas. A caffeine-free cola called Pepsi Free was introduced in 1982 by PepsiCo as the first major-brand caffeine- free cola and is today sold as Caffeine-Free Pepsi and Caffeine-Free Diet Pepsi. In 1988, the company launched Wild Cherry Pepsi as a response to the popularity of Cherry Coke brand. Though rarely marketed, the Wild Cherry Coke remains widely available. Although there has always been a diet variation of the drink since it came out, Diet Wild Cherry Pepsi didn't become widely available until 2005, when Wild Cherry Pepsi was reformulated. Other variations include the broad spectrum flavours such as the Caffeine Free Diet Pepsi, Diet Pepsi Max, Jazz Diet Pepsi, Diet Pepsi Lime, Diet Pepsi Vanilla, Diet Pepsi Wild Cherry, Pepsi Crystal and the line seem to go on in the future. 31 Figure 4: Some of the leading Pepsi Cola products: North America, Canada & Europe, From its humble beginnings over a century ago, Pepsi-Cola has grown to become one of the best-known, most-loved products throughout the world. Today, the company continues to innovate, creating new products, new flavors and new packages in varying shapes and sizes to meet the growing demand for convenience and healthier choices. Pepsi is constantly on the lookout for ways to ensure their consumers get the products they want, when they want them and where they want them. This positive motivation to expand and stretch the product line has landed PepsiCo Inc. and its subsidiary bottling companies worldwide into severe cases of Cannibalization among its brands. PepsiCo have attempted marketing many different flavors of the drink, however many were quickly discontinued amidst poor sales. Crystal Pepsi was introduced in 1992 and sold until 1993 as a rival to New Coke which was also a failure. PepsiCo attempted the 32 drink again with the Pepsi Blue in mid-2002 and withdrew it from the market in 2004. PepsiCo market tested coffee tasting variations of the drink with Pepsi Kona in Lehigh Valley and Pennsylvania areas between 1994 and 1996. In 2005, Pepsi Cappuccino was released in Romania and Bulgaria with another coffee flavored cola called Pepsi Tarik in Malaysia. Many types of the drink have only been produced or sold for a limited time, such as Pepsi Holiday Spice, a spicy Hanukkah/Christmas seasonal finish of ginger and cinnamon. PepsiCo also rivaled Coca-Cola's lemon-flavored products with Pepsi Twist, which was a commercial failure due to criticism of the taste. Pepsi A-ha, with a lemon flavour was launched in India in 2002 but was not successful either. Pepsi Twist has been successfully marketed in Brazil (with lime instead of lemon), where a limited- edition version is also sold, the Pepsi Twistão, with an even stronger lime flavor. Pepsi X is another variation which contains more caffeine than regular Pepsi-Cola and in addition also contains taurine and guaranine. It is similar to other energy drinks such as Red Bull. Another type is Pepsi Samba which was released in Australia in the 3rd Quarter of 2005. It is Pepsi with a tropical taste of tamarind and mango Aquafina FlavorSplash 33 As a response to Coca Cola’s launch of Dasani and other packed water products, PepsiCo introduced the hydration segment comprising of Aquafina Flavor Splash and other packed water products. Filling up the PepsiCo hydration portfolio, Aquafina FlavorSplash is a refreshing, full- flavored water, sweetened with Splenda and ACE-K. Multipacks of FlavorSplash use 5% less shrink wrap and come with Aquafina's new, lighter PET plastic bottles. These bottles use 20% less PET plastic, which saves twenty million pounds of waste, and feature a 10% smaller label. Other brands and products of Pepsi Cola as listed above, their details will not be discussed in this paper. However, as a side effect of product line extension, cannibalization existed among Pepsi Cola products. Cannibalization among Pepsi Cola products is discussed next. 2.2 Cannibalization among Pepsi Cola products: International and Domestic Continuous new product development is the driving force for any firm’s economic growth and the general social welfare improvement. Just like other firms, PepsiCo 34 introduces new products or brands to fill the product space so as to protect its market share and profit from rival firms and to deter the potential entry by a competitor. Through the existence of cannibalization, consumers benefit from having more products with difference attributes to meet their demand and from the lower price on existing brands due to new product introduction. The international and domestic brands by PepsiCo Inc. are as listed above. For the sake of this paper, the focus will be in brands highly involved and affected by internal cannibalization, these are Mirinda Orange and Pepsi. Cannibalization effects between Pepsi Cola and Mountain Dew & its extension (U.S.A) Internationally, Pepsi (the original flavour brand) which is a flagship brand , is the one experiencing cannibalization, both, from within and without Pepsi product lines. Acting from within the main Pepsi brand portfolio, Mountain Dew eats up the market share, sales volumes and customer preference from other international Pepsi brands. The heavily affected being Pepsi cola which looses its market share to Mt. Dew Code Red, a variant flavour of the dominant Mountain Dew brand especially in the Convenient Stores and supermarkets. 35 Having hit market in late April, 2009, Mt. Dew's Code Red line extension now ranks No.8 in overall C-store data with 2.7 share; holds No.6 spot in 20-oz packages6 (table). Code Red is cherry-flavored version of Mt. Dew; it is now sold only in 20-oz and 1-liter PET. Pepsi executive says take-home packaging debuts this fall. It is ahead of Sprite. Of top-10 CSD brands in 20-oz packaging in C-stores (table), Code Red is just behind Diet Coke and ahead of Sprite. 20-oz is biggest volume package in C-stores. 6 Top 10 CSD Brands in Convenient Stores Survey Report/Beverage Department U.S.A 36 Top-10 CSD Brands in C-Stores Brand Share Volume Gain or Loss(+/-) Mt. Dew 5.8 -8.5% Coke Classic 5.0 -2.0% Pepsi-Cola 4.4 -5.4% Dr Pepper 3.4 -1.9% Diet Coke 2.3 +0.2% Mt. Dew Code Red 2.2 n/a Sprite 2.1 -3.6% Diet Pepsi 1.5 +0.2% Diet Mt. Dew 1.1 +2.2% Diet Dr. Pepper 1.0 +7.1% Figure 5: The Data Table shows (Convenient stores) top-10 brands in 20-oz for 4-weeks ending June 16, 2009; market shares; and volume gain/loss, against comparable period last year. 37 In C-stores, Code Red holds No.8 ranking in both 1-liter and overall. In drug chains, Code Red is No.21 overall and No.6 in 20-oz. In supermarkets, Coke Red is No.3 in 20- oz ranking, ahead of regular Mt. Dew; however, 20-oz is not major package in supermarket channel. In C-stores, only 20-oz CSDs gaining volume -- beyond Code Red -- are diets. BD previously reports on channel weakness due in part to pay-at-the- pump which encourages consumers to fill up and drive away, not entering store. Pepsi bottlers are enthusiastic. They say Code Red "is absolutely off the charts. It exceeded Pepsi's (estimate) for full-year volume in its first eight weeks." When interviewed, one official from the bottling company responded, "Everybody's enthused, Our 20-oz Mt. Dew business (overall including Code Red) is up +20%." This is serious Cannibalization. In C-store data for 4-week period, regular Mt. Dew volume (all packages) totals 5.2 mil cases, down -2.9%, or about 156,000 cases. But Code Red volume for same period totals 1+ mil cases. So, even if all of Mt. Dew's volume loss were assumed to be from Code Red cannibalization, most Code Red volume is still incremental. But, Mt. Dew's loss probably not mainly due to Code Red, as Mt. Dew was down -1.9% in 4-week period ending April 21, before Code Red launched. It is rather from the slackening down 100 years old Pepsi Regular. When asked to give his views on Cannibalization, PBG chairman/CEO Craig Weatherup recently noted that, “much of Code Red volume is sourced from products "like Mistic, 38 Snapple and SoBe, and that's what the strategy is." He, however hid the fact that their own flagship brand Pepsi was being cannibalized. Other Pepsi Bottlers say that the early results indicate that cannibalization by Mt. Dew Code Red on Mt. Dew Regular is minimal. "We're seeing only 15%-20% cannibalization of (regular) Dew. Mt. Dew Code Red appears to be taking a bite out of Pepsi and Dr. Pepper." Another official from a bottler had this comment, "Almost all (Code Red) volume is incremental, cannibalization is an issue. It's too early to know for certain what the impact will be on regular Mt. Dew. But from the field, we are worried on what is happening to Pepsi regular. I haven't heard too much concern ." When asked whether Code Red has staying power or is flash-in-the-pan, top-10 Pepsi bottler said, "With the growth of flavored Mt. Dew Code Red and cherry flavor in particular, that leads us to believe that this impact on other brands like Pepsi will stay around. I definitely think it has staying power." Mt. Dew Code Red is partly targeted to urban demographic groups and to Mt. Dew consumers who might be tempted to try non-carbonated and/or energy drinks like Red Bull. Pepsi's senior vice president of strategy and marketing Dawn Hudson recently quips to Atlanta Constitution, he said, "Some still think of green Dew as hick Dew. Mt Dew Code Red could change that." In order to contain cannibalization in North America and Europe, One Pepsi executive says, "in some places, (grocers) we are building Code Red warm, single-serve displays 39 using 20-oz and 1-liter. This limitation of what is availed by dispensers and sales point will work to control the effects of cannibalization on Pepsi’s own brands. What a strategy! For the sake of convenient and efficient management of the study, SBC Tanzania Limited, a local bottling company with its Headquarters located at Vingunguti area along Nyerere Road, Dar es Salaam has been selected for a closer observation of the cannibalization problem facing Pepsi Cola in Tanzania. As was the case with Coca Cola Kwanza Limited, the study aims at examining the existence, extent, effects and steps taken to arrest the effects of cannibalization. SBC Tanzania Limited was incorporated on April 5, 2001 with a mission to revive the Pepsi Cola business in Tanzania and to transform Pepsi brands into sizeable and serious contenders for volume and share of mind in the Tanzanian market. Our Vision calls for us to build one of the best run companies in Tanzania. The name SBC traces its roots to our Nigerian sister bottling operation, Seven-Up Bottling Company PLC. Our sister company has been operating in Nigeria since that country’s Independence Day on 1st October 1960. While Our Nigerian sister company employs over 5000 employees, SBC Tanzania Limited employs about 850 employees in its nation’s wide operations. 40 The company manufactures, distributes and sells carbonated soft drinks under authority of Pepsico. Inc., Purchase, New York. The marketed soft drinks include brands like Pepsi Cola, Mirinda (Orange, Strawberry, Frutty, Evervess, The main driving force behind SBC is the El-Khalil family who are no strangers to the African continent. They came into Tanzania with almost 100 years of experience in Africa and of which 40 have been in the soft drinks business in Nigeria. We commenced commercial operations in Tanzania on April 8, 2001 and since then each passing day has been challenging, interesting and rewarding. SBC had an excellent first year in Tanzania as its long-standing strategic focus on building a broad portfolio of carbonated beverages paid off. Volume was up 50% in the first year, we embraced ‘no nonsense back to basics’ strategy for growth which worked very well for us. Over the last 4 years we have focused on improving manufacturing capacity, streamlining sales & distribution and upgrading the skills of our people through training & development. All this has paid dividends with our volumes surging ahead with growths of 18% in year 2, 8% in year 3 and 28% in year 4 i.e. 2004-05. DIRECTORS 41 Faysal El-Khalil (Chairman) Ziad El-Khalil (Executive Director) David Kelly British Rashid Mehmood REGISTERED OFFICE & PRINCIPAL PLACE OF BUSINESS Head office: 54/57 Nyerere Road, P.O. Box 4162, Dar es Salaam As a custom, when interviewed by analysts, the senior Pepsi Cola officials had a varied positive perspective from that of Coca Cola. They viewed the aspect of growth differently, they had this to say: “Growth is our lifeline, but equally important is how we get there. For us, growth and integrity go together. They are the two rhythms around the company that simply beat as one. Integrity is the first and most important of our values”7. “ We have designed SBC so that we fulfill our ambitions for growth without ever having to cut corners, compromise our integrity or otherwise violate the sacred trust placed in SBC by our shareholders, our employees and so many others” “The future ahead of us is filled with challenges, markets are more dynamic, consumer trends are more 7 Pepsi Tanzania Annual Rep 06 6/2/07 12:26 Page 2 42 volatile and short-lived, alternate product choices are in abundance, new niches are forever emerging and to cater to all of this requires a “Will of constant innovation”, trying to do things differently, quickly and cost effectively. The key to all this lies in making a Corporate Entity – Responsive” To them , business growth was something more than just the extended product lines or brand portfolios. It is a corporate way of life, an organizational culture and a multidimensional satisfaction process which considers both, the internal and external company customers. However, despite the uniqueness in corporate philosophies, SBC is faced with Cannibalization among its core products. 2.3 The effects of Cannibalization among Pepsi Cola Products: SBC Case Analysis Under this study we examined the effects of the new products introduction by Pepsi (SBC Tanzania Limited) on other Pepsi brands in relation to the market share, market competition and consumer welfare change in soft drink industry from a combined household level and store level dataset. The overall competitive effects are decomposed into two parts: the effect on the prices of existing products from increased 43 competition, and the effect of having additional product variety. These effects can either be the temporal or short termed impact or permanent long term effects. However, the following effects of cannibalization are not sorted out in a particular categorized manner. They are discussed as they are expressed and presented by SBC officials. In Tanzania, among the Pepsi Main Products as bottled, availed and marketed by SBC Tanzania Limited, the products highly involved in the in-house product Cannibalization are Mirinda Orange, Mirinda Pineapple, Mirinda Fruity and Mirinda Lemon. The intensely cannibalized (negatively impacted) brand is Mirinda Orange. Therefore, at Pepsi Tanzania market the household war is among the Mirinda Variations, strictly flavour - based cannibalization since all products are available at the same pack size (350 ml), same distribution channel and prices. VS + + The following are some of the effects of cannibalization, as discussed below: i. New product introductions impose resource costs on existing products. In developing this idea, we examined the specific processes through which such costs are incurred. It can be during research and development stages of the new 44 product, during the introduction stage with all the pre-launch and launch periods characterized with intense promotions, advertisements and new product placement. For SBC to develop, launch and market the new Mirinda variations such as Mirinda Pineapple, a significant amount of funding was to be done. Such funds originated from the same limited financial sources. It also meant that the existing brands such as Mirinda Orange had their fund allocations squeezed to enable SBC to successfully introduce, market and distribute Mirinda Pineapple or Fruity. As a result, the brand strength that Mirinda Orange had before as a single fruit flavoured product from SBC (Mirinda) is reduced greatly. This weakens the brands immunity to competition, both in the short and the long run terms. As a result, brand market share drops. 45 ii. Decline of Core brand’s market share: One obvious effect of cannibalization by sister products from the same maker is the decline of firstly, the individual fateful brand being cannibalized (in our case, Mirinda Orange) and secondly the overall generic brand such as Mirinda in our case. When Mirinda Pineapple, an inside brand, was launched in December 2004, the sales volumes of Mirinda Orange was contributing about 33% of the overall sales revenue by SBC. By mid 2005, six months later, the contribution by Mirinda Orange had dropped by 9% to 24%. This was a combined effect of cannibalization by two Mirinda variations, including Mirinda Lemon that was already introduced in September 2002. However, the overall contribution by Mirinda as a core brand was still high, at 37% shared between Mirinda Orange with 24%, Mirinda Pineapple with 7% and 6% from Mirinda Fruity and Mirinda Lemon (4% and 2% respectively). On the other side, the outward market share of Mirinda in respect to the soft drink industry remained stable in the first six months but gradually declined as some of the newly introduced Mirinda Variations were not constantly available in the market thus creating a gap that was easily seized by competitors. Some peripheral markets would go months without a particular brand, especially the Mirinda Fruity which was highly loved by the younger market (children in particular). This weakened the overall brand image. iii. More focus and resources are directed to the newly introduced product hence an elevated priority (importance and attention) to a newly introduced brand at the expense of the existing one (Mirinda Orange). This is brand wise unhealthy for the existing product as it weakens the brand which can easily give way to the competition. With every new introduction, SBC found itself directing the majority of its efforts into these new brands. Being too curious about new brands, other existing brands suffered. Sales people had to spend more time on new products, promotional campaigns focusing on new brands but on the external battle field the competition was waged against the core brands and not much on their 46 variants. As a result, the overall corporate brand market share also slid back a bit. iv. Loss of Profit across all marketing offerings: With profit as a central most objective of any business venture, cannibalization tends to reduce the profitability index of the total set of the company’s offerings. In the case of Pepsi Tanzania, all financial periods in which new product variants were introduced, the profitability of the company with regard to the brand contribution was low. Given that profit is a function of Unit Volume and Unit Margin, the declined volume of units as a result of cannibalization (market share loss) directly result into low profits. To control the effects of cannibalization of this nature, the volume of new product and the margin of the new product must be higher or equal to the function of volume and margin of the old/existing product. Unfortunately this was not the case with Pepsi in the first launch years. According to the Annual Report and Financial Statements for the Year ended 31 st March 2006, one year after the launch of Mirinda Pineapple, SBC balance sheets8 reflected recovery. SBC had its top line growing by a whooping 27% to over Tsh 60.2 billion propped by 14.5 % growth in volumes accompanied by selective price correction .The growth got translated in the bottom line which registered a net profit of Tsh 636 million. When compared to the profitability of the previous year 2004, one of the reasons 8 Pepsi Tanzania Annual Rep 06 6/2/07 12:26 Page 5 47 for the under performance was the sharp eating cannibalization. To tackle this, the marketing management of SBC had to deploy the Selective Price Correction 9 in a manner to achieve “Price Parity”10 9 Pepsi Tanzania Annual Rep 06 6/2/07 12:26 Page 5 10 Ibid 48 v. Regular Out of Stock Situations create a less friendly relationship between the company, its distributors, wholesalers, sales points and finally the already committed consumers of the newly introduced brands. In case of out of stock or deliberate production stoppage, customers get angry and may react negatively. Some pulled out of the company brand portfolio complete thus landing into the hands of competition (coca cola). The effect of cannibalization here is the resultant poor relations as a result of unsatisfied customer demands. In order to the contain cannibalization of Mirinda Orange, SBC at times stopped the production or supply of Mirinda Pineapple, Fruity or Lemon. vi. During times of deliberately created scarcity as a response to cannibalization, some amount of sales of Mirinda as a core brand is lost to close substitutes such as Fanta pineapple, Fanta strawberry or Fanta Lemon from competition or other substitute products such as juice when the already accepted flavours such as pineapple or fruitty are not available to the already existing customers. Some customers will opt to go for the same flavour from other companies or opt for juices with the same flavour as in many instances. vii. SBC Limited as a company and its core brands such as Mirinda lose many of their loyal customers as a result of unstable supply of preferred brands and the unproportionally reduced marketing activities. During the new products’ launch seasons more emphasis is put to the new brands. When these brands pick up and start cannibalizing the existing brands in their short term growth stage as it was the case with the introduction of Mirinda Pineapple and Fruity which scooped a great chunk of Mirinda Orange sales volume, the marketing management over reacted by withdrawing intensive promotional campaigns, not involving variant brands in promotions and at times starving the markets of the product. This move is hurting to customers and consumers. 49 At such times customers tend to migrate to other brands. Due to Cannibalization on the other side, the intensive marketing activities and some attractive sales promotions succeed to lure customers from the existing brand like Mirinda Orange to the newly introduced brand like Mirinda Fruity, especially when the product attributes between the two brands are somewhat similar or address the same needs. These customers may have been attracted by the associated marketing activities or the short term attributes of the product. In the long run they dislike the new brand and go back to their old brands or choose to opt for completely different product. In this manner the brand (Mirinda) and SBC product line loose their long time customers. This loss of customers may lead to loss of market share and reduced sales volume. viii. Low brand growth especially to the cannibalized brand (Mirinda Orange) and those newly introduced brands with limited or very low marketing activities like advertisements. This leads to unhealthy brands which can easily be defeated by competition. ix. SBC Tanzania Limited suffers general economic losses to the company in case of failed brand or discontinued production of a particular brand. All costs incurred during R&D, production, initial launch and the funds spent to procure initial raw materials are wasted when decisions are made to stop production or withdrawal of a particular product. For example, Mirinda Lemon is hardly available in the market. Some market have not seen it at all since its launch in 2002. x. When cannibalization between Mirinda Orange and Mirinda pineapple intensified in 2005, SBC was forced to, among other things, review its pricing structure so as to counteract the effects of reduced sales volume due to in-house cannibalization. 50 The Selective Price Correction11 was used. The once lowly priced Mirinda Fruity, Pineapple and Lemon which were being sold at Tshs 120/= had their prices increased to 150/=, same price as that of Mirinda Orange, Pepsi and Seven Up. This was done so as to achieve the price parity both for the internal and external purposes. This was done so selectively as those areas where Mirinda Orange vs Pineapple cannibalization was not felt, such as Southern Highland markets, the prices were not changed for sometime. 2.4 How Pepsi Cola Manages the Effects of Cannibalization In order to contain the effects of cannibalization among its main core products especially that which involves Mirinda Orange, the management of SBC deploys a number of strategies. The selection of a set of measures to be taken varies from time to time. The mechanisms to be used also depend on the extent or degree of cannibalization experienced at that particular market. Some of the steps taken by Pepsi Tanzania (SBC Tanzania) are: i. The management of SBC Tanzania Limited increased the production of Mirinda Orange, giving it maximum priority next to that of Pepsi Cola. The other Mirinda 11 Pepsi Tanzania Annual Rep 06 6/2/07 12:26 Page 5 51 variation brands such as Fruity, Pineapple and Lemon were ignored. The production of these variations was done only when the set production targets of Mirinda Orange were met satisfactorily. 52 ii. Pepsi Tanzania (SBC) management had set aside funds to assist Mirinda Orange regain her sales volumes that had dropped due to internal and external cannibalization. For example Mirinda Orange was allocated a budget for its advertisement and promotional campaigns while Mirinda Pineapple, lemon and Fruity had only temporary funds allocated to them that were to be used during their launching seasons. Otherwise those variants were left to survive and be availed in ithe market alongside core brands like Pepsi and Mirinda Orange. iii. The composition of the marketing mix of Mirinda Pineapple, Fruity and Lemon were purposefully made flexible to accommodate changes and priorities set for Mirinda Orange. Whatever was left behind after attending Mirinda Orange needs is what was allocated to the rest of Mirinda flavors. For example, while metal and permanent plastic shop signs were developed and placed in outlets for Pepsi, Seven Up and Mirinda, Mirinda Pineapple, Lemon and Fruity had to rely on the paper colour posters which were cheap and short lived. iv. To react to the threat of cannibalization, the SBC management introduced the Selective Price Correction over its cannibalizing products. In areas where cannibalization against Mirinda Orange was intense, the market prices for 53 Mirinda Pineapple, Fruity and Lemon were hiked in order to achieve price parity among its cannibalizing brands. Areas with less cannibalization maintained their old varied prices. No serious positioning efforts were further done to Mirinda Fruity after its threat to eat some more market share from Mirinda Orange, especially in the children and education market segment. v. Instead serious effort were underway to re-position Mirinda Orange above the rest of the Mirinda brands and next to Pepsi Cola. Due to the priority given to Mirinda Orange the rest of the brands have known to have low sale, and poor sales turnover because there is no advertisement or any form of sales activation. These new brands were left to exist quietly alongside core brands, this is unhealthy to these brands as it can also kill the brand. These measures seem to be working as the extent of product cannibalization over Mirinda Orange seem to be decreasing as years go on. However, there still exists cannibalization. This worries SBC Tanzania to the point they have not for a while introduced Pepsi Cola Variations to respond to Coca Cola Tanzania who already have Light Sugar free Coke in the market. 54 3. CANNIBALIZATION EFFECTS: CASE STUDY OF TTCL 3.1 Company Profile and Background Information The evolution of Telecommunications in Tanzania can be traced as far back as the early1920s, when the then Tanganyika and Zanzibar were still under the colonial rule. The colonial settlers, foreign trading companies and later missionaries, established their centres in the country, thus the spread of the Postal and Telecommunications network followed the pattern of these centres. The amalgamation of previous independent Postal, Telegraph and Telephone facilities in the then Tanganyika, Kenya and Uganda, took place in 1933 resulting into the formation of a company known as East African Posts and Telegraph Company which became a self contained service with its own capital account. In 1951 the East African Posts and Telecommunication Act provided an instrument covering all Postal and Telecommunications services which came to be known as the East African Posts and Telecommunications Administration. In 1961, when Tanganyika became independent, The East African High Commission gave way to a new organ, the East African Common Service Organization (EASCO) and the Head of Posts and Telecommunications was designated Postmaster General (PMG). East African Posts and Telecommunications Corporation(EAP&TC) On 1st December, 1967 The East African Community was established and became operative from 1st January, 1968 replacing the then East African Common Services Organization. It also brought certain changes in the operation of P & T Administration. The name of the Administration was changed to "Corporation" and since then the business was conducted on commercial lines under the East African Posts and Telecommunications Corporation (EAP&TC). 55 Tanzania Posts and Telecommunications Corporation (TPTC) The disintegration of the East African Community in 1977 necessitated the establishment of Posts and Telecommunications organizations in each member state of the defunct Community. The Tanzania Government incepted a parastatal known as Tanzania Posts and Telecommunications Corporation (TPTC) in 1978. However, in 1993 the Corporation (TPTC) was split as part of the government's move to liberalize the communications sector in the country. Following this split three entities were formed, and these are the Tanzania Posts Corporation (TPC) The Tanzania Telecommunications Company Limited (TTCL) and Tanzania Communication Commission (TCC). Tanzania Telecommunications Company Limited (TTCL) The Tanzania Telecommunications Company Limited (TTCL) was established by an Act of Parliament, "The Tanzania Telecommunication Company Incorporation Act of 1993". The company came into operation on 1st January, 1994. According to the Act, TTCL has been established to develop and operate telecommunications service within and outside the Country. In brief the areas of activities for the company include: 56 To provide services within and outside the Country. To operate telecom services in accordance with TTCL license issued by the Tanzania Communication Commission (TCC). To operate or take over the business assets and liabilities of the former corporation TPTC in relation to the provision of Telecommunications systems and services. To establish, develop and operate telecomm services within and outside the United Republic of Tanzania. To provide all incidental services which are necessary and proper for the purpose of the Company. To do any other activity, within the scope of operations which is deemed requisite, advantageous or incidental to facilitate its performance as specified in the Act of the Company's Memorandum of Association. 3.2 Cannibalization among TTCL Products (services) Cannibalization refers to a reduction in the sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. Like any other company’s products, TTCL’s services and products has been cannibalized in many aspects as a result of changes happening to the business and its 57 decisions to bring in new products and service packages. In the company, there are two services on which the effects of cannibalization have been experienced. These services are the landline Pre paid services and the Mobile services. Landline Pre paid services TTCL Prepaid is one of the telephone services where a telephone line is attached to a Prepaid Account and all telephone services accessed from this account are paid for in advance. TTCL Mobile Services TTCL Mobile is The Tanzania Telecommunication Company LTD (TTCL) Code Division Multiple access (CDMA) cellular network. The CDMA is a high quality wireless communication technology that supports 3G services which are the voice, data and multimedia services. Before the introduction of TTCL Mobile, TTCL was depending to landline services for all income. When mobile service was introduced in our country, TTCL was forced to introduce mobile services in order to retain those customers who preferred mobile service. 3.3 Effects of Cannibalization among TTCL Products 58 i. The additional of mobile services made some people to change from landline as a result revenue to landline decreased. ii. The decrease of revenue by landline shocked very much the company. Though some people moved to TTCL Mobile but some went to competitors like Vodacom, Zain and Tigo. 3.4 How TTCL Manages The Effects of Cannibalization Measures taken by the TTCL management to curb cannibalization and its effects include the following: i. In order to retain customer to landline services, the company introduced broadband internet service which reliable and fastest means of data transfer. Due to the introduction of broadband service to the company, some customers are returning to landline services. ii. Despite the presence of cannibalization among the company’s products, the management has made effort to do away with the effect by motivating customers to use the landlines and to be connected with internet services. In doing so many customers has turned back to use their original services. iii. Deliberately TTCL has kept its Landline service tariffs lower so as to encourage more use of landline services as opposed to new products. 59 iv. TTCL has recently invested heavily on its landline infrastructures, modernizing its facilities including the introduction of the “Siwaya” the wireless landline phone connections which are of the state of art to lure back customers to depend on landline telephone services. v. To fight the quest for mobility, the company introduced phone cards and call booths in towns, schools, public places and hospitals with the aim of reaching more customers. However, poor management of the same has defeated the effort badly. vi. Following the continued poor performance of the firm, TTCL is set to diversify its services (mostly landline) and plan to invest more in the rural markets where mobile phone usage is not yet at its advanced stage. Evidence of performance effect The cannibalization to TTCL has made big effect in terms of sales performance and revenue performances. Evidence in terms of sales performance In terms of sales, the average performance in a month was about 100 customers while after cannibalization the average sales performance was about 50 customers per months. 60 Evidence in terms revenue collection Under this aspect, cannibalization has contributed very big effect as it made not get enough collection as it used before. Before cannibalization, the average collection for TTCL DSM South was about 600 M per month while average collection after cannibalization is about 300M. C. CONCLUDING REMARKS The extent to which cannibalization has occurred, and the nature of its effects, varies considerably from one industry to the other. Some industries are built on infrastructures that are more conducive to the process of cannibalization than others. In the beverage industry, for instance, Coca Cola and Pepsi are the heavily affected firms and are always used as study cases. These multinationals fight an inward as well as an inter- companies war of cannibalization. The telecommunication industry is the other victim, especially when the company wants to master all forms of telecom services without specialization as is the case with TTCL. Another area in the Tanzanian context is Print Publishing that also wants to go into Online publishing. Think of IPP Media, Mwananchi Publications or Global Publishers who run websites offering their newspapers and periodicals online. They face a similar dilemma. In the rush to set up their online content, magazine and newsletter publishers are faced with a number of questions. To what extent does the online content serve to simply give away our subscription-based content? How do we avoid cannibalizing our subscription revenues while maintaining a Web site with enough content to make it worth visiting? How can the Web site be used to keep revenues flowing and build brand recognition? Some publishers offer only selected content, while others offer their online content via subscription. Additionally, others put their content online for free but offer special bundled content bonuses just to subscribers. 61 According to this study we learnt that the primary effect of cannibalization can be experienced by a firm through the decline of sales volumes, market share and customer preference. These are the traditional effects. The secondary effects of cannibalization can be the negative effects on the intermediaries (distributors, wholesalers, stockists) thus affecting the distribution channels and an increase in direct marketing activities as efforts to contain cannibalization effects. The study also indicated that cannibalization can lead to more price competitiveness and inter-industry conflict. Cannibalization also leads to an overhaul of market strategy and sometimes greater labour mobility especially when the effects of cannibalization are so intense to the extent they cripple a firm or the entire industry as was the case with TTCL. Lastly the study showed that the retail outlets operations are greatly affected. Despite the harshness of the term, cannibalization is sometimes viewed as a good, or at least necessary, business practice. In these cases, the implementation of new operations or new business channels at the expense of existing ones is deemed an acceptable means of gaining a foothold in changing market conditions. This was particularly true in the relatively rapid transformation from a strictly bricks-and-mortar world to the modern day clicks-and-bricks economy. Getting products and business 62 operations online often was viewed as an absolute market necessity in the late 1990s and early 2000s. Because of this, many companies deliberately cannibalized their existing operations and channels in order to establish an online presence. The alternative was to be completely squeezed out of the game by more Internet-savvy competitors. Planned cannibalization, however, must be carefully considered and delicately executed. Eating away at existing operations may be a necessary step for restructuring. However, if not mediated the results can quickly devolve into internal chaos that can bring a company's productivity and earnings tumbling. Even where cannibalization is viewed as an advisable strategy, analysts agree that over the long run, businesses and industries would do well to limit the degree of household cannibalization, as it inevitably involves suboptimal efficiency and lower profits. 63 D. REFERENCES Christman, Ed. "Retail 'Cannibalization' By Net Sales Seen." Billboard. August 21, 1999. Cuneo, Alice Z. "Cannibalization is the Buzzword and the Consumer is King, But the Day-to-Day Pressure to Cut Costs Will Squeeze Store Chains." Advertising Age. September 20, 1999. Dean, Bill. "Cannibalization? Don't Bet on It." Marketing News. June 26, 2000. "Fear of Cannibals." Bank Technology News. July, 2000. Lehmann, R. J. "Is Your Web Site Stealing Your Readers." Folio. September 15, 2000. Mark Pendergrast (2000). For God, Country and Coca-Cola, Basic Books. ISBN 0465054684. Chernev, A. (2008), “Strategic Marketing Management” Kellogs School of management Macarthur, K. , “Cannibalization a risk as Coke diet brand tally grows to seven” Advertising Age, March 28, 2005 SBC Tanzania Limited, Annual Report and Financial Statements for the Year ending March 31st , 2006 http://www.pepsi.com/pepsi_brands/all_brands/index.php www.ttcl.co.tz Tanzania Telecommunications and Communications Ltd, Annual Financial Report, 2007-2008 64