EFFECTS OF CANNIBALIZATION: CASE STUDY OF COCA COLA, PEPSI AND TTCL

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					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



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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.




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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




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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.




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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.




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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


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    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.




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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.




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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.




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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




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