3 Product Flops That Led to Higher Profits

Coca-Cola, Starbucks, and PepsiCo have all introduced innovations that never caught on. However, some of their biggest flops eventually turned into big profits.

Mar 15, 2014 at 2:00PM

Doritos Locos Tacos recently crossed the $1 billion sales mark, just one year after they were introduced in U.S. Taco Bell locations. The creation was a collaboration between Yum! Brands and PepsiCo (NYSE:PEP) that showcased the latter's ability to use its products in innovative ways.

Despite PepsiCo's recent success, the road to successful innovation is paved with failure. For every successful product created by Starbucks (NASDAQ:SBUX), Coca-Cola (NYSE:KO), and PepsiCo, there are many more that did not turn out as planned. However, three of the many failed innovations at these companies offered crucial insights into their businesses and ultimately led to their future successes.

New Coke leads to new consumer insights
Back in the 1980s, Coca-Cola was in a fight to retain its leading market share against the insurgent PepsiCo. In an effort to trim its losses from the Pepsi challenge, Coca-Cola reformulated its Diet Coke formula to make a sweeter drink that it called "New Coke." The new beverage came replete with a redesigned can, a brand new slogan, and a bold new advertising campaign. Coca-Cola also removed the old formulation from the market.

New Coke

Source: The Coca-Cola Company. 

It was this last move -- taking away the classic Coca-Cola beverage -- that angered consumers. As Bruce Greenwald described it in Competition Demystified, the move resulted in "an outpouring of protest from those customers committed to the original drink[, forcing] the company to reconsider its plans."

Soon, Coca-Cola realized its error and discovered its true competitive advantage. "Many loyal customers had a visceral attachment to the original, a drink they identified with their youth, their country, their very identity," writes Greenwald.

As it learned during the New Coke episode, Coca-Cola's durable competitive advantage is that its customers have an emotional attachment to the product, a nostalgia that is far more gripping than the product's taste. PepsiCo is often described as a timely brand -- one that changes to meet the tastes of the young and hip generation. Coca-Cola, on the other hand, is a timeless brand -- one that grows stronger in its customers' minds as time goes by.

Unfortunately, Coca-Cola may soon face another harsh reality: Its nostalgic customer base is growing old. Brand and marketing consultant Martin Lindstrom told The New York Times that the average Coke drinker is 56 years old. Coca-Cola still has incredible baby boomer mindshare, but it has struggled to bring the next generation on board. Innovation may be the solution to this problem; whether or not that innovation results in a hot new product, one thing is for sure: Coca-Cola will learn something new about its business.

Sorbetto reveals Starbucks' limits
Through the years, Starbucks has innovated on a number of fronts. Some of those efforts proved fruitful, others didn't. Best known as a coffee company, Starbucks has dabbled in a number of other businesses as well. For instance, it is now a successful player in the tea industry, with its Teavana and Tazo brands starting to gain traction among consumers.

However, not everything that Starbucks brews up comes out right. In the summer of 2008, the coffee chain rolled out the Sorbetto. The 10-ounce drink sold for $2.75 and was available in flavors like tropical tangy creme and berry pink citrus.

Unfortunately, the tart beverage was not a hit with consumers. According to Reuters, the Sorbetto introduction raised some analysts' eyebrows as they saw the limited amount of testing Starbucks did on its products before they hit stores. Moreover, the machines took 45 minutes to clean, which added significant work time for baristas while they tried to close the stores for the night.

The Sorbetto flop reveals two key things about Starbucks. First, the company cannot just slap "Starbucks" on a beverage and expect it to sell. Starbucks customers are more free-spending than the general population, but they are not going to forgo an opportunity to buy coffee or tea just to buy a new Starbucks beverage. This demonstrates the limits of the Starbucks brand.

Secondly, baristas' unpleasant experiences with the Sorbetto machine should have taught the company that new products should fit into the stores' existing workflows, or new rules should be enacted to smoothly change the stores' workflows. As Starbucks rolls out its La Boulange breakfast and bakery items, it is relearning the importance of optimizing efficiency. A Business Insider journalist discovered that La Boulange has created miscommunication issues between the food preparers and the beverage preparers, which have led to improperly filled orders, unhappy customers, and frustrated employees. Starbucks needs to revamp its workflow to accommodate the food preparation in order to rectify the situation. When the company implements what it learns, La Boulange could take off.

Crystal Pepsi paves way for healthy portfolio
More than a decade before Indra Nooyi took the helm of PepsiCo, the company was already trying to jump on the health trend. In 1992, PepsiCo introduced Crystal Pepsi as a means of courting the health-conscious consumer.

However, the product was a massive flop. It turned out that the clear and caffeine-free version of Pepsi was not attractive to, well, just about anyone. In its effort to build a product that seemed pure and healthy, PepsiCo apparently forgot to make it taste good.

Nevertheless, PepsiCo was better off for introducing Crystal Pepsi. The company learned that healthy products only succeed if they taste good. PepsiCo's current healthy portfolio consists of sweet-tasting products like Tropicana orange juice, Naked juice, and Izze sparkling juice. Each of these "Good-for-You" products is successful not because it is a nutritional superstar -- each contains a copious amount of sugar -- but because it is marginally nutritious and tastes good. That is the formula for mass-market health foods -- a lesson that the company learned from the Crystal Pepsi fiasco.

Foolish takeaway
Failed innovations rarely result in complete failures. New Coke, Sorbetto, and Crystal Pepsi offered critical insights that each company could learn from and improve upon. Coca-Cola, Starbucks, and PepsiCo will introduce similar flops in the future, but investors can rest assured that the companies will become better as a result.

Want higher profits for your portfolio?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends and owns shares of Coca-Cola, PepsiCo, and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers