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.

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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.

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