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During the early to mid-1990s Peugeot decided not to directly replace the iconic Peugeot 205, citing the reason that superminis were no longer profitable or worthwhile. Instead, Peugeot followed a unique strategy and decided that its new, much smaller, supermini, the Peugeot 106 launched in 1991, would take sales from the lower end of the 205 range while the lowlier models of the Peugeot 306 range, launched in 1993 to replace the Peugeot 309, would take sales from the top-end 205s. Between the 106 and 306 Peugeot hoped that the 205 would not need to be replaced, and could be phased out slowly, while customers who would normally plump for the 205 would continue to have a choice with either a smaller or larger car.

Unfortunately for Peugeot, this strategy did not work. With the 205 phased out, sales of rivals’ superminis continued to sell well and even increased, and without a direct competitor to these rivals Peugeot was losing sales fast. A new supermini was required, and the 206 was launched in 1998 as a somewhat belated replacement for the 205.