I'm admittedly not much of a Nirvana fan, but like any genre, when it gets too bloated, or rather, in the past when record companies over-pushed and over-exposed a type of music, people tended to gravitate away from it. I think that's why people gravitated towards grunge at that point, and then labels started pushing grunge into popularity.
And then it went out of popularity
Stuff is a bit different now with the internet, as music isn't dictated by MTV and radio anymore. There has been a rise in popularity again of hair bands due to the internet and underground scene, for example.