Soft drink manufacturer AG Barr has a rich history that dates back to 1875, when founder Robert Barr began producing aerated waters in Falkirk. The introduction of “Iron Brew” in 1901 marked a significant milestone, followed by steady growth in the following decades. After World War II, the beverage was rebranded as Irn-Bru due to labelling regulations, and by the 1950s, AG Barr began expanding its market into England. Traditionally associated with a single product, the company diversified in the mid-2000s. In 2007, AG Barr secured exclusive rights to manufacture and distribute Rockstar Energy drinks in the UK and Ireland, a partnership that concluded in 2020. Later, in 2008, the company acquired Rubicon Drinks, known for its exotic fruit-flavored beverages, for £59.8 million. In 2015, AG Barr entered a ten-year distribution agreement with the Dr Pepper Snapple Group (now Keurig Dr Pepper) for the Snapple brand in the UK, shortly after which it acquired Funkin Cocktails.
AG Barr exemplifies a company that successfully transforms basic ingredients—sugar and water—into cult classics. With low production costs and a strong brand identity, it has consistently reported high profit margins and robust cash flow. The company’s return on invested capital (ROIC), an indicator of profitability, consistently exceeds 20%, indicating that AG Barr can effectively double every £1 invested in its operations within roughly three and a half years. For comparison, the five-year averages for Unilever and AstraZeneca, two major companies in the FTSE 100, are 15.5% and 10%, respectively.
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This combination of cash generation, strategic acquisitions, and shareholder returns has enabled AG Barr to outperform the market, achieving a total return of 13.2% over the last five years (assuming a stable valuation of approximately 18.9 times forward earnings), compared to 12.8% for the FTSE All-Share index. While AG Barr remains a small player relative to giants like Coca-Cola, PepsiCo, and Monster, its journey offers valuable insights into the profitable nature of the soft drink sector.
How Coca-Cola Became a Global Soft Drink Icon
Coca-Cola reigns as the world’s most recognized soft drink brand. Developed in the late 1880s (roughly the same era as Irn-Bru), it first appeared as a syrup sold to pharmacies for $1.30 a gallon, mixed with carbonated water and sold for five cents a glass, or $6.40 a gallon. The beverage found its niche in the market through low production costs and substantial profit margins for pharmacy partners. The pivotal moment came 13 years after its initial pharmacy sale when two lawyers from Chattanooga, Joseph Whitehead and Benjamin Thomas, acquired bottling rights, which propelled Coca-Cola into the hands of millions.
Coca-Cola initially contained cocaine derived from coca leaves, in addition to caffeine from kola nuts, partly explaining its early popularity. The company began reducing cocaine levels around 1903 and completely removed it from the formula by 1912, yet by this time, Coca-Cola had already established a strong foothold in American culture. (Interestingly, Coca-Cola still uses cocaine-free coca leaf extract, sourced from Peru and Bolivia, via Stepan Company, the sole authorized importer in the US.)
In 1915, the Coca-Cola Bottling Association invested $500 to create a unique bottle design—a “bottle so distinctive that you would recognize it by feel in the dark or when broken on the ground.” This decision led to the iconic bottle shape we recognize today, accelerating the brand’s growth. By 1920, over 1,200 bottling operations had been set up, each earning healthy profits through the difference between purchasing syrup from Coca-Cola and retailing bottles.
Why Warren Buffett Values Coca-Cola
Coca-Cola’s competitive edge lies primarily in its syrup production. Although the company has at times considered bottling its beverages, it has consistently preferred to focus on syrup production and distribution, avoiding the capital-intensive bottling business. This strategy allows Coca-Cola to reinvest profits into marketing and growth, the true secret of success in the soft drink industry. Producing a beverage from water and sugar is not overly complex; the real challenge is persuading consumers to choose your product.
Investor Warren Buffett often cites Coca-Cola as an example of a “moat”—a sustainable competitive advantage impervious to monetary challenges. He famously remarked, “If you gave me $100 billion to strip Coca-Cola of its soft drink leadership worldwide, I would return the money and say it’s impossible.” This perspective influenced his investment of $1.3 billion in Coca-Cola in the late 1980s, a stake now valued at approximately $30 billion, exemplifying a remarkable investment case.
Because of its unique position in the market, Coca-Cola possesses significant pricing leverage, allowing it to increase prices incrementally while maintaining customer loyalty—a strategy it has executed for over 100 years.
While Coca-Cola pioneered this strategy, energy drinks today exemplify this model effectively. For instance, Monster Beverage has returned nearly 200,000% to investors over the past 30 years, achieving an average ROIC of 23% over the last five years, and even reaching 31.6% in 2025 with record fourth-quarter sales of $2 billion. Even at its lowest point, Monster’s ROIC of 18.4% still surpasses Coca-Cola’s 15.9% and PepsiCo’s 17.4%. Like Coca-Cola, Monster relies on an asset-light model, outsourcing most production while concentrating on its core products.
Both Monster and its leading competitor, Red Bull, invest heavily in marketing. Monster allocates about 10%-11% of its net sales to marketing efforts, focusing on event sponsorships and endorsements from extreme athletes, along with in-store placements. Red Bull, as a private entity, does not disclose its spending, but estimates suggest it ranges from 20%-30% of sales, inclusive of sponsorships for various sports teams.
Notably, customer loyalty in the energy and soft drink sectors is intense. About 60% of consumers remain committed to familiar brands, emphasizing the barriers to entry in the industry. However, opportunities exist for innovative brands to capture market shares, especially those backed by strong marketing initiatives. A significant 39% of consumers aged 25-34 prioritize “unique and innovative flavors” over brand loyalty, a trend that has propelled Dr Pepper ahead of Pepsi in demand in 2025.
Additionally, 44% of younger consumers cite sugar content as a critical factor in their choices. Brands that have successfully launched “zero-sugar” alternatives, like Coke Zero and Monster Ultra, have been able to retain customer loyalty. Meanwhile, offerings like Prime Energy, co-founded by social media influencers Logan Paul and KSI, highlight the impact of celebrity endorsement and the consumer desire to engage with exciting new products.
Shifts in the Pepsi Landscape
Competitors have continually challenged Coke and Pepsi since inception, with signs indicating that Coke’s $100 billion advantage may be diminishing. Following Coca-Cola’s dominance in the Pepsi wars during the 1980s, it maintained its status as the top soft drink brand for nearly 40 years, with Pepsi as the runner-up. However, in 2024, Dr Pepper officially matched and, by some measures, overtook Pepsi to become the second-largest carbonated soft drink brand in the US. In 2000, Pepsi controlled 13.5% of the market, while Dr Pepper held just 6.3%. Presently, those figures have shifted to around 8.3%, with Dr Pepper’s US beverage sector reporting revenue growth near 12%, surpassing its larger competitors.
This reflects a wider industry transformation. In 1995, Coca-Cola and Pepsi together dominated nearly 75% of the US soft drink market; today, that figure has dropped to about 40%. To sustain market presence, both companies have resorted to acquiring or developing new beverage brands. The Coca-Cola Company now controls three of America’s top five brands, including Coca-Cola Classic, Sprite, and Diet Coke, with 65% of its revenue now derived from international markets. Remarkably, Coca-Cola products account for 3% of beverages consumed daily in the US.
Conversely, PepsiCo has branched beyond carbonated beverages, a shift attributed to its diminishing market share. Its sports-drink and snack divisions have become its primary profit sources, with Frito-Lay—including brands like Lay’s (Walkers), Doritos, and Cheetos—responsible for around one-third of revenue and nearly half of operating profit. Dr Pepper has capitalized on its strengths while engaging with modern media, tapping into viral trends through limited-time offers like Creamy Coconut (which gained traction on TikTok in 2024 and 2025) and the Dirty Soda fad, solidifying its status as a lifestyle brand among younger generations.
Moreover, Dr Pepper’s previous status as a non-competitor of Coke and Pepsi has provided it unique advantage through distribution channels, often occupying the “third button” at drink dispensers. As bottlers usually produce multiple brands, including Coke and Dr Pepper or Pepsi and Dr Pepper, this arrangement benefits all parties. The brand’s distinctive flavor and availability strategy became its competitive edge.
Whether this advantage persists remains uncertain. Dr Pepper Snapple has leveraged its popularity to pursue acquisitions, including JDE Peet’s (coffee) and Ghost Energy, to vie in the burgeoning energy drink sector. These acquisitions have the potential to increase the company’s revenue by about two-thirds, although they may divert focus and resources from existing key brands.
Challenges for Some Soft Drink Brands
Monster Energy leads the soft drink industry in maintaining focus. Despite having some brands outside of its core Monster Energy line, these only make up around 10% of overall sales. The company has proven to be highly profitable, boasting a gross profit margin of 55.8% in 2025 on $8.3 billion in revenue and a net income of approximately $1.9 billion, alongside nearly 100% cash conversion. Rather than pursuing acquisitions, Monster typically returns its profits to shareholders or invests in marketing, closing 2025 with nearly $2.8 billion in cash and no net debt.
This unwavering focus has yielded a 21.2% annual total return for investors over the past 15 years, compared to 8.2% for Coca-Cola, 8.8% for Pepsi, and 10% for Keurig Dr Pepper. In the last five years, Monster’s revenue growth has surged by 51%, contrasting sharply with 24% for Coca-Cola, 18% for Pepsi, and 31% for Dr Pepper.
However, an overreliance on price increases for growth is troubling. Since 2021, Coca-Cola shifted its strategy towards maximizing profitability per ounce, raising prices while downsizing packaging. While this improved net income (from $9.5 billion in 2022 to $13.1 billion in 2025), it risks consumer loyalty. Price increases escalated by 6% in 2021, 11% in 2022, 10% in 2023, and 8% in 2024, yet volume growth stagnated or declined in subsequent years. Coca-Cola’s CEO, James Quincey, acknowledged that the “pricing lever” has reached its limit.
Pepsi has similarly retreated on pricing strategies. After enduring years of price hikes—evident in Carrefour’s decision to cease stocking PepsiCo products in 2024 due to price increases—it has started implementing cuts of up to 15%.
Both corporations appear trapped in a classic Wall Street dilemma of financial engineering to boost returns while neglecting the consumer’s perspective. All top-tier companies are increasingly burdened with debt, with Coca-Cola at $46 billion, Pepsi at nearly $50 billion, and Keurig close to $16 billion.
Despite these challenges, it is undeniable that the core soft drink businesses remain exceptionally profitable. Instead of focusing on larger companies, investors may find better opportunities with smaller players possessing solid balance sheets, capacity for acquisitions, or the ability to pursue growth while enhancing market share and driving revenue.
Top Soft Drink Stocks to Consider
In the UK, AG Barr (LSE: BAG) stands out as a top investment choice. Analysts at Panmure Liberum project the stock will achieve a fiscal 2026 price-to-earnings (P/E) ratio of 14, offering a yield of 3.1% and a free cash flow yield of 6%. After recent acquisitions, analysts anticipate a year-end net cash position of £53 million, excluding leases, which represents about 7% of its market capitalization.
Monster Energy (Nasdaq: MNST) shows promising growth potential. Analysts at UBS predict 11% revenue growth for 2026 and sustained high single-digit growth through the decade. The company’s net margin is expected to rise from 23.7% to 27.7% during this period. Given Monster’s proven track record in capital allocation, most of this additional income is likely to benefit investors. UBS expects the shares to trade at a forward P/E ratio of 38.6 or 26.2 for 2030, compared to a five-year average near 40.
Keurig Dr Pepper (Nasdaq: KDP) remains an intriguing option to monitor. If the company successfully navigates its latest transactions while continuing to grow the underlying business, it appears undervalued based on its growth potential. UBS anticipates a free cash flow yield of 7.8% on a forward (fiscal 2026) basis, with a P/E ratio of 13.6 and a yield of 3.2%. Considering it traded at a P/E of 22.3 in 2022, there’s significant potential for revaluation if the company can demonstrate positive progress. UBS also estimates that Dr Pepper could reduce its net debt to $5.6 billion by 2029, which could allow for future acquisitions and shareholder returns.
Another company capitalizing on the low-calorie trend is Celsius Holdings (Nasdaq: CELH), producer of the CELSIUS energy drink, marketed as a zero-sugar alternative. The company is experiencing rapid growth, with revenue soaring from $1.4 billion to $2.5 billion last year, and net income nearly doubling to $390 million. Earlier last year, Celsius acquired Alani Nutrition for $1.8 billion, another energy drink and snack brand, with sales doubling since the acquisition. With zero debt and a projected doubling of revenues by the decade’s end, Celsius is an attractive investment, trading at a forward P/E of 32.7 and a free cash flow yield of 3.4%.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion, and analysis from our expert financial team with a MoneyWeek subscription.
Key Takeaways
- AG Barr has a long history, evolving from a traditional soft drink company into a diversified beverage giant.
- Its robust return on invested capital consistently exceeds 20%, demonstrating strong profitability.
- Dr Pepper has gained ground against Pepsi, reflecting shifts in the soft drink market.
- Energy drinks are outperforming traditional soft drinks, with significant investor returns.
- Investors should consider smaller players with solid financials that could benefit from acquisition opportunities.
- Celsius Holdings is capitalizing on the low-calorie trend with substantial growth forecasts.
FAQ
What is AG Barr known for?
AG Barr is best known for its flagship product, Irn-Bru, along with its various other beverage brands, including Rubicon and Funkin Cocktails.
How has Dr Pepper’s market position changed recently?
Dr Pepper has recently surpassed Pepsi to become the second-largest carbonated soft drink brand in the US, marking a significant shift in market dynamics.
What sets Coca-Cola apart from its competitors?
Coca-Cola’s competitive edge largely lies in its syrup production model, allowing it to focus on marketing and branding rather than the capital-intensive bottling process.
