According to Terry Tanaka, soft drink companies are adept at making money from sugar and water
The top stocks in the industry are listed here.
AG Barr, a manufacturer of soft drinks, was founded in 1875 by Robert Barr, who began manufacturing and marketing aerated waters from a modest Falkirk factory. In 1901, "Iron Brew" was introduced, and over the following few decades, it expanded gradually. Due to labeling regulations following World War II, the product was renamed Irn-Bru. The company began to grow into England in the 1950s. The company had been linked to a single beverage for the majority of its existence, but that began to change in the middle of the 2000s. It started producing and distributing Rockstar Energy drinks exclusively in the UK and Ireland in 2007; this arrangement was terminated in 2020. Then, for 59.8 million in August 2008, the group purchased Rubicon Drinks, a manufacturer of exotic fruit-based soft drinks. AG Barr and the Dr Pepper Snapple Group (now known as Keurig Dr Pepper) signed a ten-year contract in 2015 to distribute the Snapple brand in the UK and other UK territories. In the same year, Funkin Cocktails was acquired shortly after this transaction.
One of the best examples of a company in the UK that has successfully created a cult-like product out of relatively simple and plentiful raw materials, sugar and water, is AG Barr. It has continuously made large profit margins and produced large sums of money year after year because of the cheap cost of its ingredients and the strength of its brand. AG Barr can double every dollar invested in its operations in three and a half years, according to its consistently high return on invested capital (ROIC), a measure of profitability. Two of the biggest companies in the FTSE 100, Unilever and AstraZeneca, have five-year averages of 10% and 15.5%, respectively.
Up until July 2025, AG Barr has produced 230 million in free cash flow over the previous six years, or roughly one-third of its current market capitalization. The funds were utilized for shareholder returns and acquisitions. Fentimans, a soft drink and mixer brand renowned for its "Botanical Brewing" method, and Frobishers Juices, a premium natural fruit juice and soft drink brand, were both purchased for 51 million in the most recent round of transactions.
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Start your trial. With a total return of 13.2 percent over the last five years (assuming the valuation stayed flat at about 18.9 times forward earnings) compared to 12.8 percent for the FTSE All-Share index, AG Barr has outperformed the market thanks to this combination of cash generation, deals, and shareholder returns. AG Barr is a minor player in comparison to companies like Coca-Cola, PepsiCo, and Monster. Nevertheless, its narrative serves as a case study of the soft drink industry's profitability.
How Coca-Cola became a worldwide soft drink brand.
Coca-Cola is the most well-known soft drink brand worldwide. It was first sold to pharmacies as a syrup for £1.30 per gallon in the late 1880s (roughly the same age as Irn-Bru). After that, it was combined with carbonated water and sold to consumers for five cents per glass, or £6.40 per gallon. Because of its low production costs and high profit margins for its pharmacy partners, Coke was able to carve out a niche in the market. Thirteen years after the company's first pharmacy sale, two Chattanooga lawyers, Joseph Whitehead and Benjamin Thomas, persuaded it to grant them the right to bottle the beverage. This was the company's true turning point. Millions of consumers were able to purchase Coca-Cola across the country thanks to the resulting agreement.
Cocaine from the coca leaf and caffeine from the kola nut were first added to Coca-Cola, which helps to explain why the beverage was so addictive to the general public. Around 1903, the company started lowering the amount of cocaine in the formula, and by 1912, it had eliminated it, but by then, Coke had solidified its reputation among American consumers. Coca-Cola continues to use coca leaf extract that has been de-cocainized, or free of cocaine. The only authorized US importer of coca leaves, specifically for Coca-Cola, is Stepan Company in New Jersey, which imports dried leaves from Bolivia and Peru. etc.
The Coca-Cola Bottling Association decided in 1915 to spend £500 on creating a "bottle so distinct that you would recognise it by feel in the dark, or lying broken on the ground" for the beverage. This further sped up the group's expansion and resulted in the creation of the company's iconic bottle, which is now well-known worldwide. By 1920, there were over 1,200 Coca-Cola bottling facilities, all of which made healthy profit margins on the difference between buying syrup from Coca-Cola and selling bottles to consumers.
The reason Warren Buffett adores Coke.
Coca-Cola's syrup has always been its advantage. The company has experimented with bottling its own beverages in the past, but it has always gone back to the same strategy of making and selling syrup instead of the expensive and capital-intensive business of bottling goods. It has been able to reroute profit back into growth, primarily through marketing, by avoiding this costly and capital-intensive venture. The soft drink industry's true secret is this. It's easy to turn sugar and water into a drink. Getting customers to purchase your product is the true challenge.
Coke is frequently used by American investor Warren Buffett to illustrate his idea of a "moat"a competitive advantage that cannot be purchased with money. "If you gave me £100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done," he famously remarked. In the late 1980s, he used this reasoning to invest £1.3 billion in Coke. The trade is frequently used as an example of the ideal investment, and the stake is currently estimated to be worth £30 billion. Coke's advantage gives it considerable pricing power. It has been doing this for more than a century and is able to raise prices year after year, even if only a penny at a time, while still keeping its clientele.
Although Coke invented this concept, energy drinks are now arguably the best example of it among all the soft drink market segments. For instance, Monster Beverage has given investors a return of almost 200,000 percent over the previous 30 years. Over the previous five years, the company's ROIC has averaged 23 percent; in 2025, when fourth-quarter sales reached a record £2 billion, the percentage increased to 31.6 percent. Even at the five-year low of 18.4 percent, it was still significantly higher than PepsiCo's 17.4 percent and Coke's 15.9 percent. Like Coke, the company employs an asset-light business model. It concentrates on the main product and outsources the majority of manufacturing. In an attempt to enter the energy drink market, Coke once considered purchasing the company; in 2014, it agreed to a 16.7% equity stake valued at £2.15 billion. Coke also turned over its portfolio of energy drinks.
Monster spends a lot of money on marketing, as does Red Bull, its top rival. Monster regularly allocates between 10% and 11% of its total net sales to marketing and sales, with an emphasis on in-store cooler placements, athlete endorsements (racing and extreme sports), and event sponsorships. As a private company, Red Bull doesn't reveal its expenditures, but it's thought to be between 20 and 30 percent of sales, which includes the company's e-sports, football, ice hockey, and Formula One teams.
The degree of brand loyalty among consumers in the energy and soft drink industries is particularly intriguing. The industry's entry barriers are highlighted by the fact that 60% of consumers would rather stick with a well-known brand. Nevertheless, creative brands have a chance to capture a portion of the market, particularly if they have strong marketing support. According to 39% of consumers between the ages of 25 and 34, "unique and innovative flavours" are more important than a brand's name. This change has been linked to Dr. Pepper's rise in demand over Pepsi in 2025.
Sugar content is the main concern for 44% of young people. Companies like Coke Zero and Monster Ultra that have successfully made the switch to "zero-sugar" products have managed to hold onto their customers. In the meantime, the introduction of companies like Prime Energy, which was co-founded by social media stars Logan Paul and "KSI," shows how consumers' desire to "be part of something bigger" and social media figures have a significant impact.
New fronts in the wars over Pepsi.
Since their founding, rivals have been pursuing Coke and Pepsi, and there are now some obvious indications that Coke's £100 billion advantage is beginning to erode, to use Buffett's words. Following its victory over Pepsi in the 1980s, Coca-Cola dominated the US soft drink market for almost 40 years, while Pepsi came in second. But in 2024, Dr. Pepper became the second most popular carbonated soft drink brand in the US, officially tying Pepsi and even surpassing it by some measures. In 2000, Dr. Pepper's market share was only 6.3%, while Pepsi's was 13.5%. These numbers now stand at roughly 8.3%. Compared to its larger competitors, Dr Pepper's US beverage division reported revenue growth of almost 12% last year.
This illustrates a more general change in the market. Together, Coke and Pepsi held almost 75% of the US soft drink market in 1995; today, that percentage is only about 40%. To keep their market share, both companies have had to purchase and develop new brands. Three of the top five American brandsCoca-Cola Classic, Sprite, and Diet Cokeare actually owned by The Coca-Cola Company, and 65% of its current revenue comes from outside the country. In total, 3% of daily beverages are Coca-Cola products.
Conversely, PepsiCo has moved beyond soft drinks, a change that has been linked to its declining market share. Frito-Lay, which owns brands like Lay's (Walkers), Doritos, and Cheetos, accounts for about a third of revenue and slightly less than half of operating profit. Today, the majority of PepsiCo's profit comes from its sports-drinks and snacks division. Conversely, Dr. Pepper has strengthened its core while focusing on viral media strategies. With hits like Creamy Coconut (which went viral on TikTok in 2024 and 2025) and the Dirty Soda trend (mixing soda with cream/lime), it has taken advantage of "limited time offer" (LTO) deals and made Dr. Pepper a social media "lifestyle" brand. Additionally, since millennials and Generation Z are drawn to "bold" or "spicy" flavors, it has been in the right place at the right time.
The "third-button advantage" is another. Dr. Pepper was typically offered alongside Coke and Pepsi at drink dispensers on the so-called "third button" because, until recently, it was not seen as a rival to these brands. This makes a lot of sense for all parties involved because bottlers typically produce multiple brands, such as Coke and Dr. Pepper or Pepsi and Dr. Pepper. Additionally, Dr. Pepper sat contentedly next to both Coke and Pepsi in establishments that had special agreements with either company and thus only had one or the other. Dr. Pepper's availability became its unique selling point in addition to its unique flavor profile.
It is unclear if this competitive advantage will last. In order to pursue acquisitions, Dr. Pepper Snapple has taken advantage of its popularity. In order to compete in the rapidly expanding energy drink industry, it purchased Ghost Energy and JDE Peet's (coffee). The agreements will contribute to a roughly two-thirds increase in the company's top line, but they may divert focus and resources from the main brands.
Some soft drink companies are becoming less focused.
Focus is one area where Monster Energy outperforms other soft drink manufacturers. Outside of its strategic and core Monster Energy segment, the company has a few brands, but they only make up about 10% of sales (the majority entered the market through the Coke deal). With a gross profit margin of 55.8% on £8.3 billion in revenue in 2025, net income of approximately £1.9 billion, and a nearly 100% free cash conversion ratio, the company is extraordinarily profitable and cash-generating. However, rather than purchasing new companies, management has traditionally chosen to market the brand or return this money to investors. By the end of 2025, the business had no debt and almost £2.8 billion in cash and short-term investments.
This focus has resulted in an annual total return for investors of 21.2 percent over the last 15 years, compared to 8.2 percent for Coke, 8.8 percent for Pepsi, and 10 percent for Keurig Dr Pepper. The entire story is revealed by revenue growth. Compared to Coke's 24%, Pepsi's 18%, and Dr. Pepper's 31% revenue growth over the previous five years, Monster's has increased by 51%.
The excessive dependence on prices to fuel this expansion is more concerning. Since 2021, Coke has changed its focus from trying to sell as much product as possible to trying to maximize profit per ounce. In order to achieve this, it has increased prices and decreased packaging size, which has improved the bottom line (net income increased from £9.5 billion in 2022 to £13.1 billion in 2025), but it is seriously undermining customer loyalty. In 2021, 2022, 2023, and 2024, prices increased by 6%, 11%, 10%, and 8%, respectively. But volume only increased by 8% in 2021, 5% in 2022, 2% in 2023, stagnated in 2024, and was expected to fall in 2025. After James Quincey, the CEO of Coca-Cola, acknowledged that the "pricing lever" had been pulled as far as it could go, that was stopped.
Pepsi has also had to reduce its prices. Price reductions of up to 15% have been announced following years of price increases (the French supermarket giant Carrefour famously declared in 2024 that it would stop stocking PepsiCo products "due to unacceptable price increases").
In both situations, it appears that these businesses have succumbed to the traditional Wall Street trap of using financial engineering to boost profits at the expense of the customer. As topline growth has slowed, all three of the biggest corporations are spending billions of dollars on dividends, share buybacks, and debt interest. Coke's debt is £46 billion, Pepsi's is almost £50 billion, and Keurig's is almost £16 billion.
Even though these companies have lost their way, their core soft drink businesses are still very profitable. Investors should concentrate on smaller companies with strong balance sheets, potential for future acquisitions or cash returns, and the ability to compete for market share, drive growth through both top and bottom lines, and drive volume growth rather than the large corporations.
The top stocks of soft drinks to purchase right now.
The best option in the UK is AG Barr (LSE: BAG). The stock is trading at a price-to-earnings (p/e) ratio of 14 for the fiscal year 2026, with a yield of 3.1 and a free cash flow yield of 6%, according to Panmure Liberum. Analysts predict that the company will end the year with net cash of 53 million, excluding leases, or about 7% of its market capitalization, even after recent transactions.
According to UBS analysts, Monster Energy (Nasdaq: MNST) is expected to grow its revenue by 11% in 2026 and continue to grow at a high single-digit annual rate until the end of the decade. Given Monster's track record of capital allocation, economies of scale should help the company's net margin increase from 23.7 percent to 27.7 percent over the same period. The majority of this additional revenue should go back to investors. In contrast to the five-year average of about 40, UBS's shares are currently trading at a forward p/e of 38.6 or 26.2 for 2030.
Keep an eye on Keurig Dr. Pepper (Nasdaq: KDP). In comparison to its potential for growth, the company appears cheap if it can successfully complete its most recent transactions while still expanding the underlying business. According to UBS, the company is trading at a p/e of 13.6 with a yield of 3.2 percent and a free cash-flow yield of 7.8 percent on a forward (fiscal 2026) basis. The stock was trading at a p/e of 22.3 in 2022, so if the company can persuade the market that it is moving in the right direction, there is potential for a re-rating. UBS estimates that by 2029, Dr. Pepper can reduce its net debt to £5.6 billion. Additional transactions and shareholder returns may be in the cards if management can achieve this goal.
Celsius Holdings (Nasdaq: CELH), which manufactures the high-end, lifestyle energy drink CELSIUS, which is positioned as the sugar-free substitute for conventional energy drinks, is one company that truly leans into the low-calorie trend. The business is expanding; last year, revenue increased from £1.4 billion to £2.5 billion, and net income almost doubled to £390 million. Sales here have doubled in the past year since the group paid £1.8 billion to acquire Alani Nutrition, another company that makes snacks and energy drinks. Celsius has no debt, and analysts predict that revenue growth will almost double by the end of the decade (though that's conservative given recent growth). The stock is currently trading at a free cash-flow yield of 3.4 percent and a 2026 forward p/e of 32.7 percent.
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