Soft-drinks maker AG Barr can trace its roots to 1875, when founder Robert Barr started producing and selling aerated waters from a small factory in Falkirk. “Iron Brew” was launched in 1901 and grew steadily over the next few decades. After World War II, the product was renamed Irn-Bru due to labelling regulations, and in the 1950s, the company started to expand into England. For most of its history, the company has been associated with just one drink, but that changed in the mid-2000s. In 2007, it became the exclusive manufacturer and distributor of Rockstar Energy drinks in the UK and Ireland (this deal ended in 2020). Then, in August 2008, the group acquired Rubicon Drinks, a specialist in exotic fruit-based soft drinks, for £59.8 million. In 2015, AG Barr entered into a ten-year agreement with the Dr Pepper Snapple Group (now called Keurig Dr Pepper) to distribute the Snapple brand in the UK and other UK territories. This deal was quickly followed by the acquisition of Funkin Cocktails the same year.
AG Barr is one of the best examples in the UK of a business that's been able to turn relatively abundant and simple raw materials – sugar and water – into a cult-like product. Thanks to the low cost of its ingredients and the power of its brand, it has consistently earned high profit margins and generated piles of cash year after year. Its return on invested capital (ROIC), a measure of profitability, is consistently above 20%, implying AG Barr can double every £1 invested in its operations within three and a half years. The five-year average for Unilever and AstraZeneca, two of the largest businesses in the FTSE 100, is 15.5% and 10%, respectively.
Over the past six years, to July 2025, AG Barr has generated a free cash flow of £230 million, about a third of its current market capitalisation, with the cash used for acquisitions and shareholder returns. The latest set of deals includes Fentimans, the soft drinks and mixers brand known for its “Botanical Brewing” process, and Frobishers Juices, the premium natural fruit juices and soft-drinks brand, both bought for £51 million.
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This combination of cash generation, deals and shareholder returns has helped AG Barr outperform the market with a total return of 13.2% over the past five years (assuming the valuation remained flat at around 18.9 times forward earnings), compared to 12.8% for the FTSE All-Share index. Compared with the likes of Coca-Cola, PepsiCo and Monster, AG Barr is a tiny player. Still, its story is a case study of the lucrative nature of the soft-drinks industry.
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How soft-drinks brand Coca-Cola went global
Coca-Cola is the world's most recognisable soft-drinks brand. Invented in the late 1880s (it's about the same age as Irn-Bru), it was originally sold as a syrup to pharmacies for $1.30 a gallon, mixed with carbonated water and sold to customers for five cents a glass, or $6.40 a gallon. Coke carved out a niche in the market due to its low production costs and high margins for its pharmacy partners. The company's real breakthrough came 13 years after its first pharmacy sale when two lawyers from Chattanooga, Joseph Whitehead and Benjamin Thomas, convinced it to give them the rights to bottle the drink. The resulting agreement helped catapult Coca-Cola into the hands of millions of consumers, who could suddenly buy Coke nationwide.
Coca-Cola originally contained cocaine derived from the coca leaf, along with caffeine from the kola nut, which goes some way towards explaining why the general public found the drink so addictive. The company began reducing the cocaine content around 1903 and had removed it from the formula by about 1912, but by that point Coke had firmly established itself in the minds of American consumers. (Coca-Cola still uses de-cocainised (cocaine-free) coca leaf extract. Dried leaves are imported from Peru and Bolivia by Stepan Company in New Jersey, the only authorised US importer of coca leaves, especially for Coca-Cola.)
In 1915, the Coca-Cola Bottling Association voted to spend $500 to develop a distinctive bottle for the drink – a “bottle so distinct that you would recognise it by feel in the dark, or lying broken on the ground”. This gave rise to the company's characteristic bottle, known around the world today, and further accelerated the group's growth. By 1920, more than 1,200 Coca-Cola bottling operations had been established, all of which earned healthy profit margins on the spread between purchasing syrup from Coca-Cola and selling bottles to customers.
Why Warren Buffett loves Coke
Coca-Cola's edge has always been its syrup. The company has in the past flirted with the idea of bottling its own drinks, but it has always returned to the same model of producing and distributing syrup rather than the capital-intensive, costly business of bottling products. By avoiding this pricey and capital-intensive business, it has been able to redirect profit back into growth, mainly through marketing. This is the real secret of the soft-drinks business. Turning water and sugar into a drink isn't difficult. The real challenge is getting consumers to buy your product.
US investor Warren Buffett often uses Coke to explain his concept of a “moat” – a competitive advantage that no amount of money can buy. As he once said, “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”. It was this logic that led him to invest $1.3 billion in Coke in the late 1980s. Today, the stake is worth around $30 billion and the trade is often cited as a case study in the perfect investment. Thanks to its advantage, Coke has significant pricing power. It can raise prices year after year, even if it's only a penny at a time, and still retain its customer base – it's been doing just that for more than a century.
Coke pioneered this model, but today it is energy drinks that exemplify it perhaps more than any other segment of the soft-drinks market. Monster Beverage, for example, has returned nearly 200,000% over the past 30 years for investors and the company has achieved an average ROIC of 23% over the last five years, with the figure rising to 31.6% in 2025 when fourth-quarter sales hit a record $2 billion. Even at the five-year low of 18.4%, that was still far above Coke's 15.9% and PepsiCo's 17.4%. The company uses a similar asset-light model to Coke's. It outsources most manufacturing and focuses on the core product. At one point, Coke even looked at buying the business to break into the energy-drink market; in 2014 it settled for a 16.7% equity stake worth $2.15 billion. Coke also handed over its energy-drink portfolio.
Monster and its leading peer, Red Bull, both spend heavily on marketing. Monster consistently spends roughly 10%-11% of its total net sales on selling and marketing, with a focus on event sponsorships, athlete endorsements (extreme sports/racing), and in-store cooler placements. Red Bull doesn't disclose what it spends as a private company, but it's estimated to be around 20%-30% of sales, which includes the company's F1, football, ice hockey and e-sports teams.
What's particularly interesting about the energy and soft drink market is the intensity of customers' loyalty to the brand. About 60% of consumers prefer to stick with a familiar brand, underscoring the industry's barriers to entry. That being said, there's room for innovative brands to grab some share of the market, especially when they're backed by substantial marketing power. Thirty-nine per cent of consumers aged 25-34 prioritise “unique and innovative flavours” over a brand's name, a shift that's been attributed to the increase in demand in 2025 for Dr Pepper over Pepsi.
Forty-four per cent of young people cite sugar content as their primary concern. Brands that successfully transitioned to “zero-sugar” products (such as Coke Zero or Monster Ultra) have retained their loyalty. Meanwhile, the launch of brands such as Prime Energy, co-founded by social-media celebrities Logan Paul and “KSI”, demonstrates the powerful influence of social-media figures and of consumers' desire to “be part of something bigger”.
New fronts in the Pepsi wars
Competitors have been nipping at the heels of Coke and Pepsi since their very foundation and now there are some visible signs that Coke's $100 billion advantage, to quote Buffett, is starting to wane. After Coke won the Pepsi wars in the 1980s, for nearly 40 years Coca-Cola was the number-one, and Pepsi the number-two, soft drink brand in the US. However, in 2024 Dr Pepper officially tied with (and, by some metrics, surpassed) Pepsi to become the number-two carbonated soft drink brand in the US. In 2000 Pepsi held a 13.5% market share, while Dr Pepper had just 6.3%. Today, those figures stand at about 8.3%. Last year, Dr Pepper's US beverage arm reported revenue growth of nearly 12%, eclipsing that of its larger peers.
This reflects a broader shift in the market. In 1995, Coke and Pepsi together controlled nearly 75% of the US soft-drinks market, while today that share is around 40%. Both firms have had to buy and build new brands to maintain their market share. The Coca-Cola Company actually owns three of the top five brands in America, including Coca-Cola Classic, Sprite and Diet Coke, and 65% of its revenue today comes from outside the US. Overall, 3% of beverages consumed every single day are Coca-Cola products.
PepsiCo, meanwhile, has expanded beyond soft drinks, a shift that's been attributed to its loss of market share. Its sports-drinks and snacks arm now provides the bulk of PepsiCo's profit, with Frito-Lay – which owns brands such as Lay's (Walkers), Doritos and Cheetos – accounting for around a third of revenue and just under half of operating profit. Dr Pepper, on the other hand, has doubled down on its core while leaning into viral media plays. It has exploited “limited time offer” (LTO) deals, with hits such as Creamy Coconut (which went viral on TikTok in 2024 and 2025) and the Dirty Soda trend (mixing soda with cream/lime) turning Dr Pepper into a social-media “lifestyle” brand. It's also been in the right place at the right time as generation Z and millennials have turned to “spicy” or “bold” flavours.
Then there's the so-called “third-button advantage”. Until recently, Dr Pepper was not considered a competitor to Coke or Pepsi, so it was usually available along with these products at drinks dispensers on the so-called “third button”. As bottlers usually produce more than one brand, with some producing Coke and Dr Pepper or Pepsi and Dr Pepper, this makes a lot of sense for all parties involved. What's more, in establishments that had unique agreements with either Coke or Pepsi and as a result only had one or the other, Dr Pepper sat happily alongside both. As well as its distinctive flavour profile, Dr Pepper's unique selling point became its availability.
Whether this competitive advantage will continue remains to be seen. Dr Pepper Snapple has exploited its popularity to go on the hunt for acquisitions. It has bought JDE Peet's (coffee) and Ghost Energy, which it acquired to compete in the high-growth energy-drinks sector. The deals will help raise the company's top line by about two-thirds, but could take attention and resources away from the core brands.
Some soft-drinks brands are losing focus
If there's one thing Monster Energy does better than any other company in the soft-drinks industry, it's focus. The company has some brands outside of its strategic and core Monster Energy segment, but these account for only around 10% of sales (most came into the business via the Coke deal). The company is incredibly profitable and cash generative, with a gross profit margin of 55.8% for 2025 on $8.3 billion of revenue, net income of around $1.9 billion and a near-100% free cash conversion ratio. But management has historically preferred to return this cash to investors or market the brand rather than buy up new businesses. The company ended 2025 with nearly $2.8 billion in cash and short-term investments and no debt.
Over the past 15 years, this focus has translated into a 21.2% annual total return for investors, compared with 8.2% for Coke, 8.8% for Pepsi and 10% for Keurig Dr Pepper. Revenue growth tells the whole story. Over the past five years, Monster's revenue has increased 51% compared with 24% for Coke, 18% for Pepsi and 31% for Dr Pepper.
More worrying is the overreliance on prices to drive this growth. Since 2021, Coke has shifted from trying to sell the most product to trying to make the most profit per ounce. To do that it's hiked prices and reduced the size of packaging, helping the bottom line (net income has risen from $9.5 billion in 2022 to $13.1 billion in 2025), but it is really testing consumers' loyalty. Prices rose 6% in 2021, 11% in 2022, 10% in 2023 and 8% in 2024. However, volume rose just 8% in 2021, 5% in 2022, 2% in 2023, flatlined in 2024 and was on track to decline in 2025. That was stopped after Coca-Cola's chief executive, James Quincey, admitted that the “pricing lever” had been pulled as far as it could go.
Pepsi, too, has had to pull back on pricing. After years of price hikes (in 2024, French supermarket giant Carrefour famously said it would stop stocking PepsiCo products “due to unacceptable price increases”) it has announced price cuts of up to 15%
In both cases, these companies seem to have fallen into the classic Wall Street trap of financial engineering to drive returns while ignoring what really matters: the consumer. All three of the top giants are spending billions of dollars on debt interest, share buybacks and dividends, as topline growth has wilted. Coke has $46 billion of debt, Pepsi has nearly $50 billion and Keurig has nearly $16 billion.
These companies might have lost their way, but there is no denying their core soft drink businesses remain tremendously profitable. Rather than looking at the big companies, investors should focus on the smaller players – those with strong balance sheets, room for further acquisitions or cash returns, and businesses that can still fight for market share and drive growth through both the top and bottom lines, as well as drive volume growth.
The best soft-drinks stocks to buy now
In the UK, AG Barr (LSE: BAG) is the top pick. According to Panmure Liberum, the stock is trading at a fiscal 2026 price-to-earnings (p/e) ratio of 14 with a yield of 3.1 and a free cash flow yield of 6%. Even after recent deals, analysts believe the company will end the year with net cash of £53 million, excluding leases, around 7% of its market capitalisation.
Monster Energy (Nasdaq: MNST) shows no signs of slowing down over the coming years, with analysts at UBS predicting 11% revenue growth for 2026 and high single-digit annual revenue growth until the end of the decade. Economies of scale should help the company's net margin rise from 23.7% to 27.7% over the same period and, considering Monster's record of capital allocation, most of this additional income should flow back to investors. UBS has the shares trading at a forward p/e of 38.6 or 26.2 for 2030, compared with the five-year average of around 40.
Keurig Dr Pepper (Nasdaq: KDP) is worth watching. If the company can execute its latest transactions successfully while still growing the underlying business, it does look cheap compared with its growth potential. UBS has the company trading at a free cash-flow yield of 7.8% on a forward (fiscal 2026) basis and a p/e of 13.6, with a yield of 3.2%. In 2022, the stock traded at a p/e of 22.3, so there's room for a re-rating if the company can convince the market it's heading in the right direction. On debt, UBS believes Dr Pepper can take net debt down to $5.6 billion by 2029. If management can meet this target, further deals and shareholder returns could be on the cards.
One play that really leans into the low-calorie trend is Celsius Holdings (Nasdaq: CELH), which produces the premium, lifestyle energy drink CELSIUS – marketed as the zero-sugar alternative to traditional energy drinks. The company is in growth mode, with revenue jumping from $1.4 billion to $2.5 billion last year, while net income nearly doubled to $390 million. At the beginning of last year, the group acquired Alani Nutrition for $1.8 billion, another energy-drink and snack firm, and in the last year, sales here have doubled. Celsius has no debt and analysts have pencilled in a near doubling of revenue growth by the end of the decade (although based on recent growth, that's conservative). The shares are trading at a 2026 forward p/e of 32.7 and a free cash-flow yield of 3.4%.
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