Dr Pepper Isn't a Cola: The Surprising Story of How the Texas Soda Breached the Wide Moats of Pepsi and Coca-Cola to Become a National Sensation

In May of 1886, Dr. John Pemberton served his first glass of Coca-Cola (KO) in an Atlanta drug store. But one year earlier, Charles Alderton had served up his first glass of Dr Pepper in Waco, Texas -- a carbonated beverage owned by Keurig Dr Pepper (KDP -0.35%) today. This makes Dr Pepper older than Coca-Cola.

With its first-mover advantage and tasty product, one would think that Dr Pepper went toe-to-toe with Coca-Cola in the early days. However, its sales really underwhelmed for a long time, and companies such as PepsiCo (PEP -0.62%) and Canada Dry were Coke's true competition for many decades.

In 1961, Coca-Cola had net sales of $537 million and was way out in first place in the carbonated soda industry. PepsiCo (or The Pepsi-Cola Company as it was known at the time) was in a distant third place with sales of $174 million. However, Dr Pepper languished in fifth place with a mere $15 million in annual sales.

In other words, Dr Pepper beat Coca-Cola and Pepsi-Cola to market by one year and eight years, respectively. But Coca-Cola's business was nearly 36 times larger than Dr Pepper's more than 70 years later. And even Pepsi-Cola was nearly 12 times bigger.

By the 1960s, it would have seemed as though Coca-Cola and Pepsi had built an insurmountable moat around their businesses -- otherwise known as a competitive advantage. But that all changed with a pivotal court case in 1963.

Dr Pepper is not a cola

Both Coca-Cola and Pepsi-Cola were working with hundreds of independent bottling companies -- that's still true today, with companies such as Coca-Cola Consolidated earning profits by working with Coca-Cola. These two soda giants made bottling companies sign agreements that they wouldn't work with their cola rivals. This left Dr Pepper with meager opportunities to expand. Coca-Cola and Pepsi-Cola had already locked down most of the bottlers.

However, in 1963, a federal court ruled that Dr Pepper was not a cola since the drink didn't contain any kola nut. That loophole allowed the Texas beverage company to sign deals with the same bottling companies used by Coca-Cola and Pepsi. By 1977, Dr Pepper had sales of $227 million, according to the Texas State Historical Society.

For those keeping score, that's an 18.5% compound annual growth rate (CAGR) for Dr Pepper from 1961 through 1977. That's an enviable CAGR for any growth stock.

Dr Pepper started gaining market share in the carbonated beverage market following the court ruling, and it continues to gain market share even to this day.

According to Statista, Keurig Dr Pepper had 21.3% market share in 2022, trailing PepsiCo's 24.7% market share by only a hair. Through the first three quarters of 2023, sales volume for Keurig Dr Pepper's drinks fell 0.9% year over year. By comparison, sales volume for Pepsi's beverages in North America fell by 4.5% during roughly the same period, meaning Keurig Dr Pepper gained a little more ground toward second place.

What this all means for investors

There are some high-level takeaways to this story. Investment advisors will often point out the desirability of finding first-movers in a growing industry and finding companies with competitive advantages. But as I've laid out here, being first to market didn't lead to enormous success for Dr Pepper for the first 70 years. Moreover, Coca-Cola and Pepsi did have a competitive advantage with bottlers but this went away following a single court ruling.

Therefore, the high-level takeaway here is that investors need to do more research when it comes to a business -- being a first-mover isn't enough. Moreover, competitive advantages are great but many are finite. Investors consequently need to be aware of risks even with strong businesses.

Drilling down further to a more specific takeaway for Keurig Dr Pepper stock, the company surprisingly still has a relatively large opportunity to exploit today -- six decades after the infamous court case that catalyzed its growth.

Consider how big international beverage sales are for Pepsi and Coca-Cola. In the third quarter of 2023, PepsiCo generated nearly $7.2 billion in beverage sales in North America and around $2.9 billion in beverage sales internationally. For its part, Coca-Cola had international revenue of $6.9 billion in its third quarter or nearly 63% of its total revenue.

By comparison, Keurig Dr Pepper had just $523 million in international net sales in its third quarter, less than 14% of its total net sales and a fraction of competitors Coca-Cola and PepsiCo.

As Keurig Dr Pepper CEO Bob Gamgort said on the company's Q3 earnings call, "Our international segment has become a scaled contributor to the overall portfolio with significant growth runway ahead."

Keurig Dr Pepper might not be a market-beating stock opportunity today -- its overall growth is tepid right now. However, the company's international business is growing nicely and could provide some upside for patient investors.