Pepsi lost the cola wars to Coke. Why is it struggling to hold on to second place?

<span>People drink Pepsi in 1953. The soda was invented in 1893.</span><span>Photograph: Watford/Mirrorpix via Getty Images</span>
People drink Pepsi in 1953. The soda was invented in 1893.Photograph: Watford/Mirrorpix via Getty Images

This month, the astonishing news broke that, after more than a century of pitched battle – including ad skirmishes, frantic marketing, and taste tests on both Earth and in space – the cola wars were officially over. Coca-Cola had always been the winner, but its longtime rival, Pepsi, was no longer No 2. Instead, a new challenger had climbed into second place: Dr Pepper.

The coup de grace was delivered by Beverage Digest, an Atlanta-based trade publication that, in late May, released an updated ranking of the top 10 US carbonated soft drink brands in 2023 based on sales volume. There, at the top, was Coca-Cola Classic, with a 19.2% volume share of the market, followed by Dr Pepper, which squeaked by Pepsi, 8.34% to 8.31%. What a comedown for Pepsi, which had enjoyed a 15% share back in the glory days of 1995.

Dr Pepper was pleased. Executives praised its innovations in spicy flavor and its appeal to the coveted gen Z demographic, which favors more unusual flavors in its soft drinks. Pepsi was not so pleased – or at least the company declined to issue a public statement. Days later, the marketing executive responsible for last year’s rebranding resigned after 17 years with the company, though an inside source told the Daily Mail that the timing was entirely coincidental. (This was not, incidentally, the first time Pepsi had fallen to the No 3 spot in the Beverage Digest rankings: from 2010-2013, it was displaced by Diet Coke, now number five.)

Meanwhile, Dr Pepper was basking in a social media triumph: thanks to a viral TikTok video, people had started dumping pickles into their Dr Pepper. Was it as big a deal as the Pepsi Challenge back in the 80s – when Americans, in blind taste tests, overwhelmingly preferred the taste of Pepsi to Coke (according to Pepsi TV commercials), inspiring Coca-Cola to retaliate with New Coke, an innovation that lasted just a few months? Perhaps not: PepsiCo stock fell after Beverage Digest’s report made the rounds but is beginning to rebound; it’s sitting at $166.48 a share. Meanwhile, Keurig Dr Pepper, Dr Pepper’s parent company, has held steady at a mere $34.49. So who’s really losing?

Maybe the excitement was just because there was a new fighter in the cola wars. “It was always Coke versus Pepsi,” said Bernd Schmitt, a professor at Columbia Business School and faculty director of the Center on Global Brand Leadership. “It’s almost Americana in a sense.” Schmitt and his Center on Global Brand Leadership colleague Matthew Quint co-starred in a 2018 Vanity Fair video looking back on the past 50 years of cola battles. They tried to think of other consumer brand wars that had had an equal impact. The closest thing they could come up with was the “I’m a Mac, I’m a PC” ads from the early 2000s, but even those were Apple versus a series of computers that ran the Microsoft Windows operating system, not two evenly matched corporations.

The cola wars date back to the late 1800s. Coca-Cola was invented in 1886. Pepsi, originally known as Brad’s Drink, followed seven years later. Coke was the classic, the “real thing”. Pepsi was “for those who think young”. Dr Pepper, a small Texas company founded in 1885, didn’t even register. In the 1960s, the FDA declared it a “pepper soda”, not a cola, and therefore a non-competitor, officially. (Dr Pepper’s CEO at the time used this ruling to persuade Coca-Cola to allow the smaller company to rent space in its bottling plant and join its national distribution network.)

In 1971, Coke released its memorable “Hilltop” TV commercial, which featured a phalanx of wholesome-looking young people from all over the world assembled on a hilltop in Italy singing about how they’d like to buy the world a Coke. It co-opted the imagery of the antiwar movement in the service of corporatism and soft drinks. It was a blockbuster.

For the next 50 years, the cola wars were fought through a series of great TV ads, many released during the Super Bowl (and some that became legends even though they were never aired on broadcast TV): athletes and small children sharing a Coke and a smile, Michael Jackson and a group of young breakdancers fueling themselves with Pepsi, a Grand Theft Auto character handing out bottles of Coke to pedestrians, a little girl threatening the bartender who gave her a Coke instead of a Pepsi in the voice of Don Vito Corleone from The Godfather. Coke dominated Christmas; Pepsi worked with pop stars.

That era ended in 2017 with a now infamous ad that showed the model Kendall Jenner abandoning a photoshoot to join in a protest for some unspecified cause and, in the interest of peace and harmony, handing a cop a can of Pepsi. It was a misguided attempt to emulate the spirit of “Hilltop” and channel the Black Lives Matter protests in America (while ignoring police brutality, another major component of the BLM movement), and it failed miserably; Pepsi pulled it after just one day. “Do you want to associate activism with a brand?” Schmitt asked in the Vanity Fair video.

But the blame doesn’t rest with Kendall Jenner. By 2017, young people had given up TV – and, therefore, commercials – in favor of streaming services. They had also started to give up soda.

Beverage Digest didn’t just rank soda brands in 2023. It also ranked every category of non-alcoholic drink on the market. At the very top, with 35.4% of the volume share of the market, was bottled water. Soft drinks followed at 33.9%, followed at a much greater distance by juice, tea, sports drinks, energy drinks, and coffee.

According to data from Mintel, a global market research firm, consumption declined in all sectors of the soda market between 2022 and 2023. Not by a lot – in a poll of 2,000 internet users, the number who said they’d had a regular cola in the past three months dropped from 47% to 43%. But still, a fall.

Meanwhile, the price of soft drinks has gone up thanks to inflation caused, according to Beverage Digest, by increased operating and input costs. While dollar sales across the market increased by 10%, volume sales actually fell by 1.7%. Mintel predicts that by 2026, concerns over wellness and the environment will have an even greater effect on the soda market.

“Sodas are on the decline,” Schmitt said. “People are looking for healthier alternatives, more interesting new brands, cooler names.”

They’re also looking for different flavors besides the basic colas. “Dr Pepper has capitalized on the growing consumer desire for flavored soft drinks,” wrote Duane Stanford, editor and publisher of Beverage Digest, in an email. “That’s especially true for young and Hispanic customers.” Indeed, Fanta orange soda (owned by Coca-Cola) – ranked ninth on Beverage Digest’s list – had an even more dramatic rise in 2023 than Dr Pepper: a 10% increase in volume sales and 20.2% in dollars.

Pepsi, meanwhile, has responded to this trend by concentrating on zero sugar, sports and energy drinks – and also Rold Gold pretzels, Lay’s potato chips, Cheetos, Doritos, Off the Eaten Path veggie chips, Quaker Oats and dozens of other snacks. PepsiCo’s holdings are vast, and less than half its brands are liquids. It is, in fact, the only major beverage company where soda makes up a minority share of revenue, says Quint. More than half its profits come from the Frito-Lay snacks division.

This may be the reason the company has failed to issue any statements about its alleged downfall (though for Father’s Day it did collaborate with the chef Bobby Flay on a “Cola-ogne” that smells like a combination of Pepsi and a charcoal grill).

“It’s hard to deduce the business model, only the effects,” said Quint. “But Pepsi can afford to say: ‘Given changing consumer tastes, we’re going to spend more ad money on snacks than on Pepsi as a brand.’”

The Keurig Dr Pepper portfolio is not nearly as diverse: it’s almost entirely beverages, with the exception of Mott’s applesauce. Coca-Cola, too, is all drinks all the time. This is why the Motley Fool advises readers to hang on to their PepsiCo stock: “Dr Pepper’s second-place finish in 2023 is a fun headline. However, in isolation, it doesn’t constitute a good reason to buy Keurig Dr Pepper stock.”

So what happens next? Are the cola wars really over? According to Mintel, despite the rise of spicy and fruity sodas, cola is still holding on as the top soda flavor. When you take Diet Pepsi, Pepsi Zero Sugar and other offshoots into account, Pepsi is still the No 2 soda, behind Coke. Besides, the taste of Dr Pepper is too distinctive to mount anything comparable to the old-school Pepsi Challenge.

Schmitt, for one, wonders if Pepsi is preparing to launch another major ad campaign to take back its No 2 spot. “We always need number two,” he said. “Number two is a big deal.”