The Journal. - ‘It Came out of Nowhere’: The Rise of Dr Pepper

Episode Date: June 7, 2024

There is a new contender in the cola wars, and it isn’t a cola. It’s Dr Pepper. WSJ’s Jennifer Maloney unpacks how after decades as a distant competitor, Dr Pepper has climbed the soda ranks with help from hefty marketing, novel flavors and TikTok videos. Further Reading: - Dr Pepper Ties Pepsi as America’s No. 2 Soda Further Listening: - The Agony and Ecstasy of Tab  Learn more about your ad choices. Visit megaphone.fm/adchoices

Do you know how many studio policies that I'm breaking right now in this moment? Do tell. What are the rules that you're breaking? You're not supposed to bring liquids into the studio. And yet. Uh-oh. Do you want to know how many liquids that I have brought into the studio with me today? Show me. Do you want to know how many liquids that I have brought into the studio with me today? Show me.

So I have three cups of ice, which is, you know, that's not that dangerous, but it obviously melts. I have a jar of pickles. I have coconut flavored coffee creamer. Oh my gosh. And finally, and most importantly, five cans of Dr. Pepper. Dr. Pepper. The other day, I talked to our colleague Jennifer Maloney, who covers the beverage industry, about Dr. Pepper,

which just achieved something kind of unexpected. Dr. Pepper is now tied with Pepsi as the number two soda brand in the U.S. With all due respect to Dr. Pepper, I knew that it existed, but I didn't think that it was anywhere near being like among the giants in the soda world. It wasn't, and now it is.

Dr. Pepper? Like, where did it come from? It came out of nowhere. For most of the last century, the top two soft drinks in the U.S. have been Coke and Pepsi. So, how did Dr. Pepper catch up? Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen.

It's Friday, June 7th. Coming up on the show, how a soft drink underdog swept the soda market. We'll see you next time. and diverse cultures. You'll love it so much, you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com. Dr. Pepper originated almost 140 years ago in the small town of Waco, Texas. It was invented in 1885 by Charles Alderton. He was a young pharmacist and... Wait, it was not founded by Dr. Pepper?

It was not. I'm sorry to say. Okay. Disappointed, but fine. Continue, please. So he was a pharmacist and he also operated a soda fountain. So if you can imagine, they had all these different flavored syrups that they were mixing their medicines in. And so this young pharmacist took all these different flavored syrups and mixed them up, trying to get this like perfect blend that would have the aroma of the pharmacy where he worked. In 1885, pharmacies must have been amazing places to be

because it smells incredible. I don't think my local Walgreens smells like anything I'd ever want to drink. No, totally not. It smells like anything I'd ever want to drink. No, totally not. The label on a Dr. Pepper says that it's made with an authentic blend of 23 flavors. Jennifer and I hadn't had Dr. Pepper in years, though.

Apparently, we didn't get the memo about how popular it's become. So we decided to remind ourselves what it tastes like. I'm going to crack mine open. Okay, me too. It's a great sound. You can hear the fizz, the little bubbles coming to the top. Okay, I'm going for it. Oh, yeah.

Oh, my God. It's coming back to me. It's so good. And when I'm tasting it now, that definitely evokes like sweet cherry flavored medicine, you know, of my childhood. But there's other stuff in there too. There's like gingery notes and like a little peppery note, a vanilla note. There's a lot going on. It's definitely a mouthful. Yeah. I second all that. 23 flavors, authentic blend. It's still a secret, you know. They won't tell me what the 23 flavors were, I asked. In the 1880s, Dr. Pepper quickly became popular in Texas, around Waco.

But not long after it was created, they faced some real competition. Coca-Cola was invented a year later, and Pepsi-Cola was invented a few years after that in the 1890s. And Coca-Cola really took the country by storm. So while Dr. Pepper was growing kind of a local following, Coca-Cola just like shot to the top of the country in terms of a national brand, it really established itself very early on as the biggest soda fountain drink. One of the reasons Coke and Pepsi pulled so far ahead is because of the systems they built to distribute their products. Both Coke and Pepsi early on developed bottling networks across the country where you had

franchises, local businesses that were independently owned that would take the concentrate or the syrup from the manufacturer and combine it with water and bubbles and put it into bottles and then distribute it to local restaurants and stores. These networks became known as the red system for Coke and the blue system for Pepsi, based on the color of their logos. You know, in terms of the beverage industry landscape, there was very much a red camp and a blue camp. And I'm not talking about political parties. I'm talking about the bottling companies

that were distributing Coca-Cola. They were the red system. And the bottling companies that distributed Pepsi-Cola, they were the blue system. And they pretty much like were the only two games in town. And if you wanted to be delivered into stores and restaurants, you needed to be delivered by a bottling company that was, you know, in one of these two systems.

Dr. Pepper was running into trouble because it was seen as potentially a rival cola and the Pepsi and Coke bottlers couldn't violate their franchise agreements with Coke and Pepsi. And so it was unclear there was this debate about whether Dr. Pepper was a cola or not. If it's a cola, then a Coke bottler can't carry Dr. Pepper because it can't carry a competing cola. So these distributors had contracts with either Coke or Pepsi, and those contracts prohibited them from carrying anything

that was too similar to Coke or Pepsi. Exactly. In the 1960s, Dr. Pepper ended up in a lawsuit. It's a long story, but what's important is that the company argued that its soda wasn't technically a cola, which is made using the cola nut. And in 1963, a court ruled in Dr. Pepper's favor. That seemingly small distinction, that Dr. Pepper isn't a cola, meant that the company could now do deals with Coke and Pepsi's distributors. And that really unlocked huge growth for Dr. Pepper because now it could be carried by

Coke bottlers and by Pepsi bottlers. And what Dr. Pepper did very shrewdly is they made alliances with both systems. And when you go into a restaurant chain like McDonald's or Wendy's or Subway, whether the soda fountain is Coca-Cola brands or Pepsi brands, chances are Dr. Pepper's also on it. So it's sort of like this third party candidate that had alliances with both sides, the red party and the blue party. I feel like there's a Game of Thrones analogy here or something like that,

where it just struck alliances with both empires and then used that to catapult itself up to power unexpectedly. Totally. The fact that it was on all these soda fountains across the country meant that consumers were like walking up to it and seeing it and many of them were trying it.

And if they liked it, then maybe they would buy it again. it and many of them were trying it. And if they liked it, then maybe they would buy it again. In 1977, Dr. Pepper launched a big ad campaign. I drink Dr. Pepper and I'm proud. I used to be alone in a crowd. But now you look around these days. This seems to be a Dr. Pepper craze. This is one of its most famous commercials. In 1981, Dr. Pepper had record sales and record profits, and it had shot up to the number three spot,

outranked only by Coke and Pepsi. But then, Dr. Pepper started to stumble. That's after the break. Need a great reason to get up in the morning? Well, what about two? Right now, get a small, organic Fairtrade coffee and a tasty bacon and egger breakfast sandwich for only $5 at A&W's in Ontario.

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throughout the aisles at Loblaws to get your essentials at great prices. It's your cue to stock up and save. Look for new value programs when you shop at Loblaws, in-store and online. Just when things were looking good for Dr. Pepper, in the 1980s, the company made some strategic decisions that backfired. It loaded up on debt to buy bottling plants and to acquire another big soda company. And then it started facing all kinds of new competition, especially from Diet Coke,

which itself became a giant in the soda industry. There were other new brands, soda brands coming onto the market. And so the pressure to spend more on marketing just to keep up really ramped up. And so Dr. Pepper's profits plummeted. It was saddled with all this debt and really was on the brink of insolvency. Things got so bad that Dr. Pepper started looking for a buyer. And eventually, it was scooped up by an investment banking firm. The company changed hands several more times before landing with its current owner. Dr. Pepper is now owned by a company called Keurig Dr. Pepper.

And the company makes the Keurig coffee machines. It owns 7-Up. It owns Schweppes. Dr. Pepper. It also owns Mott's Applesauce, Crush, Squirt, Sunkissed, Clamato, Hawaiian Punch, A&W Root Beer. So a pretty good collection of drinks. Yeah. For the last two decades, original Pepsi has been declining as people switch to sugar-free Pepsi or other drinks.

Meanwhile, Dr. Pepper has slowly but steadily increased its market share. Has Pepsi said anything about this situation? Pepsi just notes that it focuses on the whole brand family of Pepsi that includes Diet Pepsi and Pepsi Zero Sugar. And when you look at that whole brand family, the overall trademark is still solidly number two. I see. So how did Dr. Pepper start to catch up? I talked to an executive who's been there for 20 years and I said, how did you guys do this? And he said that they have been really consistent in their marketing theme,

focusing on the uniqueness of the flavor. So that really sets it apart. It is not a cola. It's something different. One of the ways the company has grown is by playing up its unique taste and adding new twists. up its unique taste and adding new twists. So they've been leaning into that by introducing new flavors. Like every year they'll have something new. Sometimes it's temporary. Sometimes it's like a permanent flavor, but they really want to capture people's attention by offering kind of wild and wonderful flavors like strawberries and cream or one time they had like a limited edition hot pepper version.

So their thesis is basically like young people like to try new flavors. We're going to throw out a whole bunch of new flavors and then see if we can hook them and turn them into regular Dr. Pepper drinkers. So it's like a gateway and it turns them on to traditional Dr. Pepper. Then does that actually work though, in terms of like more sales? So traditionally I would say, and this is just across the board for soft drinks, a new flavor often gets a lot of sales initially, like there's a little excitement about something, but then it's like a very short term gain. However, Dr. Pepper says that this has actually been a winning strategy.

They say that half of their growth has come from these new flavor iterations and half of their growth has come from the traditional Dr. Pepper. And they say that they're capturing new people through the new flavors and then converting some of them into regular Dr. Pepper drinkers. And those drinkers of regular Dr. Pepper are now coming up with their own weird concoctions and posting videos on TikTok,

like Dr. Pepper with pickles. I'm here at Sonic to try the like Dr. Pepper with pickles. I'm here at Sonic to try the viral Dr. Pepper with pickles. Pickle, pickles, I can't wait. Hi, what can I get for you? Hi, can I get a large Dr. Pepper and a side of pickles, please? This is why I broke the rules and brought those liquids into the studio. Okay, I've got the knife here. Cutting into my pickle. Okay, I've got the knife here. Cutting into my pickle.

Okay, I have my glass of ice. Dr. Pepper ice, and then dill pickles. You just plop it on top. I'm going to do three, three slices. All right, cheers. Cheers. It just tastes kind of like Dr. Pepper with a little hint of pickle. I thought this was going to be disgusting, but it's actually good. It is good. We also made what's known as a dirty Dr. Pepper with coconut coffee creamer and a squeeze of

lime juice. And I got to say, it wasn't bad. Dr. Pepper kind of has capitalized on this trend and put out its own dirty Dr. Pepper, which they call Dr. Pepper Creamy Coconut. But yeah, they saw these people making dirty Dr. Peppers and they're like, hey, we can make one. These flavors have been an especially big hit with some of the country's fastest-growing demographics. It turns out that, for example, Hispanic consumers are really keen on the new flavor offerings that Dr. Pepper has introduced, and the Hispanic population in the U.S. is growing, and its buying power is growing, so that has helped in recent years.

And young people like Gen Z and Generation Alpha, they also are really into the flavors. The company's also been spending heavily on marketing. If you watch college football, you've definitely seen their ads. Prepare to cheer. Dr. Pepper, the one fans deserve. So is there a business lesson here?

Slow and steady wins the race? Yeah, I think it's an amazing example of this dark horse candidate. This third-party candidate that formed alliances with both sides and managed to, over time, just kind of exceed their wildest dreams and all of a sudden they're number two. It's kind of remarkable. number two, it's kind of remarkable. So Dr. Pepper has achieved this sort of tied for number two status. But there's an expression, though, that I have heard throughout my life, which is, if you're not first, you're last. So they're not coming for Coke.

Coke still has a really big lead. Its market share in the U.S. is nearly 20%, while Dr. Pepper and Pepsi are tied at around 8%. I think it's really interesting to see how relevant a 139-year-old soda brand suddenly is in, like, pop culture. Like, that, to me, is notable. Mm-hmm. It doesn't seem like it would necessarily be an easy thing to achieve. No, and a 20-year steady climb, I think, also is, I think, not easy to achieve.

Like, to just chug away year after year and just climb that ladder rung by rung, to me is really remarkable. That's all for today. Friday, June 7th. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brewer, Maria Byrne, Victoria Dominguez, Pia Gadkari, Rachel Humphries, Matt Kwong, Kate Leinbaugh, Jessica Mendoza, Annie Minoff, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez Espinosa, Heather Rogers, Pierce Singhi, Lange Tong, Jeevika Verma, Lisa Wang, Catherine Whalen, Tatiana Zamis, and me, Ryan Knudsen. Our engineers are Our theme music is by Additional music this week from

Fact-checking by Bobby Lord, Emma Munger, Nathan Singapak, Griffin Tanner, and Bludot Sessions. Fact-checking by Mary Mathis and Najwa Jamal. Thanks for listening. See you Monday.