PepsiCo’s move to create own alcohol-distribution company for Boston Beer-made hard soda rankles beer wholesalers

When Boston Beer Co. announced in August it would partner with global consumer packaged-goods giant PepsiCo Inc. on an alcohol version of Mountain Dew, Craig Purser heard directly from a cross-section of beer distributors and industry insiders from across the country.  

Purser, president of the National Beer Wholesalers Association, a trade group that represents America’s beer distributors, said the deal set off alarms inside the industry, prompting concerns about the future of the three-tier system, the laws that govern the sale and distribution of alcohol beverages across the United States.

“There was genuine head-scratching going on here,” Purser says. “Our distributors were concerned, and perhaps, rightly so.” 

Under the partnership between the Sam Adams brewer and PepsiCo, Boston Beer will manufacture Hard MTN Dew, a 5% alcohol-by-volume, non-caffeinated flavored malt beverage. But instead of going through Boston Beer’s network of beer distributors, Pepsi will effectively become a licensed alcohol distributor under a newly formed arm called Blue Cloud and ship Hard MTN Dew to retailers on the same trucks that carry its soft drinks and other non-alc products, such as Gatorade.

Boston Beer, meanwhile, will use its existing wholesalers to handle most of the beverages’ sales to on-premise accounts, like bars, taverns and restaurants.

As more details of the deal continue to emerge, concerns among the alcohol industry and beer wholesalers, sowing discord and prompting a number of vexing questions. 

Among them: whether the proposed distribution of the flavored malt beverages would withstand legal scrutiny. The arrangement also raises the specter that, if allowed to proceed, it would erode the protections afforded to the regulated, yet competitive alcohol distribution system, as well as make the beer market less competitive.

“This one is a little different,” Purser said in his annual address to distributors as part of NBWA’s national convention this week in Las Vegas. “This creates a whole host of issues, as this is not a new product or a new brand being built, but it is an established, globally recognized soft-drink brand that is adding alcohol.”

Not only that, distributors say, but by creating its own alcohol distribution company to sell the product, Pepsi – and Boston Beer, in effect – appear to be circumventing the established three-tier system and cutting out wholesalers in order to sell the product directly to retailers. They worry that if PepsiCo is allowed to proceed, a new precedent could be set. 

In addition, Purser says, the proposed arrangement raises questions “related to public health, the Beer Institute’s Advertising and Marketing Code and federal and state trade practices.”

For Boston Beer, maker of Sam Adams, Dogfish Head and Truly Hard Seltzer, the deal has thrust the company into an odd position of competing directly against its distributor partners, whom it relies upon to sell and deliver the vast majority of its beverages to bars, restaurants, grocers and other retail stores across the country.

The tie-up between Boston Beer and PepsiCo also appears to be a contradiction with what Boston Beer founder and chairman Jim Koch said at NBWA’s annual conference in 2019.

“We can make beer grow again,” he said, if the industry expands the definition of beer to include beverages like wine in a can, hard seltzers, hard teas, ready-to-drink cocktails and hard kombucha. “If it’s made by a brewer and sold by a beer wholesaler, it’s all beer.”

Although his facilities will manufacture Hard MTN Dew, it’s unclear if the product would qualify as “beer” today.

Pepsi, for its part, appears to be entering unchartered territory. The issue raises concerns that others in the soft-drink business could follow suit. 

When asked during its most-recent conference call with Wall Street analysts what “the end game” is in creating its own distribution network for alcohol beverages, PepsiCo Chairman and CEO Ramon L. Laguarta said the arrangement would help give PepsiCo “an opportunity to create a distribution system in the U.S. that is quite unique in the sense that it would be an integrated distribution system that can make coordinated decisions across multiple states.”

The ability to distribute alcohol beverages would give the company a competitive advantage, helping the beverage giant fill its trucks, increase drop sizes to retailers and integrate its entire distribution system across the country, he said.

The company already has applied for permits to distribute in states including Illinois, Wisconsin, Oklahoma, Florida, Kentucky and Minnesota, Beer Business Daily reported.

But several federal and state statutes that govern the sale and distribution of alcohol could stand in the way.

“I’m not clear that (PepsiCo) can self-distribute these products, and it’s not clear that they’re going to,” said Mike Madigan, a distributor attorney, at this week's NBWA conference, per BBD.

Under the Federal Alcohol Administration Act and state alcohol laws, alcohol beverage suppliers are prohibited from paying so-called slotting fees or providing retailers with any item of value. Outside of alcohol, PepsiCo pays massive slotting fees for products ranging from Cap’n Crunch cereal and Quaker Oats to Doritos and Gatorade, which is a legal and accepted practice in the non-alc business.

On top of that, in certain states, companies that hold distributor’s licenses cannot pay slotting fees, whether they’re for non-alc products or alcohol-containing products.

The entire arrangement, Madigan said, “really raises some interesting questions.”