Effort Likely to Start Next Year in PBC Territory. Independent Bottlers Could Join in Later.
Plus: Future Smarts Explores Alcohol Crossover. Coke, Pepsi, Bottlers, Analysts Comment.
PepsiCo’s new Blue Cloud Distribution unit has now secured federal alcohol wholesale permits in at least 17 states as it prepares to launch Hard Mtn Dew next year. The company has registered a corporation called “Blue Cloud Distribution” in another eight states. Should federal alcohol wholesale permits be issued for those, Blue Cloud would then have rights to distribute alcohol in half of US states. In 13 additional states, PepsiCo reserved the Blue Cloud name and later allowed the hold to expire. The Blue Cloud name remains on hold in three states. A detailed listing of states in each category is provided later in this story.
MAPPING PROGRESS. The Green Sheet included with this story maps the states where PepsiCo has secured an alcohol wholesale distribution permit from the US Alcohol and Tobacco Tax and Trade Bureau (TTB), which collects federal excise taxes on alcohol and regulates labeling and marketing for alcohol products. The Blue Cloud TTB permits are concentrated in the eastern half of the US and cover major markets including Chicago, Dallas Houston, Atlanta, Philadelphia, Minneapolis, and St. Louis. In the west, a permit has been issued for Nevada, which also covers Las Vegas.
PBC LEADING EDGE. INDEPENDENT BOTTLERS COULD FOLLOW. The Green Sheet
map depicts the TTB-permitted Blue Cloud states atop PepsiCo’s company-owned bottling network, PBC, shown in pink. PepsiCo’s independent bottling system is colored gray. PepsiCo has told BD that the company will use a “mix of PepsiCo bottlers, local beer distributors, and Blue Cloud operations.” One system source speculated to BD that PepsiCo will start Blue Cloud operations in PBC territory and in states where its easiest to put beer and soft drinks on the same trucks efficiently. PepsiCo is “sticking a toe in the water,” as the person put it, to find out what the company doesn’t know about the country’s complex state-by-state system alcohol regulations and determine the real size of the opportunity for PepsiCo. PepsiCo will have to learn to navigate complex state-by-state alcohol sales and distribution regulations that can limit or prohibit anything from merchandising and marketing to slotting fees and customer credit terms. The person expects PepsiCo to begin putting product on PBC trucks next year by the end of this winter or early spring, with some independent bottlers being brought into the Blue Cloud network by the end of next year. Independent PepsiCo bottlers that already have beer businesses include Bernick’s, Admiral, Mahaska, and Big Foot.
BLUE CLOUD BY STATE. The following is a state-by-state breakdown of the status of PepsiCo Blue Cloud Distribution arm:
TTB + State Incorporation – Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Minnesota, Missouri, Nevada, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Virginia, Wisconsin.
State Incorporation Only – Arizona, Colorado, Delaware, Louisiana, Mississippi, Nebraska, North Carolina, Pennsylvania.
Reserved Corporate Name – Alabama, Michigan, North Dakota.
Expired Corporate Name Reservation – Alaska, Hawaii, Idaho, Kansas, Maine, Montana, New Hampshire, New Mexico*, Oregon*, Rhode Island, South Dakota, Vermont, Wyoming. * Appears to be expired.
No Activity Recorded Publicly – California, Connecticut, Maryland, Massachusetts, New Jersey, New York, Utah, Washington, West Virginia.
ANALYST VIEW. A theme running through Beverage Digest’s Future Smarts conference
on Dec. 6 was the blurring of lines between alcohol and non-alcohol beverage companies
in the US when it comes to both product and distribution. During a panel with Wall Street Analysts Lauren Lieberman of Barclays and Bonnie Herzog of Goldman Sachs, they were asked how meaningful the crossover into alcohol could be for companies such as Coca- Cola and PepsiCo. “Interesting more than meaningful,” Lieberman said. “It will come down to continuing to follow the consumer, and to consumer behavior driving those decisions, not financial ones.” Herzog said the soft drink and beer sectors are mature, so each is looking for growth opportunities outside their core businesses to leverage their strengths, including when it comes to marketing, distribution, and consumer insights capability. “You are going to see more of it,” she said of the exploration. “It will now be another growth driver for these different companies.” She added that companies on either side of the line are for the most part still in a learning mode when it comes to crossing over, and it’s unclear yet whether companies that do push harder
will lean more heavily on internal innovation or acquisition. It’s also unclear yet how meaningful the crossover could one day be to non-alcoholic beverage company P&Ls in the US. The crossover opportunity may be greater for Coca-Cola overseas during the next five years than it will be for PepsiCo in the US in that timeframe, Herzog and Lieberman agreed.
PEPSICO REACTION. During another Future Smarts session, PepsiCo North America Beverages CMO Greg Lyons said internal consumer research showed that Hard Mtn Dew will be additive to Mtn Dew brand equity and not detract. “It’s a distinctive product that’s going to help build the brand,” he said. Lyons said the company will ensure that the alcoholic product’s look and feel isn’t confused with Mtn Dew. He said PepsiCo’s decision to distribute Hard Mtn Dew is “bold” and “leverages lots of synergies within our distribution business,” adding, “we have a real right to win there.” He said he trusts partner Boston Beer to “do great things with that product and brand.” In a separate session, Brandon Muhl, CEO of Pepsi bottler Mahaska, said he sees an easier path ahead when it comes to non-alcoholic players getting into beer. Mahaska, with operations concentrated primarily in the Midwest, also distributes craft beer. He has experience with the limitations of working within the US three-tier alcohol distribution system, a state-by-state patchwork of regulations that generally prohibit vertical ownership of producers, wholesale distributors, and retailers. “If you look at these prohibition era laws
in the three-tier system, no matter what state they are in, they aren’t in place because they make any sense,” said Muhl, who added that the regulations are intended to protect beer distributors’ business models. “There is increasing evidence that there is fracturing there,” he said. “We’ve already seen that business model liberalize in some, not all, of the states we do business in.” He expects that trend to continue, albeit ploddingly. “I don’t want to overstate
it, because I definitely don’t think that there is a wholesale deregulation in the next five years coming.”
COCA-COLA REACTION. Also, during Future Smarts, Coca-Cola North America Operating Unit President Alfredo Rivera said during a fireside chat that the company would consider leveraging the company’s US bottling system for alcohol distribution barring legal restrictions or “if we could find a mechanism that allows us to do this legally.” He added, “We’re not at that stage right now.” On the bottler side, Swire Coca-Cola USA President and CEO Rob Gehring said during an interview that alcohol in the near term is more of an opportunity overseas than in the US due to legal restrictions, even though “the consumer has blurred the line for all of us.” The question longer-term for bottlers is whether consumer behavior eventually makes it “worth the investment to get into some of those sectors” of alcohol, he said.
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