At an annual convention and trade show for beer distributors last week, the National Beer Wholesalers Association warned attendees of what they see as unfair encroachment by PepsiCo’s Blue Cloud Distribution, according to Wall Street analysts who wrote about the meeting. “Pepsi's Blue Cloud distribution company was frequently discussed and was both a source of frustration and worry,” analysts at AB Bernstein wrote in an Oct. 18 research report after attending the meeting. “Many were of the opinion that Pepsi licensing out its own brands and entering alcohol distribution was not in keeping with the three-tier system.” The three-tier system is a complex state-by-state regulatory system for alcohol that generally requires distributors to be separate from brand owners. Earlier this month, two distributors in Virginia challenged Blue Cloud’s right to distribute Hard Mtn Dew in that state, according to analyst reports. (One of the distributors is owned by Reyes Holdings, which also owns Reyes Coca-Cola Bottling). In a presentation, the association showed photos of Hard Mtn Dew displayed next to Hot Wheels toys or non-alcoholic Mtn Dew, arguing this could cause consumer confusion or undermine the beer industry’s responsible consumption message, the Bernstein analysts reported. “If the regular Mtn Dew product gained it’s end cap position from Pepsi paying slotting fees, has Hard Mtn Dew directly or indirectly benefited from this?” the Bernstein analysts asked, citing concerns expressed by the NBWA. In alcohol, slotting fees are illegal, Bernstein noted. Adding to distributors’ concern, Blue Cloud recently announced a plan to distribute a Lipton Hard Iced Tea for FIFCO USA, which is licensing the brand from PepsiCo’s RTD tea JV with Unilever.
THREAT TO THREE-TIER ALCOHOL LAWS. In a separate report yesterday, analysts at Consumer Edge Research noted that complaints against soda company encroachment into alcohol centered mostly on PepsiCo’s Blue Cloud, rather than Coca-Cola, which has merely licensed its brands to distributors. Coca-Cola’s approach provides growth to existing beer distributors, while PepsiCo’s approach adds a third competitor in a beer distribution system that has generally consolidated to two major players in most states, the analysts wrote. “In our experience, beer distributors have always been highly sensitive to any event that can bring them incremental competition or disrupt the competitive environment in which they operate,” the analysts wrote. In addition, if Blue Cloud works, the mechanism offers an alcohol path for Coca-Cola and Keurig Dr Pepper to eventually follow, “or a platform to seek to change the existing distribution laws,” the analysts wrote.
BLUE CLOUD RESPONSE. When asked about criticisms leveled at PepsiCo and Blue Cloud, Blue Cloud executives sent BD the following rebuttal, which is reprinted in its entirety:
“Recent comments at the National Beer Wholesalers Conference mispresented key facts about Blue Cloud Distribution (BCD) which was established to operate at the wholesale tier within the parameters of the three-tier system. Blue Cloud Distribution is committed to following all government regulations for licensing and business operations, while providing expanded choices for consumers in this growing market. Given some recent commentary, it is important that false assertions be corrected.
“ASSERTION – BCD has been denied licenses in ‘several’ states.
FACT – BCD has secured licenses in nearly a dozen states and only received two denials. In the states where we have been denied, we continue to speak with local government officials to clarify any questions they may have.
“ASSERTION – BCD is responsible for product placement.
FACT – BCD is clear on alcoholic beverage placement in the retail environment and maintains very strict policies on placement to ensure there is no consumer confusion between alcoholic and non-alcoholic products. BCD gives specific guidance that alcoholic and non-alcoholic beverages should not be merchandised or advertised together. Alcoholic and non-alcoholic products have different graphics and 21+ is noted in red on any alcoholic can.
“ASSERTION – Hard Mountain Dew and other alcohol products are catching a ‘free ride’ with non-alcoholic products.
FACT – BCD operates with its own staff, equipment, warehouse space, invoices, and systems. BCD does not pay slotting fees and competes to distribute and place Hard Mountain Dew based on the merits of Boston Beer’s product and that company’s expertise. It does not distribute any non-alcoholic beverages. However, unlike BCD, there are beer wholesalers that sell both alcoholic and non-alcoholic beverages, particularly in the energy category. Wholesaler regulatory standards should apply equally to all companies operating in the wholesaler tier.
“ASSERTION – This is a co-manufacturing relationship.
FACT – The Boston Beer Company (BBC) and FIFCO USA are the manufacturer and supplier of Hard Mountain Dew and Lipton Hard Iced Tea respectively. These companies developed the formulas, own all of the IP and control the marketing of the products. BCD is only the distributor.”
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