Soft drinks’ swerve into alcohol lane tests liquor regulations

The soft drink industry’s expansion into the booze business is testing state liquor laws, with alcohol industry members filing formal complaints to regulators in at least two states and alcohol policy groups scrutinizing the emerging trend.

The issues include how the products are being distributed, where they are placed in the stores, the potential for consumer confusion, and marketing and youth access.

“We’re already concerned about what the traditional alcohol industry is producing, and now we’re concerned about a whole new set of products from a new market,” said Alicia Sparks, chair of the U.S. Alcohol Policy Alliance, a nonprofit that works to reduce excessive alcohol use.

Since prohibition, the production, distribution and sale of alcoholic drinks has generally operated under a kind of church-and-state model known as the three-tier system. While there are exceptions, the basic rule is alcohol producers cannot distribute it to retailers or sell it to consumers — it must first go through a wholesaler and then a retailer, and each are regulated separately.

“Tied house laws” prohibit a beer, wine or liquor producer from paying a distributor or retailer for special treatment. Those rules do not apply outside of alcohol sales. Soft drink and food companies often pay pricey slotting fees for premium shelf space in grocery stores.

But traditional soft drink companies like PepsiCo and The Coca-Cola Company are crossing over into alcohol sales with products such as Hard Mtn Dew, Lipton Hard Iced Tea, Simply Spiked Lemonade, Fresca Mixed, and Jack and Coke cocktails. That is blurring the once clear lines between companies that produce alcoholic or non-alcoholic drinks.

“What we’re seeing is an interest from non-alcohol companies wanting to come in and sell these products through their distribution,” said Justin Nordhorn, the director of policy and external affairs at the Washington State Liquor and Cannabis Board.

Blue Cloud Distribution, a subsidiary of PepsiCo, has applied for three distributor licenses in Washington State. Hard Mtn Dew has already hit store shelves in nearly a dozen other states, including Missouri, Ohio, Oklahoma, Tennessee and Virginia.

The Boston Beer Company, maker of Samuel Adams beer, produces Hard Mtn Dew — a malt beverage with flavors that include Baja Blast and Black Cherry — as part of a partnership with PepsiCo. Blue Cloud then distributes it.

That business model has beer, wine and spirits distributors watching warily and, in some cases, mounting formal challenges.

Last month, beer distributors in Virginia filed a complaint with the Alcoholic Beverage Control Board arguing that Boston Beer should be distributing Hard Mtn Dew through the wholesalers it uses to distribute its other products.

By using Blue Cloud, “Boston Beer has established an unlawful ‘dual-distribution’ scheme for its Hard Mtn Dew brand,” the complaint argued.

A spokesperson for Virginia’s ABC Board described the complaint as a “franchise dispute.”

Also in October, the Nevada Beer Wholesalers Association and the Wine & Spirits Wholesalers of America filed a complaint with the Clark County Board of Commissioners in Las Vegas seeking the revocation of Blue Cloud’s importer/wholesaler license. The wholesalers argue that the business arrangement between Boston Beer, PepsiCo and Blue Cloud “violates the three-tier system of alcohol.”

In an email, Blue Cloud Distribution refuted the suggestion that it is a co-manufacturer and said it is “committed to following all government regulations for licensing and business operations, while providing expanded choices for consumers in this growing market.”

But the road to regulatory approval has not been totally smooth. In April, Georgia regulators denied the company’s request for a wholesale dealer license after determining that the Boston Beer, PepsiCo and Blue Cloud business model “is a violation of the three-tier system.”

Blue Cloud said Georgia is one of two states where it has been denied and that the company continues to address regulators’ questions.

Besides challenges to Hard Mtn Dew’s distribution model, concerns have been raised about consumer confusion.

In June, the Illinois Liquor Control Commission sent a letter to the Illinois Retail Merchants Association cautioning against placing Hard Mtn Dew next to regular Mtn Dew on store shelves.

Meanwhile, the beer wholesaler industry and substance abuse prevention advocates have documented instances in other states where alcoholic and non-alcoholic products from the same company have been placed side-by-side. In one instance, a photo showed cases of Hard Mtn Dew stacked below a display of Hot Wheels cars.

That has prompted beer wholesalers to question whether the new alcohol-based products from large soda companies are “catching a free ride” on paid product displays for non-alcoholic beverages.

“We’re seeing example after example of how this is ending up in the retail trade in a less responsible way,” said Craig Purser, president and CEO of the National Beer Wholesalers Association.

In its statement, Blue Cloud Distribution said it does not pay slotting fees and gives “specific guidance that alcoholic and non-alcoholic beverages should not be merchandised or advertised together.”

PepsiCo and Coca-Cola did not respond to emailed requests for comment. Boston Beer declined to comment.

Despite the concerns, and formal complaints, state regulators by and large said they are not hearing complaints about the new ready-to-drink alcoholic beverages.

Oklahoma’s Alcoholic Beverage Laws Enforcement Commission was the exception. It confirmed it has an active investigation underway, but did not provide details. When asked if the investigation involved the placement of alcoholic drink products in stores, an attorney for the agency said in an email, “That is one of many issues that is being investigated at this time.”

As so-called alcohol crossover products increasingly hit the market, the Distilled Spirits Council, a trade association, said it is developing guidance to address concerns about the potential for consumer confusion and how the products are marketed.

“The guidance will also include suggested responsible merchandising practices for our retail tier partners who have the responsibility and control over how products are presented to consumers for sale,” Lisa Hawkins, a spokesperson for the Council, said in an email.