Hard “Soft-Drinks” and their “Disruptor” Presence

Feb 24, 2023

By: Louis J. Terminello, Esq. and Brad Berkman, Esq.

There has been much ink spent, including recently in the New York Times, on the introduction of ready to drink (RTD) alcohol beverage brands by soft drink manufacturers, such as Coca-Cola and PepsiCo. The drinks manufacturers are clearly capitalizing on the growth of the RTD and alcoholic seltzer category (which is exploding) in conjunction with the hard-earned brand equity that they have built over a very long period of time and at great expense. Health and alcohol experts are concerned. Some of these drinks have significant sugar content and unique taste profiles that arguably disguise or mask the fact that one is drinking an alcoholic beverage. In addition, they appear to appeal to new consumers of beverage alcohol. There likely will be more criticism of these beverages from all corners as the specific category grows.

The above said, the reader of this blog, by now, is well aware of the three-tier system. It is often written about here. The three-tier exists only in the alcohol beverage world and nonalcoholic drinks producers, including soda manufacturers, have great experience at vertical integration – they are good at producing, marketing, and distributing their own wares.

Capitalizing on the built-in brand equity, PepsiCo introduced Hard Mountain Dew into the marketplace with a 5% a/b/v. More interesting than that, PepsiCo has, to a degree, successfully attempted a creative work-around of the three-tier system that is causing significant anxiety amongst alcohol beverage wholesalers and state regulators in various jurisdictions.

PepsiCo, as brand owner and manufacturer of Mountain Dew, licensed the rights to the Boston Beer Company, which is manufacturing the hard version of the ubiquitous soft drink. PepsiCo, in turn, created its own rather significant distribution company called Blue Cloud, so it could purchase the drink from Boston Beer and drive distribution on its own terms. PepsiCo’s argument is that, even though they are a beverage manufacturer, they are not the manufacturer of Hard Mountain Dew, and as such, are three-tier compliant and may distribute the new Mountain Dew label. Kentucky and Georgia did not agree with PepsiCo’s position and denied the issuance of distributor’s licenses to Blue Cloud. It will be quite interesting to see how other states react to this business model as Blue Cloud expands its footprint. From the desks of these alcohol beverage lawyers and industry observers, it is interesting to see an old and established US company act as a modern-day disruptor of a longstanding and established regulatory framework. This is an interesting development to keep an eye on. We suspect there will be other similar attempts by similarly situated companies. Lawsuits will likely follow. Stay tuned.

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Hard “Soft-Drinks” and their “Disruptor” Presence

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