THE GIST
Last year, Coca-Cola quietly created a new subsidiary called Red Tree Beverages, designed to give the company more control over its forays into alcoholic beverages. But the news didn’t become public until July 2023, when Coca-Cola’s chief of new revenue streams, Dan White, spoke to the press about the new division.
On face, Red Tree appears to be a color-coded answer to Blue Cloud, a division that PepsiCo launched last year to distribute licensed alcoholic products such as HARD MTN DEW and Lipton Hard Iced Tea. But Coke has watched its rival come under the scrutiny of regulators and trade groups—to say nothing of challenging sales for HARD MTN DEW—and has chosen a different path. Red Tree leadership has been adamant that the company will not distribute any product, at least not in the near future. Nor does Red Tree make alcoholic beverages: Both PepsiCo and Coca-Cola instead license brands to alcohol companies who manufacture the actual liquid, such as PepsiCo with Lipton Hard Iced Tea (via FIFCO USA) and Coca-Cola with Simply Spiked (via Molson Coors).
So what does Red Tree do? It’s a test balloon, of sorts.
As a “firewalled” subsidiary of Coca-Cola, it offers something of a legal and regulatory shield as the parent company explores new business opportunities.
It gives Coca-Cola a focused team working on beverage-alcohol partnerships.
Red Tree’s staff can also explore how to have greater influence over how Coca-Cola’s billion-dollar brands are licensed and marketed, which presumably includes alcoholic versions.
While the alcohol and soft drink industries keep close eyes on any regulatory changes, Red Tree at the least gives Coca-Cola a more formal seat at a table where decisions are being made regarding products that carry its valuable brand names. Under the current licensing structure, alcohol companies who partner with Coca-Cola (Molson Coors, Constellation, Brown-Forman) have most of the decision-making power. According to a Coca-Cola spokesperson, these partners are “solely responsible for manufacturing, marketing, selling, and promoting these products.” It’s a lucrative deal for those companies, leveraging the decades of brand recognition that Topo Chico, Fresca, and Coke have built. No doubt Coca-Cola would like greater say in products that carry such cachet.
“In a partnership like [canned] Jack and Coke cocktails, you don’t want either to lose brand equity,” says Charles Nouwen, founder of Peer to Beer consultancy and a 20-year veteran of Anheuser-Busch InBev’s innovation division. “Coke wants to go big but they’re going step-by-step and understanding—through Molson Coors, Constellation, and Brown Forman—about how the three-tier system works in the U.S. and how to play in that space.”
WHY IT MATTERS
If PepsiCo jumped into the alcohol pool, Coca-Cola is splashing in the shallow end—for now. With more soft drink and energy brands spinning off into alcoholic versions of core products, there’s something of a Wild West rush to get involved and cash in as regulators debate policies that could slow growth later on. This is a clear sign Coca-Cola at least wants an opportunity to get more involved and it makes sense—PepsiCo (No. 1) and Anheuser-Busch InBev (No.2) are the top-two beverage companies in the country by revenue and until now, Coca-Cola (No. 3) didn’t have significant skin in the alcoholic beverage game. Practically every top-10 business in this sector aside from Coca-Cola is entirely in alcohol or has strong connections.
“It seems like Coke’s strategy is probably a bit less to bite off at this early stage,” says Danny Stepper, co-founder and CEO of L.A. Libations, a beverage creator, incubator, and accelerator. (Stepper has worked with Coca-Cola on beverage-alcohol partnerships, and Molson Coors is a minority investor in L.A. Libations.) “I think they created this entity to give them the flexibility to legally do what they want to do.”
Coca-Cola declined to make anyone available for interviews regarding Red Tree, but a spokesperson called the subsidiary “the next logical step” as the company continues “deliberate and disciplined experimentation in alcohol.”
By now, even a casual shopper can be aware of the convergence across alcoholic and non-alcoholic beverage brands that have resulted in the likes of Sunny D Vodka Seltzer, Simply Spiked Lemonade, and Lipton Hard Iced Tea. Beverage companies themselves are following a similar trajectory, with traditionally non-alcoholic companies such as Coca-Cola and PepsiCo dabbling in alcohol, and traditional alcohol companies such as Molson Coors Beverage Co. and Sierra Nevada Brewing Co. investing in non-alcoholic beverages.
“Every alcohol company wants to be a non-alc company and every non-alc company wants to be an alcohol company,” Stepper says.
But the regulations regarding alcohol distribution in the U.S. make this logistically complicated. For one, non-alcoholic beverage companies can pay slotting fees to retailers in exchange for shelf placement; alcohol companies can’t. Non-alcoholic beverage makers can also outright own their distributors, as Coca-Cola and PepsiCo do with their bottlers, while alcohol companies can’t in most states (and in places they can, there’s a limit to how many companies they can own outright.)
PepsiCo chose to challenge the conventions of that system when it created Blue Cloud, which led to blowback from existing beer distributors and state regulators. Jim Koch, founder of Boston Beer (PepsiCo’s manufacturing partner for HARD MTN DEW) told the Beer Insights Seminar in November that regulators in 20-30% of states could block distribution of HARD MTN DEW. These blocked or delayed applications for wholesaler permits hindered the national rollout Blue Cloud had planned for HARD MTN DEW. Coca-Cola has the benefit of watching PepsiCo test these choppy waters first.
“Being the big guy, Coke can be very fast followers,” Nouwen says. “They’re not trying to create the market. This gives them a chance to see how regulation will progress.”
In contrast to Blue Cloud, Red Tree has drawn less outright criticism from regulators and trade groups, likely because it’s not distributing alcoholic beverages. The National Beer Wholesalers Association has had sharp words for Blue Cloud: At its annual conference last year, NBWA CEO and president Craig Purser accused Blue Cloud of marketing crossover beverage products to children and “catching a free ride” with regard to the slotting fees PepsiCo can legally pay for its soft drinks. But the NBWA appears to be taking a wait-and-see approach to Red Tree.
“NBWA has always supported more alcohol producers entering the regulated alcohol industry,” an NBWA spokesperson said in a statement. “We look forward to learning more about Coca-Cola’s plan for Red Tree to enter the space.”
The question is how much control Coca-Cola will want in the future over the manufacturing and distribution of its branded alcohol products. While Coca-Cola isn’t saying so explicitly, it would create huge efficiencies in terms of manufacturing and transportation if it were able to consolidate operations across soft drinks and alcoholic beverages. Currently, Coca-Cola-affiliated third-party bottlers make and distribute sodas to stores nationwide, while Coca-Cola licenses its brands to external alcohol companies who make Coke-branded alcoholic products, then put them on third-party wholesaler trucks for delivery to the same stores.
“If you look outside the U.S., all of it is delivered on the same trucks. Just not here,” Stepper says.
Perhaps no company is more entwined in this realm with Coca-Cola than Reyes Holdings, the corporate parent of a Coca-Cola bottling division and a beer wholesale division that carries a number of Coca-Cola-branded alcohol products. Reyes also owns the largest—and arguably the most powerful and influential—beer distribution company in the country. Consolidating even part of these operations would create massive cost savings. But right now, both Coca-Cola and Reyes deny any changes to the status quo.
“This does not impact how we currently operate on the alcohol or non-alcohol sides of our business. We will continue working with our suppliers to distribute their brands,” Reyes Holdings said through a spokesperson.
This is another area where PepsiCo was potentially a cautionary tale. PepsiCo took a step toward vertical integration with Blue Cloud by distributing an alcoholic product that carries its licensed brand. But it quickly found out how rigid those regulatory structures still are. While Coca-Cola waits to see whether regulations change or PepsiCo alters its Blue Cloud strategy, Red Tree builds a less controversial structure for whatever comes next.
“Coke figured out that this is probably the best play that will enable them to get into alcohol today,” Stepper says. “I don't know that licensing [their brands to alcohol companies] is the long-term play but I think it’s the way to help them get into it now.”
Words by Kate Bernot