Update, November 29, 2023: Blue Cloud has been dealt another regulatory blow in Virginia, with the state’s Alcoholic Beverage Control Authority (VABC) issuing a “final decision and order” that prohibits Boston Beer Co. from selling its Hard MTN DEW and Lipton Hard Iced Tea brands through PepsiCo’s wholesaler. The decision, first reported by Beer Marketer’s Insights, means Boston Beer must use its existing Virginia distributors, Premium and Blue Ridge, to sell those products. The VABC had ruled similarly this summer, at which point Boston Beer appealed the decision. This latest ruling appears to be the regulator’s final word on the matter.
It’s a huge setback for Blue Cloud, PepsiCo’s alcohol distribution arm, which only sells those two Boston Beer products in the Commonwealth. Beer Marketer’s Insights calls Blue Cloud’s Virginia operations “pretty much useless” following this ruling. Blue Cloud would have to either sign on new beverage-alcohol brands that don’t have distribution contracts in Virginia, or Boston Beer would have to terminate its contracts with existing beer wholesalers and move its business entirely to Blue Cloud in order to justify Blue Cloud’s existence in the state. Neither seems especially likely; however, this story will be updated should developments occur.
The original story follows.
THE GIST
A Virginia regulator has reached a decision that deals a sizable blow to Boston Beer Company and its business partner, Blue Cloud Distribution, PepsiCo’s new and controversial alcohol division. It effectively bars Blue Cloud from distributing Hard MTN DEW in the state. The ruling is the latest and most significant setback for what’s already been a choppy, piecemeal rollout for Hard MTN DEW, a flavored malt beverage (FMB) inspired by the beloved soft drink that was intended to make a national splash.
In a judgment issued July 26 reviewed by Good Beer Hunting, the Virginia Alcoholic Beverage Control Authority (VABC) ruled that Boston Beer—manufacturer of Hard MTN DEW—violated the state’s Beer Act (Va. Code § 4.1-503) by selecting Blue Cloud as its wholesaler rather than Boston Beer’s existing distributors in the state. The complaint had been filed by two of those wholesalers, Premium Distributors and Blue Ridge Beverage Company. They argued that they were Boston Beer’s existing wholesalers in particular geographies, but that the brewery chose Blue Cloud to distribute another of its brands, Hard MTN DEW.
The VABC agreed with the distributors’ central argument that state law permits a brewery to partner with only one beer wholesaler to distribute its brands of beer (or products taxed as beer, like FMBs) in a given geography.
Because of Boston Beer’s pre-existing business relationship with Premium Distributors and Blue Ridge, those distributors are legally allowed to bring new Boston Beer products into their portfolio.
Boston Beer, meanwhile, was arguing that Hard MTN DEW was a wholly new and separate brand, and assigning it to a different company didn’t violate state law.
As a result, the VABC ruled that Blue Cloud will no longer be able to distribute Hard MTN DEW on behalf of Boston Beer in areas where Boston Beer has existing distribution: “Boston Beer’s appointment of Blue Cloud as a distributor of the Hard MTN DEW brand in [sales territories covered by Premium and Blue Ridge] is hereby nullified.” The ruling also found that Boston Beer did not act in bad faith regarding its appointment of Blue Cloud, as Blue Ridge and Premium had alleged.
The ruling comes at a time when distribution or sales disruptions would hurt some summertime momentum for the Hard MTN DEW brand. In Virginia grocery, convenience, and other chain stores tracked by market research company Circana, Hard MTN DEW just had its best four-week period since it debuted in September 2022. A boost in sales volume has mostly come from the debut of Hard MTN DEW's Summerbox Variety Pack, which accounted for one-third of volume sales for Hard MTN DEW in the most recent four-week period.
Boston Beer declined to comment on the ruling. Blue Cloud did not return a request for comment.
WHY IT MATTERS
The VABC’s ruling is simultaneously detailed and vast. For a sample of how almost absurdly nitty-gritty the legal arguments are, consider that a significant portion of the arguments made during the hearing revolved around the legal meaning of the word, “its,” and any implication “its” has in reference to previously established beer brands made by Boston Beer. A sample: “The Petitioners have argued that ‘its’ is a determiner and the use of ‘its,’ unmodified by any other determiner, is plainly understood to refer to all of Boston Beer’s brands. Boston Beer, meanwhile, has argued that ‘its’ does not function as a determiner and that the absence of any determiner preceding ‘brands’ leaves Va. Code § 4.1-503 ambiguous.”
Precise language aside, the ruling has national implications.
“This will reverberate across the country,” says Kevin Anderson, a consultant with BreweryCompliance.com and a former special agent with the VABC. “Millions of dollars are at stake. It’s going to be a hot-button issue everywhere.”
Anderson says that Virginia is considered a model for other states’ alcohol codes, so the VABC’s ruling against Boston Beer and Blue Cloud not only hinders their partnership in the Commonwealth, but also serves as a cautionary tale for other soft-drink-and-alcohol crossovers. Regulatory hurdles are part of the reason Coca-Cola has structured its new alcohol subsidiary, Red Tree Beverages, differently from Blue Cloud. Rather than acting as a distributor, Red Tree will instead advise on the licensing partnerships that Coca-Cola has with alcohol companies such as Constellation Brands (Fresca Mixed) and Molson Coors Beverage Company (Topo Chico Hard Seltzer).
According to a VABC spokesperson, Boston Beer has not yet appealed the VABC’s decision; it has until August 25 to do so. Anderson expects Boston Beer would appeal, in which case the matter would then go to another hearing at the VABC, and potential appeals could continue up to Circuit Court. He says he was surprised by the ruling, as he had been told in the past by the VABC that a brewery and the brands its brews are distinct: He noted examples when small breweries launched hard seltzers and assigned them to new distributors (in the same territories where they have existing wholesaler contracts) with express clearance from the VABC.
“I was always under the impression that technically a brand and a brewery who brews it are distinct,” he says.
The National Beer Wholesalers Association (NBWA) disagrees. Through a spokesperson, the NBWA said it was not surprised by the Virginia ruling.
“Virginia law, as well as laws in many other states, is clear regarding the relationship between beer suppliers and their existing distributors,” the spokesperson wrote via email. “While we always welcome new entrants into our nation's alcohol market, the way that Pepsi’s Blue Cloud is attempting to do so continues to raise questions from regulators, legislators, industry members, consumers and public health groups.”
Whether Boston Beer appeals the decision or not, the VABC ruling adds to doubts about how significant a challenge Blue Cloud would be to the beer wholesale status quo. Nadine Sarwat, equity research analyst and director of European and American alcoholic beverages at Bernstein Autonomous LLP, told a panel at the National Beer Wholesalers Conference earlier this year that regulatory snags represent “an uphill battle” for Blue Cloud’s long-term success. According to reporting from Brewbound, Sarwat said at the time that Blue Cloud is unlikely to become “a meaningful threat” to the existing beer distribution system.
Words by Kate Bernot