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Boston Beer and Pepsi's New Hard Mountain Dew Could Already Be in Trouble

By Rich Duprey – Updated Oct 21, 2021 at 11:13AM

Key Points

  • Hard Mtn Dew will be distributed to stores, bars, and restaurants through a new wholesaler JV.
  • The new company could run afoul of the archaic three-tier alcohol distribution system in the U.S.
  • It could also rankle Boston Beer's existing distribution network.

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Prohibition-era regulations may stop the new hard soda brand from seeing the light of day.

There was already good reason to doubt the new Mountain Dew branded hard soda collaboration from Pepsico (PEP -0.08%) and Boston Beer (SAM -3.78%), but the alcoholic beverage may already be in trouble even before it's had a chance to roll off the production line. 

Archaic Prohibition-era regulations could kill the drink, or at the very least cause problems with distributors for the two beverage companies. This hard soda just might be a hard sell.

Woman checking in a keg

Image source: Getty Images.

A beverage whose time has come and gone? 

Pepsi and Boston Beer announced this summer they were forming a joint venture to produce an alcoholic version of the neon green soda called Hard Mtn Dew, a flavored malt beverage that will have 5% alcohol by volume.

Although hard soda had a brief burst of popularity, it suffered what Boston Beer chairman Jim Koch described as a "boom-splat phenomenon." Sales soared as consumers searching for an alternative to beer latched on to the brewer's Coney Island Brewing brand of hard soda, along with those of Pabst Brewing's Not Your Father's Root Beer, Molson Coors' Henry's, and craft brewer Saranac's Jed's Hard.

But consumers ended up abandoning hard soda over concerns about sugar, which is one reason hard seltzer took off. Some consumers saw it as a lighter, fresher, and healthier alternative to soda or beer.

Although Hard Mtn Dew will be sugar-free, with natural and artificial flavors, diet soda sales haven't exactly been lighting the world on fire, and with consumers more health conscious than ever, especially after the pandemic, a hard soda seems to be a step in the wrong direction.

The U.S.'s three-tier alcohol distribution system won't help, either.

Taking the long road to market

A relic of Prohibition's aftermath, the three-tier system prohibits brewers, distillers, and vintners from selling alcohol directly to the public. It requires them to first sell their booze to a distributor or retailer who can then turn around and actually sell it to drinkers. When you hear brewers talking about depletions, this is what they mean: sales to a middleman -- the middle tier -- that they're forced to use.

The required use of wholesalers results in less competition and drives up alcohol's cost. A few years ago Huffington Post explained how this archaic system makes a six-pack of craft beer cost $12 or more, or double what a mass-produced beer from a macro brewer goes for. Wholesaler and retailer margins account for more than half the cost.

While distributors play an important role in getting beer moved around the country -- they're the reason many local and regional craft beers are able to become nationally popular -- they're doing so from a government-protected vantage point. And now it might flatten Hard Mtn Dew.

Cans of Hard Mtn Dew

Image source: Boston Beer.

Entering in through the back door

When Pepsi and Boston Beer came together to produce the hard soda, Pepsi formed an entity called Blue Cloud Distribution that will be responsible for selling, delivering, and merchandising Hard Mtn Dew.

While Pepsi will use the wholesale operations to ship the beverage to retailers, Boston Beer will produce the hard soda in its facilities and will continue to use its regular distribution network to put the hard soda in package goods stores, bars, and restaurants.

Existing distributors are likely fearful that Blue Cloud will essentially allow Pepsi to bypass the three-tier distribution system and act as its own wholesaler and sell directly to retailers.

Pepsi chairman and CEO Ramon Laguarta essentially said as much when he told analysts, "We have an opportunity to create a distribution system in the U.S. that is quite unique in the sense that it would be an integrated distribution system that can make coordinated decisions across multiple states from one decision point, and that could be, I think, competitively advantaged."

Indeed, if it's able to distribute both alcohol and soda to its network of retailers, it would have a huge leg up on its rivals because that would give it a deeper, broader truckload of products. Boston Beer, on the other hand, will be putting itself in competition with its own distributors, not a good spot to be in as they might be less likely to fight for shelf space for the brewer's brands, especially its Truly products.

Woman looking at beer bottles in liquor store

Image source: Getty Images.

Setting up a conflict of interest

When Anheuser-Busch InBev (NYSE: BUD) was acquiring SABMiller, it found itself in the middle of a Justice Department investigation over its acquisition of five distributors in three states that craft brewers said made it difficult for them to put their beer on liquor store shelves. The megabrewer was accused by craft brewers of prioritizing its own craft beers over those of the competition by using the newly acquired distributors.

The Wall Street Journal also said at the time Anheuser-Busch was offering its distributors incentives worth millions of dollars if they stocked its products almost exclusively. The Justice Department finally had Anheuser-Busch enter into a consent decree saying that it would stop trying to monopolize the market.

It's possible Pepsi and Boston Beer could face a legal challenge to the distribution joint venture. Although Blue Cloud is applying for wholesaler licensing, that might be seen as within the letter of the law but not the spirit.

The three-tier system should be dissolved in favor of a competitive model that would allow for such innovation. That it has stood for nearly a century without too much pushback, though, suggests it could cause Hard Mtn Dew to falter right out of the gate.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV and Boston Beer. The Motley Fool has a disclosure policy.

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