Is Blue Cloud the New Uber?

Uber earned their spurs by challenging regulations throughout the country, which protected cab companies from competition. Cab companies were highly regulated and the barrier to entry to their marketplace was significantly high. In order to get into the market, someone needed to purchase a cab medallion, which in 2014 New York City cab medallions were selling for $1 million.

With barriers to entry high, the cab companies’ marketplace seemed impenetrable. And then came Uber, which challenged the system and overcame government actions directed at it, such as cease-and-desist orders. Uber and other ride sharing apps became so popular that revenue for New York cabs fell by more than 30%. Those medallions that sold for $1 million in 2014, today those same medallions sell for $80,000.[1]

The old way of doing business crumbled and gave way to innovation, and was led by a well-funded company willing to take on the status quo.

Alcohol is not immune to challenges to the status quo and the biggest challenges may be coming not from a pesky startup, but an establish giant from another industry. With the entry of Coke and Pepsi branded alcohol products into the market, we may see a sea of change that could really upset the applecart.

In recent years, soft drink giant PepsiCo became licensed as a liquor wholesaler in many states through its Blue Cloud Distribution entity.

In addition to entering the alcohol space through distribution, PepsiCo has decided to enter into a partnership with Boston Beer Company, where Boston Beer Company will manufacture an alcohol fused version of Mountain Dew called Hard MTN Dew. Boston Beer Company will then appoint Blue Cloud as its distributor of the product. Although Blue Cloud has wholesaler licenses in over 17 states, Hard MTN Dew, according to its website is only available in Florida, Iowa, and Tennessee.[2]

Of course, the big question is, why the slow expansion when two iconic companies are behind an already popular brand?

The issue may come down to alcohol regulatory complexities. To some state regulators, this seems like PepsiCo is a manufacturer of the product and it is then wholesaling its own product, which is generally not allowed, as a tier violation. Except for limited self-distribution privileges, most states forbid a manufacturer from distributing its own product and requires them to appoint an independent wholesaler. In the liquor industry, it is a three-tier system and each tier is required to be independent of the other, lack of independence is often times considered a tier violation, which is illegal in many states. Of course, the controversy is whether PepsiCo is the manufacturer or whether it commits a tier violation by being connected to the manufacturer via a financial interest.

The interesting story as this plays out and PepsiCo seeks approval, is will PepsiCo become the new Uber?

State regulators may claim that PepsiCo is connected to the manufacturer via a financial interest and this may be enough in their mind to constitute interest in the manufacturing tier. If the state regulators conclude this and prohibit PepsiCo’s plans, what could be the end result?

In the non-alcohol world soft drink manufacturers produce and distribute their products, and the system works. Some in the alcohol space may disagree it works and point to the lack of soda options versus the plethora of alcohol options. But as I indicated before in a previous blog post, this is not an apples-to-apples comparison, so the analogy is sketchy.

So, if PepsiCo does not get its way, does it challenge a system that does not allow them to operate under the business model it has used for years in another industry?

Liquor wholesalers have a powerful grab on the legislature and have entrenched companies making millions, but they also have a formidable player on the other side in PepsiCo.

In the old days before Uber was founded in 2009, taxi cabs had a monopoly and with a valuable commodity such as a cab the medallion, nobody would have thought that a company fighting this system would prevail. But with a well-heeled campaign, Uber bucked the system.

The alcohol world changes slowly and major changes that could change the system are rare and hard to achieve. But the shockwaves that a giant like PepsiCo could create through its efforts, should never be underestimated.