Blue Cloud, a division of PepsiCo, announced recently that it would no longer distribute liquor. It is shifting away from distribution to concentrate on its brand licensing of Hard Mountain Dew and Lipton Hard Ice Tea.

This in itself seems like a minor occurrence, but the real story is how we got to this crossroads. Attacks by the wholesale industry, specifically the beer wholesalers, led to the demise of Blue Cloud. The influence of the beer wholesalers led to governmental harassment of Blue Cloud, which eventually led PepsiCo to throw up its hands and fold. In other words, government agencies did the bidding of the beer wholesalers to influence the marketplace.

Scare tactics were used showing Hard Mountain Dew next to Kool-Aid Jammers and below a Hot Wheels display. Ironically, beer wholesalers never much employed these tactics before, nor did they call out the retailer responsible for the placement of product for sanction.

The wholesaler lobby also took the position that PepsiCo, as a manufacturer owning a distribution company, violated the principles of the three-tier system. What they did not prove out is whether PepsiCo manufactured any product. The reason being is they couldn’t because PepsiCo was not the manufacturer of product, it licensed out its brands to Boston Beer and FIFCO, who in turn manufacture the brand. Licensing a brand to a manufacturer does not make one a manufacturer, it makes one a brand owner, and there is no three-tier violation for a wholesaler owning a brand.

Finally, the wholesaler tier advocated against Blue Cloud based on the potential that PepsiCo could us its chips portfolio (PepsiCo owns Frito-Lay) to pay slotting fees as a way to get Hard Mountain Dew or Hard Lipton Ice Tea on the shelf. In liquor, it is illegal to pay slotting fees to a retailer to get product on the shelf, but in the potato chip world, this is a legal and everyday practice.

The propaganda and scare tactics became effective as states like Florida and Georgia denied Blue Cloud a license, and the Virginia ABC issued an adversarial ruling against Blue Cloud’s business interest.

Why this matters

One must wonder what the standard is for denying a license and how this impacts the ability for someone to enter the marketplace. Blue Cloud was denied a license based on what could happen and that the regulator was convinced, what would happen if they were issued a license.

If the standard for denying a liquor license is what could happen, then every entity applying for a liquor license should be denied, as every licensee has the potential to violate state liquor laws. Second, we must ask ourselves when does the regulator’s judgment of unscientific probability get to decide who is issued a license. Shouldn’t the license be issued and if there are violations, then the offender gets due process and is able to defend itself. Unless prohibited by statute or some extreme circumstance, anyone applying should be issued a license. However, in Blue Cloud’s case, it seems the government regulators in numerous states decided this issue based on their beliefs in probability, instead of letting the facts play itself out. Somehow the government regulator stepped into the role of Nostradamus. One must ask who is running and influencing government agencies that are supposed to be impartial.

Southern dilemma

Southern Glazer Wine and Spirits is being subject to a witch hunt by the out-of-control Federal Trade Commission (FTC). The FTC focused its attacks on whether Southern violated the Robinson-Patman Act, an obscure act, which prohibits a supplier from offering better prices to retailers at the expense of smaller competitors. Specifically, the investigation is focused on whether Southern engaged in discriminatory practices when it offered better pricing terms to large retail chains versus smaller retailers.

The FTC is utilizing an obscure law to punish Southern for operating in accordance with sound market principles. Those who purchase more have more bargaining power and the ability to get better pricing. Why wouldn’t Southern offer a large retailer better pricing terms as this makes sense, whether one is selling alcohol or selling matches. But it seems the FTC is somehow going to become the marketplace arbitrator on behalf of the liquor marketplace.

Dangerous precedents

Blue Cloud and Southern seem to be at the opposite extremes of the spectrum, but when looked at more closely, they have a lot in common.

I can’t say I am the biggest Southern fan, but when the government attacks them unfairly, I need to come to their defense, because today it may be Southern, next time, it may be a player, I favor more. Regardless of whether it is Southern or some online marketplace, what wrong is wrong, and if the government is going to set and influence the marketplace, then I think we are going down a wrong road.

Blue Cloud stands for the proposition that the government can deny one a place in the market, if they make a judgment call on one’s probability to violate the law.

Of course, this is concluded through inference and without concrete evidence.

These are bad trends and are terrible for the industry. Some may celebrate the results, but be careful of the methods used, as it may come back to bite you.