Why PepsiCo’s and Coca-Cola’s Alcohol Drinks Worry Health Experts

JOHNSON CITY, Tenn. — On a quiet street corner, a sign marks the birthplace of a beverage behemoth: Here, in 1954, the Tri-City Beverage Corporation bottled its first case of Mountain Dew.

The soda was originally uncolored and lemon-lime flavored, and its inventors used it as a mixer with bourbon. “Mountain dew” is also a nickname for moonshine, which farmers sometimes processed from leftover crops. Labels on early soda bottles promised it was “specially blended in the traditional hillbilly style.”

It wasn’t until after PepsiCo bought the company in 1964 and eventually built a global youth-oriented brand, one marketed by extreme sports athletes, that the soft drink left its Appalachian roots behind.

In a way, Mountain Dew came full-circle last year when PepsiCo turned the brand toward a new alcoholic beverage: Hard Mtn Dew. At a One Stop Wine and Spirits frequented by students from East Tennessee State University, the new 24-ounce cans are prominently displayed. Although the brew bears little resemblance to its ancestor, its alcoholic content is “exactly what Mountain Dew is all about,” Charles Gordon Jr., owner of Tri-City Beverage, said.

Hard Mtn Dew reflects a major change in the alcohol industry, which for the last century mainly produced drinks categorized as beer, wine or spirits. In recent years, those lines have blurred, and a fourth category of ready-to-drink beverages has emerged — hard seltzers and other flavored malt beverages, wine coolers and canned cocktails. Although these products differ in primary ingredients and how the alcohol is processed, all typically are flavored and packaged for casual consumption.

This isn’t the first time a new type of alcoholic beverage exploded in popularity but some earlier fads were associated with single products like Zima, Smirnoff Ice or Four Loko. “It’s only really in the last three to four years that it’s become a major category,” Nadine Sarwat, a beverage analyst at Bernstein Research, said.

Sales of hard seltzers and ready-to-drink canned cocktails were valued at nearly $10 billion in 2021 by the Grand View Research firm, which expects them to grow by double digits in coming years. And in a major shift, PepsiCo and Coca-Cola have debuted alcoholic products in the U.S. market. In February, Monster Beverage, a maker of energy drinks, began rolling out its first line of alcoholic drinks called The Beast Unleashed.

But as alcohol-related deaths in America reach record highs, regulators and public health experts are voicing concern that the new class of drinks and the expanding industry could alter how people buy and drink alcohol. Some also expressed worry that the convenience of the new products could reverse the long-term decline in alcohol consumption by young people. And recent studies show that consuming even one alcoholic drink a day increases a person’s risk of cancer and heart disease.

Coca-Cola and Monster Beverage declined repeated requests for comment, and PepsiCo referred questions about products bearing its brands to the independent companies that it had licensed to manufacture and market them.

Pamela Trangenstein, a scientist with the alcohol research group at the Public Health Institute in California, recently supervised a study at college football games. She described a sea of empty White Claw hard seltzer cans covering the floor of a student section at one stadium.

“The carbonation and sugar content can make it taste like you aren’t drinking alcohol,” she said.

Major alcohol producers like Anheuser-Busch InBev and Diageo have invested heavily in this category, but the moment has also presented traditional soda makers with a tantalizing new market, Ms. Herzog said. In addition, manufacturers and distributors make a higher profit per case of alcoholic beverages than for nonalcoholic drinks, according to Kevin Asato, a beverage industry consultant.

In 2018, Coca-Cola dipped a toe in the market when it introduced Lemon-Dou in Japan, the first hard drink among its brands since the 1980s. In 2020, the company paired with Molson Coors Brewing Co. to make Topo Chico Hard Seltzers, and last year, Coca-Cola entered into agreements to produce Fresca Mixed cocktails, Simply Spiked Lemonade and a canned Jack & Coke.

On an earnings call on Feb. 14, James Quincey, chief executive of Coca-Cola, cited its “early alcohol experiments” like Jack & Coke, scheduled for sale in California at the end of next month, as a way for the company to be “a total beverage company — everywhere.”

By licensing its soft drink brands to established alcohol makers for sale through existing distributors, Coca-Cola kept within the lanes of the regulatory firewalls that separate alcohol producers, distributors and retailers. This three-tier system has characterized the U.S. alcohol industry since the repeal of Prohibition and is intended to prevent a single company from vertically integrating and suppressing its competitors.

PepsiCo, in contrast, has attached fewer of its brands to new alcoholic drinks — just Hard Mtn Dew and Lipton Hard Iced Tea, so far — but has shown greater willingness to disrupt the status quo.

The company established a wholly owned subsidiary, Blue Cloud Distribution, to keep more control over sales and marketing, and a greater share of the profits. The venture involved hiring more than 250 employees, obtaining individual state licenses to distribute alcohol and a fleet of trucks.

To comply with the three-tier system, PepsiCo licensed Mountain Dew’s brand to the Boston Beer Co. and provided it with Mountain Dew flavoring. That way, PepsiCo is independent from production and can instead control distribution.

Not all states have approved of the arrangement. Last spring, regulators in Kentucky and Georgia denied Blue Cloud distributor licenses, ruling that Blue Cloud had blurred the lines between manufacturer and distributor. Indiana regulators denied Blue Cloud a comparable license last month.

Jeff Birnbaum, a spokesman for Blue Cloud, pointed out that Hard Mtn Dew and Lipton Hard Iced Tea are both manufactured and marketed by separate companies, in accordance with the three-tier system.

Local beer distributors have also tried to block the new competition. In October, beer wholesalers in Nevada and Virginia filed complaints with regulators asking them to revoke Blue Cloud’s licenses.

And in December, independent beer distributors appealed to federal regulators, calling on the Treasury Department’s alcohol and tobacco tax bureau to investigate whether retailers were giving soft drink companies more favorable treatment of their alcoholic products. Soda companies routinely pay retailers so-called slotting fees for prominent placement of their products, but doing so for alcoholic beverages would violate the three-tier system, the distributors argued.

They also provided photographs of what they called “inappropriate placement” of Hard Mtn Dew in stores, shown next to children’s juice boxes and toy cars.

Mr. Birnbaum, a spokesman for Blue Cloud, said the company did not dictate to retailers how to display its drinks, but urged them to avoid confusing alcoholic and nonalcoholic products and to correct improper placement. He also noted Hard Mtn Dew was priced and packaged in line with other malt-based ready-to-drink alcohol beverages, and “boldly says on its label that it is for individuals 21 and older.”

Excess drinking already kills more than 140,000 Americans each year, according to the latest estimates, far surpassing drug overdoses or firearm deaths.

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