As inflation soars, how is AriZona iced tea still 99 cents?

Gas is four bucks a gallon on Long Island, and nearly six bucks in California. Groceries are 8% higher than last year. Dollar stores: now dollar-and-a-quarter stores.

But a giant, 23-ounce can of AriZona iced tea still costs 99 cents, the same price it has been since it hit the market 30 years ago. Today, that’s cheaper than most bottled water, 20-ounce sodas, iced teas and canned coffees on the market. 

How does Woodbury-based  AriZona pull this off while everything else goes up? The price of aluminum has doubled in the last 18 months. The price of high fructose corn syrup has tripled since 2000. Gas prices are pumping up delivery costs. But the 99-cent Big AZ Can, as the company calls it, persists.

The short answer: the company is making less money. The big cans are still profitable, but for the moment, they’re much less so than a few years ago.

Don Vultaggio, the 70-year-old, 6-foot-8 chairman of the company, is choosing to take a haircut in order to keep the price flat and cans moving.

“I’m committed to that 99 cent price — when things go against you, you tighten your belt,” Vultaggio said this month. Even though his costs are higher, “I don’t want to do what the bread guys and the gas guys and everybody else are doing,” Vultaggio said. “Consumers don’t need another price increase from a guy like me.”

He has the power to make a call like that because AriZona is one of the few independent private companies remaining in the consolidated world of nonalcoholic packaged beverages, a market dominated by PepsiCo, Coca-Cola, and Keurig Dr Pepper, which owns Snapple.

Vultaggio, a Brooklyn native with the accent to prove it, got the idea for the tea company when he was running his route as a beer distributor in Manhattan. He noticed that people were drinking Snapple, even though it was freezing outside. He decided to get into the iced tea business then and there.

Today, he co-owns the company with his sons, Spencer and Wesley, who serve as chief marketing officer and chief creative officer, respectively, and joined him on an interview call. Forbes puts their combined net worth at over $4 billion, all from AriZona, placing them among the thousand richest people in the world.

The company sells about 1 billion 99-cent cans each year, Vultaggio said, which makes up about 25% of its total revenue. Its fruit drinks, energy drinks, bottled teas, snacks, hard seltzer, and other offerings move less volume, but have higher prices and higher margins.

When Vultaggio started out, Snapple also charged 99 cents for its signature 16-ounce glass bottles. AriZona was cheaper, but only because it contained 50% more tea per can. Now, a Snapple is $1.79. An 18.5-ounce container of Gold Peak, Coke’s brand, costs $1.99. Pure Leaf, the upscale Pepsi-Lipton label, goes for $2.09.

AriZona products commanded nearly 16% of the ready-to-drink tea market in the U.S. by volume in 2020, second only to PepsiCo’s slate of Lipton, Pure Leaf, and Brisk. That amounts to 255 million gallons, according to Beverage Marketing Corp. 

Vultaggio’s calculation is that raising prices and losing customers in the process just isn’t worth the short-term profit. “Your company has to deal with cost increases, but your customers have to deal with cost increases too,” Vultaggio said. “And if you break their back, nobody wins.”

AriZona’s 30-year run at 99 cents is exceptional, but the record for longest-holding beverage price still goes to Coca-Cola, which held the cost of a 6.5-ounce bottle at five cents for more than 70 years, from 1886 to 1959.

AriZona has been committed to 99 cents since 1996, when it started printing the price directly on cans to stop retailers from raising prices on their own. Since then, it has used scale, technology and constant tweaks to the business to keep costs down and revenues rising.

Some of the key changes, Vultaggio said: back in the day, only one factory made the huge cans — now, there are multiple suppliers competing on price, and can technology has changed to reduce the amount of aluminum in each by 40%. The company has streamlined operations, using its own factory in New Jersey, which can churn out 1,500 cans per minute, for much of its product. Company trucks mostly make deliveries in the middle of the night to avoid traffic.

But the economics right now are brutal.

The company charges wholesale distributors a little more than $12 per 24-can case, or 50 cents a can (AriZona declined to share how much it charges retailers it distributes to directly, but distributors charge about 70 cents per can to their customers). With just that stack of pennies to work with, every cent counts.

In the last 18 months, the cost of aluminum has gone from $1,750 per metric ton to nearly $3,250. Shipping, taxes, and other expenses for aluminum doubled in the past two years to $880 per ton.

With about 23 grams of aluminum per Big AZ Can, that means the price of metal alone has gone from nearly 5 cents up to 9.5 cents a pop — when you’re selling a billion cans a year, that’s $45 million down the tubes.

The Vultaggios declined to break down exactly how much their costs have risen per can. They did say that the company typically hedged aluminum prices to offset costs, but those hedges expired. Now, it’s exposed to the full brunt of the global commodity price.

The prices of tea, water, high fructose corn syrup, honey, citric acid, and flavorings have remained fairly flat in recent years, but over the long term the pressure has grown. High fructose corn syrup has risen from around 15 cents per pound 20 years ago to more than 45 cents today, amounting to a roughly 3-cent increase per can. That small change, times a billion, equals an additional $30 million eaten away.

One of AriZona’s largest cost savings isn’t in the can or the corn syrup, however: it’s in the marketing.

“Most brands in America today believe they have to go out and have a Super Bowl commercial or do traditional advertising,” Vultaggio said. “When we first started, I didn’t have the money for that — so each can had to be like a billboard. That’s why I chose the big can. It stood tall.”

To this day, the company has kept its marketing budget to a minimum and its entire operation lean, with only about 350 people on staff at its Woodbury headquarters and 1,500 companywide.