THE MAN, THE CAN & THE PLAN

Ari­zona Bev­er­ages co­founder Don Vul­t­ag­gio rose from the streets of Brook­lyn to build a $3 billion iced-tea for­tune one 99-cent Tech­ni­color tall­boy at a time. All it took was star­ing down thieves, in­dus­try gi­ants and one very dis­grun­tled part­ner.

Forbes - - CONTENTS - BY CHASE PETER­SON-WITHORN

Lunchtime at Ari­zona Bev­er­ages. Don Vul­t­ag­gio and a half­dozen key lieu­tenants stream through the com­pany’s ec­cen­tric Long Is­land halls. A re­cep­tion desk shaped like a can, walls lined with steer skulls, a lounge mod­eled af­ter a New York sub­way sta­tion—all cranked out by a team of in-house wood­work­ers tasked with cre­at­ing campy of­fice decor. “Doesn’t it re­mind you of Willy Wonka’s fac­tory?” says one passerby, emerg­ing from a 1950s-diner-themed cafe­te­ria and strid­ing un­der a gi­ant ceil­ing clock made of gears.

Their des­ti­na­tion: Vul­t­ag­gio’s of­fice—wonka’s in­ner sanc­tum—with its pala­tial liv­ing room, over­size din­ing ta­bles and full kitchen. Ev­ery af­ter­noon, the tow­er­ing Vul­t­ag­gio (he stands closer to 7 feet than to 6) turns the place into a five-star restau­rant, tak­ing busi­ness meet­ings over a mul­ti­course, fam­ilystyle power lunch pre­pared by his chef, Ar­mando. “I had a guy come in here one day from a ma­jor com­pany and ask, ‘How big is your mar­ket­ing department?,’ ” Vul­t­ag­gio says with a smirk, div­ing into broc­coli-and-ched­dar soup while crack­ing open a can of Ari­zona’s Arnold Palmer Zero. “I said, ‘6-foot-8.’ ”

For­get pricey tele­vi­sion spots and ex­pen­sive bill­boards—don Vul­t­ag­gio knows what it takes to stand out. Grow­ing up in Brook­lyn, he was al­ways a head taller than his peers, a size-12 shoe by age 12. When he started brew­ing beer in the 1980s, he stirred up pub­lic­ity with racy posters and a malt liquor named af­ter the Sioux war­rior Crazy Horse that ended up be­ing banned by Congress fol­low­ing protests by Na­tive Amer­i­can groups. Then he jumped into the ready-to-drink tea in­dus­try in the early 1990s.

His in­no­va­tion—a 24-ounce tall­boy can of iced tea, dressed in flam­boy­ant pas­tels and priced at just 99 cents— was big­ger, bolder and a bet­ter bar­gain than the com­pe­ti­tion. It was a hit. And he hardly spent a dol­lar on ad­ver­tis­ing. “We took the mar­ket by storm, like out of nowhere,” the 65-year-old Vul­t­ag­gio says, seated among the rows of past and present Ari­zona cans and bot­tles that line his of­fice like pho­to­graphs of loved ones.

Last year Ari­zona sold more than 3 billion con­tain­ers of the stuff—an es­ti­mated $1.2 billion worth of Le­mon Tea, Green Tea, Arnold Palmer Half & Half and 85 other va­ri­eties of teas, juices, wa­ters and beers. That kind of scale makes Ari­zona the sec­ond-largest ready-to­drink tea brand in Amer­ica, be­hind only Lip­ton. It also makes Vul­t­ag­gio—who owns 100% of the com­pany with his two sons—a bil­lion­aire, worth an es­ti­mated $3 billion, enough to rank No. 264 on this year’s Forbes 400.

“They’re one of the few bev­er­age com­pa­nies that started from scratch and be­came a billion-dol­lar com­pany in the last 20 years,” says Michael Bel­las, chair­man of Man­hat­tan-based Bev­er­age Mar­ket­ing Corp., a con­sult­ing and re­search firm. “It’s one of the great suc­cess sto­ries.”

At least when ev­ery­one gets along. Other than its col­or­ful cans, the com­pany might be best known for the nearly decade-long bare-knuckle le­gal brawl be­tween Vul­t­ag­gio and John Ferolito, his friend and 50% part­ner for 40 years. A case study in how in­fight­ing can stran­gle even a mar­ket leader, the bat­tle took years to straighten out, re­sult­ing in one of the big­gest cor­po­rate dis­so­lu­tions in New York his­tory and, in 2015, a con­fi­den­tial set­tle­ment. The dust is just now set­tling. Mean­while, com­peti­tors like Gold Peak and Pure Leaf have el­bowed their way in, grab­bing mar­ket share while Ari­zona tried to get its house in or­der.

“We’re back to our fight­ing weight,” Vul­t­ag­gio says with a thick Brook­lyn ac­cent. Now in com­plete con­trol of the busi­ness, he’s mov­ing Ari­zona into new teas, food prod­ucts and in­ter­na­tional mar­kets, with his sights set on dou­bling the size of the com­pany in five years. “We’re ready to con­quer the world.”

VUL­T­AG­GIO AL­WAYS

knew he’d make it big. “I used to day­dream that I was go­ing to pull up in front of this big fac­tory,” he says, help­ing him­self to a plate of sal­mon fresh off Ar­mando’s grill. “The guard knows me. He wel­comes me and opens the gate to my fac­tory.”

Lofty am­bi­tions for a kid in 1960s Flat­bush, a work­ing-class neigh­bor­hood in a gritty bit of Brook­lyn. He spent his days bag­ging gro­ceries at a lo­cal shop af­ter school. His dad man­aged an A&P su­per­mar­ket and would some­times pull his son out of bed to go in­spect the crime scene af­ter the store had been robbed. Con­vinced a high school di­ploma would do lit­tle to make his day­dream a re­al­ity, Vul­t­ag­gio tried to drop out dur­ing his ju­nior year. He stuck it out for his mother’s sake, then got a job set­ting up in-store beer dis­plays for Piels, a lo­cal brew­ery run by one of his fa­ther’s old war bud­dies.

When the brew­ery folded in 1973, Vul­t­ag­gio went into the dis­tri­bu­tion busi­ness, of­fer­ing all the pop­u­lar brands so that small, cor­ner stores could pool their or­ders to meet brew­ers’ pur­chase min­i­mums. He found the per­fect part­ner in John Ferolito, a young beer dis­trib­u­tor he had met on his route, with whom he shared “grandiose ideas about busi­ness.”

The busi­ness they formed was any­thing but grandiose—a cou­ple of kids with a dingy Brook­lyn of­fice us­ing an

van to haul beer and soda to neigh­bor­hoods even dicier than their own. “We were like Star Trek,” Vul­t­ag­gio says with a chuckle, para­phras­ing the sci-fi fran­chise’s fa­mous phrase: “We worked where no man had ever been.”

It wasn’t easy. By Vul­t­ag­gio’s count they were robbed on about 100 oc­ca­sions—old bat­tle sto­ries he’s more than happy to re­count for lunch guests seated around his gi­ant ta­ble. There was the time some­one barged into the of­fice and or­dered Vul­t­ag­gio into the closet at gun­point. And the time they scraped to­gether enough money to buy com­put­ers, only to have them stolen even be­fore they were fully in­stalled. And the time a dis­grun­tled ex-em­ployee drove a truck off the lot in the middle of the night; Vul­t­ag­gio found him sell­ing stolen beer from the back of the truck six blocks away. Of­ten he and Ferolito would go af­ter sus­pects them­selves be­cause the cops had more im­por­tant things to do. “It was like the Wild, Wild West in those days,” re­calls Ilene Vul­t­ag­gio, Don’s wife of 41 years. “Ev­ery night the alarms would go off.”

In 1985, the part­ners moved into brew­ing, de­vel­op­ing a 40-ounce malt liquor called Mid­night Dragon and pro­mot­ing it with a poster of a young woman in red lin­gerie hold­ing up a bot­tle, a straw in her mouth. The cap­tion: “I could SUCK! on this all night.” Sleazy? Sure. But ef­fec­tive. Within a few years, they had dropped the other brands to sell Mid­night Dragon ex­clu­sively.

They pushed the en­ve­lope even fur­ther, launch­ing a sec­ond malt liquor, Crazy Horse, in 1992. With pack­ag­ing in­spired by old West­ern movies, it, too, would prove a hit—un­til a few months later, when protests by Na­tive Amer­i­can groups, who found the name of­fen­sive, led Congress to ban “the use of the name Crazy Horse on any dis­tilled spirit, wine or malt bev­er­age prod­uct.” Le­gal chal­lenges played out for years; Vul­t­ag­gio even­tu­ally set­tled with the groups in 2004 and re­named the drink Crazy Stal­lion. But by then, he had al­ready moved on.

Ari­zona iced tea was

born on a dreary Fe­bru­ary day in 1991. Vul­t­ag­gio was sell­ing Mid­night Dragon to a Man­hat­tan bodega when a Snap­ple truck pulled up and be­gan un­load­ing case af­ter case. “Iced tea in the win­ter­time?” he thought to him­self. “I’m go­ing into the tea busi­ness.”

He and Ferolito drove to a South Jersey plant to price out a 16-ounce lug­cap bot­tle and pa­per la­bel—just like Snap­ple. “On the way home I’m say­ing to my­self, ‘Why would cus­tomers buy me? They’re com­fort­able with Snap­ple,’ ” Vul­t­ag­gio says. “By the time we got off the park­way in Brook­lyn we had talked our­selves out of the tea busi­ness.”

So the idea spent two months on the back burner, all but dead un­til the part­ners came across a 24-ounce can of Ga­torade in a store. They rec­og­nized the type of can—schlitz used it for tall­boy beers—from their dis­tri­bu­tion days. “I said, ‘That’s the prod­uct!’ ” Vul­t­ag­gio re­calls. “Sell it at the same price as Snap­ple, 24 ounces ver­sus 16.”

Big­ger is bet­ter, he rea­soned. His suc­cess with malt liquor showed that bolder is bet­ter, too. For that he didn’t have to look far. He had al­ready turned his house in the Rock­away sec­tion of Queens into a struc­ture straight out of Santa Fe: white and turquoise stucco, pink polka-dot snakes nailed to the garage, a gar­den of cacti out front. The place stood out like a pas­tel sore thumb on a block of drab brick fa­cades— the per­fect blue­print for tack­ling an in­dus­try where mar­ket share is won and lost in the two sec­onds a cus­tomer takes to scan the cooler at 7-Eleven.

He and Ferolito bor­rowed that South­west style—de­cid­ing on the name Ari­zona be­cause it con­jures an im­age of dry air and healthy liv­ing—and set out to make the pack­ag­ing just as eye­catch­ing as Vul­t­ag­gio’s home. “Pas­tels had never re­ally been used at that point,” Vul­t­ag­gio says. “It was at­trac­tive—but, more im­por­tantly, dif­fer­ent.”

The first cans, le­mon and rasp­berry teas with bright pink and turquoise la­bels, rolled off the lines in May 1992. They were an overnight hit. Sales of Arold

izona bal­looned to 18 mil­lion cases in just three years. The part­ners rein­vested their profits and quickly added new fla­vors, in­clud­ing peach in 1994, mango in 1995 and a green tea with gin­seng and honey in 1996 that re­mains the com­pany’s most pop­u­lar prod­uct. By the early 2000s, Ari­zona was pump­ing out more iced tea than Snap­ple.

In 2002, Vul­t­ag­gio struck a deal to pro­duce the golf leg­end Arnold Palmer’s epony­mous half-tea, half-lemon­ade con­coc­tion. He ex­pected it to do well at golf cour­ses, but it took off in con­ve­nience stores and su­per­mar­kets, too. It’s still one of his best­sellers: Last year Ari­zona sold a half-billion units with Palmer’s face on them.

These days, new prod­uct ideas are of­ten formed over his daily lunches with key ex­ec­u­tives and his two sons, Wes­ley, 36, and Spencer, 33, who serve as chief cre­ative of­fi­cer and chief mar­ket­ing of­fi­cer, re­spec­tively. They of­ten scour Man­hat­tan, re­port­ing back on which drinks are tak­ing off and which are fiz­zling out. It helps keep Ari­zona ahead of trends— cru­cial when your big­gest com­peti­tors are global gi­ants like Coca-cola (Fuze and Hon­est Tea), Unilever/pepsi (Lip­ton) and Dr Pep­per (Snap­ple). To counter their economies of scale, Vul­t­ag­gio stays nim­bler, rush­ing prod­ucts to mar­ket in as lit­tle as 90 days com­pared to a year or more for his ri­vals.

He stays leaner, too. “We can work on a lot less be­cause our whole struc­ture is less,” says Vul­t­ag­gio. He still signs nearly ev­ery check the com­pany writes, ques­tion­ing each cost just like he did when he was on the streets of Brook­lyn strug­gling to get by, help­ing Ari­zona main­tain a net mar­gin of around 15%. To keep the tall­boy cans at the fa­mous 99-cent price, Vul­t­ag­gio has worked with man­u­fac­tur­ers to thin them by 50% and has started hedg­ing alu­minum fu­tures. To keep ship­ping costs down, he runs light­weight trucks at night to avoid city traf­fic and per­fected a hy­brid dis­tri­bu­tion model in which Ari­zona de­liv­ers some goods itself while oth­ers go to distrib­u­tors or even straight into the ware­houses of big chains like Walmart or Costco.

“We do busi­ness with many of his com­peti­tors,” says John Vac­caro, pres- ident of Bet­t­away, a lo­gis­tics firm that han­dles about 90% of Ari­zona’s ship­ping. “Usu­ally two, three, four years af­ter we do some­thing with Don, some­one else is do­ing some­thing sim­i­lar.”

For ex­am­ple, Vul­t­ag­gio was quick to move his ware­houses from high-rent ur­ban ar­eas to the sub­urbs, send­ing nightly ship­ments into the city. He has also been for­ward-think­ing about fleet man­age­ment, buy­ing his own trucks and pay­ing oth­ers to op­er­ate them, thus elim­i­nat­ing ex­tra markups on his ship­ping bills.

And un­like some of his larger ri­vals, which shoul­der the costs of op­er­at­ing hun­dreds of fac­to­ries around the world, Vul­t­ag­gio owns only one plant, in Maple­wood, New Jersey, which han­dles much of the com­pany’s busi­ness in the North­east. The rest of his bev­er­ages are brewed world­wide by some 70 in­de­pen­dent drink mak­ers. “The sim­ple math says if you get the price that makes a consumer want to buy it and buy it again, and the com­pe­ti­tion doesn’t look as good or taste as good, you’ve got a busi­ness,” Vul­t­ag­gio says.

it ALL nearly FELL APART

over the past decade, when a feud be­tween Ferolito and Vul­t­ag­gio brought Ari­zona to a screech­ing halt. Like most di­vorces, this one had deep and tan­gled roots. The prob­lems seem to have be­gun when the part­ners re­lo­cated from their cramped Brook­lyn of­fices to Long Is­land in 1994, length­en­ing Ferolito’s schlep from his New Jersey home. In le­gal doc­u­ments Ferolito claims that prior to the move Vul­t­ag­gio had largely con­fined him­self to over­see­ing the ware­house but now be­gan in­volv­ing him­self in broader cor­po­rate af­fairs. Per Ferolito, the two butted heads over man­age­ment styles and de­ci­sion mak­ing, and Vul­t­ag­gio started to “mis­treat” him, “re­fus­ing to meet with him or take his calls and de­lib­er­ately avoid­ing him at the of­fice.” Vul­t­ag­gio dis­putes these claims, say­ing that by the time they re­lo­cated he was al­ready run­ning the show and Ferolito had

with­drawn from daily operations.

Even­tu­ally, the part­ners signed an agree­ment in 1998: Vul­t­ag­gio would han­dle the day-to-day, but Ferolito would re­main a 50% part­ner, en­ti­tled to half the profits and half the vote on ma­jor de­ci­sions. Vul­t­ag­gio kept ex­pand­ing Ari­zona; Ferolito spent more time play­ing golf and over­see­ing his per­sonal in­vest­ments, in­clud­ing a course in Colts Neck, New Jersey. “Then one day he said, ‘I want to sell our busi­ness,’ ” Vul­t­ag­gio says. “I tried to talk him out of it.”

But Ferolito per­sisted, so the two ex­plored sell­ing Ferolito’s half to a multi­na­tional that could be a strate­gic part­ner. Prob­lem was, Vul­t­ag­gio runs the place like an ex­ten­sion of him­self. He loves to hire friends and fam­ily and cook pan­cakes and omelets for his nearly 300-per­son staff on his birth­day. The manda­tory dress code that day: pa­ja­mas. He even wall­pa­pers hall­ways and some­times pastes the de­cals on trac­tor-trail­ers him­self. The big suit­ors wanted some­thing Vul­t­ag­gio re­fused to give up: con­trol.

“I’ve seen what large com­pa­nies have done to en­tre­pre­neur­ial com­pa­nies,” Vul­t­ag­gio scoffs. “Some­times they do well but most times not. They take the en­trepreneur’s spirit, throw it in the garbage and fold it into their cor­po­rate phi­los­o­phy.” Need­less to say, Vul­t­ag­gio blocked the deals.

Next came an avalanche of le­gal fil­ings, beginning in 2008: claims by Ferolito that Vul­t­ag­gio and the ex­ec­u­tives at Ari­zona were guilty of “op­pres­sion” and “fraud­u­lent con­duct” and had con­spired to cut off Ferolito’s profit dis­tri­bu­tions to pres­sure him into sell­ing back his shares at a steep dis­count; coun­ter­claims by Vul­t­ag­gio that Ferolito was putting his own in­ter­ests be­fore the com­pany’s for “purely self­ish rea­sons” and that he even brought five armed men to Ari­zona’s head­quar­ters to in­tim­i­date the staff. “The law­suit story—it’s one of those Greek tragedies,” Vul­t­ag­gio ad­mits. Ferolito de­clined re­peated re­quests for com­ment.

Mean­while, lawyers cir­cled like hawks, ques­tion­ing any move that might af­fect the bal­ance sheet and thus the po­ten­tial sale price. Top tal­ent steered clear, wor­ried that tak­ing a job at Ari­zona meant un­em­ploy­ment within a few months. Plans for growth were put on hold. Vul­t­ag­gio found him­self spend­ing more time deal­ing with the lit­i­ga­tion than the busi­ness. Com­peti­tors pounced.

“It cre­ated the op­por­tu­nity for Gold Peak and Pure Leaf to enter the mar­ket,” says Bel­las, the in­dus­try con­sul­tant, who served as an ex­pert wit­ness for Ferolito. Coke and Pepsi, re­spec­tively, poured money into those tea brands, seek­ing refuge from de­clin­ing soda con­sump­tion. At the same time up­starts ped­dling or­ganic, health-con­scious of­fer­ings, like GT’S Liv­ing Foods’ kom­bucha teas, came nip­ping at Vul­t­ag­gio’s heels. Ari­zona’s U.S. mar­ket share slipped from about 20% in 2011 to 17% to­day. “It’s like a train,” Vul­t­ag­gio says of the lit­i­ga­tion’s im­pact. “If you dis­con­nect the lo­co­mo­tive from the cars, the train will keep mov­ing, but even­tu­ally it’ll stop.”

In the end the court or­dered Vul­t­ag­gio to pay Ferolito about $1 billion for his 50% stake. The par­ties were still hag­gling over the pre­cise terms in April 2015 when they reached a con­fi­den­tial set­tle­ment. Ari­zona wrote Ferolito a check, the funds pieced to­gether from the com­pany’s cash hoard and a bank loan, which Vul­t­ag­gio says is nearly paid off to­day. The train is back on the rails.

now VUL­T­AG­GIO is rolling

up his sleeves and test­ing new prod­uct lines, hop­ing to com­ple­ment his cur­rent tea of­fer­ings with­out can­ni­bal­iz­ing them. He launched Good Brew, which com­petes in the fast-grow­ing pre­mium tea mar­ket along­side Pure Leaf and Star­bucks’ Tazo teas, and is mak­ing a push into min­eral wa­ter. He’s also widen­ing the com­pany’s al­co­holic port­fo­lio, which still in­cludes Crazy Stal­lion plus six other adult drinks but makes up less than 5% of his busi­ness. In July, he reached a deal with Mol­son Coors for a spiked ver­sion of Arnold Palmer and in Au­gust be­gan im­port­ing a lager from Ger­many called Win­ter­stern.

He’s also steer­ing Ari­zona into snack foods. The com­pany has had a small na­cho line for years and is now launch­ing a beef jerky called Crazy Cow­boy, de­signed to boost busi­ness in con­ve­nience stores by of­fer­ing some­thing to pair with an Ari­zona tea. Given all these moves, Vul­t­ag­gio is build­ing a new plant in New Jersey, set to open at the end of next year. And the real growth, he hopes, will hap­pen over­seas.

“We’re just scratch­ing the sur­face in a lot of mar­kets,” Vul­t­ag­gio says. Ari­zona has been in Canada since the 1990s and be­gan sell­ing in Mex­ico in 2007. Next up? Ag­gres­sive ex­pan­sion in Europe. “There are op­por­tu­ni­ties for us to go in and do what we did in Amer­ica for Ger­mans or Ital­ians.”

Not that ev­ery­one’s fore­casts are quite as rosy. “It’s re­ally, re­ally hard as an Amer­i­can brand to make it in­ter­na­tional,” says Tom Pirko, pres­i­dent of the con­sult­ing firm Bev­mark and a former ex­pert wit­ness for Vul­t­ag­gio. “But you’ve got a true-grit fac­tor with him, which is one of the things you al­ways go back to.” For Ari­zona to keep grow­ing, Pirko says, it will need in­creased in­vest­ment in more so­phis­ti­cated mar­ket­ing.

Hardly mu­sic to Vul­t­ag­gio’s ears. When asked whether he thinks a TV ad might ex­pand his brand, he coun­ters: “I don’t know the an­swer to that be­cause tra­di­tional ad­ver­tis­ing is dead.” In his eyes, grass-roots cam­paigns, like those he’s been wag­ing since day one, will carry the day.

“Our mar­ket­ing plan is to make it look good, make it taste good and price it fair,” he says. “In a world where the Madi­son Av­enue guys are com­pli­cat­ing it with ‘You’ve got to do this and this and this,’ our suc­cess is based on keep­ing it sim­ple.”

Pack­age deal: Ari­zona’s eye-catch­ing de­signs stand out on any shelf.

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