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.
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.”
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.