Raising Arizona

By Sean Gregory

Like any good chairman of a multimillion-dollar beverage company, Don Vultaggio knows that distribution is a key to success. But unlike most high-flying executives, Vultaggio, head of privately owned Ferolito, Vultaggio & Sons, maker of the popular Arizona brand of iced tea, will spend a Friday night on a forklift. On a recent evening, Vultaggio, in jeans and an untucked T shirt, zipped around a steamy, 30,000-sq.-ft. Tampa, Fla., warehouse on a hi-low, moving pallets to fit 3 million cans, bottles and gallon jugs of Arizona into the space. Vultaggio had flown from his Lake Success, N.Y., headquarters early that morning to reorganize the space, stopping first in Orlando, Fla., to shake hands with Arnold Palmer, whose face graces the can of Arizona's half-iced-tea, half-lemonade drink. But forget about lounging at the 19th hole: Vultaggio worked the warehouse until 3 a.m., then returned for a 10-hour shift on Saturday. Asked whether he would rather be hanging out with an American icon, Vultaggio says, "What do you think? Doesn't this look more fun?"

Born in Brooklyn, N.Y., Vultaggio prefers the forklift to the corner office because he is more at home on the warehouse floor. "Some may call that micromanaging," says Vultaggio of his hands-on approach. "I don't know what that is. To me, it's just normal."

Vultaggio is the blue-collar anti-CEO, a former truck driver and Brooklyn beer distributor who, with innovative packaging and consumer-friendly pricing, has built Arizona into the fastest-growing major bottled-tea brand in the country. And he has done it on his own terms, dismissing the conventional wisdom about management (chairmen schmooze; they don't reorganize warehouses in the middle of the night), finances (entrepreneurs sell out or go public as soon as they can) and marketing (consumer companies spend at least a few bucks on advertising to consumers) along the way. "Don came up from the bottom and did not forget the lessons he learned from the street," says John Vaccaro, owner of Bett-A-Way Traffic Systems in South Plainfield, N.J., Arizona's national logistics provider for the past 14 years. "Now he's a street fighter in the boardroom."

Vultaggio treats the battle for supremacy in the $3.5 billion ready-to-drink tea category like a heavyweight bout, and he plays the role of the trash-talking underdog. He dismisses Lipton (made by Pepsi and Unilever) and Nestea (a Coke-Nestle partnership) as "garbage." His advice to Coke: "Fire those people [the marketing executives]. Put them on a truck, and run them south. They're out there covering their asses." Vultaggio gloats about the fate of Snapple, once a proud independent like Arizona, that was swallowed and spit out by Quaker Oats and is now part of Cadbury-Schweppes. To its owners, he says, Snapple is "not even worth talking about." The soft-drink superpowers feel similarly about him. They refused to bash back.

Vultaggio does have reason to brag: his brand dominated 2005, a year in which Coke and Pepsi fizzled. "Arizona went nuts," says Jeffrey Klineman, editor of Beverage Spectrum magazine, a trade publication. According to Beverage Digest, Arizona topped the retail iced-tea market in 2005, taking a 32.3% market share in supermarkets, convenience stores and drugstores and picking up more business than any other brand. Arizona's annual sales in major retail-distribution channels topped $417 million, according to Information Resources. The company says its total sales, including Wal-Mart and all the hundreds of tiny corner bodegas that sell Arizona, are north of $600 million.

Arizona is one of the players that has turned the entire soft-drink industry on its head. Teas, sports drinks, bottled water and energy drinks, once considered niche players, are driving the market, while the once invincible colas have lost their crown. "Carbonated beverages are in serious trouble," says Tom Pirko, president of BevMark, an industry consulting firm. Shipments of soda slipped 0.7% in 2005, says Beverage Digest--the first annual decline in 20 years. Coca-Cola's flagship, Coke Classic, was down 2%; Pepsi-Cola fell 3.2%. And soda is absorbing some of the blame for America's obesity. A study released in early March linked soda to teenage weight gain. Meanwhile, other sweetened drinks have largely escaped criticism and instead are touting their health benefits. "You can't swing a stick at a beverage convention," says Klineman, "without hitting a dozen companies talking about the antioxidant values of their drinks."

Arizona has grown through a careful combination of solid value pricing, attractive packaging and a steady stream of new products. Such new health-conscious items as Diet Decaffeinated Green Tea have thus far not cannibalized sales of its reliable iced-tea flavors. Almost all the drinks come in oversize 24-oz. cans, with the 99-c- price painted on the front to prevent retail markups, and each flavor gets a distinct look. "Arizona's marketing has been in eye-catching, aesthetically pleasing packaging," says Gary Hemphill, managing director of Beverage Marketing Corp., a research and consulting firm. "To win that shelf battle, your package has to look better than the other guy's."

The bottles have cult followings. "If I were planning a room inspired by [Arizona's] Green Tea with Ginseng," wrote interior designer Carelton Varney in the Palm Beach Daily News, "I'd go for an aqua-blue wall with a carpeting of rose pink, and I'd be certain to find an Asian print to use for drapery."

So how did Vultaggio, the 6-ft. 8-in. son of an A&P produce manager, who started out hawking beer in New York City from the back of a Volkswagen bus (he proudly recalls being a victim of armed robbers and once threw a brick at a robber's getaway car), wind up building a New Age--drink business, selling bottles adorned with cherry blossoms? From death stares to drapes in three easy steps. Vultaggio and partner John Ferolito established a semisuccessful beer distributorship before trying to produce their own brands. Their first choices were a little less refined than mandarin-orange-flavored green tea sweetened with honey. They started Midnight Dragon malt liquor in the mid-1980s and, to promote it, printed thousands of posters featuring a scantily clad woman sipping Midnight Dragon through a straw and a vulgar tagline. Midnight Dragon peaked at 3 million cases annually. In the early '90s, Vultaggio's Crazy Horse malt liquor took off, until protests and lawsuits from Native American groups compelled some states to ban it.

Vultaggio found his next business, iced tea, through his most trusted adviser: his gut. On a frigid February day in 1990, a Snapple delivery truck interrupted his sales pitch with a lower Manhattan store owner. "I'm knocking myself out trying to get a five-case order of beer, and this guy is taking 100 iced teas," Vultaggio says. "What am I doin'? I said, I gotta go into the tea business." That was his million-dollar focus group. "Yeah, I was focusing," he says. "Wow, that's big."

Snapple was then the hot brand, so Vultaggio needed a way to distinguish his iced tea from his new rival. He picked the name Arizona after staring at a map; his Uncle Vito had moved there to ease his asthma. Vultaggio saw pricing as his true opportunity: Why not give the consumer a 24-oz. can at the same price as Snapple's 16-oz. bottle? After developing the drink with the help of a "flavor house" in New Jersey, Vultaggio dispatched his sales force to Manhattan. "Some of those guys couldn't sell lemonade in Saudi Arabia in the summer, and they come back with orders," he says. Vultaggio would sift through Dumpsters and shake Arizona cans to see if consumers were gulping it down, and he still uses the tactic, which he calls the garbage survey. "You talk about the latest data," he says. "Garbage is usually cleaned every day." From 1992 to '94, Arizona grew from $20 million to $300 million, and it now outsells Snapple.

Over the past decade, Vultaggio has rejected overtures to sell his company as well as frequent advice to take it public. "Why do we want to have these Wall Street guys coming around to complicate it?" he asks. Vultaggio says remaining independent lets him move drinks quickly to market. He sees an alluring piece of cobalt-blue glass on the beach, and a few months later, Arizona has a cobalt-blue bottle. Vultaggio has discussed a distribution deal with Coke that would put Arizona in Coke's vending machines. Without the vast distribution networks of Coke and Pepsi, Arizona still lags behind Nestea and Lipton in vending machines and fast-food fountains. Vultaggio says Coke has talked to him about buying out Ferolito's share of Arizona, with Vultaggio still retaining full control. "That's the only way I would do it," Vultaggio says.

Some analysts think that Vultaggio's stubborn streak, especially his rejection of advertising, is hurting him. Pirko, president of BevMark, believes that with soda lagging, Coke and Pepsi will shift some focus to trouncing Arizona. "It's vulnerable," Pirko says of Arizona. "Word of mouth might work when there's little competition, but now the shelves are overloaded, groaning with new products. He who spends is usually he who gets the space." Vultaggio is utterly unmoved. "We've got a winning formula," he says. "What's the sense of changing it?"

He's stubborn, but he is not standing still. Vultaggio is making a bet on the energy-drink craze, pioneered by Red Bull and the hot upstart Monster. In April he will unveil a hybrid product: Arizona's Green Tea Energy Drink, packaged in a sleek black can--a bizarre combination that promises to keep you up all night while helping your heart. Don't be surprised if Vultaggio finds another hit. "People see something exciting, and they remember it," he says. "Think they remember the first time they had C2 [Coke's low-calorie cola]? I doubt it." Sure, you can take the CEO off the street. But that doesn't mean he can't still hurl some bricks.

With reporting by Wendy Malloy/ Tampa