Ferolito, Vultaggio & Sons History

Address:

5 Dakota Drive, Suite 205
Lake Success, New York 11042
U.S.A.

Telephone: (516) 812-0300
Toll Free: 800-832-3775
Fax: (516) 326-4988

Private Company
Founded: 1972
Employees: 250
Sales: $300 million (1997 est.)
SICs: 2082 Malt Beverages; 2086 Bottled & Canned Soft Drinks & Carbonated Waters

Company History:

The seemingly overnight success of AriZona Iced Tea in the early 1990s made its owner, Ferolito, Vultaggio & Sons, a major player in the multibillion-dollar "New Age" beverage market, which offers alternatives to traditional colas and other carbonated drinks. Since its early 1970s founding in Brooklyn, New York, as a beer distributorship, Ferolito, Vultaggio & Sons (FV&S) was intent on proving that, in co-founder John Ferolito's words, "We're high class enough to be No. 1, and low class enough to know how to get there." Inspired by the success of the Snapple brand of beverages, FV&S strove to provide a popular ready-to-drink tea beverage that soon distinguished itself primarily by its unique packaging: oversized, brightly-colored cans bearing southwestern-style graphics. In the late 1990s, the privately owned company, having moved its headquarters to Lake Success, New York, followed up its iced tea success with a line of fruit drinks and another line of carbonated drinks, as well as a beer called Mississippi Mud.

From Distributorship to Malt Liquor Maker

John Ferolito and Don Vultaggio went into business together in the early 1970s, soon after graduating high school. While they held delivery jobs at a brewery and beer distributorship, they decided to team up, part-time, to form their own business on the side. Together, the Brooklyn natives purchased a used Volkswagen bus for a couple of hundred dollars, ripped the seats out of the back, and proceeded to work delivering reduced-price beer and soda to Brooklyn homes and grocery stores.

This venture soon became full-time work, and the men purchased a used truck to make wholesale deliveries. Their territory centered on such neighborhoods as Crown Heights and Bedford-Stuyvesant, known as tough, high-crime areas that other union drivers tended to avoid. Vultaggio and Ferolito were eventually successful enough to acquire a small fleet of trucks, though they were still second-tier distributors flogging beer at cut-rate prices.

Not satisfied with their role as distributor, the pair soon decided they'd rather make their mark with their own product. They established the Hornell Brewing Co. in the mid-1980s to oversee this new venture, and Ferolito, Vultaggio & Sons eventually became a division of Hornell. The first product FV&S tried, and ultimately failed, to market was Spence & Wesley, a flavored seltzer water named for Vultaggio's sons.

The partners achieved a higher profile with their next product, a malt liquor, with a high alcohol content, named Midnight Dragon. Ferolito and Vultaggio made the product available at a cheap price and promoted it vigorously, reportedly targeting the streets of Manhattan's and Brooklyn's black and Hispanic neighborhoods in particular, every night for a year, shaking hands with passersby and thanking owners of small stores for their orders. Citing Ferolito's and Vultaggio's approach as an example, one Wall Street Journal reporter noted disapprovingly that companies employing such tactics "play a part in the cycle of poor nutrition that is approaching crisis levels in the inner city."

Ferolito, Vultaggio & Sons also publicized the brew with suggestive point-of-sale posters, notably one displaying a woman clad in red lingerie, sipping the brew through a straw, with the accompanying tagline, "I could suck on this all night." This ad was withdrawn following protests by the National Organization for Women, although Ferolito was said to have told the Wall Street Journal in 1989: "Real men like sex and sex sells beer. I'm not interested in wimps and achievers who want to suck on a lime and drink Corona." Although available only in the New York City metropolitan area at the time, Midnight Dragon had estimated sales of one million cases in 1988. The following year FV&S formed a joint venture with a Cincinnati brewer to introduce Midnight Dragon to other major U.S. markets and to handle additional marketing and production.

Ferolito, Vultaggio & Sons next launched a new brand of malt liquor it called Crazy Horse, named after the Sioux leader, with a label that bore a drawing of an Indian in a feathered headdress. Produced by G. Heileman Brewing Co. and sold in 40-ounce bottles, the beer was marketed in New York City and five states.

The brand soon drew negative attention. In 1992 the U.S. Surgeon General called the brandname "an insensitive and malicious marketing ploy" aimed at Native Americans, who had long been experiencing a high rate of alcoholism and alcohol-related illness. The U.S. Bureau of Alcohol, Tobacco and Firearms, which had approved the product only two months earlier, then reversed itself, citing technical violations that it said, along with the clear-glass, 40-ounce bottle and dark color of the beverage, "all combine to create the misleading impression that the product is a bottle of whisky." Congress passed a 1992 law essentially banning the product, but in 1993 a federal judge overturned the act on First Amendment grounds. In 1997 FV&S would still be fighting legislation that banned Crazy Horse in some states, as well as contending with an organized boycott. Annual sales of the brew had dropped by that time from a peak of three million to some 240,000 cases, according to Vultaggio.

Entering the Iced Tea Market: 1992-95

Ferolito, Vultaggio & Sons' Hornell Brewing Co. was earning annual revenues of about $10 million, when, in 1992, FV&S launched the less controversial product--AriZona Iced Tea--that was to make its fortune. Some 200 ready-to-drink teas had been introduced in the previous two years, produced by such industry giants as Lipton and Snapple, but AriZona stood out for its pastel-colored packaging, vaguely reminiscent of Native American artwork, and its jumbo 24-ounce can. "You know how much time you have at the cooler when the consumer's thirsty?" Vultaggio asked a reporter rhetorically. He answered, "A split second. Make it easy and they'll buy it." The six-foot-eight co-founder credited the can's creation to "my partner, myself, my wife, and a gal in South Jersey who does our mechanicals."

The brand name, Vultaggio said, came to him when he was standing in front of a map in his office and asking himself "Where is hot?" and "What sounds good?" The idea for the product, he confessed, was inspired by rival Snapple Beverage Corp., which was also founded in Brooklyn. "We had been beer guys all our lives and we only knew beer," Vultaggio told a Beverage World reporter, noting "Iced tea was foreign to us." Nevertheless, he and Ferolito thought they could do whatever the three founders of Snapple had done. Vultaggio relayed that his company paid more for extra tea flavoring and higher-grade sweeteners but marketed 24-ounce AriZona for the same 99 cents as the 16-ounce bottle of Snapple's iced tea. Production was handled by the same Cincinnati company that made Midnight Dragon, Hudepohl-Schoenling Brewing Co.

The product's success was also reportedly inspired by the partners' experience selling in urban neighborhoods. "We learned a lot working up and down the street," Ferolito told a Brandweek reporter. "Party King was a popular soft drink that taught us pretty colors worked in the inner city. Sweetness worked too; that's why Nehi was a success." Twenty-four-ounce beer cans were already available in these markets.

Ferolito and Vultaggio knew all about the beverage wholesaling game after more than 20 years in the business. They ordered wholesalers--mostly large beer distributors of Budweiser and Miller&mdashø repack their products into "rainbow cases" that would provide small retailers with an assortment of the four AriZona Iced Tea flavors--lemon, diet lemon, raspberry, and tropical--even if the retailer only ordered one case. The multiethnic FV&S sales team was told to get the product placed in all its existing beer accounts. The company resisted paying "slotting allowances" to supermarkets. "I don't like retail chains," Ferolito said in 1994. "They're a pool of sharks that you can't sell your products to like a human being." (By late 1997, however, FV&S would give in, routinely paying slotting fees to chain stores.)

By mid-1993 the four AriZona teas each were available in 7.7- and 16-ounce sizes as well as in the big can, in more than 30 states. FV&S sold more than ten million cases of AriZona in 1993, even though 80 percent of the sales were in only four markets--New York, New Jersey, Miami, and Detroit. AriZona had come from nowhere to take fourth place among ready-to-drink teas in the United States.

The point man for the expansion of Ferolito, Vultaggio & Sons products was Michael Schott, who was minority owner and vice-president of Hudepohl-Schoenling when that company had contracted to produce and distribute Midnight Dragon. Schott was running a Detroit beer-wholesaling operation when FV&S introduced AriZona Iced Tea. He brought it to Detroit and took it to the top there in its first year, moving 900,000 cases of the beverage in 1993. FV&S then hired Schott as its chief operating officer and charged him with making the drink national. Before the end of 1994 AriZona Iced Tea was being sold in all 50 states, with estimated sales of $300 million a year, compared to an estimated $10 to $20 million in 1992 and an estimated $130 million in 1993. Ferolito and Vultaggio each pocketed $30 million in aftertax profits in 1994.

By the end of 1993, FV&S had also begun making AriZona Iced Tea available in a proprietary 20-ounce long-neck, widemouth bottle (produced by Anchor Glass) that proved even more popular than the big can. Packaging innovations continued, as they began offering the beverage in milk-style wax cartons, large aseptic packs, and even in powdered form. The AriZona design was licensed for lollipops and freeze pops, beach towels, shirts, and other goods. In early 1994 FV&S widened the beverage line by introducing AriZona Cowboy Cocktails, a juice-based drink in such flavors as Mucho Mango and Strawberry Punch, with Kiwi Strawberry and Pina Colada added later. Soon the company was also putting out lemonade and a nonfat, chocolate-flavored drink. During this time Canadian distribution was also achieved through an agreement with Molson Breweries.

By this time Ferolito, Vultaggio & Sons was seeking to move from its overcrowded 6,000-square-foot Brooklyn warehouse, where, Vultaggio said, "we have been burglarized about 20 times and the roof is impossible to repair." In the fall of 1994 the company began moving to a corporate office park in Lake Success on Long Island, although the sales staff would remain at the Brooklyn site. During this period the partners decided against taking FV&S public and also reportedly turned down an offer of about $400 million for the company from Heileman.

FV&S began 1995 by introducing its iced tea in a fifth flavor--ginseng--in 20-ounce, cobalt-blue bottles. Later in the year the company introduced the first of what became its Soda Shop line of carbonated soft drinks--Chocolate Cola, Diet Chocolate Cola, Vanilla Cola, Chocolate Covered Cherry Cola, and Root Beer Float--under the AriZona name. The root beer drink included milk and cream, which, according to Vultaggio, was unprecedented in a carbonated beverage. These drinks were marketed in a thicker 19-ounce bottle to accommodate the carbonation, and with labels featuring the distinctive AriZona package graphics. FV&S's estimated sales of $285 million in 1995 included 20.3 million cases of Arizona Iced Tea. Earnings were said to be $45 million before taxes. (A later estimate put 1995 sales at $355 million.)

The Going Gets Tougher: 1996-98

In 1996 FV&S introduced Mississippi Mud, a black-and-tan beer that was a blend of English porter and continental pilsner. The first alcoholic beverage since Crazy Horse to be marketed by the company, the brew came in a 32-ounce glass jug inspired by the rustic clay whiskey-drinking vessel John Wayne hoisted in the film The Alamo. Despite the broadened scope of its product line, or perhaps because of it, AriZona's sales slipped to an estimated $337.3 million in 1996. Moreover, its share of the iced-tea market fell to 9.6 percent, compared to 10.7 percent in 1994. FV&S's totals would have looked worse, according to a Newsday article, if the company had not raised prices sharply and introduced new superpremium-priced flavors.

By the spring of 1997 Schott and several FV&S sales and marketing executives had departed, forcing Vultaggio to assume the position of sales manager himself. One job that demanded action was to smooth the ruffled feathers of some of the company's 500 distributors, angered by what they considered broken promises and strong-arm tactics. At least five distributors had filed lawsuits against FV&S, charging that the company had breached contracts for distribution rights. In early 1997 the company shifted its business in many markets from beer wholesalers to soft-drink bottlers, thereby, according to one account, throwing its distribution system into chaos.

FV&S next began shipping its goods directly to major national retail chains, paying local distributors a per-case fee of about $1.50 for circumventing the wholesale end of the business. The company also switched from 24-unit to 12-unit cases for some of its higher-priced packages, thereby enabling retailers to invest less money in AriZona inventory while continuing to stock a variety of flavors. (Some warehouse-club stores had been reluctant to spend $300 to $400 to stock the brand, and some suspected that the 24-unit cases were so heavy that clerks might avoid restocking shelves.)

By this time the partners were reportedly reconsidering their determination to hold the annual advertising budget to $1 million--trivial compared to Snapple's $33 million and Lipton's $17 million in 1996. The company had sponsored the Schwinn Cycling & Fitness racing series and other bicycling events in major metropolitan areas in 1996 but dropped this promotional effort, which included AriZona uniforms, posters, and banners, after a single year.

Despite earlier urgings from Schott, and even at one point from Ferolito, Vultaggio had in 1995 vetoed a plan to hire an advertising agency from more than a half-dozen interviewed. Beverage-industry consultants considered the rejection a mistake. "AriZona had a great burst in the beginning because of the packaging, but the consumer is tired of that," said one, adding "If you don't spend money to promote your brand, you will fall to the earth and crash."

By this time Strawberry Punch, tropical-flavored tea, and the carbonated line of beverages all had failed--the latter, according to a distributor, because FV&S failed to get the message out that AriZona now had such drinks, while marketing them in bottles similar in size and appearance to that of the teas and juices. "I saw people shaking it up in the store, thinking it was tea," he said.

Still, the company continued to innovate and achieved some success. By the spring of 1997 AriZona's new Green Tea with Ginseng and Honey had become one of FV&S' biggest hits. It also introduced an egg cream called Lite Chocolate Fudge Float and added to its line a Herbal Tea the ingredients of which included chamomile, ginseng, bee pollen, and honey. While some AriZona products maintained the original southwestern motif in their packaging, others seemed to take reflect designs of the Far East or recapitulated American artwork of the 19th century. Still others had a ceramic appearance "like they were handpainted in Tuscany," according to Vultaggio. FV&S also added a line of diet teas, a proprietary 16-ounce bottle, and a squeezable plastic sports bottle made to look like a metal can. The product line extended to nearly 50 stock keeping units (SKUs) in late 1997.

In the fall of 1998 FV&S test-marketed Blue Luna iced coffee, its first nonalcoholic beverage line not under the AriZona brand name. Introduced in Cafe Latte and Lite Cafe Mocha forms and sweetened with the newly approved product Splenda, Blue Luna came in elaborate 12.5-ounce bottles shaped like double-handled Roman jugs. Earlier in the year, FV&S had commissioned pop artist Peter Max to create a limited-edition series of 16-ounce bottles for its core Lemon Tea line.

While industry observers agreed that FV&S's unique, award-winning packaging designs have contributed in large part to the company's sales and success, some have expressed concern over the company's meager advertising budget and strains on relations with its distributor network. Ferolito and Vultaggio, however, considered such reports overstated, and, with their reputation for product and packaging innovation, planned to enter the next century as popular as ever.

Ferolito, Vultaggio & Sons History

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