STEEP COMPETITION

Arizona Iced Tea is having a really hard time keeping its dollar cans at a dollar

In the market for beverages with no booze, the obvious leaders are the soda giants: your Coca-Colas and Pepsis of the world.

Iced tea is another matter. It’s one of the few non-alcoholic beverage areas that’s still seeing decent growth in the US, and the market has long been dominated by an indie player with a deceptively simple strategy: Never raise prices.

Arizona Iced Tea came on to the scene in 1992 as an insurgent. Its ultra-cheap prices helped it topple Snapple, the industry leader, and become the country’s largest player. Its simple formula—a little high-fructose corn syrup and a little water mixed with tea in a 99-cent, 23-ounce (680 ml) can—made it a corner-store staple that brought in nearly $1 billion in sales from its core line last year.

But as consumer preferences shift, premium and organic teas are taking over, racking up big gains at the expense of cheaper mainstays. In a turnabout, Arizona, having unseated Snapple from below, now finds itself fending off attacks from above, and playing catch-up to reach consumers it didn’t have to worry about before.

A decade ago, Arizona Iced Tea and Unilever’s Lipton and Brisk brands between them commanded nearly three fifths of the entire US market for ready-to-drink teas. In 2014, they had less than half, including Arizona’s Arnold Palmer line, which debuted in 2008.

Gobbling up market share have been Coca-Cola’s Gold Peak, which it launched in 2008, and GT’s kombucha teas. Both have about 7% of the US market from practically nothing in 2005, and the latter, at around $5 a bottle, is more akin to the expensive health-conscious cold-pressed juices at Whole Foods than what you’d normally find in a gas-station refrigerator.

Inc. magazine profiled the rapidly growing company behind GT’s in March:

For GT, the only real response is to keep growing. Over the past two years, GT’s has become increasingly available in mainstream grocers–first Safeway and Kroger, and now Target and Walmart. In the late 2000s, Whole Foods outstocked other retailers in GT’s by a factor of three; today it is still the product’s largest outlet, but just marginally.

Their rise is symbolic of a lot of the change taking place in American food preferences. Giants like McDonald’s and Coca-Cola have long been associated with cheap but unhealthy eating, and, like Arizona, they’ve recently begun losing their dominant market share to companies with more expensive products that skew organic and at least seem healthier. Overall sales have plateaued at Coke around $45 billion annually, and McDonald’s is dealing with worse revenue declines than it saw during the recession.

“Consumers are more aware of what they’re putting in their body,” said Ryan Douglas, a sales manager at Morris Distributing, which sells Arizona wholesale in Southern California in addition to higher-end brands like Runa and Sweet Leaf.

In some cases the incumbents have moved in to acquire the upstarts. Coke acquired Honest Tea outright in 2011 for an undisclosed price after investing $43 million three years earlier. General Mills bought organic macaroni and cheese company Annie’s for $820 million this year.

The incumbents have also become more aggressive. “The big brand owners in soft drinks, the Coca-Colas, the Pepsis, are putting more marketing behind their own brands as they see a decline in carbonates,” said Euromonitor beverage analyst Howard Telford, referencing the soda slowdown.

That’s where things get tricky for Arizona. Though it still commands a huge chunk of US tea sales, it got there by undercutting on price. That won’t be as helpful in fending off its challengers.

Though it knocked Snapple from the top spot in American tea, it hasn’t ever raised its prices, which are printed on its signature cans so retailers can’t charge more. Those prices are a huge point of loyalty for its customers. When one woman tweeted a photo earlier this year showing Arizona cans affixed with $2 stickers, popular Twitter user Desus Nice, sharing her outrage, jokingly called for the matter to go before the highest office in the land:

Arizona’s social media team replied a couple days later, pointing to a tweet that reaffirms the company’s commitment to the 99-cent price:

Meanwhile, both corn (the basis of high-fructose corn syrup) and aluminum commodity prices are higher than they were when Arizona launched, albeit not as high as they were a few years ago.

And non-alcoholic beverages have kept pace while Arizona has remained resolute.

Douglas, the distributor, says that carrying Arizona has its good and its bad points. Though Morris Distributing doesn’t make as much money on it, the brand’s scale still opens doors to retail shelves where it can stock more expensive teas. “If you make more margins on another product, you’re necessarily not going to push it more, but you’re going to use it to balance out your lower margins with Arizona,” he said.

Robert Marciano, Arizona’s head of sales and marketing, told Quartz the company has changed its business mindset in response to shrinking margins. “We’ve eaten the costs and changed our thinking to ‘fast nickels’ instead of ‘slow dimes’,” he said, meaning that the company has focused on keeping up sales volumes from its loyal customers.

But Arizona is also trying to branch out, and has launched newer product lines aiming for that artisanal sweet spot. Its Oak teas, for example, are brewed with oak chips and are often at least twice as expensive as the regular Arizona fare. It’s also peddling aspirational (and pricier) sparkling juices under its Skinnygirl partnership with reality TV star Bethenny Frankel.

“The thing that a lot of people like to market to consumers is higher-priced products, because everyone likes to be in the luxury or elite category,” Marciano said. “People are living the lives or want to live the lives of celebs.”

Though those new products don’t necessarily line up with Arizona’s reputation as a big value in a big can that’s what it has to start selling if it wants to hold onto its dominant position as America’s go-to brew.

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