Why a Tariff Could Change AriZona Iced Tea

At 99 cents, the price of AriZona Iced Tea has remained the same since 1997.

AriZona Iced Tea Cans

For almost three decades, Arizona Iced Tea’s co-founder and CEO, Don Vultaggio, retained its 99 cents price. A perfect and inexpensive marketing tool, the 99 cents on the can really says I am cheap to his supermarket, gas station, and convenience store fans. The result appears to be the volume that low margins require.

In the past, to preserve the 99 cents price tag, AriZona cut costs by using less aluminum and encouraging more supplier competition. The company also tweaked its operations and saved on sugar transport with its own rail connection.

Now though, because AriZona gets 20 percent of its aluminum from Canada (and the rest from recycled American aluminum), a 50 percent tariff could be too much to absorb.

Our Bottom Line: Comparative Advantage

Knowing that Canada produces AriZona Iced Tea aluminum because of its comparative advantage, 19th century economist David Ricardo (1772-1823) would have been smiling from his grave.

As Ricardo explained, comparative advantage is all about opportunity cost and the sacrifice (tradeoff) created by a decision. As a result, we have a comparative advantage doing those activities that require the least sacrifice. (So, it makes sense for me to write this blog and not wash my dishes.)

Rich in the cheap power near Quebec, Canada has a comparative advantage for smelting aluminum. By contrast, power is considerably more costly in the U.S. Producing it here would require much more of a sacrifice.

In this graphic from the Visual Capitalist, you can see the exports created by Canada’s comparative advantage:

So the U.S. benefits immensely from our aluminum imports…as long as their cost is low.

My sources and more:  Thanks to the NY Times for the Iced Tea update from this past Axios newsletter and this Medium article. Always handy, the Visual Capitalist had our graphic and an explanation.

Please note that Don Vultaggio is actually CEO of the Arizona Beverage Co. whose primary product is AriZona Iced Tea. Also, our featured image is from Myung J. Chun at the LA Times and several of today’s sentences were in a past econlife post.