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Valuation of AriZona Iced Tea
The Situation
Due to a series of lawsuits, the Supreme Court for the State of New York held a trial on the valuation of the business entities, described as AriZona, which produce beverages and other food and beverage-related products, most notably various lines of iced tea. Part of the claim by one of the parties involved was that AriZona was committed to selling its flagship iced tea at 99 cents a bottle and would continue to do so, independent of market conditions.
NERA’s Role
The opposing party (Ferolito) hired NERA Senior Vice President Dr. David Tabak to respond to this claim. Dr. Tabak provided analyses including discussions of economic theory on incentives that could affect pricing and on the ways that the claimed behavior would harm the company's future profits. Dr. Tabak also showed that other companies that had appeared to commit to similar fixed-price strategies had abandoned those strategies when market conditions changed. He also described additional actions that AriZona should have considered as market conditions were expected to change as well as how the incentive to maintain the 99-cent price would be change as inflation increased the costs of production.
The Result
In a decision on 14 October 2014, the Honorable Timothy S. Driscoll stated, “AriZona's assessment of its future domestic performance is centered on its plan to continue to price its flagship 24 ounce can at 24 cents. … Nevertheless, as explained credibly by Ferolito expert economist David Tabak, AriZona certainly could consider raising prices at some point in the future. Tabak noted that other companies that initially committed to a fixed pricing strategy had to adjust their prices." The opinion further noted, as described Dr. Tabak's testimony at trial, that "it might well make sense for AriZona to consider alternatives such as raising prices, shrinking the size of the can, tinkering with the product formula, or developing new products that are less expensive." The Court then reached a valuation conclusion based in part on this reasoning.
Download the opinion.