Based Business Episode 1: Raising Prices and AriZona Iced Tea

In the first episode of Based Business with Parker McCumber, 
Parker and Jacob talk about a popular meme with some misleading information regarding increasing prices and the choice business owners face when contemplating raising prices. 

Feel free to ask questions and share your point of view in the comments! 

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Transcript

 Hi, ladies and gentlemen, my name is Parker McCumber, and this is based business. Uh, the introduction for the show is simple. We are here because there's a lot of myths and false information going around, particularly in the business and economic world. And our goal is to shed just a little bit of.

On these issues from a based rational and logical perspective. Again, my name is Parker McCumber. I am a serial entrepreneur. I hold an MBA and I currently operate and own a number of businesses. The majority of which online I'm here today with my cohost, Jacob Johnson. Yes, I'm 

Jacob Johnson. Um, I have a degree in financial planning, so I know a few things about the insurance world, financial world, economic side of stuff, and I work in insurance.

So, um, I deal with a lot of the, um, yeah, the economic side of stuff basically every day. 

So at the end of this episode, I'm going to go ahead and drop, uh, Jacobs, you know, links, uh, in the. Like YouTube description and things like that. So you guys, if you ever need insurance or something like that, go ahead and hit this dude up.

He's a wizard. Uh, and on that note, let's just jump right into it. So I'm going to hit share screen with you guys, and I'm just going to pull up what we're talking about today. So this is something that I've seen. This is something that I've seen go around Facebook a lot, the last couple of days, particularly from.

Friends of mine that I know have absolutely no business or economic, uh, kind of background or understanding here. Uh, so this is something that I, I kind of want to address because I feel like it's becoming very prevalent. Uh, I think it was originally posted here by the other 98% on Facebook. So real quick, if you're just listening in and you can't see what we're looking at, it's a picture of the father and son ownership.

Of Arizona ice tea. Uh, and this is what the image says. A can of Arizona ice tea is still 99 cents. When the cost of aluminum goes up, it has doubled in the last 18 months. The company just makes slightly less profit. And guess what? The owner and his two sons who collectively own 100% of the company are worth a combined $4 billion.

Raising prices is a choice. Greedy CEOs are choosing to watch us. And that's what it says. Okay. So I've got a couple problems with this. Uh, first you're using an absolutely huge company and you're comparing it to every business. When you say, you know, generic terms like raising prices as a choice, greedy CEOs are choosing to watch us suffer.

Yeah. Well, 

one of the things that I wanted to point out right away is is it doesn't take into account your cost of goods, right? Like what it costs to produce a candidate, Arizona ice tea. Right? If you, if you. Um, sports cars, you know, you tend to have a wider profit margin because it's a luxury good. That very few people, I mean, not very two people why, but very few people can afford, right?

If you're producing, you know, like four, they just recently stopped producing certain types of cars. They only produce trucks now because they realized their market. They have a higher profit margin in that area. And, and with Arizona, Steve, they probably have a different profit margin they're working on or a different scale of economy.

How much profit, how many things they're selling. Right. It just makes this image. It'll 

not make sense. Yeah. I don't think it makes sense at all. So here's a post that I actually made, um, yesterday about it. Uh, and, and something I want to highlight here is, uh, that Arizona ice tea. Has an absolutely massive economy of scale.

And if you're not familiar with the term economy of scale, essentially in business, that's when the volume of production that you're making and the volume of distribution actually makes your products more profitable. Uh, if you specialize in something, say a can of iced tea and you only make a can of ice tea and your factory is geared to be as efficient as possible.

At making those cans of iced tea, it's going to be obviously cheaper to make a cannabis tea than if you were to have like someone that's doing a soda production, stop producing soda change over what, however they fill the cans, all that stuff. Uh, so specialty here plays a big role as well as volume. Uh, and I pulled this off the Arizona ice tea Wikipedia page.

But it said that their 2017 revenue was a little bit over $3 billion, right. $3 billion. And now you're like, oh, greedy CEOs now. Okay. Arizona ice tea is able to keep the can of ice tea 99 cents. Because even if they had an absolutely embarrassing profit margin of 5%, which is very low, very low in any category.

You're still making $150 million a year of profit that goes to the ownership group. Right. So I think it's just because of the sheer volume. I mean, I don't know very many business owners who own a multi-billion dollar business. It's a unicorn company, right. Uh, I mean the vast majority of businesses, startups, mom, and pop shops on main street, they fail most fail in the first year.

I think about 50% fail in the first five years. Right. So it's just absolutely absurd that someone would take a 30 plus year company like Arizona ice tea that has been running effectively. Absolutely insane. Volume of $3 billion in sales. I mean like, dude, do the math here. If it's a dollar a can and they make $3 billion in revenue, they're selling a lot, they're selling 3 billion units, you know?

Right. That's a lot. So it really is not, I mean, as a small business owner myself, I, you can't hold this standup. To the common, well, 

one 

more thing to be aware of in relation to this is people think, oh, well, aluminum's gone up like example. Recently housing would costs went up the average condo in our area, um, or single family home costs about 40 to $60,000 more just in the cost of lumber alone, right.

With construction. The way that their industry works is they buy. That they're going to build like a week before or day before, or they haven't deliberately ordered a month before from the lumber mill where some of these companies that do that larger business across a huge area. I mean, I don't know, ice teas anywhere besides the United States and Canada.

I don't know if they're in the UK or whatnot. But they negotiate the price of commodities. Sometimes years in advance, they've got set things where it's, here's the price. And when they got that much money moving, they can even bet against and hedge against the cost with commodity. Um, I remember the name of the term, um, trades basically, right?

Like with, with stock market prices basically, but for commodities they can say, oh, the price goes up. We can make a profit on that. Use that to buy the commodity that we're buying. So there's ways to level the costs that huge corporations have. That you as a single consumer buying two cans of iced tea or whatever your, you know, snack, that's gone up 20% in price, um, that you can't do as an individual 

consumer.

Yeah. So I actually looked into the very first time I saw this, uh, you know, me and my guess we'll call it this misinformation post from the 98%. Uh, I went and looked up what the cost of a can was for Arizona iced tea and the aluminum cans. In 2012, uh, I think it was 2012 was 5 cents a can, was the aluminum cost.

Right? 

Did that include like the production of like turning 

the production, production, everything. So shaping 5 cents is what is what they're spending on a camp. So even if you say, well, that's doubled 10 cents a can, right. That's essentially 10% of your cost is producing the packaging of that can, uh, I mean relatively low in the grand scheme of like packaging and, and the cost that you associate with making sure that a product's ready to be delivered to a customer.

Uh, and, and granted, I know that that's not their only packaging cost, right? You're going to put these on pallets when you ship them to your, your warehouses, grocery stores, whatever they're going to have plastic wrap over. I'm like, there's some other stuff that goes into that in the grand scheme of things.

But as far as an individual, can, I think you're looking at about 10. Uh, with the tall boy cans, a 24 ounce cans, if they use is what they claimed. Uh, but there's, there's a handful of other reasons that you see prices rise, especially in today's kind of environment and markets, right? Uh, I mean, no one was immune to rising costs associated with the coronavirus pandemic.

Right. And a lot of the stuff is just very simple. Dictated by supply and demand. Um, something I, I wanted to highlight, you know, just that, that a lot of Vicom entrepreneurs saw, right. Was that the reduced workforce in factories, right. Made it take longer to get your goods produced. And then you had shipping delays from reduced workforce in your like freight carrier.

Reduced workforce in your ups, your FedEx, your post offices to actually deliver your warehouse, just packaging it, right? Yeah. Everywhere. So you see reduction in labor that leads to an increased of increase in costs because all of a sudden that labor is being stretched thin. The supply is not there. The demand for it goes up there's costs associated with labor that increased costs associated with shipping that have increased costs associated with production that have incurred.

Uh, and I mean, that's, that started in 2020 where you really started to see big hikes there, but it's continued. And, and with the constant inflation or the constant printing of more money in, in the United States and really around the world to kind of combat some of the Corona virus, pandemic, uh, you know, economic effects, you see more dollars.

Competing for the same or less amount of goods being produced now, uh, they're going right back to that supply and demand thought if you have more dollars going for, or competing for the same amount of cost, obviously, or the same amount of produce, they're obviously going to have to raise your prices to balance out that supply, to.

What do you think, Jacob? Yeah, no, I agree 

completely. Um, but you also, at the w one more thought I had with the whole supply demand thing is, is the type of good you have, right? Connecting it to the Arizona tea situation. You have some goods that are, that have to say more stagnant. You got your, your typical, your, your, your bread, your utilities, your, your water bill, you know, some of those things that it doesn't matter what happens to the price.

You have to buy them right. Where she had luxury goods, which weirdly enough COVID increases. The amount of people buying certain types of luxury goods, because they were at home, they were bored. They know what to do. People were buying toys that they couldn't use. Like now we have this huge influx of people going to Disneyland and go into vacation spots that are making those prices go up.

Um, but Arizona ice tea, right? Like their, their product has a certain market. People know that, oh, here's what its cost is going to be. If they raise their price by 25 cents a can like, like dollar stores have done a lot of dollars and I was selling a product for a dollar 20. I think they're going to have a really bad quarter, the dollar stores, because people are going to shop there unless they're used to it being a certain price, it's a standard.

Do it. It's not a luxury. Good. You increase the price. They might lose 50% of their sales, who knows what it will be. And that's more than the benefit of 

increasing the costs. Absolutely things become a lot more competitive when you start to raise costs because people start shopping around and thinking that dollar is not stretching as far as it used to.

So if you're a local with say bakery, right, and you bake your loaves of breads or cookies or. And you raise your prices 25% or whatever, because your costs have increased, uh, due to scarcity, due to supply and demand, et cetera, people start shopping around. Um, and all of a sudden you're, you know, maybe more constant customer base is looking elsewhere.

So it's not necessarily in a business's best interest. To raise costs like you were saying in your example, but it is sometimes necessity. I think, I mean, going back to let's pull back up that, that post real fast as a screen-share, uh, going back back to this, this post Arizona is able to not raise their prices because of their massive economy of scale because of their volume, a small business, though, getting hit with.

Just taking the example out of this, out of this meme here, the cost doubled, right? Yeah. If mom and pop on main, main street, see a double in their cost of goods, they have to raise their prices because they're not benefiting from $3 billion in revenue. They're probably working, you know, somewhere in the range of 50 to $150,000 a year.

Right. And if their profit margin let's say is a modest, you know, 20%. And their costs double. 

Yeah. Well, in grocery stores tend to have a lower margin, the lowest margin. A lot of them, it's actually two to 3% operating margin if you have 5%, but so it's even low double costs for a grocery store, mom and pop, you know, that's selling their yeah.

It's 

game over for him. Uh, it's a game over. So you, you run into an issue where you lose profitability, right. And if you lose profitability, You have, you know, you really have to find a way to become profitable again, and that can be done by raising your prices or becoming more efficient. Right. And so sure you can say, uh, you know, raising prices as a choice in the sense that you could always become more efficient, so you can find a way to be leaner.

You can find a way to be more cost-effective to take more advantage of an economy of scale, perhaps, but at some point you can. You actually, can't become more efficient, right? If you're laying off employees left and right, and you're trying to do this by yourself and, and you're trying to cut the costs any way you can.

For example, if, if you know Jacob and I started a business and I can't afford to pay Jacob anymore, and Jacob leaves, I can't do the same workload that we just had. So you actually then are losing product or services that you could sell to make money. And you are still. 

Yeah, our quality, just as an example, in the insurance realm that I've worked in, we've got an explosion over the last couple of years with COVID.

Cause a lot of people they're bored. They're not, they're not driving or whatever it is. And they're thinking, okay, how can I make this cheaper? I'm driving my car a 10th as much. Like we saw in Utah, the amount of miles being driven, measured by the Utah. I saw the data in February. It dropped almost 80%.

How much people were dressed for like two or three months. Right. Went back. Um, and now it's normalized again, it's actually surpassed what it was two years ago, which is expected with Utah's population growth. Um, when people drop and they're like, well, I'm driving 80%. Why am I paying the same amount? So we saw this huge spike where people were just searching even our own clients, because they wanted to get the best cheapest price rather than quality.

But people weren't asking the questions about what is my policy cover? What does this look like? What does that it's? Oh, that's $2. I literally had one client lead me over 93 cents a month. Oh, that's how much cheaper it was for them to go somewhere else. And I'm like, you've gotta be kidding me. This client been with our office for 10 years, you know?

And so it just depends on your industry. It can be affected by that. 

Yeah, absolutely. Well, I think that we've done a pretty good job, uh, kind of going over just a, a general basis of why sometimes it's not a choice, uh, and why it's necessary to raise prices and why that, uh, meme example again, I'll pull it up for you from the 98% is let me see if I can get that screen share before.

Uh, why it's not really applicable to the vast majority of businesses. Again, they're benefiting from billions of dollars of revenue, which means even at a very small profit margin, they're able to reap massive amounts of wealth for the ownership group. Uh, and at some point, if you aren't raising prices, but your costs are increasing, you lose that profit.

Yeah. Uh, so we're going to go ahead and I think we'll call this episode. This is the first episode of base business I would encourage you to please like, and subscribe hit the follow button, hit that follow button. And if you guys have questions, comments, concerns, or thoughts that you'd like to share, uh, go ahead and drop them down.

I'm sure. You know, you can hit that comment button on YouTube. If you see this on Facebook, you've got a spot right there. Uh, we're also going to be hosting on, I think pretty much every major podcast platform to find it on Spotify. Find us on Spotify, uh, like scrap the like subscribe, let us know what you want to see.

And we're going to keep producing videos, talking about what goes on in the business world and our 2 cents keeping it based, keeping it based. Have a great evening. I don't know how to stop recording. Go team USA.