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| May 2nd 2008 |
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| Gallo: The Campbellīs soup of wine |
by Kevin McCallum
If Mondavi democratised production, Gallo democratised consumption, famously declaring it wanted to be the Campbell’s Soup of wine, giving consumers what they liked to drink at a price they were willing to pay. The company has come a long way since then.
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To understand why E&J Gallo is such a powerful force in the US wine market, one needs look no further than the Publix supermarket in Sarasota, Florida. Upon entering the grocery, one of 928 locations in the American southeast, the first item a shopper visiting in early March would have seen was a bottle of Frei Brothers Cabernet Sauvignon. Framed by colorful flowers and fresh strawberries, several varieties of Gallo’s fastest growing Sonoma County wine took center stage on a wine barrel, all discounted by $3 down to $16.99 per bottle.
It should surprise no one that one of the hottest brands of the largest US winery would occupy such fertile retail ground, where impulse buys boost sales well beyond the rates possible on the crowded wine aisle. But the real secret behind Gallo’s profound influence in the US wine market lies not in that key first display, but in the second, third, fourth and fifth similar displays that surrounded it, all just steps from the market’s entrance. Beside the Frei Brothers display sat bottles of Rancho Zabaco, a popular Sonoma County Zinfandel brand made at Gallo’s Healdsburg winery. Another barrel showed off the wines of Louis M. Martini, the Napa winery Gallo purchased in 2002. Next to that sat an arrangement of Barefoot Cellars, an inexpensive line of California wines Gallo purchased in 2005, exponentially increasing their production.
Finally, under a sign that read ‘Wine Simplified’, shoppers found something called Polka Dot, a German Riesling in an aqua-blue bottle, one of many new offering from Gallo’s fast growing stable of imported brands.
In all, five out of the eight wines on display in Publix’s entrance were Gallo brands, though you’d never know it from looking at the labels. The other three brands belonged to fast-growing Chateau St. Michelle Wine Estates in Washington State, Sonoma County sparkling wine producer Korbel, and one of Constellation Brands’ California brands, Estancia. All formidable rivals to be sure, especially Constellation, which surpassed Gallo several years ago as the largest producer of wine in the world following its purchase BRL Hardy in 2003 and the Robert Mondavi Corp. in 2004.
But none possess anything approaching the grip Gallo maintains on the prime real estate inside US supermarkets, where the majority of the $30b in US wine sales last year occurred. This unparalleled access to US consumers has helped the company transform itself in less than 20 years from a generic jug wine producer into a diversified and global wine empire.
“No other company is participating so broadly in this huge, burgeoning global wine market,’ said Jon Fredrikson, a prominent US wine industry analyst and head of Gomberg, Fredrikson & Associates. “There is nobody that is so diversified anywhere in the business.”
Whether it’s jug wine, fortified wines, entry level varietals, mid- to high-end Sonoma and Napa Valley |
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wines, or its port and brandy business, the modern E&J Gallo has long seen the value in a diversified product line, leveraging its strength in one wine category to give its new brands a boost. Increasingly, that diversity is taking on a decidedly international flavor. Gallo has dramatically ramped up its import business in recent years late, forging partnerships with 14 foreign wineries in eight nations to produce an estimated 6.2m cases of wine destined for the US in 2006.
Perhaps in recognition that it got caught flatfooted in that last big shift in the US wine business – from generic jug wines to varietal wines in the 1980s – Gallo has embraced globalization like no other wine company. From French Pinot Noir, to South African Shiraz, to Italian Pinot Grigio, to New Zealand Sauvignon Blanc, Gallo is now bringing foreign wine into the US from every major growing region of the world.
“We want to offer a portfolio of products to the US that allows us to compete in all segments of the wine business,” says Roger Nabedian, general manager of Gallo's premium wine division.
New brand development continues to play a key role in creating that diversity. The company makes or markets over 60 different wine brands. But increasingly, Gallo is achieving the portfolio diversity is seeks through joint ventures with foreign wine producers. Some distrust Gallo’s aggressive new import strategy, concerned it will limit consumer choice and hasten the homogenization of wine. After all, this is the company whose co-founder famously aspired to be the Campbell’s soup of wine. But to many in the US wine industry, the way Gallo has partnered with foreign producers and helped them craft wines that appeal to American consumers is nothing short of “brilliant,” says Vic Motto, chief executive officer of Global Wine Partners, a Napa Valley-based investment bank. “If your goal is art, this is not art,” he says. “This is commerce.”
In the beginning
Nearly 75 years ago, two months after the repeal of Prohibition made it once again legal to sell alcohol in the US, brothers Ernest and Julio Gallo turned tragedy into opportunity. After their father Joe Sr., an Italian immigrant saloonkeeper turned grape-grower, killed their mother and turned the gun on himself, the brothers took over the family business and changed its course forever. Instead of sending grapes east for home winemakers, they took $6,000 and a few winemaking pamphlets from the local library and founded a winery in a rented warehouse in Modesto, a sleepy town in California’s dusty Central Valley. While the town may have been modest, the brothers’ aspirations were anything but. They worked tirelessly to build their new winery against larger rivals and longer odds. The way Ernest told it, since all they could afford was one tractor, he would drive it for 12 hours and then Julio would drive it for 12 more.
Coming of age |
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as they did in the Depression, the Gallo brothers showed a fierce determination to succeed and no patience for wine snobbery. People wanted basic wine at affordable prices, and that’s what they unapologetically gave them. With Julio focused on modern, cost-effective ways to make the wine, and Ernest using aggressive and at times Machiavellian means to sell it, the brothers made a dynamic team.
Along the way, they reinvested heavily not only in the winery, but in other assets that helped them control costs, such as owning their own glass factories, label printers, and even distribution companies. Such vertical integration served the company well. Soon E&J Gallo had become the largest winery in the nation, propelled by the success of non-vintage jug wines like Hearty Burgundy and Carlo Rossi and potent fortified wines like Thunderbird.
Though the market has since shifted – and Gallo along with it – to varietal wines, the success of Gallo’s jug wine business in the 1960s and 1970s is widely credited with introducing millions of Americans to wine and setting the stage for the nation’s eventual shift to becoming the world’s most lucrative wine market. Gallo’s jug brands remain formidable products and powerful revenue generators to this day. The Carlo Rossi brand alone remains the company's top selling wine by volume, selling more than 12.7m cases in 2006, according to the 2007 edition of the Adams Beverage Handbook. Its Livingston Cellars and Peter Vella brands, jug and box wine brands, respectively, are also regularly listed as some of the top selling brands by volume in the nation. So while the company has made decisive moves away from its jug and fortified brands, they continue to form the winery’s foundation, giving it steady revenue, economies of scale, and immense clout with distributors. Those strengths have given Gallo tremendous market advantages as it has reinvented itself, not once but twice.
The first time was when US wine drinkers during the 1980s turned away from the generic, non-vintage jug wines in favor of varietal wines. Competitors were flooding the market with inexpensive ‘fighting varietals’ that offered a set of seemingly more sophisticated wines for reasonable prices, and Gallo was forced to follow suit.
“People wanted varietal wines, and (Gallo) had to come out with new brands to go with the market or they were going to have tough times,” says Frank Walters, research director for Impact DataBank, a wine industry data analysis firm. “You can’t live on Boone’s Farm and Thunderbird and Carlo Rossi. If they had stood on those brands, today their market share would have plummeted.”
Some have suggested that Gallo was slow to either recognize or capitalize on the shift. Ernest Gallo’s feeling that varietal wines were elitist and Julio’s belief that non-vintage wines were more consistent are often cited as reasons for |
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the company’s slow response. The company may also have been distracted. While rivals were racing to launch varietal wines, Gallo was riding the wine cooler wave. Launched in 1984, Bartles & Jaymes wine coolers became phenomenal success for the company, hitting a peak of 18.4m (2.25 gallon) cases in 1990, with 49% of the market, according to Fredrikson. The following year, taxes on wine increased, and the company stopped putting wine in the ‘coolers’, switching to malt. Sales have fizzled ever since.
Whatever the challenges Gallo faced in making the transition to varietal wines, by the early 1990s, it had made remarkable progress. By 1991 it had become the largest seller of varietal wine in the US, according to report from San Francisco investment bank Hambrecht & Quist. The 1990s were also a period of dramatic transition within the family owned company, as the second and third generations of Gallos assumed greater responsibilities and leadership roles. Ernest’s son Joe opened the company’s first overseas sales office in the U.K. in 1985, and took on a greater leadership role as the founders aged.
Joe Gallo became CEO in 2001 and by all accounts is the undisputed head of the multi-billion family business, though he shares the presidency with his cousin Bob, Julio’s son. The third generation is coming up strong, as well. Bob’s children Matt and Gina Gallo head the high profile fine wine operation based in Sonoma County, 60 miles north of San Francisco. Matt is the vice-president of operations, and while Gina carries the title of winemaker. Joe’s daughter Stephanie is head of marketing and his son Ernest J., is director of innovation. They are just a few of the 15 Gallo family members leading the winery into the future, a testament to the fierce work ethic passed down from the company’s founders.
“You didn’t grow up Gallo and not work,” Gina Gallo has said.
More than just a marketing slogan, family ownership has given Gallo a significant advantage over some of its corporate rivals. While it is a massive company with nearly 5,000 employees, its leadership is clear and centralized. “Everything is right there in one building in Modesto, where decisions are made and made quickly,” says Fredrikson.
Another key advantage to family ownership is the ability to invest for the long-term, instead of for quarterly profit demands of shareholders, Joe Gallo explained in a rare interview with Harpers in 2006. “Basically, we are uniquely suited to the wine industry where you have to think long term,” Joe Gallo said. “The advantage of a family business is we can think eight or 10 years and we will get a return on our investment.”
Gallo has seen its early investments in Sonoma County begin to pay considerable dividends. The company purchased the sprawling Frei Ranch near Healdsburg in 1978, and built a two million case winery there. In 2005 is |
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won approval to more than double the capacity, to 4.9m cases.
Its Sonoma County holdings have been key to its move up market. The cooler, coastal county is widely considered to be far superior for grape growing than the scorching Central Valley. All told, the company owns over 3,000 acres of vineyards in Sonoma County, and more than 10,000 in California, according to industry estimates. Though a fraction of Gallo’s overall production, Sonoma County is home to some of company’s most prestigious brands, including its Gallo Family Vineyards Sonoma Reserve wines, and other fast growing and profitable brands like Frei Brothers and Rancho Zabaco.
Many in the industry welcomed Gallo with open arms for the marketing boost its programs brought to the profile of Sonoma County wines. The company also took significant flak from some quarters, particularly the rural county’s vocal environmental community. Critics assailed the size of the winery, the county’s largest, and the scale and methods it used to develop its vineyards. The company’s so-called ‘industrial farming’ approach often involved using heavy equipment to move tons of earth to sculpt the natural oak studded hillsides into manicured – and therefore easier and cheaper to farm – vineyard rows.
“It looked like they were building a city out there,” said one industry insider who recalled the uproar. “It frightened the bejesus out of people.”
Some of those fears may have been misplaced, stoked by images of Gallo’s monstrous Modesto facility, which takes up several city blocks and looks more like an oil refinery than what regular folks think of as a winery. While the company doesn’t release production figures, industry estimates are that its total US wine business – including imports -- is approaching 80m cases annually. Gallo defends its environmental record, pointing out that it has set aside half of its 6,000 acres in the county for wildlife habitat, and has gone to great lengths to make its Sonoma County vineyard and winery practices some of the most environmentally friendly in the industry.
Despite these efforts, the company has had to swim upstream against consumer perceptions linking the Gallo name to jug wine and big business. Despite a recent rebranding that was supposed to highlight the company’s family ownership, the reality is the Gallos don’t put the Gallo name on the vast majority of their wines.
“It’s not like they’re trying to hide it,” says John Hinman, a veteran San Francisco beverage attorney. “It’s just, why advertise it if it doesn’t help?”
Just four of the company’s more than 60 brands use the Gallo name, under the Gallo Family Vineyards moniker. The name is a rebranding of the Gallo of Sonoma label, into which the company has poured tens of millions of dollars in advertising since launching it in 1994, with |
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limited (by Gallo standards) results. All told, about 600,000 cases of Gallo Family Vineyards Sonoma Reserve, Estate and Single Vineyard, are made in Sonoma County, a number industry watchers say has been a disappointment.
The company’s real growth in varietal wines has come through aggressive brand launches, regularly rolling out new, well researched brands that most consumers would never suspect were Gallo creations – Turning Leaf, Redwood Creek, Rancho Zabaco, Dancing Bull, Frei Brothers, and MacMurray Ranch, just to name a few.
Acquisitions of new brands and wineries have also played a key role. Barefoot Cellars is a noteworthy example. The fast-growing Sonoma County-based negociant was selling about 500,000 cases in 2005 when Gallo purchased it. In two years, Gallo has boosted the brands’ production eight-fold to nearly 4m cases, making it the fastest growing wine in the nation, according to Impact Databank.
“It’s just tearing up the market,” says Fredrikson. “Barefoot basically took the wind out of the sails of Yellowtail.”
The critter brand from New South Wales came out of nowhere in 2000 and quickly became the number one imported wine in the US Last year it sold about 8m cases in the US, and expects to that number to increase slightly in 2008. The success of Yellowtail confirmed what Gallo already knew – American consumers liked US wines, but were increasingly drawn to the sense of adventure and value that imported wines offered. Gallo proved that with its 1996 launch of Ecco Domani, a Pinot Grigio from Italy. That brand was developed because US grape growers simply couldn’t meet growing demand for the varietal, Nabedian says.
The motivation was similar for the company’s 2001 joint venture with Australian producer McWilliam’s Wines – US growers just didn’t have enough Syrah, and so the company reached out to the respected Shiraz maker. Gallo has since taken a 10% stake in the company. Since those two ventures, the company has broadened its thinking somewhat on imports, viewing them not just as alternative sources of hard-to-find varietals, but as ends unto themselves, Nabedian says.
As Americans’ interest in imports continued to increase, Gallo realized it could either be the one offering those wines or stand by and watch competitors capitalize on the opportunity. And so its joint ventures have proliferated. Following on the success of Ecco Domani, Gallo has launched three other Italian brands -- Bella Sera, Maso Canali, and Da Vinci. Other offerings have included Red Bicyclette and Pont D’Avignon from France; Black Swan, from Australia; Polka Dot, a German Riesling; White Haven, a Sauvignon Blanc from New Zealand; Don Miguel Gascon, a Malbec from Argentina; Sebeka from South Africa; and Martin Codax, from Spain.
In many cases, such as with Martin Codax, Gallo doesn’t tamper with the wine one whit, Nabedian said. All that |
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wine needed was to have its marketing and packaging “retooled” for the US market, he said.
But other brands involve much more direct winemaking involvement by Gallo, such as Red Bicyclette, the line of French wines from the Languedoc region launched in 2004. Gallo worked closely with French winemakers to create a vin de pays from France that US consumers – according to Gallo’s vast research - were more likely to enjoy. “We’re not trying to have the science dominate the art, or if you like the term, the ‘terroir,’” Nabedian says. “But we are trying to provide them with some insight into what the US consumer prefers and some insight into what the US consumer prefers to avoid.”
While the original plan was for Gallo to sell Red Bicyclette in France and the UK, the brand, which was designed with the US consumer in mind, did not perform well in Europe. It has since been withdrawn and is now only being sold in the US, Canada and Korea. “It wasn’t a huge failure, but it wasn’t by any measure a success,” Nabedian says.
Overall, however, Gallo’s import strategy is proving wildly successful. The company has gone from no imports to millions of cases in a little over a decade. The exact number is hard to pin down. Impact Databank puts it around 6.2m for 2006, and Wine Enthusiast magazine, which named the company importer of the year in 2007, figures it’s closer to 4.7m cases. Certainly some of the credit for those numbers must go to Gallo’s insights into what drives the US consumer. But that’s far from a complete explanation. Plenty of foreign producers are, after all, perfectly capable of making wines that appeal to the US palate. But selling them in large quantities in the complex, highly regulated and fractured US retail wine market is another thing entirely. That’s where Gallo’s expertise lies, and that’s the real reason its import portfolio is booming.
“They are in touch with the market,” says Motto. “They have their finger on the pulse of the market – the consumers, the distributors and the retailers -- in a way no foreign producer could ever hope to duplicate.”
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