That E&J Gallo bought J Vineyards, the highly-regarded California sparkling wine producer, last month was shocking, but it did make business sense. Gallo, for all its vastness, doesn’t make high-end bubbly and doesn’t have many successful restaurant wine brands, and J does and is. Plus, J owned 90 acres of prime Sonoma vineyards, making the deal even sweeter for Gallo.
So how to explain this week’s news that The Wine Group, second-biggest to Gallo among U.S. producers and with even less of a critical reputation, bought the fiercely independent and much beloved Benzinger Family Winery? The Wine Group has never shown any desire to make wine not sold in grocery stores, and its two biggest brands are Franzia and Almaden, the five-liter box cash cows.
Call it one more step in the Big Wine-ing of America:
• The increasing consolidation in the U.S. wine business, something I wrote about at the beginning of the year. It is getting harder and harder for wineries that make less than one-half million cases to find distributors and space on store shelves. Benziger makes less than 200,000 cases a year, which wouldn’t even make it the biggest producer in Texas, and J sells only about one-third of that. Said the owner of a leading California independent: “My guess is that a winery really needs to be above 200,000 cases to really get the attention of a distributor. But maybe 500,000 is the new 200,000?” A distributor told me: “There are too many labels fighting for too few spots on the shelf or wine list. It’s crazy.”
• Family and independence, two hallmarks of the California wine business since the 1980s, aren’t enough anymore. These are just the latest sales involving long-time family wineries, which saw an opportunity to cash out to avoid succession problems, solve family disputes over winery operations, or to take advantage of Big Wine’s deep pockets. Sale prices weren’t disclosed, but one report said the J deal may have been worth as much as $90 million, which would make the Benziger price well into the hundreds of millions of dollars. Even of the sale price was half of that for each, which is probably more accurate, that’s a winning payout.
• It’s all about the land. Benziger, with sales of less than $10 million, is so small compared to the multi-billion dollar Wine Group that there is almost no way it could affect the parent’s financial performance. This makes the deal even more baffling, unless it was for the 200 or so acres of quality Sonoma vineyards that were part of the sale.
Will Big Wine run their new companies successfully? Certainly, if success is defined by profit. Otherwise, expect the new owners to do what new owners always do, despite best intentions and protests to the contrary — cut costs, eliminate unnecessary products (so say good bye to J’s lovely pinot gris), and “rationalize” operations. Gallo and The Wine Group won’t ruin J and Benziger the way Sears destroyed mail-order clothing retailer Lands’ End, but they won’t be the same wineries they were before the sale. That’s something we’ll have to learn to live with, because consolidation is going to be with us for a very long time.