Tag Archives: E&J Gallo

Gallo’s high-end wine conundrum

woman with wine glass
“I never considered that — just .36 percent.”

Why did a 100-million case winery buy two wineries that don’t make enough wine to matter to the bottom line?

E&J Gallo, the world’s biggest winery, sent more than a few tremors through the wine business last week when it bought high-end labels Rombauer and Massican.

These are distinctively non-Gallo brands; about the only thing they have in common with the Barefoots and Apothics that that generate Gallo’s vast profits is that they’re made in California. Rombauer, best known for its buttery chardonnay, makes $100 wines, while Massican is a boutique white producer.

In one respect, the acquisition makes perfect sense, given wine’s sales slump — and especially for labels costing $15 and less — as well as the industry’s hyper-drive to premiumization. In addition, as several wine people told me, Gallo gets expensive Napa land; access to Rombauer’s wholesalers and restaurant customers; and more leverage with retailers for the pricey wines it already owns, like J, the sparkling maker.

In another, though, it’s almost baffling. Gallo makes 100 million cases a year, while Rombauer does 350,000 and Massican maybe 10,000. That’s 360,000 cases annually, or about .36 of Gallo’s total (if my math is correct). Even allowing that the new brands are more expensive, the effect will be minuscule. How can the acquisitions make any difference to Gallo’s bottom line?

To answer that question, consider one of the great missteps in the history of one the most successful U.S. companies ever, McDonald’s. In 1998, McDonald’s bought Chipotle, Boston Market, and a regional pizza chain called Donato’s. The idea was to expand from fast-food burgers to something more expensive that would broaden McDonald’s appeal.

Sound familiar?

Everyone – including me, who did a lot of restaurant trade writing then – thought it was a masterstroke, and most of the stories in the trade and business media spoke to McDonald’s genius.

As I did more reporting on the story, I talked to a really smart stock analyst. He laughed when I asked him about all that brilliance. He said to me – and this has stuck with me since — “What possible difference could these three small chains make to a $12 billion company?”

And, sure enough, McDonald’s almost ruined Chipotle, discovered what a mess Boston Market was, and did ruin Donato’s. Eventually, it sold all three and has never done anything like that again.

This is not to say that Gallo will screw up Rombauer and Massican; its track record speaks otherwise. Rather, it’s to note that even smart companies do things that don’t turn out the way they were supposed to, even if they had all the best reasons for doing so.

Photo: Matilda Wormwood via Pexels

Is Gallo about to change the idea of winery tasting rooms forever?

Tasting rooms
Will wine drinkers soon be toasting each other with Gallo wine in company-branded tasting rooms?

Winery tasting rooms have traditionally been about Drink Local; Gallo’s plan could turn them into the wine equivalent of Disney stores

June 16 update: Bring on the Barefoot! The world’s biggest wine producer successfully negotiated the hurdles detailed in the first post and will build its warehouse, cannery, and bottling plant in rural South Carolina.

South Carolina Gov. Henry McMaster says the plan will hire almost 500 people over the next eight years, an impressive achievement for a county with around 1,000 residents.

The final agreement will allow Gallo to open three tasting rooms, but the company has not said where they will be.

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Winebits 641: The “Big Wine makes mega-deals” edition

international styleThis week’s wine news: Constellation Brands and E&J Gallo finalize their cheap wine blockbuster, plus Geyser Peak is sold again and Treasury wants to set Penfolds free

• Finally done? Constellation Brands’ $1.1 billion sale of its low-price wine labels to E. & J. Gallo is expected to close by the end of June, despite the coronavirus pandemic, reports the Press-Democrat website. The deal will send almost all of Constellation’s $10 wines to Gallo, including Black Box, Ravenswood, Clos du Bois, and Mark West, as well as vineyards and wineries in California and New York. The original April 2019 deal, worth $1.7 billion, had to be revised after U.S. regulators objected.

• Poor Geyser Peak: When I started writing the blog, Geyser Peak’s $10 sauvigngon blanc was one of the most dependable cheap wines on the market. But that was also several owners ago, and quality has never been the same. So it’s not necessarily bad news that the brand has been sold once again. The current owner, Australia’s Accolade Wines, will sell Geyser Peak, Atlas Peak, XYZin and Outlot to something called 2 Bears LLC. No word on who is behind 2 Bears.

• Whither Penfolds? Australia’s Treasury Wine Estates, one of the two or three largest producers in the world, has been feuding with stock analysts for the past year or so, defending what the analysts have been calling the company’s poor performance. So Treasury may spin off Penfolds, one of the world’s great wine brands and home to the legendary Penfolds Grange (which I’ve been lucky enough to taste and so can attest to its greatness). Whether this pleases anyone in the shadow boxing world of financial analysis is anyone’s guess, but it points to the pressures Treasury faces in a world where people drink less wine and Big Wine companies are being urged to shed brands.

Winebits 624: Scratch and sniff, Gallo-Constellation deal, Amazon wine

scratchand sniff
“Hmmm.. is that gardenias and lilacs?”

This week’s wine news: Scratch and sniff wine corks, plus Gallo and Constellation rework their wine deal and Amazon launches private label wine in Europe

• It smells so good: How about scratch and sniff wine corks? Amorim, one of the largest closure producers in the world, has developed wine stoppers that contain a fragrance, as well as a complementary spray that can be sold with the wine. Call it perfume for wine. There’s no indication in the story in the link, which reads like a cut and paste news release, how the fragrance doesn’t get in the way of the wine’s aroma — which would seem to be a serious problem. In addition, the scratch and sniff product is part of a new line of closures that includes one with an LED and one that changes color when the wine is at the correct temperature.

• Not so fast: E&J Gallo and Constellation Brands have revised their massive wine sale after a warning from U.S. government regulators. The original $1.7 billion deal has been reduced to $1.1 billion, and Constellation won’t include several brands that would have given Gallo too big a share of the U.S. market in several categories. That includes Cook’s California Champagne, a $7 sparkling wine, since Gallo already owns Andre, a similarly priced California bubbly. Expect Constellation, which is running away from wine as quickly as possible in favor of legal weed, to dump Cook’s on someone else.

• Amazon wine: Amazon has launched its own-branded wine in Europe. The story in the link, which focuses on how this might affect California, misses the point – that it’s likely illegal for Amazon to do this in the U.S. It also misses the point about Amazon’s competition in Europe, which aren’t high-end wineries, but supermarkets selling €10 wine. So the on-line retailer is selling €20 wine in Europe, apparently because it doesn’t want to compete with Aldi, Lidl, and the rest.

Winebits 588: Constellation sells 30 wine brands, drunk shopping, drinking at home

constellationThis weeks’ news: Constellation Brands sells 30 wine and spirits labels to Gallo, plus drunk shoppers prefer Amazon and more younger people are staying home to drink

• Constellation sale: The third-biggest wine company in the U.S. is washing its hands of cheap wine after selling a gaggle of less than $10 wines to No. 1 E&J Gallo last week. The brands include Black Box, Clos du Bois, Ravenswood, and Rex Goliath. Originally, Constellation asked for $3 billion and only wanted to sell some brands. But the analysts I talked to said there was so little interest in the sale from potential buyers that Constellation had to sweeten the pot and cut the price to get the deal done.

• Good old Amazon: Where do drunk shoppers go when they’re ready to spend but not remember what they did? Amazon, of course. Almost 90 percent of drunk shopping took place on the Internet retail giant last year, and shoppers spent an average of $444. Yes, that’s an impressive total, but Imagine how much more it might be if Amazon could sell wine the way it sells clothing and shoes (the top two drunk buying items).

• Not in a restaurant or bar: Wine Industry Insight reports that more young consumers are staying home to drink. The reason, which will surprise no one except those in the restaurant business: “Drinking at home is cheaper.”

Apothic coffee: Is it any wonder I worry about the future of wine?

Apothic coffeeApothic coffee might reach a younger audience, but how will coffee-flavored wine save the wine business from itself?

The marketers at E&J Gallo are geniuses, turning brands like Barefoot and the sweet red Apothic into massive national best sellers without one lick of support from the traditional wine media. So why would Gallo come up with an Apothic coffee product, called Apothic Brew, “a taste that captures the smooth mouthfeel and velvety chocolate notes of cold brew with the juicy blackberry characteristics of a dark red wine“?

Because if the Gallo marketers think the wine business needs Apothic coffee, and it knows the wine business better than anyone, we’re doomed.

Regular visitors here know that wine is facing conditions it hasn’t seen since the 1980s – flat consumption, rising prices, reduced quality, and the tail end of the Baby Boom that powered those 30 years of growth. Plus, the two generations younger than the Boomers have shown no indication of picking up the slack.

Hence all sorts of attempts to bring wine to Generation X and the Millennials, including virtual reality labels. That’s probably where Apothic Brew fits in, a product for younger consumers who think wine is snobby and too geeky. But if even Gallo, the world’s biggest wine company with almost $5 billion in revenue, has to resort to a wine and coffee blend to reach younger consumers, we’re doomed.

Because isn’t Apothic coffee just Red Bull in a bottle with a cork? This is not a value judgment on the product; I don’t do that. Drink it if you want, and enjoy it. But how is a boozy energy drink going to help the wine business out of its doldrums? Wouldn’t fairly priced quality wine, closed with a screwcap, deliver better results?

Because if Apothic coffee is the future of wine, we’re doomed.

Big Wine strikes again

Big Wine
“Who do we want to buy next?”

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.

More about Big Wine:
? How to buy wine at the grocery store
 ? Downton Abbey claret ? wine merchandising for dummies
? Big wine tightened its grip on the U.S. wine market in 2013