E. & J. Gallo Winery Business Information, Profile, and History

History of E. & J. Gallo Winery

E. & J. Gallo Winery is the largest winemaker in the world, with production of nearly 900 million bottles per year. Gallo produces one in every three bottles of wine made in the United States. While best known for its inexpensive jug wines and such fortified varieties as Thunderbird, in the 1980s and 1990s Gallo has aggressively followed consumer preference into more expensive categories, notably cork-finished varietals (wines made wholly or predominantly from a single type of grape, such as Merlot). Many of these appear under brands other than Gallo, including Turning Leaf, Gossamer Bay, Indigo Hills, and Northern Sonoma. The winery, which remains privately owned by the Gallo family, has about 2,500 acres of prime Sonoma land in vine, making it the largest landowner in the region. It operates four California wineries. Gallo is also a market leader in sherry, vermouth, and port, marketed under the Gallo trade name; their other leading brands include André sparkling wine, E & J brandy, and Bartles & Jaymes wine coolers.

Early History

Gallo's phenomenal success rests on the shoulders of the brothers Ernest and Julio Gallo, who founded the winery in Modesto, California, in 1933. Ernest was regarded as the marketing and distribution expert, while Julio oversaw wine production. The Gallos' contribution to every aspect of their business is widely acknowledged throughout the industry. Ernest is credited with almost singlehandedly increasing domestic demand in the 1960s and 1970s, while Julio's technical innovations include the widespread adoption of stainless steel fermentation tanks to replace the traditional wood casks for all but the most expensive wines.

The growth of the Gallo winery parallels the emergence of California winemaking as a world-class industry. California had been successful in international competitions as far back as the early 1900s, but with the arrival of Prohibition in January 1920 the thriving industry was almost destroyed. Thousands of acres of carefully cultivated wine grapes were uprooted and replaced with cash crops such as apples and walnuts. When Prohibition was repealed on December 5, 1933, a mere 160 of California's original 700 wineries were intact, and federal and state taxation and legislation had decimated domestic wine consumption.

In 1933 Ernest and Julio Gallo, aged 24 and 23 years, respectively, entered the wine business. They had worked since childhood in the modest vineyards of their immigrant Italian father, and after the death of both their parents, they decided to start making their own wine. Their technical expertise was gleaned from two pre-Prohibition wine pamphlets in the Modesto Public Library. Ernest and Julio obtained the necessary government license, purchased winemaking equipment on credit, and leased a small Modesto warehouse for $60 a month. They then visited local growers, offering them a share of the profits in return for the use of their grapes. By the time of Prohibition's repeal in December 1933, Ernest had made his first sale of 6,000 gallons of wine to Pacific Wine Company, a Chicago distributor. Profit in the first year was $34,000, a sum that was immediately plowed back into the business.

The first Gallo winery was built at Dry Creek in Modesto and until the late 1930s sold table wine to local bottlers, who sold it under a variety of labels. In 1940, however, the first Gallo-labeled wine was introduced, and business increased substantially. Bottled in Los Angeles and New Orleans, the original selection consisted of the varietal wines Zinfandel and Dry Muscat, in addition to sherry and muscatel. It was during this early period that Ernest developed the strategic vision that would make him renowned throughout the industry. Realizing that consumption would never rise while wine was relegated to a secondary position behind hard liquor, he introduced the novel concept of salespeople who sold wine exclusively, a highly successful idea which was soon widely imitated. He recruited a team of zealous salespeople to push Gallo products and guarantee them high visibility on liquor store shelves. From the beginning, Gallo followed a strategy of expansion into new markets only when existing markets were conquered. Twenty-five years later, Gallo brands were available nationwide, and the company's distribution system was regarded as its greatest competitive strength.

Accomplishments in Winemaking, 1940s--70s

The company was also admired for its enological accomplishments. The Prohibition era had wreaked havoc on crops of better varieties of wine grape, which had been largely supplanted by inferior table and raisin varieties. The Gallo brothers addressed this problem with the purchase in 1942 of 2,000 acres of land in Livingston, California. Starting in 1945, they pursued an ambitious research and experimentation program that covered all aspects of viticulture, from rootstocks to irrigation methods. Grapes grown on the Livingston land were transported to a special research winery in Modesto for further testing. When a particular variable was determined to be beneficial, it was introduced into day-to-day winery operations. Many of the experiments, such as an innovative pest control system, were well ahead of their time and had far-reaching beneficial effects on the entire industry. In 1958 a research laboratory went into operation. By 1993 the research staff of 20 included chemical engineers, microbiologists, and biochemists, and a total of 50 research papers had been submitted by the winery to the American Society of Enology and Viticulture. The company also maintained a technical library designed to keep researchers and growers abreast of the latest developments in their respective fields.

In 1957 the Gallo brothers built a customized glass plant in Modesto, a step in the process of vertical integration which would eventually encompass the Fairbanks Trucking Company, an intrastate transportation company established in 1961; and Midcal Aluminum, an aluminum bottle cap and foil manufacturing plant founded the same year. In 1957 the company introduced Thunderbird, a citrus-flavored fortified wine that reflected consumer tastes of the period. Over the years, the brand began to sell particularly well in depressed neighborhoods because of its high alcohol content and low price. Although Thunderbird was undoubtedly one of Gallo's early marketing successes, it also contributed to the company's down-market image. By 1989, in the face of public concern over alcoholism and internal family pressure, Gallo had asked distributors not to sell its flavored fortified wines to retailers in low-income neighborhoods.

Consumption of table wine in the United States increased more than sixfold between 1960 and 1980, corresponding to a period of great growth for the Gallo company. Production techniques were developed to provide high quality at lower cost than the competition. Wine industry experts unanimously praised Gallo's achievement in "bringing new wine drinkers to the fold" with their clean, consistent, and competitively priced product. As early as 1972 the wine critic of the Los Angeles Times identified Gallo Hearty Burgundy, priced at $1.25 a bottle, as "the best wine value in the country today." This wine was credited with influencing Americans to buy more California jug wines. In 1965 Julio Gallo established a Grower Relations staff of wine professionals who continue to work with growers, recommending new technologies and practices developed largely at Gallo's research facility. Among the most important developments of this period was a quality drive initiated by the company with California growers in 1967. In exchange for replacing existing grapes with grape varieties of Gallo's choice, growers were offered 10- to 15-year contracts guaranteeing them a fair price for their harvest. More than 100 growers signed contracts, thus ensuring the reemergence of such classic grapes as Chardonnay, Cabernet Sauvignon, and Sauvignon Blanc. As a result of the increasing supply of true wine grapes, Gallo was able to discontinue use of the inferior Thompson seedless grape in 1972.

In 1976 the Federal Trade Commission charged Gallo with unfair competition, and the winery signed a consent agreement restricting its ability to control its wholesalers. The consent order was designed to prevent Gallo from vertically integrating to a point where competitors would be unable to distribute their products effectively. In September 1982, Gallo successfully filed a petition to have the order set aside, arguing that "dramatic changes in the wine industry," specifically the entry of conglomerates such as Coca-Cola and Seagrams, had rendered the terms of the original order obsolete.

Moved into Premium Wines in the 1980s

During the 1980s Gallo made a strong move into the premium wine market. In 1981 a premium Chardonnay was launched, to be followed one year later with a vintage-dated Cabernet from 1978. In late 1988, having dropped some of its original cork-finished varietals, Gallo introduced others, such as a successful new "blush" category of varietals. A vintage year was added across the Wine Cellars label, a trend the winery had resisted for many years. Given the company's production, marketing, and distribution expertise, no one in the industry was surprised when Gallo quickly took a leading role in the premium wine market. At the same time, Gallo was experiencing great success with the Bartles & Jaymes wine cooler, a beverage containing a mixture of wine, fruit juices, and carbonated water, and having less alcohol than table wine. The Bartles & Jaymes product was introduced in 1985 and within a year had become a market leader in a highly competitive and burgeoning segment. Many analysts attributed its success to an inspired ad campaign by Hal Riney and Partners, featuring a pair of eccentric characters named Frank Bartles and Ed Jaymes. The wine cooler phenomenon was short-lived, however; by 1993 demand had plummeted and Gallo and Seagrams were the only wine cooler producers left in the market. Advertising expenditure dropped accordingly. New introductions in the 1990s included the Eden Roc champagne brand, priced somewhat higher than the company's market leader, André champagne.

In April 1986, Ernest and Julio filed suit against their younger brother Joseph, charging him with trademark infringement. Joseph had begun to market cheese under the Gallo name. The case was important because it brought into question the right of an individual to use a personal name that had already been registered as a trademark by someone else. Several months later, Joseph filed a countersuit, claiming that he had been deprived of his rightful one-third share of their parents' winery, in effect a substantial share in the E. & J. Gallo Winery itself. Ernest and Julio's defense rested on the assertion that their winery was completely self-funded and had nothing to with their parents' estate. In September 1988 Joseph's counterclaim was dismissed. In June 1989 a U.S. District Court judge settled the trademark infringement case in favor of the plaintiffs, and Joseph Gallo was given 30 days to stop using the Gallo name on his cheese.

Second Gallo Generation Took Over in the 1990s

Ernest and Julio Gallo headed the winery they founded into their 80s. By the early 1990s the winery's leadership finally passed on to the second generation. Julio died in 1993 at the age of 83 from a broken neck he suffered when he overturned his jeep on a family ranch. Ernest, stricken by the loss, soon thereafter gave up day-to-day management, remaining involved only in long-range planning as Gallo chairman. Gallo was thereupon run by four copresidents: David Gallo, eldest son of Ernest, in charge of domestic marketing and advertising; Joe Gallo, also a son of Ernest, head of domestic and international sales; Bob Gallo, son of Julio, head of vineyards and winemaking; and Jim Coleman, Julio's son-in-law, responsible for warehouses and bottling plants. David died in March 1997 of a heart attack, leaving Joe Gallo fully in charge of sales. According to an article in the Los Angeles Times Magazine, 15 of Ernest and Julio's 20 grandchildren were employed by the winery in 1997, making it likely that Gallo family members would remain in leadership positions for years to come.

In the 1990s consumers continued to gravitate toward more expensive wines, and Gallo sought new ways to capture the mid-priced and premium categories. Despite the winery's efforts to escape its longstanding image, Gallo was still perceived as a low-end brand. To counter this, the Gallo winery began producing varietal wines under new brand names, with the Gallo name appearing nowhere on the label. In 1995 Turning Leaf made its debut, while Gossamer Bay debuted the following year. Gallo positioned both of these brands in the $5 to $10 per bottle range, the mid-priced area typical for supermarket-sold wine. By the fall of 1996 Turning Leaf had become one of the top 12 varietal wines sold in supermarkets.

Both Turning Leaf and Gossamer Bay were made at the Modesto winery; the inclusion of "Made in Modesto" on their labels was the only clue to their Gallo parentage. But Gallo was able to achieve an even greater distancing with wines produced in California's Sonoma County, where Gallo had been buying up vineyards and had a winery in Healdsburg. Gallo thereby began selling varietal wine vinted and bottled in Sonoma County; sold under a number of different brands, including Indigo Hills, Rancho Zabaco, Anapamu, Marcellina, and Northern Sonoma; and labeled "Made in Healdsburg." Some varieties sold for as much as $40 a bottle, placing them well into the premium category. Gallo wines finally began to receive serious attention from wine critics.

The move upmarket was not without its difficulties. Gallo was the object of a much-publicized lawsuit filed in April 1996 by Kendall-Jackson Winery Ltd., maker of Vintner's Reserve, the number one chardonnay brand in the United States. Kendall-Jackson contended that Gallo had copied the packaging of Vintner's Reserve for that of the Turning Leaf line of chardonnay and other varietals. Gallo prevailed in federal court in 1997 as well as in a federal court of appeals in 1998.

At the turn of the 21st century, Gallo Winery was well-positioned from the low to high ends of the wine market. Even under the direction of the second generation of Gallo family leadership, the winery was clearly following the direction of its founders--Ernest Gallo once said, "We don't want most of the business. We want it all."

Principal Divisions: Ballatore Champagne Cellars; E & J Distillers Brandy; E & J Gallo; Tott's Champagne Cellars.