E & J Gallo

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E & J Gallo

P.O. Box 1130
Modesto, California 95353
U.S.A.
(209) 579-3111

Private Company
Employees: 3,000
Sales: $1 billion (estimated)

The Gallo winery is a highly secretive private business which does not offer public tours or display its name on its company headquarters. It produces 55 types of wine ranging from premium corked varieties to popular low priced “jug” wines. Ernest Gallo’s marketing skills and business acumen complement his brother Julio’s concern for both quality control and improvement of the wines. This combined attention to consumer needs and wine quality has ensured Gallo a leading position in the wine industry.

Joseph Gallo, Ernest and Julio’s father, purchased a 230 acre vineyard in California after he emigrated from Italy during Prohibition. Although most alcohol was banned during this period, wine could be sold for religious and medicinal purposes. Joseph, however, could not profitably sell his grapes; he was competing with too many other struggling vineyards established prior to Prohibition. The prospect of a grim future induced Joseph to kill his wife, attempt to kill Ernest and Julio, and finally to kill himself. This family tragedy was actually the catalyst for Ernest and Julio’s founding of Gallo wines immediately after Prohibition. They pooled their inheritance of $5,900 to establish a winery in Modesto, California. With a recipe borrowed from a pamphlet in the Modesto Public Library, Ernest and Julio began what was to become a wine empire.

Initial labor costs for producing the wine were minimal. Ernest convinced his wife to help prepare wine in the shed which served as their winery. The exhausting and sacrificial labor yielded positive returns: the Gallo brothers sold their one gallon jug wine for one half the price of their larger competitors’ wine. Ernest used aggressive marketing skills to increase the sales of the jug wine. He flew to Chicago and sold a contract for 6000 gallons of Gallo wine at fifty cents per gallon to a major distributor. Within the first year Ernest and Julio had earned $34,000 in profits.

Since the founding of Gallo wines, Ernest’s aggressive business tactics have underlined his quest for perfection—in wine as well as in life. If Ernest believes, for example, that a business agreement has not been executed in the proper manner, the person at fault is instantly reprimanded, sometimes fired. Ernest has also gained a reputation for reading his market: he has continously and successfully predicted consumer tastes. His brother Julio oversees the quality of the wine. Julio personally tastes every batch at eleven o’clock each day. He also flies over the Gallo vineyards to inspect the growth and quality of the grapes. Thus, Julio’s striving for the finest quality wine mirrors his brother’s quest for managerial perfection.

In 1938 Ernest and Julio established their own bottling company in Modesto; in 1940 they purchased bottling companies in Los Angeles and New Orleans. Through these acquisitions Ernest believed that the winery could become self-sufficient and thereby accumulate additional profits.

At the outbreak of World War II distributors bought wine at low prices because the wine market was diminishing and there was a surplus. Then these distributors forced their retailers to purchase the wine at high prices as a condition of buying the hard liquor that was in great demand. After the war, the distributors caused the price of wine to rise again because they controlled most of the available stocks—the result of their purchases during the war. Gallo took the opportunity to sell its wine to the distributors at the high price of $1.50 per gallon in 1946. In 1947 Gallo bought back the same wine for $.50 per gallon when the wine market declined.

As a result of having this revenue at its disposal, Gallo was the first to automate its winery. At Julio’s insistence, Gallo was the first to hire research chemists. This industry innovation transformed wine making into an exact science; the taste of Gallo wines was now more stable than the taste of that of its competitors. The revolutionary use of stainless steel storage bins instead of wooden storage bins also led to a beneficial change; the wines no longer retained the taste of bacteria infested wood. The Gallo winery was also the first to computerize its records.

In 1957 Gallo introduced “Thunderbird,” a red wine with 20% alcohol flavored with lemon juice, which sold for one dollar per bottle. Ernest introduced this wine because people in the south had been flavoring strong wines with juice for years. An unprecedented 2.5 million cases were sold in less than one year. Ernest Gallo had recognized a consumer trend before the competition and had profited handsomely. The success with Thunderbird also had a negative effect on the company: it established Gallo in the public consciousness as a purveyor of cheap wine—a reputation the company would later find it difficult to overcome.

Gallo’s power was enhanced during the 1960’s as increasing numbers of small vintners, unable to keep up with the wine industry’s ever-rising expenditures for advertising and marketing. In 1930 there had been 800 vintners in California; in 1963 there were 241. Gallo improved and increased its advertising to ensure that it maintained its position in the industry against the larger wineries which were expanding through acquisitions of smaller vintners. In 1963 Gallo spent $5 million on advertising; the entire wine industry spent only $12 million. As well, Gallo maintained a tight rein on its distributors, insisting that they accept modest profit margins, to keep prices low for the consumer, to provoke more Americans to drink wine.

The per capita consumption of wine in America had been steadily rising: in 1959 consumers spent $650 million on wine while in 1962 they spent $745 million. Gallo capitalized on this increase by encouraging the sale of table wines more vigorously than the sale of sweet dessert wines. In 1963 the sweeter wines still outsold the table wines by a 2 to 1 ratio (86 million gallons to 40 million gallons). But the wine advisory board of California supported Gallo’s crusade for table wines by levying a tax of two cents per gallon on dessert wines and one cent per gallon on table wines. The advisory board also established wine-tasting sessions and wine study courses. Their efforts went a long way in helping to destroy the myth prevalent in the U.S. that wine should be consumed only on special occasions. Still, Americans were reluctant to drink wine with meals although Europeans had been doing it for centuries. During the mid-1960’s the typical Frenchman drank 35 gallons of wine in one year, the typical Italian drank 31 gallons, and the typical American drank 1 gallon.

Gallo’s competitors were not just the other California wineries: European winemakers began to invade the domestic market. Gallo emphasized the superiority of American wine to consumers by explaining that its stability and predictable flavor were due to the constant California climate. Domestic winemakers cross-bred grapes to improve the flavor of wines while Europeans relied on the same grapes every year. A 1965 federal directive supported the Gallo contention of American wine “superiority”: only American wines may be served at U.S. embassies and U.S. related functions abroad.

While Gallo attempted to improve the image of American wines, it also battled for rights to the best grapes in the country. In 1967 Gallo offered grape growers a fifteen year contract at a minimum price of $75 per ton of grapes or the going market price that year, whichever was higher. Gallo proposed this contract because of a shortage of certain grapes: the company wished to overwhelm its competition by capturing a large portion of the grape market. By offering a fifteen year contract for grapes, Gallo also hoped that growers would specifically plant grapes for Gallo consumption only. This action would exclude the competing wine companies and force them to use other, perhaps more expensive, grapes.

Gallo introduced the first “pop wines” in 1969. Under the Boone’s Farm Apple Wine label, Gallo marketed the first wine flavored with juice and carbonated. This later version of Thunderbird captured the market; by 1972 it had 88% of the pop wine sales in the United States. By 1969 Gallo was number one in the wine industry, producing 66 million gallons of wine per year (wine sales for the industry as a whole were 172 million gallons).

Despite record wine sales, Gallo continued to struggle with the pressures of being a private business without the financial resources of a public company. The shortage of available capital limits Gallo’s potential growth. It is difficult for Gallo to make acquisitions because the company cannot issue shares on the open market; it must rely on retained earnings or go into debt to purchase any new business.

However, there are advantages in being a private business that sometimes outweigh the disadvantages. A private business can be more daring and introduce new products which might easily fail—without answering to irate shareholders. The company’s directors have more freedom. Finally, more latitude is allowed the company in how it spends its profits. It can either reinvest in the operation of the company or initiate a new line of products. Both Ernest and Julio recognize these advantages and have resisted all outside suggestions to transform Gallo into a public company. The personalities of the founders, especially Ernest, do not allow for restrictions in making decisions about new product lines or consumer trends.

It was Ernest Gallo’s decision to promote the image of wine as an everyday drink and not a sophisticated European drink, and that decision was a correct one; he boosted sales of table wines. As Gallo sold more of its “hearty burgundy” and less of the pop wines, its profits increased. Consumers switched from sweet dessert wines to lighter table wines. Champagne and sparkling wines also became drinks for any occasion. The surge in American travel to Europe also helped build a new market for table wines. It also greatly helped the sales of European wines in America: imported wines enjoyed 10.5% of the market in 1956, 21% in 1970.

California’s share of the national wine market declined from 90% to 73%. However, Gallo was not adversely affected: it continued to increase sales by increasing its share of the domestic wine market. By 1971, along with United Vintners, it shipped 60% of all California wines.

The 1970’s were also a period of difficulty for the company. In 1973 the United Farm Workers (UFW) boycotted Gallo wines. Cesar Chevaz’s union had represented the Gallo workers, but in 1973 Gallo workers decided to change to the rival Teamsters Union. Chevaz charged Gallo with illegal tactics, and the dispute lasted for two years. In 1975 Gallo allowed its employees to vote for a new union of their choice. They did not vote to reinstate the UFW. Again, Chevaz charged unfair labor practices; he received support from senators Walter Mondale and Alan Cranston; 200 California stores removed Gallo wines from their shelves; protests were organized by other unions. Gallo continued to claim that the company paid workers well above the industry average and had not changed unions without the consent of the employees.

Despite these difficulties Gallo continued to dominate the wine market. It also began to upgrade the types of wine for which it was known. In 1974 Gallo introduced its first premium wines made with varietal grapes. To enhance the premium image that the company wished to establish, Gallo sealed its varietals with corks (in the past Gallo had sealed its wines with screw caps). Despite these efforts to upgrade the Gallo image, wine writers were still embarrassed to recommend Gallo wines; its reputation as a maker of cheap wines continued to haunt the company. Gallo attempted to erase this negative image by spending more money in promoting its new premium wines.

Its problem with the unions also continued to plague the company. In 1976 Gallo again felt the repercussions of its decision to switch unions. Gallo wine ads were banned from some college newspapers while others gave free ad space to the UFW in papers where Gallo already advertised. To add to its difficulties, Gallo was forced to consent to an FTC order barring anticompetitive dealings with its wholesalers for ten years. The FTC charged that Gallo set up “exclusionary marketing policies which it enforced by coercing distributors.” Gallo acceded to this consent agreement, but would not admit that it had committed any inproprieties.

Gallo was limited as a result of this consent agreement, and its competition took advantage of this restraint. The Coca-Cola Company’s wines, such as Taylor, challenged Gallo’s market share with extensive ad campaigns and lower prices. In response, Gallo offered discounts and initiated a new advertising campaign to counteract Coke’s growing influence on consumers. Soon, Coke’s war with Pepsi monopolized its ad budget, and thus thwarted Coke’s fight with Gallo. Coke sold its product line of wines to Seagram in 1983.

Although Gallo sales were high, Ernest Gallo became increasingly annoyed with the limits on the winery’s dealings. In 1982 the company petitioned the FTC to lift the consent agreement barring Gallo from exclusive dealership. Since its market share had declined, Gallo argued that it was not the same threat as it had been before. The FTC agreed and revoked the consent agreement. Several grape growers were not so pleased with Gallo. Steven Sommer, a Sonoma grower, filed a grievance with the California Department of Agriculture after Gallo had downgraded his harvest from $475 per ton to $275 per ton; Bernard Rutman sued Gallo because Gallo had rejected his grapes for no apparent reason after 40 years of service. Growers became victims of Gallo’s quest for perfection; the grapes that had been used for years suddenly did not meet Gallo standards.

While Julio upgraded wine quality, Ernest continued to predict successfully new consumer trends. The success of Gallo’s wine cooler, Bartles and Jaymes, is a result of Ernest Gallo’s careful consideration of the needs and tastes of the public in different age and career groups. Bartles and Jaymes appeals to an older audience because of its sleek bottle and smooth taste. California Cooler, the competition, appeals to a young audience primarily because it is available in different flavors. However, the clever advertising, product positioning, and dynamic marketing of Bartles and Jaymes have helped it to sustain its number one position among wine coolers throughout the 1980’s. Ogilvy and Mather handles the $20 million ad budget for the cooler—a substantial portion of the total $35 million Gallo advertising budget.

Gallo premium wines, aged in a newly built cellar in rows of twelve foot casks made from Yugoslav Oak, are Ernest Gallo’s pride. Gallo recently increased its advertising budget to $40 million, and the premium wines as well as the wine cooler will be the focus of future Gallo advertising and marketing efforts.

Ernest Gallo’s strong character is the prime force behind the success of Gallo wines. He allows himself no leisure: in his spare time he invites politicians, businessmen, and winemakers to his house to discuss business. Ernest does not waste time socializing with people who do not understand the wine business. As Julio says, “We don’t socialize much. There’s not much to talk about.” The goal of perfection may be obsessive, but the Gallo bothers do sell wine. Ernest is rigorous in following certain practices to increase the sale of Gallo wines. He teaches retailers how to sell Gallo wine by forcing them to read a 300 page manual entitled How to Maximize Your Wine Profits. He trains them in the shelf positioning of Gallo wines. He employs more Ph.D.’s than all the other wineries combined to work in the Gallo research laboratories. Finally, he imposes on Gallo’s top executives the most ambitious marketing strategy in the industry. Threequarters of the top people in the wine industry have at one time or another worked for the Gallo winery.

The future of Gallo not only lies in the success of its premium wines but also and more importantly in the direction of the winery after Ernest and Julio Gallo die. Ernest and Julio’s brother, Joseph, claims that he owns one-third of the business; the inheritance with which Ernest and Julio began their first winery should have been shared with him. However, his claim will probably not be upheld in court. Julio’s son, Robert, and his son-in-law, James Cole-man, are the most likely successors; they already oversee most of the day-to-day operations of the winery. Ernest’s sons, David and Joseph, also work in the business. Yet many observers feel that what the brothers have in mind for the future is most likely to be a professional manager answering to a family board of directors.

The Gallo winery has consistently dominated the market since its founding by accepting small profit margins and occasional losses. In 1986 Gallo led the industry in champagne (Andre), brandy (E & J), and wine coolers (Bartles and Jaymes). A long time aide to Ernest and Julio has remarked that “the wine-maker is a warrior.” If that is so, then it must be added that the Gallo brothers have combined the combative spirit with persistence and a quest for perfection—and it is that combination that is the secret of their success.