E & J Gallo Winery

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E & J Gallo Winery

P.O.Box 1130
Modesto, California 95353
U.S.A.
(209) 579-3111
Fax: (209) 579-3192

Private Company
Incorporated: 1933
Employees: 5,000
Sales: $1 billion (est.)
SICs: 2084 Wines, Brandy, and Spirits

E & J Gallo Winery is the largest winemaker in the world. In 1990, the wine industry newsletter Impact estimated Gallo’s sales at over $1 billion on shipments of 67 million cases, and in 1991 Gallo produced one in every three bottles of wine made in the United States. Gallo grows approximately five percent of the wine grapes it uses, the remaining ninety-five percent coming from hundreds of independent growers. While best known for its inexpensive jug wines, in the last decade Gallo has aggressively followed consumer preference into more expensive categories, notably cork-finished varietals. By 1991, according to estimates by investment banking firm Hambrecht and Quist, Gallo was the largest producer of varietals in the United States, selling an estimated eight million cases that year. The winery’s crowning achievement will undoubtedly be its introduction of a limited-production, estate-bottled $60 Cabernet Sauvignon and $30 Chardonnay from the Gallo property in California’s Sonoma County. These wines will be released when the company feels that their quality equals or exceeds other offerings in the most expensive super-premium category. In pursuit of this goal, the Gallo brothers have almost 2,300 acres of prime Sonoma land in vine, making them the largest landowners in the region. The company is also a market leader in sherry, vermouth, and port, marketed under the Gallo trade name; their other leading brands include Andre sparkling wine and E & J brandy.

Gallo’s phenomenal success rests on the shoulders of two publicity-shy octogenarians, brothers Ernest and Julio Gallo, who founded the winery in Modesto, California, in 1933 and who remain with their families its sole owners. Ernest is regarded as the marketing and distribution expert, while Julio oversees wine production. The Gallos’ contribution to every aspect of their business is widely acknowledged throughout the industry. Ernest is credited with almost single-handedly 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. In an era when most of the big winemakers are publicly listed conglomerates, Gallo remains resolutely family-oriented. The second generation of Gallo family members has been active in management of the winery for many years, and the third generation has recently begun to make its mark.

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 Repeal came 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 which was immediately ploughed 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 wine was introduced under the Gallo label, 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 which 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 salesmen who sold wine exclusively, a highly successful idea which was soon widely imitated. He recruited a team of zealous salesmen 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.

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 which 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 twenty included chemical engineers, microbiologists, and biochemists, and a total of fifty 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 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 intra-state 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 which 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 downmarket 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 ten- to fifteen-year contracts guaranteeing them a fair price for their harvest. More than one hundred growers signed contracts, thus ensuring the re-emergence 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.

During the 1980s Gallo made a strong move into the premeium 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 and Jaymes wine cooler, a beverage containing a mixture of wine, fruit juices, and carbonated water, and having less alcohol than table wine. The Bartles and Jaymes product was introduced in 1985 and within a year had become 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 Andre 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 which 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.

Ernest and Julio show no signs of retiring; indeed they still keep a demanding daily schedule. Such is their influence on every aspect of their business that analysts have speculated on the future of Gallo when they do finally leave. However, for many years they have been transferring responsibility for day-to-day running of the winery to the second generation. Ernest’s son Joseph is in charge of sales and domestic and international marketing, while his son David holds an important position in marketing. Julio’s son Robert and son-in-law James Coleman are active in the production side of the business. Ernest, the company chairman, is still responsible for overall marketing and sales strategies, while Julio oversees production. Although per capita consumption of wine in the United States has been shrinking since the health-conscious 1980s, the Gallo brothers have managed to maintain their formidable output. They have exploited their tremendous distribution strength to the full. They have invested large sums in distinctive advertising campaigns. They have an almost infallible sense for what their customers want. In the 1980s, wine coolers were extremely popular. In the 1990s, Gallo is poised to capitalize on the long-term trend toward drinking more expensive wines. Ultimately, however, the company’s success can be summed up in the words of Ernest Gallo as “a constant striving for perfection in every aspect of our business.” Competitors would surely agree.

Principal Subsidiaries

E & J Gallo Winery Europe; Gallo Glass Company Inc.; Gallo Sales Company Inc.; Pio Bartolomeo Inc.; Fairbanks Trucking Company; Frei Brothers Winery Inc.; Midcal Aluminum Inc.