The Terlato Wine Group

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The Terlato Wine Group

900 Armour Drive
Lake Bluff, Illinois 60044
U.S.A.
Telephone: (847) 604-8900
Fax: (847) 604-5829
Web site: http://www.terlatowinegroup.com

Private Company
Incorporated: 1981 as International Products Corporation
Employees: 631
Sales: $260 million (2000)
NAIC: 422820 Wine and Distilled Alcoholic Beverage Wholesalers

The Terlato Wine Group, operating out of the Chicago suburb of Lake Bluff, Illinois, is a privately-owned holding company for 13 independent companies that are vertically integrated in the premium wine business. Terlato is owned and operated by the Terlato family, headed by its chairman and CEO Anthony J. Terlato, who is joined by his sons, William, president and chief operating officer, and John, senior vice-president. For decades, the family concentrated on importing and marketing quality wines, primarily catering to restaurants and upscale wine shops. The company developed an international presence, and in recent years has expanded its reach to include wine production and international marketing.

Origins of the Group in the 1940s

Anthony Terlato formed the International Products Corporation in 1981, but the original parent company of what would become the Terlato Wine Group was Pacific Wine Company, originally owned by the founder’s future father-in-law, Anthony Paterno. In 1946, Paterno was an importer of olive oil and other Italian food products when he acquired Pacific Wine Company, a Chicago bottler of California wines under a number of labels, one of which was Pacific Wine. Terlato’s father, Salvatore, was a friend of Paterno and owned a northside Chicago wine shop. At the age of 20, Terlato already had considerable retail experience in the wine business when Paterno persuaded him in 1955 to take a job as a sales rep at Pacific Wine. The company, one of 35 area bottlers of wine, imported bulk wines from Gallo and the Charles Krug Winery for sale in local stores but faced a formidable challenge after Italian Swiss Colony began bottling and marketing its Roma wines. Terlato was instrumental in Pacific Wine changing its business from bottling to the distribution of premium wines, primarily to the restaurant market. He established Charles Krug Mondavi despite the price disadvantage of the wine being bottled in California. In the process, Terlato showed an innovative spirit, convincing restaurants to carry just one Charles Krug wine in exchange for free wine list printing and staff training. CK Mondavi also became the most expensive gallon wine in Chicago wine stores. Pacific Wine then introduced imported wines. Bolla Veronese Wines, Lancers, Blue Nun, and Mateus all became major successes that firmly established the company’s restaurant trade.

In 1959, it was Terlato’s chance meeting of Alexis Lichine, a major importer of French wines, that resulted in Pacific Wine distributing his products. The bottle operations were closed down and the company added Roederer Champagne to its portfolio, as well as premium burgundies and classified French Bordeaux. Pacific Wine was still very much an Illinois distributor, but that situation would begin to change in 1961 after Terlato discovered a dessert wine with an almond flavor, forerunner to Amaretto, which he named Sicilian Gold. In order to nationally distribute the product, he and his father-in-law created Paterno Imports. While his father-in-law assumed responsibility for Paterno, Terlato acted as president of Pacific Wine, although he was clearly destined to inherit control of the growing family empire.

Paterno’s success with Sicilian Gold opened the door to other major imported wines, including Vittorio Gancia’s famous Asti Spumante. One of the company’s greatest successes was a personal discovery on the part of Terlato. In 1972, he was dining in a Rome restaurant, seated near a door leading to a terrace, and noticed that waiters were passing by with a large number of bottles bearing a distinctive green labels. Learning that the wine in question was named Corvo, he ordered a bottle. In a 1990 profile in The Wine Spectator, Terlato recalled, “We lingered, and the glasses emptied, and he [the waiter] filled them up. Before I knew it, we had drunk three bottles. I went straight to Sicily and arranged to import it to America.” Before being represented by Paterno Imports, Corvo’s U.S. sales were less than 1,000 cases a year. Within seven years the number grew to more than 250,000 cases.

Anthony Terlato Becomes Head of Paterno Imports in 1977

With the death of Anthony Paterno in 1977, Terlato succeeded his father-in-law as the head of Paterno Imports. Two years later it would be another one of his discoveries that became a turning point in the fortunes of the family wine interests. On a trip to Italy in search of a product that could replace the popular white wines of the day, Terlato visited a neighborhood restaurant in the small town of Portogruaro. He ordered every kind of Pinot Grigio on the establishment’s wine list, some 18 bottles in all, with the wine of Santa Margherita proving exceptional. He visited the winery the next day and arranged to introduce its Pinot Grigio to America. A marketing campaign for Santa Margherita was launched in 1980, ultimately making it the most successful imported wine in history priced over $15.

In 1981, Terlato created International Products as a holding company for the family burgeoning wine businesses. During the next decade, several Illinois wine distributing companies would be added to the fold, which resulted in complete statewide coverage. At the same time, Paterno Imports grew into a full-service marketing company with an international reach. Beginning to help Terlato during this period were his sons. After graduating from Loyola University in 1981, William Terlato joined the family business, becoming Paterno’s national sales manager in 1985, vice-president of the company in 1988, and president in 1994 at the age of 35. John Terlato also attended Loyola University, then went to John Marshall Law School and Harvard Business School, and worked for Caldwell Banker for two years before going to work for Pacific Wine. He became president of the company in 1995, also at the age of 35.

Despite continued success in the 1980s, International Products also faced challenges. Some Italian wines were discovered to be tainted with glycol, prompting Terlato to turn to California for new sources of premium wines. Moreover, economic conditions led to a significant decrease in the U.S. consumption of Italian wines. Early in the decade, Italian wines increased in price as a result of strong vintages but never receded after the results were not as strong. Moreover, due to the declining value of the dollar against European currencies, many of the Italian wines in the company’s portfolio became even more expensive. As a result, demand for Italian wines plummeted. Despite maintaining a profitable business, International Products was too dependent on European imports, which accounted for over 92 percent of its business, and began an effort to diversify.

While competitors were looking for a California Cabernet to promote, Terlato opted for Pinot Noit and discovered a Sonoma Valley boutique winery named Rochioli, which became the first U.S. marketing client for Paterno Imports. Deals then followed with Napa Valley’s Markham Winery and Freemark Abbey, both troubled brands that Terlato successfully turned around. As a result of these domestic marketing efforts, International Products was beginning to position itself as a beverage company, Albert one that concentrated on quality products. In 1992, it added two companies to better realize this expansive vision. Vintage Wine Co. was created to provide marketing support for premium wines with yearly sales of less than 25,000 cases. In addition to California wines Rochioli and Jaeger Inglewood, the Vintage family of wines included offerings from Italy, France, Germany, Mexico, and Chile.

New Corporate Headquarters in 1995

International Products became one of the most profitable and influential importers and marketers of premier wines, due in large part to Anthony Terlato’s commitment to quality. Accordingly, the company’s motto, “Quality is a way of life,” was more than just a phrase. With the launch of a new wine, customers would be picked up in limousines and brought to International Products headquarters for a sampling. When the standard cheese and bread accompanying the wine became too predictable, Terlato began to offer meals, many of which he cooked himself. Ultimately the company created some 300 recipes, and a chance to dine at International Products became a coveted invitation. To provide a more luxurious setting for these meals and further enhance the spirit of quality, in 1995 International Products purchased Tangley Oaks, a Tudor Gothic mansion to serve as it corporate headquarters. It was originally commissioned in 1916 by meat packing heir Philip D. Armour and his wife, and took 16 years to design, build, detail, and furnish. Tangley Oaks served as Armour’s home from 1932 until 1953, when it was sold and became the headquarters of United Educators, Inc., a publishing house. Terlato commissioned a two-year restoration of the core of the manor, as well as the addition of a state-of-the-art gourmet kitchen to provide the kind of meals that the company’s guests had come to expect from International Products.

Company Perspectives:

For more than 40 years, The Terlato Wine Group has dedicated itself to a simple philosophy—“place quality first.” Adhering to this principle has helped Terlato Wine Group achieve a scope unmatched in the wine industry.

In the same year it purchased a new corporate home, International Products took a significant step in achieving vertical integration in the premium wine business by becoming directly involved in the production side. It entered into a joint venture with Japan’s Mercian Corporation, owners of Markham Vineyards. International Products had successfully sold Markham wine and was instrumental in convincing the winery to drop the Vinmark label, a conventional name it applied to some excess wine, in favor of developing a new wine, Glass Mountain. The two parties agreed to create a joint venture, with International Products providing the financial resources and marketing expertise and Markham producing the wine, in order to create a high-quality brand in the $14 per bottle range. In 1996, International Products acquired Napa Valley’s Rutherford Hill Winery, another brand it already represented and famed as the first winery to focus on Merlot. Terlato quickly took steps to make quality the top priority of Rutherford Hill. Inferior lots were cut, reducing overall production by 14,000, and production facilities were greatly improved, as were the public areas for tourists.

In 2000, International Products officially changed its name to Terlato Wine Group. The business had grown consistently under Anthony Terlato’s leadership, doubling annual sales every five years for the past three decades until it was now estimated to total $250 million. Although Terlato and his sons, who were increasingly more responsible for expansion, were confident that they could continue the pace, the family business faced some obstacles. The California wine industry was undergoing a period of consolidation and prime vineyard land was becoming extremely expensive, in some cases priced in excess of $100,000 an acre. In March 2000, Terlato turned to Australia, where prime growing land could be purchased at less than a tenth the price. It entered into a joint venture with Michel Chapoutier of the Rhone Valley and Trevor Mast of Mount Langi Ghiran to purchase 475 acres in Western Victoria in Australia. The venture also held an option to purchase an additional 500 acres on a neighboring property. Initial results from the Australia plantings were not expected until 2006.

Terlato also became involved in the heated California market in 2000, acquiring a 50 percent stake in Chimney Rock Winery with an option to purchase the remaining half. The deal also included a nine-hole golf course owned by the vineyard, which would be closed and converted to vineyards. To some observers, Chimney Rock, with just $3.5 million in annual sales, was a surprising choice, but Anthony Terlato believed that the winery produced the best’undermarketed” Cabernets. He was also impressed with Chimney Rock’s winemaker, Doug Fletcher, who boasted 25 years of experience after receiving a biology degree from the University of Oregon and had been with Chimney Rock since 1987. Not only did he possess technical sophistication, he shared the Terlato commitment to producing wines of global quality. In December 2001, Fletcher was named to the new position of Director of Winemaking for Terlato.

In 2001, Terlato was active on a number of fronts. To support both Chimney Rock and Rutherford Hill it purchased an additional 60 vineyard acres in Rutherford. Terlato also purchased a majority interest in Alderbrook Vineyards and Winery in Sonoma County, California. In November 2001, the company announced the formation of what it called a “super-premium wine distribution company,” aptly named Cream Wine Company, an Illinois distribution business. The focus of the venture was to discover, launch, and hand-sell distinctive, high quality wines from artisan wine producers in Australia, Spain, Portugal, New Zealand, Germany, South American, as well as California, the Pacific Northwest and other emerging wine growing areas around the world.

Although there was some speculation that Terlato might go public, the Terlato family seemed well positioned to continue to finance the company’s growth and were clearly reluctant to take on pressure from shareholders with short-term goals. In addition, talk of selling the business appear unfounded. The family seemed content to run its diverse wine interests, answering to no one and following only their personal vision of quality.

Principal Subsidiaries

Paterno Wines International; Pacific/Southern Wine & Spirits; Rutherford Hill Winery; Chimney Rock Winery; Cream Wine Company.

Principal Competitors

Beringer Blass Wine Estates; Kendall-Jackson Wine Estates Ltd.; National Distributing Company Inc.; Southern Wine & Spirits of America, Inc.; Robert Mondavi Corporation; E. & J. Gallo Winery.

Key Dates:

1946:: Anthony Paterno acquires Pacific Wine Company, a Chicago wine bottler.
1955:: Paterno’s son-in-law Anthony J. Terlato joins the business and is instrumental in changing its focus to distribution of quality wines.
1961:: Paterno Imports is established.
1977:: Paterno dies, and Terlato assumes control of the businesses.
1981:: International Products Corporation is formed as a holding company for the family’s wine interests.
1995:: Tangley Oaks mansion is acquired to be used as corporate headquarters.
1996:: Rutherford Hill winery is acquired.
2000:: International Products changes name to The Terlato Wine Group.