Gallo Is Top Seller of Varietal Wines : Agriculture: The firm edged out Sutter Home in the category last year. The development may herald a war in pricier products.

In a move that could start a battle in the pricey end of the wine market and result in lower prices for consumers, Modesto-based E&J; Gallo Winery, the world’s largest, has jumped into the No. 1 spot in varietal wine sales.

Gallo bumped Sutter Home--maker of the heavily marketed white Zinfandel and its closest competitor in varietal wines--out of the top spot in 1991, according to an analysis of the secretive company just released by Hambrecht & Quist, a San Francisco investment banking firm.

Gallo’s entry into varietal wines, those named for a single grape variety, “has the same potential impact on the competitive environment as the Japanese entry into the U.S. automotive market in the 1970s,” according to the Hambrecht & Quist report.

A key conclusion of the survey is that Gallo is rapidly moving to dominate sales of fine wine, a category in which it launched its first product just 15 years ago. The company, however, did not really push its varietal program until a decade later. “Without varietal wines (in 1991), Gallo’s business would be shrinking,” the report said.

A spokesman for co-owners Ernest and Julio Gallo in Modesto said the company would have no comment on the report. Family-owned Gallo never releases sales or production figures and almost never comments on reports about the company.

Industry analyst Ed Everett of San Francisco said he believes that Gallo’s move into premium varietal wine signals the beginning of a major battle between Gallo and Heublein, which is based in Connecticut and is a division of Grand Metropolitan of England.

“Gallo almost always waits until a segment is time-tested, and then they make a major move into it, so the fact that Gallo has moved so fast into varietals indicates the market has matured and Gallo is ready for a fight,” Everett said.

“If Gallo really wants to use all of its muscle and financial strength to do with the varietal market what it did in the early 1980s with jug wines, then they will get into a real slugfest with Heublein--the company I think they are worried about most,” he said. “Look at supermarket shelves and see the amount of shelf space allocated to Grand Met’s brands. I think Gallo sees that as a declaration of war.”

Everett said Gallo is taking dead aim at Heublein’s Blossom Hill brand, sales of which he said have gone from zero to 1.7 million cases in two years. “This has to awaken Ernest’s sharpest interests,” Everett said.

An industry insider who asked for anonymity said he believed that Heublein was well-positioned to compete with Gallo, but added: “Sebastiani and Vintners International (which markets Taylor California Cellars and Paul Masson wines) might be hurt by Gallo’s move into varietals.”

The four varietal wines in which Gallo is strongest are White Zinfandel, White Grenache, French Colombard and Chenin Blanc. The company plans to increase its push dramatically in Cabernet and Chardonnay in the next two years.

Hambrecht & Quist predicts that Gallo’s aggressiveness will keep prices for lower-end fine wine under pressure “as Gallo continues its strategy of passing cost savings on to consumers”; that grape prices will rise “as Gallo begins establishing inventories for its coming push in Chardonnay and Cabernet,” and that other wineries will face greater capital needs “in an environment of higher costs and lower prices.”

The report, which looked at Gallo’s 1991 performance, showed that the company sold 9.6 million cases of varietal wines last year--compared to No. 2 Sutter Home’s 4.2 million cases--for revenue of $192 million.

Gallo earned $849 million in revenue last year on sales of 68.3 million cases, much of it ($261 million) from jug wines, a declining category the last decade, the report said. Only in varietal wine and sparkling wine did Gallo show increases. Varietal wine sales rose 26% over 1990, and sparkling wine sales rose 5%. Gallo’s sales declined in 1991 in jug wines, wine coolers, brandy and dessert wines.

“Many people have been skeptical about the Gallo brand being successful in the varietal segment because of its history in generic and dessert wines,” said John Fisher, head of Hambrecht & Quist’s consumer group, which produced the nine-page report. “But there is a new generation coming along, and there is a new Gallo that appears in this analysis. The company’s ability to re-create itself in the growth areas is truly impressive.”

The report noted that Gallo remains only No. 9 in Chardonnay sales and No. 4 in Cabernet, but that it is the top producer of Sauvignon Blanc and that it will surpass industry leader Sutter Home in White Zinfandel sales this year. Sutter Home sold 3 million cases of White Zinfandel in 1991.

A spokesman for Sutter Home said Gallo’s strong move into varietal wines won’t change the way it markets White Zinfandel, but he admitted that “we will be putting a greater emphasis on (that) marketing” this year.

As for Gallo surpassing Sutter Home in White Zinfandel sales, Sutter Home President Roger Trinchero said, “Sutter Home White Zinfandel has always been America’s favorite White Zinfandel, and we are confident that it will remain so.”

Jon Fredrikson, an industry analyst with Gomberg, Fredrikson & Associates, said Gallo is focusing almost all its energy in premium wines that sell for $3 to $6 a bottle.

Gallo’s move into varietals ultimately will affect every California winery, even those in the higher end of the market, said Jean-Michel Valette, who wrote the report.

“The important message is that everybody will be impacted,” Valette said. “At first glance, it’s just the (lower-end) Sutter Homes and Sebastianis, but even producers of $15 wine will be affected by this. If you charge $15, you’re going to have to justify that price in the face of massive advertising Gallo will be bombarding the consumer with to convince them that $6 wine is just as good.”

Winning the Wine War

Modesto-based E&J; Gallo is the nation’s beverage behemoth, topping the list of the major wineries in the country. The top wineries in percentage of all wine sold in the U.S. in 1991:

Total wine shipped: 196 million cases

E&J; Gallo: 33.7%

Heublein Inc.: 8.5%

Canandaigua Wine Co.: 5.6%

The Wine Group: 51%

Vintners International: 4.9%

Others: 42.2%

Source: Gomberg, Fredrikson and Associates, San Francisco