A Buyer’s Market

Gallo is on the move.

Earlier this month, the E&J; Gallo Winery acquired Louis M. Martini, one of the Napa Valley’s oldest and most respected wineries, along with hundreds of acres of vineyards in Napa and Sonoma counties, including the historic Monte Rosso vineyard, one of California’s viticultural treasures.

On Friday, Gallo purchased the Mirassou Vineyards brand and inventory. Mirassou is another old California name--the family has been producing wine for six generations. In this deal, the Mirassous will keep their winery and vineyards in Santa Clara and Monterey counties, possibly to start a new brand. Meanwhile, Heather, David and Mark Mirassou will work for Gallo to help produce and market Mirassou wines.

At first glance, these acquisitions appear to be a dramatic sign of deepening woes in the wine industry--of Gallo, the world’s largest wine producer, buying out smaller, struggling labels. The moves are also an example of Gallo’s eagerness to establish itself among the state’s most respected winemakers, and shed lingering associations with the low-end wines largely responsible for the company’s success.

But there’s more to it than that. What we’re seeing is a new Gallo.

In the past, Gallo has always created its new brands from scratch. If it needed a new winery, it built a facility such as the large Gallo of Sonoma winery near Healdsburg. It currently has four large wineries in California producing wine under more than 20 labels, including Indigo Hills, Gossamer Bay and Rancho Zabaco.

Wine produced in those facilities can now be bottled under the Martini and Mirassou labels, so both probably will expand significantly once new marketing campaigns are underway. Gallo won’t comment on its plans for Martini or Mirassou estate wines. Both wineries still have wines from the 1999-2001 vintages on the market. Any changes in winemaking style would begin in the 2003 vintage, with the new wines reaching consumers in 2004.

Gallo is, first and foremost, a sales and marketing machine. If it holds true to past patterns, its vast grape and wine resources will flow into expanding the Martini and Mirassou brands to volumes that would boggle their founders’ minds. Terms of both sales were not released because all three companies are privately held.

Competitors see Gallo as the 300-pound gorilla that gets what it wants. Many regard it as the Titan that protects California wine interests in an often-hostile political environment. Regardless, Gallo is on the move in a way that it hasn’t been before--not only expanding, but shifting focus.

This isn’t just about making a lot of money from California wine. It’s about California. The state’s wine industry has been pummeled by post-Sept. 11 economic woes and over-planting. In particular, mid-size wineries--those producing 100,000 to 500,000 cases a year--have suffered from the drop in restaurant, hotel and airline business. They’ve also been hit by a trend toward consolidation among distributors (down to a handful from nearly 50 in the 1970s), which has made it difficult to bring more products to the marketplace.

The situation has set up another kind of consolidation: big fish gobbling up little ones. Wine industry analyst Rich Cartiere, publisher of Wine Market Report and Global Wine News, notes that the Gallo deals were well-timed to take advantage of the trend toward wine distributor consolidation.

“Gallo’s clearly taking an opportunity here,” he says. “Consolidation is wreaking havoc with wine brands. It’s created a bottleneck in the distribution system so that a big swath of wine has to move through a narrow funnel to get to the consumer. It’s really hard for a mid-size winery to go it alone.”

That was a big factor in the Martini family’s decision to sell, says winery President and Chief Executive Carolyn Martini. “This year has been a ‘Perfect Storm.’ It’s worse than just the stock market. There’s an oversupply of wine. Destination hotels and airlines are down, and those are our key accounts. Liquor sales have gone up and wine sales have gone down. And brokers who have been in business 35 or 40 years are suddenly gone.” Finally, she says, she and her brother, winemaker Michael Martini, became overwhelmed. “It got to where we’re all looking at each other, saying, ‘Do we want to keep fighting this battle?’ It’s just pretty difficult.”

Louis M. Martini is one of California’s oldest family-run wineries. It has been a pillar of the Napa Valley wine community since its doors opened immediately after repeal of Prohibition in 1933. The Mirassous claim to be America’s oldest wine family. Their 150-year saga began when vintner Pierre Pellier arrived from France in the early 1850s. He settled south of San Francisco in what is now the Santa Clara Valley, where he planted vines and began producing wines in 1854. He had come to California seeking gold, and he found it when one of his wines won a gold medal at the 1858 San Francisco Fair. In 1881, Pellier’s daughter married a neighbor, winegrower Pierre Mirassou, who became a partner in the family wine business. Successive generations of Mirassous carried on the family business.

“They sold wine out of the trunk of their car, building the brand on relationships,” says company marketing director Heather Mirassou, who is Pellier’s great-great-granddaughter. By the early 1980s, the Mirassous were producing 380,000 cases a year. At that point, the fifth generation, headed by Daniel Mirassou, decided to pull back and concentrate on their strengths.

“We’d been making everything for everybody,” says Heather Mirassou. “So we decided to focus on what we produce best, which is cool-climate varietals.” They scaled back to around 150,000 cases, primarily Chardonnay, Pinot Noir and Pinot Blanc from their chilly Monterey County vineyards.

E&J; Gallo was founded in 1933 by Ernest and Julio Gallo, the California-born sons of immigrants from northern Italy. Their immediate and lasting success was based on an ideal partnership: Julio found his passion in growing grapes and making wine, while Ernest discovered that his inner businessman was a sales and marketing genius. Early on, according to family lore, the brothers made a pact: Ernest told Julio, “I’ll sell as much wine as you can make,” to which Julio replied, “I’ll make as much wine as you can sell.”

By the end of the 20th century, E&J; Gallo was producing approximately 60 million cases a year of fortified, sparkling and still wine, along with brandy, under more than 30 different brands. It remains the largest single buyer of grapes in the world, and its mammoth production center in Modesto is bus-ride big, including facilities for manufacturing glass bottles and labels.

Inevitably, the Gallo brothers formed relationships with other winemaking families. Their 1977 purchase of the large Frei Brothers ranch in northern Sonoma County was the foundation of a separate entity within the company, Gallo of Sonoma, focusing on high-end varietal wines. Gallo had been buying grapes from the Frei family since 1934. After acquiring the Frei ranch, it reconfigured the property using surplus heavy equipment from Alaskan Pipeline construction. Gallo planted new vines and built a new winery, then launched the Gallo of Sonoma label.

The latest acquisitions continue Gallo’s evolution away from the cheap fortified wines and generic blends that built the business. “This shows the resiliency of Gallo as a family corporate entity, to be able to reinvent yourself so thoroughly and change directions without internal disruptions,” says Cartiere. “One of Gallo’s biggest problems has been overcoming its own names,” low-end wines like Thunderbird, Night Train and Annie Green Springs. “But it’s committed to doing that,” he says. “They’ve come to recognize that it’s going to take generations, and meanwhile they need to use other tactics to maintain market dominance.” Now the tactic is to reach out to some of the old wine families who worked alongside Ernest and Julio Gallo to raise the California wine industry from the shambles of Prohibition.

Ernest, at 94, is still active in the business, now largely run by the family’s third generation. Julio Gallo died in 1993. His granddaughter, Gallo of Sonoma marketing director Caroline Coleman Bailey, believes he would be pleased by the acquisitions. “It mirrors what Julio and Ernest started,” says Bailey. “It’s all about family, and keeping family wineries in the family. That’s what’s exciting. My grandfather would be smiling right now.”