Gallo Starts Pressing Its Way Into the Napa Valley

E. & J. Gallo Winery became the biggest name in California wine without paying much attention to the nation’s most prestigious grape-growing region.

But now the wine giant has a big crush on Napa Valley.

As the 2003 harvest gets underway, Gallo is in the process of buying 4,000 tons of premier Napa-grown Cabernet Sauvignon grapes, enough to make more than 250,000 cases, according to industry sources. And Gallo is getting the grapes for as little as $1,500 a ton, about 60% less than the average price similar grapes fetched last year, according to industry sources.

With all that well-priced fruit, the privately held company known for its jug wines and Sonoma-grown vintages intends to ramp up production of Cabernet under the Louis J. Martini brand, which it acquired last year, in a bid to establish itself as the foremost purveyor of Napa Cabernet.

This month, Gallo will start shipping 110,000 cases of Martini wine made before it owned the winery, at retail prices of $17 to $55 a bottle.

Then, early next year, as it ramps up production of Martini Cabernet, Gallo is expected to launch a new Napa brand out of the Martini winery, which is in the heart of the valley on California 29.

Gallo’s goal is to produce as many as 800,000 cases of Napa wine by 2007, according to people familiar with the company’s plans.

That would give Gallo double the volume of each of the largest Napa producers: Beringer Blass Wine Estates, which sells Beringer and Stag’s Leap wines, and Diageo Chateau and Estate Wines, the owner of the Beaulieu Vineyards and Sterling brands.

The company isn’t talking about its intentions.

“Not everything has been finalized,” said Jon Holman, a Gallo spokesman in Modesto. “We are still in the planning and research stages.”

But people familiar with Gallo’s strategy said the company expected to begin bottling the new Napa label later this year.

Made using bulk Napa wine that the company purchased over the last year for $10 to $10.50 a gallon, it is expected to sell in the price range of $10 to $15 per bottle.

Its name hasn’t been made public, but it won’t bear the Gallo logo.

The world’s second-largest wine company, Gallo controls a third of the state’s wine production and has estimated annual sales of about $1.7 billion. It hasn’t been a significant player in Napa in recent years as either a big buyer or grower.

But in the last year, Gallo became the “the major buyer” of 2001 and 2002 Napa bulk wine, primarily Cabernet, Merlot and Chardonnay, said one industry source who has been watching Gallo’s strategy unfold.

And now Gallo is heavily in the market for Napa grapes to crush this year for Martini’s 2004 vintage, according to people who are familiar with the industry giant’s move.

Mike Martini, whose family sold its 70-year-old winery to Gallo, confirmed that Gallo would begin to outline its plans for Martini wine at a meeting with its distributor in Los Angeles on Friday.

Martini said Gallo had plans to increase grape purchases to the point where it could produce more than 300,000 cases of Martini brand Cabernet annually by 2007.

“This will be dependent on grape availability and how well it sells,” said Martini, who remains with the company as the senior winemaker of his namesake label.

“We are really going to look at excelling at Cabernet because Gallo thinks that is the best way to rebuild the brand.”

The Louis J. Martini label was once one of California’s most respected, selling 325,000 cases in 1980. But the family was unable to keep pace with the shifting wine tastes -- such as the growth in white Zinfandel and more traditional white wines -- and increased competition from within California and from Australian and Italian imports.

Since it acquired the winery, Gallo has invested about $1 million in capital improvements in the facility, remodeling the tasting room and purchasing several dozen small fermenters that provide Martini with the capacity to make small lots of reserve and boutique-style Cabernet wines.

Gallo’s dual strategy to create a premium Cabernet brand and introduce a companion Napa red could be bad news for the small Napa vintners who produce 100,000 cases or so a year retailing for $10 and up.

“This is going to be scary for the independent wineries,” said Bud Leedom, and industry analyst with Well Fargo Securities in San Diego. “Gallo has such clout in marketing and distribution.”

Leedom said Gallo’s moves probably would crowd some of the smaller producers off store shelves.

Still, Gallo’s heightened interest in Napa is good news for the region’s grape growers, who have a new buyer to soak up much of their surplus bulk wine and grapes.

“We have to be excited that the guy with largest share and best distribution has come to our area and is buying up all the surplus fruit,” said Andy Beckstoffer, one of Napa’s top growers.

“If they chose to, Gallo has the opportunity with Louis Martini to produce some of the finest Cabernet in the world,” said Beckstoffer, who did not sell fruit to Gallo this year.

But he also noted with some irony that Gallo’s strategy could end the price advantage it has enjoyed, if it makes so many purchases it saps up the glut.

“The price they pay today for the grapes won’t be the price they pay tomorrow,” Beckstoffer said.

For now though, Gallo is striking at an auspicious time, said Robert Nicholson of International Wine Associates, a wine industry investment bank.

The slump in the California wine industry combined with the grape glut has pushed down prices for both grapes and wineries.

“They have an unprecedented opportunity with Martini to get into the Napa wine business at a keen price,” Nicholson said. “This is a very smart strategy.”