Gallo troll: Did the quest for quality cost it No. 1 ranking?

[Robin Garr]

Pondering the death of Ernest Gallo and the varying emotions that the Gallo name wrests from wine lovers, I was struck by an odd hypothesis that I thought I would throw out on the table for discussion:

We know that after Ernest and Julio built their family firm into a cash-producing empire by satisfying the nation's thirst for cheap, generic and even "brown-bag" wines, the younger generation (Gina and Matt) sought to move into more upscale markets. They also, I think, sought to bring <i>respect</i> to the family name. After years in which Gallo consciously left the family name off many of the wines, they invested heavily in the Sonoma operation and proudly put "Gallo" back on the label of the wines produced there.

As a closely held family business, they had the luxury of pursuing quality without any real need to satisfy public stockholders or to make the quarterly balance sheet look good, perhaps reasoning that when you've got a family-owned company earning gazillions of dollars, you can afford to throw a few of them in the direction of quality.

By any objective standard, they achieved the quality goal. They also saw Gallo drop to No. 2 as Constellation (formerly Canandaigua) moved into the top spot as largest wine company in the US (and the world).

So, the troll: Could these issues be directly related? Is it possible that Gallo lost primacy to a more bottom-line-oriented company <i>because</i> they were willing to downplay short-term profits and invest more in the product, giving way to a hungrier firm that felt no such obligation?

Just thinkin' here ...

...Is it possible that Gallo lost primacy to a more bottom-line-oriented company <i>because</i> they were willing to downplay short-term profits and invest more in the product, giving way to a hungrier firm that felt no such obligation?...

Gallo never lost anything because of what they did. Constallation became #1 because of what Constellation did. The companies simply have different business plans. One grows from within, the other grows by acquisition. You're right it's a troll.

They also saw Gallo drop to No. 2 as Constellation (formerly Canandaigua) moved into the top spot as largest wine company in the US (and the world).

Robin,

I just wonder if the standard you are using for 'success' is the appropriate one. Just because Gallo dropped to number 2 in terms of size doesn't mean they were doing poorly. Alas, I speak out of ignorance of the recent objectives of these corporations (eg, are they going after market share, profits, expanding into new markets). But, for argument's sake, consider a Constellation looking to expand its empire through acquisition of existing brands, while Gallo gallops along committed to pushing what it comes up with itself. (And I have no idea if Gallo grew in the same way that Constellation did or not). But, one could easily imagine that Gallo is an incredible success just to stay in the same league as Constellation while there is so much dynamic change in the producer side of the market.

Unfortunately the differences between the two corporations might go without saying to those more familiar with the business side--so I apologize if I am muddying the waters. But is the general consensus that Gallo is performing poorly?

One grows from within, the other grows by acquisition.

I agree with you Howie, except for this last statement. Although not on the same level as Constellation, Gallo has done its share of acquistion. L.M. Martini and Wente come to mind. They have also invested overseas in Italy and Southern France.

[Robin Garr]

I just wonder if the standard you are using for 'success' is the appropriate one. Just because Gallo dropped to number 2 in terms of size doesn't mean they were doing poorly.

Well, I <i>said</i> it was a troll, Keith. But by the horse-race standard, at least, when the firm that was in No. 1 position for many years is suddenly overtaken by a firm that had trailed, it gets attention.

But is the general consensus that Gallo is performing poorly?

Again, see above. I'd say not. And they certainly don't have any stockholders outside the family who have to be satisfied.

I just think it's interesting that Gallo made some substantive changes in its approach, changes apparently aimed at upgrading the family's image, going for higher-end products, seeking the wine-geek market, and proudly adding the family name to "super-premium" bottles, did all this and seemingly rehabilitated "Gallo" as a respectable label and not just a name associated with jug wine - an effort that required significant expenditures - and were rewarded for that effort by seeing another mass-market competitor pass them.

Of course, I've always thought the quarterly balance-sheet mentality may be good for stock players but not so good for consumers, and frankly, if my hypothesis is accurate, I would admire Gallo a little more for the tough decision to play the long game rather than the short one.

well, if one were actually on the front lines of wholesale distribution when gallo was building their empire, it would not have occurred to one that they were doing it by satisfying thirsts for decent wine. in fact they were doing it by strong arming, paying off, whatever it took to get their brand very visible - big eye level sets, display features. year after year at the holidays they would push dozens of cases of tott's and balatore into retail stores knowing they wouldn't sell; but hoping they might finally be accepted.

somewhere along the line they lost their taste for this approach - i think the availability of actual sales stats - scan trac, etc. may have dampened their lying about their own sales and especially that of others. their vindetta agains taylor california cellars was really ugly. you really had to be there at a retail wine set when an army of gallo goons would make sure they got everything they wanted in terms of placement and shelf space and position.

anyway, they did change - bless 'em for that.

an effort that required significant expenditures - and were rewarded for that effort by seeing another mass-market competitor pass them.

I would admire Gallo a little more for the tough decision to play the long game rather than the short one.

If I had to guess, I'd say that is more or less what Gallo is doing. If I were working at Gallo, I'd be looking at the wine market and wondering for a variety of reasons (eg, grape gluts, climate change, new production areas coming online) if I wanted the success of my brand to depend as much on jug wine as it does today. Will I be able to compete in terms of cost with new competitors and will my raw materials in California be cheap enough? Will my customers' attachment to Hearty Burgundy be sufficient to overcome any price differential? And the ever-daunting questions of shifts in consumer preferences.

Gallo has built up huge success that centers around the brand Gallo. If they ever wanted to move upmarket and redefine that brand to make it appealing it was going to take significant investment. But for them, I would guess doing it now is better than doing it later--when they might not have the jug profits to fund it.

My guess is that the whole Gallo of Sonoma thing was more long-run thinking about where Gallo wants to position itself to max out its brand. Of course, the horse race aspect can become important if enough people think it is relevant, but I don't think there's a lot of lost sleep at Gallo on the decision to upgrade.

It's worth mentioning that the Feds had something to do with that, Creighton, as well as structural changes in wine distribution -- i.e. bigger distributors. From the Times archives:

The Federal Trade Commission has vacated a 1976 consent order against the E.& J. Gallo Winery that had been aimed at preventing the nation's leading wine maker from engaging in anticompetitive relationships with its dealers. Gallo, in an announcement Friday, said the F.T.C. found that conditions in the wine market ''make it unlikely that competitive injury would result'' if the order was set aside. Gallo had asked the F.T.C. in September to set aside the order, arguing that the structure of the wine market had changed, reducing its dominance.

well, that order had to do with their relations with their distributors. what i was talking about was their AND their distributors relationships with retailers. they were both still engaged in the tactics i mentioned up to at least 1990.

I was in Sonoma in 1998 and went on a tour/tasting/presentation of Gallo's then new Frei Ranch winery. During the tour the guide was quite proud of the quantity of grapes and speed in which they were crushed. etc. The guide was especially pround of how fast they could fill their barrels using their pressure system, as I recall it was under 2 minutes.

The next day I was at Sebastiani. During the tour and barrel tasting I saw their Sonoma Chardonnay being moved from one barrel to another using a gravity hose.

We came away with the feeling that one of these operations was a factory and the other a winery where quality was the governing principle not speed and quantity. You decide which is which

We came away with the feeling that one of these operations was a factory and the other a winery where quality was the governing principle not speed and quantit

I think you came away with exactly the impression that Sebastiani wanted you to come away with, George.

I also believe that's exactly what it is, an impression.

Robin, I think your original premise is interesting. But perhaps a little "forest for the trees?" Perhaps, when the elder Gallos started reliquishing day-to-day control to the next generation, THAT is when they were ripe to be passed as #1 for size.

Just a reminiscence.

From November 1987 to November 1989, I was stationed in Sardinia, Italy. In 1989, I was transferred to San Diego, CA, USA. Right after Christmas, I was sent out to meet my boat in Guam.

The wine selection at the package store on Guam was pretty meager. I wanted a decednt bottle of wine for a cookout we were having, but couldn't find anything that appealed to me. I saw a bottle of Gallo with a ten dollar price tag on it, and was intrigued. Ten bucks for Gallo? Who would pay that, and why? Curious, I bought it, mainly to see if it could possibly live up to that stratospheric price tag (remember, I was supporting a family of four on First Class Petty Officer's pay).

It was, as I recall, one of the better wines I have ever had the pleasure of drinking. I came to the conclusion that Gallo knew how to make good wine, even if they rarely did so. Any prejudice I had against them died that evening.