Wine News Gallo Set to Dominate the Bargain Basement

Gallo Set to Dominate the Bargain Basement

Gallo's purchase of the Constellation brands gives it a huge chunk of the lower price tiers.
© Constellation | Gallo's purchase of the Constellation brands gives it a huge chunk of the lower price tiers.
The buy-out of a raft of Constellation brands has been given the go-ahead by regulators.
By W. Blake Gray | Posted Thursday, 07-Jan-2021

Monopolies should be feared; sometimes not for the obvious reasons. AT&T had among the best research labs in the world, which was good, but it kept long distance prices artificially high. If AT&T had not been broken up, you would not be able to pick up your cellphone and dial your mom across the country for free.

That is the fear for the Gallo-Constellation deal, which finally was approved this week by the US Federal Trade Commission. Already the world's largest wine company, Gallo will go from producing 26.9 percent of all US wines to 30.3 percent after absorbing Clos du Bois, Ravenswood, Franciscan, Manischewitz and several other brands.

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The FTC approved the deal only after Constellation agreed not to sell Gallo the cheap sparkling wine brands Cook's and J. Roget, and Paul Masson brandy (we wrote recently about Gallo's plans for world brandy domination.) Comparing to other companies that make cheap wines, the Wine Group is now a little over a third the size of Gallo, and provides some competition, as do much smaller Trinchero, Treasury and Delicato. So Gallo is not a complete cheap-wine monopoly, but don't be surprised if Gallo emerges as a potential buyer for some brands from troubled Treasury in the near future.

I have both respect for Gallo, and fear of its intentions. Gallo is very good at every aspect of the wine business, and one of the main reasons (but not the number one reason) for its success is that it makes good wine for the price. Constellation was great at brand building but could be indifferent about wine quality; its stewardship of some of these famous brands will not be missed. Gallo does try to make sure that your $7 wine is more than just a well-designed label; in many tastings I have sat in on of cheap wines over the years, its wines have done very well.

Building the perfect beast

What I fear is Gallo's dominant position in distribution and in the grape market. For the former, Gallo has never been shy about using its market muscle to elbow out competitors. That will only increase.

That said, I'm a wine snob, and I'll admit that I don't personally care much about the under-$10 supermarket category. Gallo makes competent-to-good wines in that category and I probably should wax on about how important it is to preserve market access, blah blah, but let's face it: most of the wine companies that enophiles care about aren't even trying to compete under $10 a bottle. We care about artisan winemakers and farmers.

Which leads me to my real fear about Gallo's new market power: the impact on grapegrowers.

Right now, California grapegrowers are, or should be, delighted that the deal has finally gone through. Constellation had lame-duck ownership of those brands and didn't want to make a lot of wine for them. The grape market in California has been flat at the low end for a couple of years. Gallo will make more of some of these wines and it will buy more grapes to do it.

In the long term, though, Gallo just got a lot more power over growers. Gallo will be able to set prices and pick and choose from suppliers. This is arguably good for consumers – monopolies are often established by companies that use their growing size to charge prices so low that smaller companies can't match them. But it's not good for farmers, and not good for farmworkers either.

In 1973, United Farm Workers staged a strike and a nationwide boycott of Gallo wines after Gallo decided to have the Teamsters represent its workers, rather than UFW.

From 1995 to 2000, Gallo stalled through five years of negotiations with UFW because it wouldn't extend healthcare benefits to farm labor contractor employees. UFW finally signed the contract in 2000 and, within three years, Gallo had increased its number of labor contractor employees without health care to 80 percent, up from 60 percent a decade earlier. By 2003, the California Agricultural Labor Relations Board filed a formal complaint against Gallo, and in 2005 UFW asked for another nationwide boycott of Gallo wines. This one wasn't as effective as the boycott in the 1970s because the US is less friendly to labor issues than it once was.

Gallo now has even more power over farmworkers than it did 16 years ago. That's unsettling. I'm sanguine about the impact of a larger Gallo on wine quality, but anyone negotiating with Gallo – and that includes grocery stores as well as suppliers and farmworkers – has less leverage.

Gallo has always been interested in vineyards as well as brands, as its purchase of the Stagecoach Vineyard demonstrated.
© E&J Gallo | Gallo has always been interested in vineyards as well as brands, as its purchase of the Stagecoach Vineyard demonstrated.

Fading competition

What if competition reduces even more? Treasury already wants out of the cheap wine market. Delicato is doing well there but is also looking more upscale. The Wine Group is probably the most enduring competition Gallo will have, but it also has increasingly looked at the higher end.

Why wouldn't these companies want to sell more $20 wine than $10 wine? It's more profitable. It's also where the wine market is going; sales of wines over $11 in the US continue to grow while sales under $10 do not. Gallo, which is family owned and thus needs not worry about quarterly profits, sees an opportunity.

Another thing that worries me is the concentration of political power. Gallo already has a large impact on US and California wine policies and this will only increase that. If you own a big company, you aren't interested in laws and regulations being written to help small companies.

On the plus side, Gallo is taking on a job that the wine industry needs done, but is bad at: reaching out to new drinkers. Few people start out with wine by drinking vins pétillant or cru Beaujolais: most Americans' first experience with wine will be with something cheap and available, likely from a grocery store. If that wine is good, they're more likely to buy more wine in the future. Gallo is great at marketing and will reach out to young consumers to try wine, and will deliver wines that taste good. To some extent this raises everybody's boat.

A generation from now, people in the wine industry might regret that this deal went through. Once you create a monster, it's hard to control it.

A generation game

The interesting thing about Gallo is that unlike Constellation, which has lost interest in wine in favor of beer, spirits and cannabis, everyone expects Gallo to still be doing the same thing a generation from now; just more of it. And no wonder.

Gallo may seem very American, but there's a historical irony about it. In the heyday of Robert Mondavi, he spoke often about his desire to create something like the great wine estates of Europe. He wanted to not just make great wine, but to leave a legacy that would endure for centuries.

At that time, Gallo was still the jug-wine company. But Mondavi's business didn't even make it to another generation: it was sold to the most dispassionate of wine conglomerates, Constellation, where it remains to this day. When the Mondavi name ceases to have market value, as will happen eventually, Constellation will just sell it – probably to Gallo – and move on.

Gallo is the multi-generational European-style business that Mondavi dreamed of creating. There was a hiccup in the late '80s when Ernest and Julio Gallo's younger brother Joseph got into a legal battle over Joseph's cheese business. In a countersuit, Joseph said their parents started the business and he should get a third of it. A judge dismissed the suit.

Since then the Gallo family has done well to keep everyone in the fold, at least as much as we know. Gallo family members hold the key positions and seem (from outside) to work together well.

Unlike Constellation, which cared little about vineyards, Gallo has snapped up vineyards whenever possible, and doesn't sell them. Gallo holds onto the land; Stagecoach Vineyard in particular (but not alone) is now part of the family legacy. That's only going to increase. Constellation held onto its portion of To Kalon Vineyard, acquired when it bought Mondavi, but does anyone think Gallo wouldn't be a better steward? Wait long enough and we'll probably see it.

It's fair to fear the impact of one company having so much power. And Gallo, which has not always been as benign as it now seems, doesn't have much accountability, with no shareholders' meetings or public forums of any kind.

Gallo's only accountability right now is to consumers. I have to say that in my experience Gallo has always done right by them, which is reason enough to celebrate – for now – the completion of this deal.

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