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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."

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