It started in red jug wine; now Gallo sees a future in China and tequila

Ask Joseph E. Gallo how his family winery became one of the world's largest, and he instantly credits luck. But give him a few minutes, and he'll go on to explain how generations of hard work, meticulous planning and insistence on excellence fostered success.

"We had certain principles that we've always been guided by. One is to stay independent and be master of our own destiny. Run the company conservatively. Don't take on too much risk. ... Invest in innovation ... and be very attuned to what the customer wants," said Gallo, son of co-founder Ernest Gallo and now E.&J. Gallo Winery's president and chief executive officer.

Bob Gallo, co-founder Julio Gallo's son, and Jim Coleman, Julio's son-in-law, are co-chairmen of the privately held company's board of directors, putting the family's second generation firmly in control of the business.

Members of its third generation -- often called G-3 -- occupy key roles. Fifteen members of the family work for Gallo, including a couple from the fourth generation.

The story of how Ernest and Julio Gallo founded their winery has been told often. But the inside story rarely revealed is how the brothers -- and subsequently their children and grandchildren -- expanded the family business to more than $2 billion in annual sales.

"You have to remain relevant," stressed Joe Gallo, 65. A company must "have an ability to spot opportunities. It's almost like an art form. They come along every day, and it's amazing how the best of people don't see it. But they're there every day."

For 75 years, the winery has capitalized on opportunities and repeatedly reinvented itself -- and the wines it produces.

That will continue, Gallo assured. He revealed company plans to expand into hard liquor like tequila, push wine sales into China and Russia, reintroduce an old favorite (sangria) and prepare for the next hot-selling varietal (perhaps malbec).
The winery sold more than 70 million cases last year, and Gallo said the company is "growing at a pretty healthy rate."

Evolution of a company

Its beginnings were much more humble. Starting with borrowed money in August 1933, the founders rented a warehouse at 11th and D streets near downtown Modesto.
Joe Gallo gave The Bee a tour of that ivy-encased Founders Building, which now hosts a private exhibit of the winery's artifacts -- including wine bottles and print advertisements from throughout the decades.

A walk around that showroom and the current public exhibit at the McHenry Museum in downtown Modesto demonstrates the company's evolution.
"When my dad and uncle began business, the market was basically red jug wine. They'd send barrels to these little taverns, and people would come with jugs, fill them up and take them out," Gallo said. "Wine was sold mostly to the immigrants."

In its quest to satisfy and cultivate customer demand, Gallo wines continually have changed. The company started with dessert wines -- port, sherries and muscatel -- then introduced specialty brands like Thunderbird, Boone's Farm and Ripple. Gallo's table wines, like Hearty Burgundy, Chablis Blanc and Carlo Rossi, eventually gained in popularity.

"Up to 1974, we did not make varietal wines," explained Gallo, who joined the company full time in 1965. "We didn't even have chardonnay, cabernet or merlot or sauvignon blanc grapes planted. So we came out with secondary varietals like barbera, chenin blanc and French colombard, which was really a stop-gap measure. Then we quickly started planting the real varietals people wanted, and the market moved in that direction."

To meet demand for upscale varietals, the company opened wineries in Napa, Sonoma and Santa Barbara counties.

"In Modesto, we don't make wine now. It's all for bottling and shipping," Gallo said of his company's headquarters, which employs more than 3,000 people. "A massive amount of our wines are made in Fresno and Livingston, then shipped up here and bottled. We have seven wineries in the state."

It also imports wines from 14 wineries abroad and employs 2,000 more people worldwide. Gallo has wineries in Italy, France, Germany, Spain, South Africa, Australia, New Zealand and Argentina.

Last year, Gallo exported more than 14.7 million cases of California wine to 90 countries around the world, and it plans to expand to Russia.

"We're starting to make an effort into China. We think there's terrific potential over there," said Gallo, who recently returned from China. "We would ship our cases over there and have people distribute it. That's our current plan."

The Chinese, Gallo believes, "could become big wine drinkers because they seem to be very open-minded. They have some wine already (but they) want to adapt more to the Western styles."

China has more acres of vineyards than the United States, and it is the sixth- largest grape grower in the world. Rather than seeing Chinese wine as a threat, Gallo called it an opportunity.

"Certainly the Chinese are very intelligent people and extremely hardworking. They're very knowledgeable. They learn. There's no doubt in my mind that 10 years from now their industry will really have improved. By the same token, I hope we'll continue to improve.

"Long-term, that's competition, so we'll have to find opportunities. There are always going to be areas where we have certain advantages, or maybe there will be collaboration of some type. It's hard to say how it could happen, but in evolving, changing markets there are those who see opportunities and capitalize on it," Gallo said. "We're confident that whatever evolves, we'll be involved in a meaningful way."

Wine isn't the only beverage Gallo has plans for.

The company recently went into the gin business and Gallo said it's "taking a serious look at tequila now."

"One of the most important things we have is our distribution system, where we can go across the country with many different outlets and sell different products," Gallo explained. Adding liquors to its wines "is a natural complement to our distribution system."
Too many companies make vodka, he said, so Gallo is focusing on tequila.
"It's going to be made down in Mexico and it's going to be 100 percent agave, which has to be produced and bottled down there," Gallo said. "We're in the early stages of planting that. It's probably going to take a couple years ... before we get to market."

The new tequila brand will create jobs in Modesto because that's where it will be imported and distributed. Gallo said the tequila marketing and brand support staff also will be based in town.

Promoting wine-drinking

The company's focus, of course, will remain wine.
Like his father and uncle, Joe Gallo is convinced American wine consumption has potential to grow.

Per capita, Americans drink just 8 liters of wine per year, compared with 17 liters in the United Kingdom and 56 liters in France.

To increase that, Gallo said, his winery has spent decades promoting "a wine-drinking culture" in America. He said doing that required improving wine quality (it "wasn't very good" right after Prohibition), then changing perceptions about wine drinkers.

"Wine was marketed as an elitist beverage. The perception was it was drunk only by those who were not the average American," Gallo said about the early years of wine sales. "Even today, 80 percent of the wine in America is drunk by 8 percent of the population."

That's slowly changing as wine becomes increasingly better, prices stay reasonable and choices include "thousands of flavors," Gallo said.
But such variety can pose problems.

"Our research tells us that the wine section is the most intimidating section of the store. There could be 2,000 wines to choose from," Gallo said. "A lot of times when people are intimidated, they don't make a decision and they don't buy. To some degree, that holds back consumption."

His advice to novice wine buyers: Try one of Gallo's Barefoot varieties, like pinot grigio (suggested retail $6.99).

"It's a fruit-forward wine. There's no oak in it. It's not complex in terms of a lot of different ingredients," Gallo explained. "It's not intimidating, and you don't have to explain the history of it when serving it or be wine knowledgeable to buy it."
For more seasoned wine drinkers, Gallo predicted, the next big varietal trend may be malbec. He recommended trying his company's Argentina import, Don Miguel Gascon's malbec (suggested retail $11.99).

"Nobody knows for sure, but malbec has a chance to make a major run in this country," Gallo said. "One way to describe malbec is as a better version of merlot. ... It's much more fruit-forward, and there's much more depth to it and complexity. It's very easy to drink."

Relatively little malbec is grown in the United States now. If its popularity continues to expand, there may be "a major opportunity for the California grower," Gallo said. "But it's too early yet for anybody to be planting malbec because we have to figure out where it grows best and the style. It's going to take some time to do that."

Another wine to watch for is an old favorite, a Spanish-style wine called sangria. During the early 1970s, Gallo's Madria- Madria sangria was promoted with TV and print ads featuring Joe's wife, Ofelia, who was born in Nicaragua.

"We're going to reintroduce sangria in this country next year sometime," Gallo said, but his wife won't advertise it. "She said I can't afford her anymore."

Passion and perfection

Creating the right advertisements and promotions always have been a Gallo priority.

"My dad put an awful lot of time in trying to figure out how to market wine and make it acceptable and easy for the consumers to appreciate," Gallo said. "One of his big initiatives was to put display cases in the stores for our wines."

Gallo wines were the first to be featured in TV ads. The company also introduced brand management techniques as it hired its own national sales force for distribution.

"On the production side, my uncle pioneered the long-term grape contract with growers. He was a firm believer in offering a great quality for the price to the consumer," Gallo said. "Our winemaking group, no question, is the best in the industry. They're very passionate about what they're doing. ... They get down in the vineyards. They know how the grapes are pruned and irrigated, when the crop comes off and what the sugar should be."

Hiring good employees is key to making wine and selling it.

"The culture we created was one where you strive for perfection. You can never be satisfied. Have a sense of urgency. Hire good people. And work hard," Gallo said, acknowledging that work environment isn't for everyone.

He said his company seeks employees who are open- minded, creative, take pride in their work, constantly try to improve and are action-oriented.

"My father and uncle would discuss issues, and if they couldn't come to a decision, they'd drop the issue, then bring it up the next day or two. Often over time, a third solution would emerge that was better. It's important to have a healthy dialog back and forth."

Open discussions continue among Gallo family members.

There's no set career path for family members who join the business, according to Joe Gallo: "The challenge with any family member, or any employee, is that we give them opportunity to maximize their talents."