The E. & J. Gallo Winery Teaching Notes

31. The E. & J. Gallo Winery

Teaching Notes

The E. & J. Gallo Winery, the largest and most well-known wine producer and distributor in the United States, was faced with an ethical issue of whether to continue its line of dessert wines. Eighty-five percent of all company’s dessert wine sales were marinated in half-pint bottles with screw tops. These wines, known by names of Thunderbird, Mad Dog 20-20, and Night Train, were consumed primarily by low-income drinkers, many of whom frequently abused alcohol. Wines were fortified with more alcohol and were very inexpensive compared with regular table wines—factors which made them quite popular with heavy drinkers and winos.

The dessert wine market was a $500 million business and Gallo was a major player in the segment. The strategic-ethical decision facing Gallo was whether to abandon the dessert wine business as a socially responsible and ethical action, thus doing its part in not being a prime supplier of a questionable product to a questionable segment of the population.

Suggestions for Using the Case

This case proves to be extremely popular with students since they tend to be very familiar with the company, its products, and the social issue of alcohol abuse. We suggest beginning the class discussion by asking what responsibility Gallo Winery has to society in combating alcohol abuse. Generally, the class will split into two factions: one group will argue that if such wines did not exist, there would be fewer winos; a second group will contend that alcoholics are going to be alcoholics anyway, and if they don’t abuse wine, they will simply switch to other alcoholic beverages (beer or cheaper liquors).

Next, you can explore the strategic importance of dessert wines to wine producers. Is it a key product? Do dessert wines have any redeeming qualities? Then you can explore the impact of withdrawing from the dessert wine market. Considerations here include the probable impact on individuals who abuse the product, on the owners’/stockholders’ sales and profits, and on Gallo employees who work in the company’s dessert wine operations.

There is enough data in the case to do some limited “number crunching” and analysis. Since Gallo is a privately held corporation, there were no financials to include in the case beyond those provided by “industry watchers.” But there is plenty of meat in the case to provoke a heated and stimulating discussion of a company’s ethical responsibilities and the consequences of doing what is ethical.

1. 
   How important is the dessert wine segment to the industry? To Gallo? Do such wines have any redeeming features as a product, even if they are in demand by a segment of the population?
   
2. 
   Would you judge that the dessert wine segment is more profitable than the other wine segments? Does the marketing strategy for dessert wine differ substantially from that of other wine segments?
   
3. 
   What are the key success factors in the dessert wine segment? Is there a strategic fit between dessert wine and Gallo’s other wine products?
   
4. 
   What responsibilities does Gallo have to consumers in furnishing dessert wines? Do Ernest and Julio Gallo personally have any responsibility to speak out against alcohol abuse? Should they be doing more than speaking out?
   
5. 
   If Gallo Winery decides to abandon the dessert wine segment, what will be the impact on those individuals who abuse the dessert wine products?
   
6. 
   What responsibility does Gallo have to the employees in its dessert wine operations should the company elect to abandon dessert wines?
   
7. 
   What actions would you recommend the company take?
   

From the information in Exhibit 3 in the case, the industry was a 196 million case market. In the United States, 133.3 million cases come from California. The growth rate for wine was flat and was declining as far as production was concerned. The percent change from 1985 to 1986 was a decline of 5.5 percent.

Exhibit 2 in the case shows that wine consumption was mature and had only shown large increases in those years when a new product (i.e., wine coolers) was introduced. In fact, the introduction of wine coolers had played a significant role in holding the market growth positive.

There were about 13,000 wine-making operations in the United States (see case Exhibit 5). Of the 13,000 wineries in the United States, six wine-making operations accounted for 53 percent of the market; an additional 23 percent of the wine market was supplied by imports. Among the six dominant players, E. & J. Gallo Winery was by far the largest, with a market share of 26.1 percent.

It is debatable how attractive the wine-making business is over the longer run due to health consciousness trends and the concern about alcohol abuse. Looking at Exhibit 6, one can easily conclude that all segments of the wine market are mature. Dessert wines had a 0.6 share point change between 1985 and 1986 and imported specialty wines had a 0.5 share point change. The two fastest-growing segments were the very high end wines and the very low end wines.

There was a trend toward drinking higher quality wines and moving away from the moderate priced table wines. Wine coolers enjoyed popularity among those very young drinkers who associated wine coolers as being “better for you” then beer and hard liquors. Exhibit 8 provides the drinking patterns for 1986. Women drank more wine coolers then men (55.1 percent to 44.9 percent), and men and women drank equal amounts of wine. On the other hand, malt beverages and distilled spirits were clearly male-dominated drinks.

In looking at beverage consumption by household income, one can see that the higher the household income, the greater the consumption of all alcoholic beverages; however, the largest increases in alcoholic beverages consumption are in wines. This would suggest that as income increases, people tend to drink more wine and higher quality wine.

Personal disposable income was expected to grow in the United States through 1995. As more dual career families came into play, then the number of individuals dining out was expected to increase. Consequently, wine sales in restaurants should go up. Also as the aging baby boomers grow in numbers and importance, then the shift from distilled spirits to wine should increase.

The dessert wine category had been a profitable venture for Gallo and other wineries because they were made with less expensive ingredients, packaged in inexpensive containers, and required little advertising support. They were low-margin, high-volume products that filled both a production niche and a sales niche.

The dessert wine segment accounted for 55 million gallons of wine and constituted a $500 million industry. Dessert wines contained more than 14 percent alcohol; typically, the alcohol content was 18–21 percent—a factor which enhanced their attractiveness to buyers who wanted to get drunk cheaply.

3. What are the key success factors in the dessert wine segment? Is there strategic fit between dessert wine and other Gallo products?

Students should point to the following factors as insuring market success in the dessert wine segment.

• 
  Low price (under $2 per bottle).
  
• 
  High alcohol content (as much as 18 percent).
  
• 
  Effective distribution system and an ability to gain shelf space in liquor stores and supermarkets in socio­economic impoverished areas.
  
• 
  Brand name appeal.
  

In discussing the social responsibility interest issue with our classes, we find that two points of view emerge from the discussion. Some students will insist that corporations should not be concerned about society’s or consumer’s interests as long as everything that was done was legal. Others will argue that a company’s actions must be both ethical and in tune with societal expectations and public opinion. You can write one of these on one end of the board and the other on the opposite end of the board, then ask the class if the true answer is probably somewhere in the middle. Do a company’s customers determine whether the product is acceptable and worthwhile when they make the decision to buy the product or not? You can play devil’s advocate here by asking if the general public knew that Gallo was the market leader in the dessert wine segment, whether sales of their higher-priced, more prestigious wines would be damaged. Is it important to Gallo that the Thunderbird brand not be connected with the Gallo brand? Would a significant number of people care? Would Gallo’s image be tarnished?

Since low price is the primary appeal for the purchase of dessert wine and since the commodity nature of the product makes it easy to produce and to supply, if Gallo should elect to pull out of the dessert wine segment, then in all probability another opportunistic (unethical?) wine-maker would move quickly to absorb Gallo’s market share. If this is the case, the impact on Gallo’s dessert wine customers would be minimal. Gallo, of course, might gain a clear conscience as well as some points with knowledgeable segments of the public. It would also avoid potential embarrassment should public interest groups decide to arouse public opinion against the producers of dessert wines for their “uncaring, irresponsible” actions in supplying an undesirable product to “addicted” drinkers and thus contributing to alcoholism.

Students can make a good case that Gallo’s abandoning the dessert wine segment will probably have only modest, if any, bearing on the level of alcoholism. Opportunistic wine-makers with excess capacity will likely increase their production and the situation will stay the same. Of course, Gallo could lobby heavily to ban cheap dessert wines or make them more costly through higher taxation. In this case, alcohol abusers would find it more difficult to locate an inexpensive product to satisfy their needs.

6. What responsibility does Gallo have to the employees in the dessert wine operations should the company elect to abandon dessert wines?

Assuming that the class majority is solidly in favor of abandoning the dessert wine segment, then the issue of social responsibility can be raised once again regarding Gallo’s responsibility to the employees in the dessert wine segment. If a company changes its strategy because of an ethical change of heart, does the company have any responsibility to those employees of Gallo affected by the “tightening” of the ethical principles? In Gallo’s case, had not the employees of Gallo in the dessert wine side of the business done a formidable job in the marketplace in effect accomplishing the strategic mission of the company by becoming the market leader in the dessert wine segment?

On September 22, 1989, in an article in The Wall Street Journal, Gallo announced it would attempt to end its lucrative business with skid-row alcoholics. Gallo said it would pull the potent wines, Night Train Express and Thunderbird, from its markets in San Francisco to see if it had any effect on alcoholism.

Gallo repeated in the article that the wines were not the source of the trouble with alcohol abuse. Gallo maintained that the problem partly stemmed from law enforcement agencies that did not enforce existing laws that ban sales to habitual alcoholics and obviously drunk patrons.

The article continued that some San Francisco skid-row retailers continued selling Thunderbird and Night Train even after Gallo stopped shipment by purchasing the product on the black market. If the program was successful in San Francisco, then Gallo stated the company would consider stopping the wine’s sale throughout the country.