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UNPACKING E. & J. GALLO’S RECENT MASSICAN ACQUISITION

THE BACKGROUND

Gallo’s focus on luxury wine has been slow but steady, with notable purchases such as Orin Swift in 2016, Pahlmeyer in 2019, and the creation of Maze Row imports in 2020. But in 2021, Gallo also purchased 30 brands from Constellation for $810 million. The majority of the labels retailed for $11 or under and included names such as Clos du Bois, Ravenswood, and Manischewitz. The refocus on the luxury tier seems to be an about-face to the business strategy of just a couple of years ago. Rombauer wines average $42 per bottle. Massican’s average about $35.

Rombauer played a key role in the development of many of Napa’s top brands. Estates such as Duckhorn, Dominus, and Corison produced some of their earliest vintages at Rombauer’s facilities. “After the passing of our father, Koerner Rombauer, five years ago, we went through extensive planning for the future,” K.R. Rombauer writes in an email. “We came to the mutual decision that the best path forward for the winery was to transition it to another family-owned business with greater resources.”

“Rombauer is a leader in luxury wine,” writes Joe C. Gallo, VP and general manager of Gallo Luxury Wine Group, in an email. “When we learned the Rombauer family was exploring their options we felt Rombauer would be a great fit within our luxury portfolio. Once we started talking we quickly realized there was a strong cultural fit between our families and companies.”

According to Bob Knebel, president of Rombauer, Gallo was a like-minded and “strategic company with a long-term vision that would continue to honor the legacy built by the Rombauer family and would continue to nurture that customer-centric culture.”

The acquisition includes the Rombauer Estate Brand, three wineries and production facilities, two tasting rooms, and more than 700 acres of owned and sustainably farmed vineyards in Carneros, Atlas Peak, St. Helena, Calistoga, Sonoma Valley, and the Sierra Foothills. Both the winemaking and leadership teams will remain in place. Terms of the deal were not disclosed.

Both companies cite their company structures as an important element in the deal. “As a family-owned company, we have a long-term view of our industry — we don’t get distracted by short-term events,” Gallo says. Knebel agrees, noting that not being beholden to stakeholders that expect rapid financial gains allows them to be thoughtful when planning for the future.

When considering the U.S. market in the context of other winemaking areas of the world, such as Europe, the generational story isn’t often there. A producer like Hugel in Alsace, for example, counts 13 generations behind it. And it’s not uncommon to hear of the youngest generation in places like Crete or Taurasi, which used to sell grapes to bulk wine companies, turning a family’s grape-growing business into a winemaking estate.

Stateside, however, being acquired is often the goal, especially for upstart brands. It was vital in the dot-com boom and start-up culture of the past couple of decades. And when speaking with Petroski several years ago, he made clear to me that he was building Massican to be a lifestyle brand that would appeal to a larger luxury company.

“We’ve all been kind of circling around this conversation, of what’s the future of the wine industry and who is the future wine consumer,” Petroski says. “It seems like we’re still trying to navigate the whole space, and the best way for me to consider new audiences was to create new content around the wine brand to create that luxury lifestyle brand.”

Massican is not just a line of wine; it’s also an online magazine, Substack newsletter, a future place in the Metaverse, an NFT, a soon-to-publish cookbook, and potentially more.

But Petroski didn’t anticipate the offer from Gallo to come so early in the brand’s existence.

“When I had a glass of wine with Dan before harvest last year, I was inspired by his vision,” Gallo says. “It aligned with the value my family and our company have of bringing more people into wine. Dan has been able to accomplish a lot, essentially by himself.”

The two stayed in touch and Gallo approached Petroski with the deal this year. Gallo will own the Massican brand and inventory (the brand does not own vineyards). Petroski will stay on long-term with the goal of increasing production to 50,000 cases in the first five years, and continue to drive the brand vision as well as its winemaking. Other terms were not disclosed.

“We need to get out of this love affair of niche production,” Petroski says. It’s not enough for a wine brand — or the industry — to succeed with just a handful of fans, which Petroski has certainly succeeded in building over the years. “We need a hundred thousand, we need a million people to be really, truly great and to leave a lasting impact.”

Much like the wines themselves, the audiences for Rombauer and Massican vastly differ. Gallo calls Rombauer a legacy brand with a loyal following. Massican, however, appears to be a play at a newer audience of consumers.

Both brands allow Gallo to test the waters for future acquisitions. If it succeeds with maintaining Rombauer’s brand integrity with its fans, it could boost the confidence of other well-established estates looking at Gallo as a future buyer. On the flip side, given that Massican owns few assets, meaning no physical vineyards or tasting room, the brand is a lower-risk investment for Gallo. If it succeeds, it creates a blueprint for potential future acquisitions of boutique labels that may have a similar model as Massican.

STATE OF THE INDUSTRY

The domestic wine market is badly in need of consumers. In 2022, U.S. per-capita wine consumption dropped by almost 9 percent compared to 2021 — the largest decline since 1947 — according to Karl Storchmann, editor of the Journal of Wine Economics and executive director and vice president of the American Association of Wine Economists AAWE.

Silicon Valley Bank has reported on the decline in its annual State of the Wine Industry report since 2018. But in a twist, according to the 2023 report, which offers data from 2022 and projections for the coming year, dollar sales were expected to be up 1 to 2 percent in 2023, thanks to the growth of higher-priced tiers (the $15–$24.99, and the $25–$49.99 categories were both up 6.8 percent while wines priced $50-plus were up 10 percent). Although smaller in volume, these tiers serve as a Band-Aid of sorts given dramatic declines of wines in the $15-and-under category.

Other companies report on the premiumization trend. According to Constellation Brand’s Q1 FY2024 results, the company’s higher-end wine brands gained share in the category and outperformed in the higher-end wine segment in tracked channels. Constellation owns over 100 wine, beer, and spirits brands. The wine portfolio includes luxury brands such as Schrader Cellars, Robert Mondavi, Lingua Franca, the Prisoner, and more.

And if one needs further proof of the luxury wine trend, Silicon Valley Bank announced in its 2023 Direct to Consumer report that the price of Napa wines increased from 2021 to 2022 by $17 on average.

Storchmann says that without knowing the purchase prices of Rombauer and Massican he can only speculate, but “against the decline in U.S. per capita wine consumption, I can imagine that the acquisition prices were relatively low.”

“This may be a great time for Gallo to complete its portfolio,” he adds, noting that the acquisitions hint at a long-term strategy, while providing the means to weather the slowdown, especially in lower-tier brand sales.

When it comes to a brand like Massican, Gallo is clearly speaking to a new demographic. According to the drinks industry analyst IWSR, consumers under 55 are less likely to show brand loyalty and show a greater propensity for experimentation. Massican’s Italian-inspired white wines are a far cry from Napa’s signature Chardonnay and Cabernet Sauvignon.

WHAT THESE DEALS SIGNAL FOR THE FUTURE OF THE INDUSTRY

For smaller producers, Gallo’s deal with Massican indicates a potential sea change. “The acquisition actually makes me hopeful that winemakers and vintners like Dan can have a bigger seat at the table,” says Alison Smith-Story of Healdsburg-based Smith Story Wine Cellars. Owned by Smith-Story and husband, Eric Story, the 10-year-old boutique winery produces less then 5,000 cases of wine from Sonoma and Anderson Valleys. “The U.S. market needs more true fine wines like Massican more than ever these days and I truly believe as long as he continues to lead the brand Gallo’s going to gain a new and very curious and loyal fine wine customer base.”

“It’s a smart move on the larger winery or wine company’s part, too,” Smith-Story adds. “Acquiring a deeply loved high-quality small winery is easier than making up something from scratch to then launch.”

Deals such as these could also change the shape of less established domestic wine regions. Willamette Valley’s Et Fille winery was created by Jessica Mozeico and her father Howard in 2003. After her father’s passing in 2017, Mozeico took over all operations and now runs the business on her own. “Massican’s acquisition does speak to the segment of the business that has been outperforming the rest of the wine market, which is the premium segment,” she says.

Spurred by the quality of premium wines coming out of the Willamette Valley and the potential for growth, both international and national wine companies are purchasing brands. Mozeico thinks this could grow Willamette Valley as a category and lend prestige to the region “significantly more than a highly fractured market of small wineries,” as she puts it.

But on the flip side, she notes that larger brands coming in could negatively affect the ability of interested winemakers being able to establish themselves. Mozeico says that out of the seven vineyards she sources from, five have changed hands in the last five years. “Big players coming in and buying smaller ones contains two sides of a coin for small wineries — the positive side being category growth and the negative side being less land availability,” she says.

Storchmann, though, thinks the Gallo deals serve as a beacon of light for an industry that’s struggling to retain drinkers and remain relevant in a world where consumers have more choices than ever. “In times of decreasing per capita wine consumption and uncertainty about the near future of the U.S. wine industry, the recent acquisitions signal Gallo’s confidence in future growth,” he says.

“We have tremendous respect for creators who have built something that breaks through, creators like Dan Petroski, like the Rombauer family,” Gallo says. “Protecting and building upon the legacy of these producers is core to our family and our company. Massican and Rombauer are very different, but both are important to wine.”

Published: September 13, 2023, Shana Clarke, Vinepair