In order to evaluate E & J Gallo Winery’s strategies by assessing the pros and cons and determining whether they were successful both profitably and ethically, it is highly essential to consider the strategic practices of the company from very beginning of its operations.
E & J Gallo Winery’s Strategies
As initially, E & J Gallo Winery had mainly focused on the strategy of marketing of low- grade fortified wines, in this stage it is important to briefly describe the ethical dilemmas that are concerned with the general practices of the wine industry.
At first, fortified wines were created by mixing distilled-wine to wine in order to increase the alcohol-level; this process assisted to make sure that the wines could last for a relatively longer period and no germination occurred before it reached the final consumers.
According to the case, Port and sherry wines, for instance, are high quality fortified wines and there are practices among certain manufacturers in the industry to offer such high quality wines; but on the other hand, the manufacturers of poor quality fortified wines usually employed low- priced grain alcohol to increase the alcohol-level up to fourteen or twenty per cent.
The advantage that these manufacturers gained is that the strong alcoholic levels would attract consumers towards such products and low price would mean that there would be higher sales in certain areas of the country.
Ernest and Julio Gallo formed E & J Gallo Winery in 1933 – in fact, the two brothers who were trying to take the responsibility of their father’s small family business following the strange death of their parents; however, in order to make a success in the business, the brothers focused on the strategy to produce poor quality fortified wines.
It is notable that this strategy has proved to be a success in terms of profitability since that time until today; however; it is arguable that threatening public health by mass selling of low grade products at very cheap prices (so that everyone buy could them) could by no means be justified in terms of ethics.
The case suggests that the two most popular poor-quality fortified wine brands of E & J Gallo Winery are Thunderbird and Night Train, which sells for no more than one or two dollars per 375 ml bottle – the strategy of the Gallo brothers was to target low- income people and teenagers (as such items offered greater intoxication at low-prices).
In most of the states, there were rules that stated that the alcohol-levels in the fortified wines should not exceed the level of twenty per cent – this meant that a brand with greater alcohol-levels would not be sold in groceries; moreover, the government started to impose high tax rates for such brands (which were much more than distilled-spirits).
However, the advantage for poor quality fortified wine makers was that it was still legal to make such wines and although such marketing strategy was ethically wrong, there were no breaches of law in seeking market opportunities; as a result, the Gallo Company faced no big dilemmas in the marketing its products albeit the higher tax rates involved.
However, there was a problem of damage to E & J Gallo Winery’s brand image – the business was soon recognised as a maker of low- grade products and this meant that health conscious and high- income earners did not prefer its wines.
In order to overcome this problem, the company undertook another unethical strategy – it decided to disconnect itself from the products like Thunderbird and Night Train by withdrawing its corporate name from their packaging to hide its link with the products, but continued to sell them; it is notable that despite such an action, the low-grade items experienced higher-sales.
Therefore, it could be said that this strategy also proved to be a success in terms profitability as there were little or no impact over the sales of those items even after the implementation of this weird strategy. The company produces items of different price assortments and records their names as part of the business’s products, but excludes the names of its notorious brands from the list.
According to Thompson and Strickland (2008), at the early stages of the business, the strategy of the brothers were to target merely the extensive national market, and take the position of the business at a very strong level.
In order to implement such a long- term strategy, Ernest worked hard for day and night along with his workers; for example, he undertook a short- term strategy to work for sixteen hours a day in order to make long journeys all across the country and know what the people around the USA prefers when it comes to wine drinking.
This strategy to conduct thorough market research regarding consumer tastes and behaviour has been extremely successful in terms of profits and as a result, the business turned out to be the market leader in the industry (although after such an excellent strategic approach, the Gallo brothers came up with the products like Thunderbird and Night Train).
Irrespective of the ethical dilemmas present, the company undertook another strategy to promote Thunderbird by means of an appealing radio tinkle, which became an exceptional success, and the sales figures rose significantly in numerous inner city and low- income areas in the USA.
To manufacture fine table wines, this company had planted about 400 varieties in experimental vineyards from 1950s to 1960s; however, it was problem to convince growers to change from ordinary grape varieties to delicate as the process took at least four years; therefore, the management offered the farmers to enter long-term agreement with flexible terms and conditions.
However, this company had guaranteed the farmers that they would pay annual basis to get quality products from them and to minimise all possible financial risk; consequently, this company had gained competitive advantage over the competitors in California (Thompson & Strickland, 2008, p.265).
According to the given case study, the objective of the company was to increase productivity and develop efficiency by enlarging financial help and providing skilled viticulturists along with technical supports to making wine and marketing products.
However, most of the competitors sold their products through wholesale distributors, but Gallo followed a vertical integration strategy and operated own distributorships, for instance, it owned wholesale distributors in ten locations and above 300 independent distributors handling its wines; therefore, low-cost mass production and strong distribution were the key of success for this company.
At the same time, Gallo had the capability to offer low price while they brought 95% grapes from farmers, and used paper-thin margins to capture large market share; this strategy was profitable because they had strong control over supply chain, develop brand image and experience, broaden functions in global market, and strongly compete with the competitors and so on.
The Pros and Cons E & J Gallo Winery’s Strategies:
Table 1: The Pros and Cons E & J Gallo Winery’s Strategies. Source: Self generated.
As a private firm, it had the opportunity to offer the lowest price to become market leader in this industry though it had to face occasional losses to introduce new brands or expand business in the new place; however, this low-cost pricing strategy was profitable in business context, but create ethical dilemma while the customers consume low quality products.
Gallo had concentrated more on the market research in order to know about the customers’ choice about wine-drinking habits and produce new products accordingly; however, it spent more than $100 millions on advertising with intent to developing customer awareness; as a result, the company successfully attracted upscale wine drinkers in the middle of 1990s.
However, the invest more for adverting and research was profitable strategy for this company because it assisted to become number one brand in terms of sales; moreover, this company had won a number of awards including most prominent award known as “Rremio Gran Vinitaly at the International Wine and Distilled Fair” in Verina (Thompson & Strickland, 2008, p.265).
At the same time, new product development was one of the most effective and profitable strategies of this company, such as, it introduced about 75 brands (top-selling red and white table wine and Blush Chablis) to export all over the world and it was “largest-selling global brand” (Thompson & Strickland, 2008, p.265).
Overall strategies of Gallo was profitable while its sales in 2001 were $1.35 billion; in addition, it was the top ranking seller in 2000 and received the lifetime achievement award from James Beard Foundation and achieved award among the top sellers; however, the exhibit 3 of the given case shows that E&J Gallo winery produced highest 620,000,000 gallons wine.
According to the given case, profits from sales increased significantly and it sold 70 million case of wine and generated more than $3.5 billion sales profit in 2007; which influenced the company to increase production volume; therefore, it purchased about 325 acres Napa Valley
- Thompson & Strickland (2008) addressed the statement of Professor Edward Freeman and stated that there is a long tradition of freedom of contract in the US, and the people are free to make mistakes, for instance, the problem of street alcoholics was more complex and they purchased Thunderbird of this company though these are harmful for the health of the consumers;
- The owner of this company only concentrated on the maximisation of profits for which they actively contributed to political campaign with intent to control business environment and get benefit, for instance, Ernest provided $100000 for a Clinton fund-rising lunch to influence him regarding Chilean wine imports along with increase funding for wine promotion program, which was unethical business practice.
At present, E & J Gallo Winery is the largest winery in the globe and the largest exporter of California wine; in addition, it is the ever-growing company in this industry because the products of this company are available in more than 90 countries (E & J Gallo Winery, 2012, p.1).
According to the press release report, this company had purchased Edna Valley Vineyard from Diageo, which produces a variety of wines, specializing in Chardonnay; this implementation of strategic plan had increased Gallo’s presence and properties in California’ Coast wine country and developed consumers’ perception and value creation (Hensley, 2011, p.1).
Thompson & Strickland (2008) presented several factors that E & J Gallo Winery considered before taking any initiatives or strategic plan, for example, this company research on customers’ demand to introduce new products or change the taste of existing products particularly checked the position of the local market. However, the following figure shows about the demand of the home market –
Thompson & Strickland (2008) further stated that E & J Gallo Winery fixed the pricing strategy considering a number of factors like volatility of the price of raw materials, types of bottles, production costs, and terms of the agreement with growers and so on; however, the next table provides more information regarding price stricture of the company –
Table 1: Price Category. Source: Self generated from Thompson & Strickland (2008).
Data Monitor (2011, p.15) reported collaborated with Wal-Mart to supply products at an affordable price ($2 to $5 range); however, the management team of E & J Gallo Winery would carry on its profitable low pricing strategy in the future.
Suppliers are key success factors for the development of the company, so, supplier development team of this company performs with about three thousand suppliers to support and expand business with efficiency, reliability, and high quality; however, Data Monitor (2011, p.15) reported that supplier’s involvement in fraudulent case could destroy the brand image and customer’s perception and confidence on the company.
Data Monitor (2011, p.15) stated that Gallo’s supplier Sieur d’Arques had liable of selling falsely labelled French Pinot Noir to Gallo; in 2010, Gallo imported approximately 20% of the total French Pinot from Sieur, but Sieur had supplied for its Red Bicyclette brand; therefore, Gallo bound to stop sale this brand and this fraudulent activities adversely effect on the company.
However, the marketers of this company always concentrate on the suppliers because both quality of the products along with the production costs depend on the best supply; thus, loyal suppliers provide full support (related with packaging, technology and corporate support) to the company, which helps to develop the next generation of procurement strategies with e-procurement system.
According to the report of Data Monitor (2011, p.15), this company has more than 5,000 employees all over the world, but Gallo has not sufficient number of skilled work force for winemaking; therefore, the crisis of efficient and proficient workers can lead to low capacity utilization and reduced profitability level of this company.
Data Monitor (2008, p.15) stated that Gallo expanded business with limited existing pool of experts because they failed to recruit efficient and professional employees from other winemaking countries; therefore, Gallo needs to focus more on the human resource management strategy to avoid any difficulty related with wine production system, fall customer relationship, delay supply and so on.
In addition, Data Monitor (2011, p.15) further addressed that find out of agricultural employees for the vineyards has been a rising threat to Gallo particularly for the period of harvesting seasons, which creates problem in entire production segment, so, it is significant for the management to recruit efficient and industrious labour from developing countries like Bangladesh and China as they work sincerely and retain for the long time.
According to the report of Data Monitor (2011, p.16), many competitors like Constellation Brands, LVMH Moet Hennessy Louis, Brown-Forman Corporation, Pernod Ricard, etc. have designed aggressive marketing campaigns to promote expensive brands and to capture additional market share in the recessionary economy; therefore, this company needs to invest more for marketing campaign to face the challenge of intense competition.
According to E & J Gallo Winery (2012), Gallo Winery very recently declared a strategy to buy Courtside Cellars in San Miguel, California in 10 August because this twelve- year- old winery will enhance the company’s constant growth in California’s Central Coast – the purchase comprises thirty-four acres of land and a winery capable of crushing 60000 tons of grapes.
The concerned persons of E & J Gallo Winery’s top- level management as well as the Senior Vice President, expressed hopes that this strategy will be greatly helpful because Gallo Winery has been intensifying its existence in that area throughout the last couple of years and this strategy could make this constituency a solution to move its finest products forward
E & J Gallo Winery (2012) has also suggested that earlier this year, the company implemented the strategy to buy more than three- hundred acres of vineyards in Monterey County; on the other hand, it is notable that in the previous year, the company brought Edna Valley Vineyards, which produces one of the best- selling Chardonnay brands in the US.
According to Datamonitor (2011), the company’s deficient attendance in important growing marketing-channels had turned the company susceptible to escalating rivalry from small wineries as winery direct sales to customers have been mounting; as a result, the company undertook the recent strategy to expand in such essential marketing channels by focusing on the ways to develop the networking in new mediums.
Gallo normally sold its wines through conventional channels using wholesalers, large retailers and stores without much direct sales to customers; so, little presence in such new channels made the company exposed to the emergent antagonism and if the problem was left untreated, in long- term it may have faced falling market share; however, Gallo foresees to introduce online selling service.
However, according to Datamonitor (2011), Gallo currently focuses on continuing its old strategy to operate a research winery, which would produce 400 to 700 experimental wines annually; in addition to this, Gallo’s viticulture and chemistry department provides research and investigative support to its grape growers and winemakers; moreover, Gallo uses the knowledge gleaned from its research and development (R&D) efforts to launch new products.
The strategy of revitalising product line ensures the company’s entry into new markets or consumer segments; as a result, strong R&D presents a competitive edge to Gallo over its peer group and ensures strong monetary growth; additionally, the strategy of strengthening brand-equity harvested ample product offerings and made it the largest winemakers in the US and the leading exporter.
According to Datamonitor (2011), the company exports its products in more than ninety overseas markets and sells approximately sixty brands; by means of implementing appropriate strategies at the right time, the company benefits from powerful brand equity amongst its consumers as its extensive product-offerings and its years of market-presence provides noteworthy brand-awareness
In January 2009, the Catena Family named E & J Gallo Winery the US importer for the Alamos line of wines and in the same month, Gallo implemented an excellent strategy to co- partner with Taste of the NFL (TNFL), a non profit- making organization, to deal with food shortage concerns in the USA; in addition, in February 2009, Gallo took over the Las Rocas brand of Spanish wines from European Cellars, an importer of wines from Spain and France (Datamonitor, 2011).
In March 2010, the company revealed strategies to lessen its product offerings in the UK market in the upcoming years; in May 2010, it also joined up with Molson Coors in the UK to tackle the allocation of three of its wine brands in the country; moreover, in May 2011, Gallo started new varieties of Merlot-Rose and Summer Red variants of wine under the brand name Gallo Family Vineyards in the UK; conversely, in the following month, Gallo launched the Barefoot Moscato wine brand in the country.
However, the company believes that diversification of its product line is the key strategy to keep up revenues in this competitive winery industry; as a result, the company offers a wide variety of products in different markets and hopes to introduce new brands in the upcoming years (Datamonitor, 2011).
It is notable that Gallo brought 182 acres of Chiles Valley vineyards from the California Wine Company – this marked a second extension of Gallo’s interest in Napa Valley; in addition, the company brought Napa- based William Hill Estate from Beam Wine Estates (BWE) to enlarge its properties in California’s North Coast wine country; on the other hand the company also released a new brand of wines under the label ‘Martha Stewart Vintage’.
E & J Gallo Winery expand business all over the world by leveraging its distribution network and using rage of products while Data Monitor (2008) estimated that global industry grew by 1% in 2010 with value of $289.1 billion and expected to increase up to $308.60 billion by 2015; therefore, it is important to discuss different brand extension strategies using Ansoff matrix.
Ansoff Matrix for E & J Gallo Winery
Johnson, Seholes & Whittington (2008, p.350) argued that Ansoff matrix refers to a strategic growth theory for starting up or acquiring business outside the current markets; however, the next figure shows suitable strategy of E & J Gallo Winery –
- Market penetration: market penetration is effective strategy while E & J Gallo Winery expand its business in different region of the US (Atlanta, Boston, Charlotte, North Carolina, Arizona and Portland) with its regular wines since it should not require any internal modification to offer wine to gain new consumer;
- Product development: Thompson & Strickland (2008) stated that product development is one of the most crucial strategies for this company to expand business in local market and this company followed it from the very beginning of its operation; however, Data Monitor (2011, p.4) stated that Gallo markets over 60 brands of wines and develop markets mid-priced wines;
- Market development: this strategy would be suitable for Gallo Winery if this company enters in a new market with present wine products like Data Monitor (2011, p.15) stated that It entered Chinese wine market with existing products and captured 48% share of the Asia-Pacific wine market. In addition, China changed taxation policy and entry barriers as a member of World Trade Organization; therefore, China increased import alcohol from the foreign markets; so, this market grew by 24% in 2010 and the market expected to grow from value of $13.40 billion to $23.10 billion by 2015 while the government decreased tax for importing alcohol from 65% to14%;
- Diversification: It involves expand business in the new markets with new products; however, this company introduced different wine products considering the fact that people of different countries can absorb different level of alcohol.
Gallo has strategy to offer its wines under diverse brand names that are exclusively positioned to cater the necessities of different clients; for example, the company’s offerings under the premium grouping comprises brand names like Anapamu-Cellars, Bridlewood, Frei brothers Reserve, and Indigo-Hills; in the same way, Gallo’s offerings under mid-priced variety wines include Turning Leaf and Redwood Creek (Datamonitor, 2011).
In addition, Gallo’s strategy is to proffer jug wines under the Carlo-Rossi label, sparkling-wines under Andre and Tott’s labels, fortified-wines from Livingston, and distilled-spirits like randy under Cask & Cream; as a result, elegant positioning of brands enables the company to satisfy an extensive consumer base thereby increasing opportunities for top- line growth; moreover, strong R&D enhances Gallo’s competitive edge.
Reference List
E & J Gallo Winery. 2012. Company Fact Sheet. Web.
E & J Gallo Winery. 2012. E. & J. Gallo Winery Announces Intention to Purchase Central Coast Winery and Crush Facility. Web.
E & J Gallo Winery. 2012. Suppliers. Web.
Hensley, S. 2011. E. & J. Gallo Winery Buys Edna Valley Vineyard & Winery. Web.
Johnson, G. Seholes, K. & Whittington, R. 2008. Exploring Corporate Strategy: Text & Cases, FT Prentrice Hall, London.
Thompson, A. & Strickland, A. J. 2008. Strategic Management. Tata McGraw- Hill Publishing Company limited, India.