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Wash. Wineries Hope Gallo Will Lift Industry

Washington wineries are hopeful that the recent acquisition of Washington brands Columbia Winery and Covey Run Winery by Modesto, Calif.-based E. J. Gallo Winery, the world's largest privately owned wine company, will boost the state's industry.

YAKIMA, Wash. (AP) — DuBrul Vineyard has gained respect in the wine industry for producing top-notch wine grapes.

With microclimates that can accommodate different grape varieties, the vineyard near Sunnyside has sourced many award-winning wines, including ones from its estate brand, Cote Bonneville.

But with those wineries producing just a few thousand cases of wine a year, DuBrul's reputation doesn't extend too far beyond the Pacific Northwest.

So for Cte Bonneville winemaker Kerry Shiels, the recent acquisition of Washington brands Columbia Winery and Covey Run Winery by Modesto, Calif.-based E. J. Gallo Winery, the world's largest privately owned wine company, is a good thing.

"I think the entrance into the state by a California producer signals that Washington has grown up to the point that it is an important, viable player in the wine industry," Shiels said.

In fact, the Washington wine industry's response to Gallo's acquisition early last month has been overwhelmingly positive, which may appear Pollyannaish to other industries where competition is much more cutthroat.

But most believe Gallo's entrance here will generate much-needed exposure for what is still a relatively young wine region.

"The first and most important thing is that your category is healthy," said Andrew Browne, founder and CEO of Seattle-based Precept Wine, which owns several brands, including Willow Crest Estate Winery and Sagelands Vineyard in the Yakima Valley. "We have a greater chance of making the category — Washington wines — more competitive and more enticing for the consumer."

While Washington state is No. 2 in wine production nationwide, most of the state's wineries are small. Most of the Yakima Valley wineries yield under 5,000 cases a year, said Barbara Glover, executive director of Wine Yakima Valley. About 90 percent of the wineries produce less than 30 percent of all the state's wine, according to a recent Washington Wine Commission economic impact study.

That means many wineries' distribution and marketing is limited to Seattle and other areas within the Pacific Northwest. Some wineries only sell from their tasting rooms.

At about $3 million a year in assessments from wineries and grape growers, Washington Wine Commission lacks the funding for a constant and full-fledged national consumer marketing campaign.

As a result, the commission has shifted its focus to gaining buzz for Washington wine via trade media, such as Wine Spectator and Wine Enthusiast, and leaving consumer marketing to tourism organizations, wine associations and the wineries themselves.

Gallo's wide distribution network and marketing muscle are appealing for commission executive director Steve Warner.

"Clearly, people around the U.S. and the globe know Gallo," he said. "They know the word, they know the name."

Many consumers know Gallo for its value-priced wines, including a number of jug wines, but the company's acquisition and development of premium brands worldwide has been a key part of its business strategy.

The company has been eyeing the Pacific Northwest for years.

Gallo declined to reveal the purchase price, but Reuters reported that the two Washington brands fetched between $50 million and $100 million.

The key asset in the deal for Gallo was Columbia Winery, which is based in Woodinville but produces its wines in Sunnyside, said Roger Nabedian, Gallo's senior vice president and general manager of the company's premium wine division.

The winery, which started in 1962 as Associated Vintners, has been credited for advancing the state wine industry in the early years. Winemaker David Lake, who died in 2009, was an industry pioneer.

But as Columbia Winery changed hands several times in the last decade, the brand lost some of its luster.

In the short term, Gallo's focus is rebuilding Columbia Winery into to a premium wine brand in the $10 to $15 price point, with reserve and other limited production wines at higher prices.

"I think it can fairly quickly be restored to some of its past pedigree and help build the Washington wine category nationally," Nabedian said.

Plans for Covey Run, also Woodinville-based with production in Sunnyside, are less clear.

"We have a lot to learn in how it may or may not fit in our wine portfolio," he said.

Growth is on the long-term horizon.

Currently, the two brands sell 250,000 cases a year. That's a large number by state industry standards, but relatively small compared to other large players in the state: Ste. Michelle Wine Estates distributes millions of cases of year, while Washington wines from Precept Wine and New York-based Constellation Brands — owner of Hogue Cellars in Prosser — are in the upper six figures.

Nabedian said Gallo could potentially sell 1 million cases of Washington wine a year in the next five to 10 years.

Gallo has been talking to regional grape growers who seem willing to plant more grapes if given the right opportunity.

"(Growers) have access to land, they have access to land with water," he said. "They just chose not to plant because they haven't had people offer them the commitment they need to make the investment."

But with many wineries — not just Gallo — ramping up production and in need of more wine grapes, the state may see a shortage, said Paul Gregutt, a long-time Washington wine writer.

"It should be really good for growers who have grapes that are desirable," Gregutt said. "It's a seller's market. If you have good grapes, it's good — there (are) a lot of people who want those grapes."

While much of the buzz is on Gallo's potential as a flagbearer for Washington wine, little has been said about how the huge company will affect the competition within the industry. Gallo isn't seen as a direct competitor to the small boutique wineries that make up most of the industry.

"I don't think it will have any impact on 98 percent of the wineries," Gregutt said. "The little guys will continue to do what they do, and the fact that Gallo's in (the industry) is not going to matter a quid."

Gallo will likely compete for market share with the larger wineries who distribute Washington wines nationally, including Ste. Michelle, Constellation Brands and Precept, he said.

"As (Gallo) grows, they'll be some elbows bumping against each other," Gregutt said.

But, at least publicly, those companies aren't bumping elbows quite yet.

"We welcome anyone to Washington state who is going to be supporting and promoting the Washington wine industry," Kari Leitch, vice president of communications for Ste. Michelle Wine Estates, said in a statement.

Precept's Browne said that even the large wine companies still have differences in their business strategies that enable them to co-exist.

Browne believes that Ste. Michelle Wine Estates will continue to be a leader in Washington wine. For Constellation Brands and Gallo, their in-roads in Washington reflect a diverse business model.

And his company, Browne says, is focused on the Northwest region as a whole — the company also owns wineries in Oregon and Idaho.

"There's not one go-to market strategy," he said.

Shiels, the Cote Bonneville winemaker, doesn't think her winery will see much impact from Gallo since she wants to stay small.

"We're growing a little bit," she said. "But we won't be competing with Gallo on a volume basis anytime soon."