Controversy as Gallo Seeks East Coast Foothold

E & J Gallo is offering South Carolina legislators a $400 million investment slated to create at least 300 new jobs and give the wine giant a retail outpost on the East Coast.

New legislation – passed last Thursday by the South Carolina State Senate and up for review in the house – would allow the winery to set up four tasting rooms and a bottling facility.

Lock Reddic, the owner of seven Green’s Beverages stores, five of which are in the state – says South Carolina was a ripe target because of its pro-business, open-market stance, good ports and solid rail system. Reddic is also the head of the alcohol beverage control stores of South Carolina, a group of approximately 975 liquor stores that operate in the control state.

State senators voted in favor of the plan as it is viewed as a significant boost to state coffers and one of the tasting rooms is slated to open in Chester County, one of the state’s less well-off areas.

The others are likely, according to state senator Scott Talley, to be rolled out in higher-net worth areas such as the tourist hubs of Hilton Head island and Charleston. Talley says that many visitors will probably be tourists so, despite limitations on opening hours, industry insiders think they are likely to compete with local bars and restaurants.

What is more important is that the tasting room operations – and other associated businesses such as setting up a winery – are likely to enable the mega giant to do business in the state with all the rights of a local winery as well as a retailer, effectively compromising the three-tier system, according to Reddic. The winery portion of the plan, he says, is not likely to produce a single grape.

Key language in the legislation says that the winery in question must either produce or bottle a minimum number of gallons per tasting room per calendar year: that is where the questions about Gallo actually needing to produce wine – and not just bottle it – in the state come into play. E&J Gallo declined to comment for this story.

Gallo humor

Gallo already has approximately 40 percent market share in the state, so the region’s three wholesalers couldn’t fight them, noted Reddic. “As far as Gallo is concerned the wholesalers won’t let out a peep,” confirms John Hinman, a partner in the San Francisco-based law-focused firm of Hinman & Carmichael.

“Gallo surreptitiously moved in and put a gun to the wholesalers’ heads,” shared a South Carolina retailer who requested not to be identified. “Then they got the strongest defense lawyer they could, sprung it all on us.

Reddic said that Gallo found the existing wine laws within the state to be “very ambiguously written”. What is more Chester County, where a tasting room is slated to open in the town of Fort Lawn, is one of the poorest counties in the state and in deciding to open there Gallo “choose wisely”. When a company brings business to this category of county they are offered “all kinds of tax credits as the state rolls out the red carpet”, concluded the retailer.

The mayor of Fort Lawn, Carlton Martin, confirms that Gallo will not have to pay city taxes on the tasting room should it open as it is outside the city limits. The mayor of the approximately 800-population town says that residents are excited about the project bringing a lot more traffic to the business people in town. He admits that the bulk of the visitors may well be tourists as “maybe one-third of the residents drink wine as we have a lot of churches in town”.

“The gist of this is that Gallo is pouring hundreds of millions of dollars into the South Carolina state coffers and as long as you pump this much money in you get all these privileges that were given to Gallo,” shares a Bay Area-based wine executive who did not want to be named on the record.

“They picked South Carolina because our local and regional people went after them,” shares Richard Wallace, an attorney and the owner of the Columbia, South Carolina-based Richard Wallace Harrison & Wallace Law Group. “Our department of commerce is actively seeking people who will come to South Carolina and create jobs…. [and] members of the legislature tend to get seduced by the promise of jobs.

© Gallo
| Local operators say that Gallo operating tasting rooms and retail runs against the three-tier system.

When I questioned why Gallo might not have gone after a higher-value market like New York State, Hinman joked that since “you are talking about people from Modesto, they might be more comfortable in South Carolina than New York”.

Bad news for locals

Many local retailers are not happy about Gallo’s move as the winery’s tasting rooms are likely to take both visitation and sales away from them. Tami Vogel, the wine buyer for the three-unit Frugal MacDoogal stores – which has two stores in South Carolina – says that local businesses are equally invested in creating jobs and that all the revenue from these jobs will stay in the state as opposed to flood out to California. She adds that the tasting room concept competes with local businesses that “have also been hammered due to Covid”.

Not everyone believes that the tasting rooms, which will have to close at 5:30pm, will compete with local business. Billy Watterson, co-owner of the Bluffton, South Carolina-based Burnt Church Distillery bets they are not likely to even sell the maximum of two cases per person per month, suggested that reduced tasting pours won’t compete with restaurants and that the satellite tasting rooms will close before restaurants get busy later at night.

Harry Root, president of the Charleston-based Grass Roots Wine Wholesalers company shares that he is “not against them coming to market, I just don’t want them competing with bars and restaurants”. He adds that, with the amended close time, they shouldn’t be giving his clients a run for their money.

He notes that because he is the only distributor in the state that doesn’t sell Gallo’s products that is likely to be the reason why he was the only distributor in attendance at the senate hearing. Also, as one of the only in-state entities that don’t sell Gallo products of some kind, Root is also less likely to have his business undercut by Gallo’s move.

If Gallo enters the market it “is going to be a direct competitor in the state of South Carolina with myself and anyone else who sells Gallo wine”, says Charles Sonnenberg, Frugal MacDoogal’s owner.

The unidentified retailer points out that now with retail purchases capped at two cases per-person per month in a family with three legal-age wine buyers six cases of wine is likely – at 72 bottles – to be enough to satisfy that family for the entire month with no need for them to purchase alcoholic beverages elsewhere.

What next?

Sources that I spoke to expect the legislation to pass in the South Carolina house of representatives in short order. They also think that Gallo will use its South Carolina hub to set up an East Coast beachhead to ship and do business out of with the advantage of operating as both a retailer and a winery.

“South Carolina is near the south and north corridor routes so Gallo’s wines sold there will go through its wholesalers on the East Coast,” says the retailer who did not want to be identified. That, he and others shared their perspective, was always Gallo’s long-term plan. “They are circumventing the law by saying ‘we are a local winery, grow grapes here and make wine here’. It’s nothing but a ruse.”

Once Gallo makes inroads into the state, “they are going to use social media and saturate South Carolina and everywhere else with direct wine shipments”. He says the move will be a complete violation of the three-tier system.

“They are relentless. They are Gallo. I don’t blame them for what they are doing but how they are doing it,” says Reddic about the way the winery would seem to be dismantling the three-tier system. “A bottle sold at a satellite store is one not sold at retail.”

He adds that state legislators managed to let BMW invest $10.5 billion in the state in 2016 and didn’t allow them to sell directly to consumers, but they are somehow going to allow Gallo to do so.

“So, for four out of 10 bottles sold I am going to be competing with their satellite stores,” he shares. Next up K-J or another large winery; “Then I will have 10 wineries that are competing with me.”