Five years ago, the Terlato Wine Group (TWG) had a problem. The Lake Bluff, Illinois–based company had entered new contract negotiations with the Marzotto family—owners of the largest brand in the TWG portfolio, Santa Margherita—but the two sides were having difficulty coming to terms. TWG chairman Tony Terlato had launched Santa Margherita in the United States in 1979 and built the brand into one of the top-selling super-premium wines in the market, spearheading the luxury Pinot Grigio category in the process. In 2012, as negotiations commenced, Santa Margherita was selling about 600,000 cases in the U.S. annually at a price point of above $20 a 750-ml. bottle, and the brand accounted for nearly 40 percent of TWG’s 1.6 million–case volume. In the end, the two parties went their separate ways, with Santa Margherita opting to establish its own U.S. import subsidiary at the start of 2016, and TWG beginning a new chapter in its history.
Bill Terlato, Tony’s son and the company’s current president and CEO, notes that the end of a long-term relationship with a trusted partner can sometimes be a blessing in disguise. “In retrospect, it turned out to be the best thing that could have happened to us,” he says. “All the effort it took to keep that brand propped up was robbing energy from additional opportunities. As soon as we were able to put that focus in other directions, things exploded for us across a broad basket of brands.”
One of those opportunities is Burgundy. Bill’s brother, TWG vice chairman John Terlato, has been the driving force behind the group’s new Burgundy Cru division, which has assembled an impressive portfolio, beginning with Domaine Ramonet in 2014 and expanding to a current total of 14 domaines. “Over the last 10 years I’ve spent a lot of time in Burgundy, building relationships there,” John says. “It’s not something you can do by phone. Nothing happens quickly in Burgundy.” In 2016, TWG’s business totaled 2.1 million cases, with a combination of strong organic growth and new additions more than making up for the loss of Santa Margherita. “Before the transition, we were growing at about 6 percent to 8 percent annually,” Bill says. “Last year we grew by 32 percent across a broader spectrum of brands.” Progress in value terms is also ramping up. After reaching $300 million in revenue in 2016, Bill projects that the company will hit $375 million this year.
New Growth Avenues
Once it became clear that the partnership with Santa Margherita was coming to an end, TWG set about systematically transforming its business. Over the past half-decade, the company has added nearly 50 wine and spirits brands—both imported and domestic—that together comprise about 700,000 cases. It has also dramatically accelerated its organic growth, with its existing portfolio up a combined 40 percent over the same time period.
One of TWG’s new additions has placed the company in direct competition with its former partner. Terlato Vineyards Friuli Pinot Grigio ($20 a 750-ml.), which debuted in 2015, reached 35,000 cases last year, and it’s projected to surpass 70,000 cases in 2017. “We now have 240 acres in Colli Orientali, the premier growing region for Pinot Grigio,” Bill says. “We control more than 50 percent of the Pinot Grigio grapes from that region, and we’re looking to buy more vineyards.” He adds that the wine is now the No.-2 Pinot Grigio over $15 at the Kroger grocery chain. “We’ll remain 100-percent estate-grown and estate-bottled, so we think we can max out at about 150,000 cases,” Bill explains. “We’re not looking to be the volume leader, but we want to be the quality leader.”
While TWG intends to continue leading in Italian Pinot Grigio, it’s also stoking growth in other areas of the business. Foremost is California label The Federalist, which has caught fire over the past few years, nearly doubling to 200,000 cases in 2016, according to Impact Databank. “We still have a long way to go before we maximize distribution on The Federalist,” Bill says. “This year we have access to 360,000 cases. We could sell more if we had the grapes, but that will provide a nice leap forward.”
The Federalist, which retails in the $15-to-$25 tier, is geared toward the millennial male demographic. Its counterpart—aimed at millennial women—is Seven Daughters, which grew 12 percent to 230,000 cases last year. Also sourced from California, Seven Daughters now has the top-selling Moscato in the restaurant channel. “Seven Daughters Moscato has risen to over 100,000 cases,” notes Dave Lane, who serves as president and COO of the group’s Terlato Wines division. In addition to The Federalist and Seven Daughters, the company is seeing solid results in less obvious areas, such as Merlot under the Napa Valley–based Markham brand, Lane says.
TWG’s rising profile in California recently led it to appoint industry veteran Sandra LeDrew to the new position of president of winery operations and chief development officer in February. LeDrew has responsibility for such California holdings as Rutherford Hill, Chimney Rock and Sanford, along with joint ventures in France, Italy and Australia. She also oversees production of The Federalist, Seven Daughters and Terlato Family Vineyards brands, among other duties.
“The way our California business is developing, we needed someone on the ground looking after the wineries full-time,” Bill explains, adding that LeDrew’s wealth of industry experience—particularly in the Golden State—makes her a natural fit. For LeDrew, who was president of Treasury Wine Estates Americas from 2012 to 2016 and president of Diageo Chateau & Estate from 2009 to 2011, the new role marks a move to an independent player after years at publicly quoted companies. “The Terlatos have a remarkable family business, with a spectacular portfolio of brands anchored in luxury,” LeDrew says. “It’s a company that’s very clear about where it wants to go, and it has its eye on the long term.” TWG’s winery operations in California and elsewhere had previously been under the purview of John Terlato and senior vice president and general counsel John Scribner, who each spend about one week a month in California. While those two senior executives will continue to be involved, LeDrew’s appointment gives the company a full-time leadership presence on the scene.
The move also frees up John to pursue his long-term quest to continually improve the company’s vineyards and winemaking. “Sandra will put a great business framework around the wineries, which allows me to focus on farming and winemaking,” he says. “I’ve been researching how we can make wines that stand shoulder-to-shoulder with the great wines of the world. We have the vineyards and winemaking teams in places like Sanford, Rutherford Hill and Chimney Rock to accomplish that goal.”
John also leads the charge in scouting TWG’s potential vineyard acquisitions, the most recent being Washington state’s Klipsun, on Red Mountain. Known as a seller of high-quality grapes, Klipsun hasn’t made its own wine in the past, but TWG aims to change that. While the vineyard will still sell to other producers, the Klipsun brand will soon be showing up on store shelves in its own right, giving TWG its first foothold in the burgeoning Washington category. An entry into Oregon is also a possibility. “We’re definitely looking there, and we’ve bid on a couple things,” Bill says. “You always have to have an eye toward the future and say, ‘Where are the holes in our portfolio, and where can we grow?’”
On-Premise Powerhouse
Burgundy plays into TWG’s on-premise strategy. “The attention to detail the wineries show in their vineyards is extraordinary,” John says. “It’s a very intuitive process. They don’t make wine by recipe there. They seek to create wines that are transparent expressions of the vineyard. We’re focusing these wines on the restaurant trade.”
On-premise interest translates into off-premise sales. “We want brands that are attractive to restaurants because then they also become attractive to retail,” Bill explains. “We don’t do it the other way around. We want our portfolio to read like a great wine list and cover all the different regions, styles, varietals and price points.” In addition to the new Burgundy division, TWG’s French portfolio is getting a boost from Belleruche, made by partner M. Chapoutier. Offering red, white and rosé expressions retailing at around $15, Belleruche is now the top Côtes du Rhône label in the United States, outselling its top four competitors combined. It’s been a driving force behind the recent U.S. growth of the overall M. Chapoutier portfolio, which jumped 14 percent to 200,000 cases last year.
Meanwhile, TWG has a one-two punch in Champagne. The company gained marketing rights for established player Piper-Heidsieck from Rémy Cointreau USA in mid-2015, and it also imports grower label Duval-Leroy. “Piper is the sixth-largest Champagne brand in the United States,” Bill says. “We want it to be No.-3. We’ve done a lot of work over the first 18 months repositioning it. Now we’re starting to see growth, and the brand is getting back to a healthy and respected position.” TWG has firmed up pricing on Piper-Heidsieck ($45 a 750-ml.) significantly, but the brand still achieved volume growth last year, advancing 7 percent to 45,000 cases, according to Impact Databank.
The group is also participating in the Italian sparkling wine boom with the Riondo and Nino Franco Prosecco brands, which play in the DOC and DOCG segments respectively. More broadly, TWG’s Italian range continues to prosper in its targeted on-premise market. “Things like the Gaja group of brands—including Ca’Marcanda and Pieve Santa Restituta—as well as Cusumano, Anselmi, Il Poggione, Cecchi and Feudi di San Gregorio are all very strong restaurant labels,” Bill notes. TWG remains committed to maintaining its leadership position in the on-premise, which accounts for 55 percent of the company’s total placements and about 35 percent of volume. A recent deal to handle Italy’s San Benedetto water brand on a national basis also targets TWG’s on-premise prowess. Aimed toward the fine dining segment, San Benedetto has its own separate sales force within the TWG organization.
While keying in on opportunities in French and Italian wine, TWG is continuing to seed growth in niche segments like South Africa. Offering such brands as Anthonij Rupert, Ernie Els, Rust en Vrede, Durbanville Hills, Nederburg and Two Oceans, TWG now sells above 90,000 cases of South African wine annually. The company’s southern hemisphere range also includes Loveblock and Wairau from New Zealand, Terlato Chapoutier from Australia, Tamari from Argentina, and Lapostolle from Chile.
Getting Into The Spirit
Two Oceans, Nederburg and Durbanville Hills are all produced by South Africa’s Distell, with whom TWG entered into a partnership in late 2015 to create a new U.S. joint venture, TD Artisan Spirits. TWG initially delved into spirits in 2013 with the brands Riazul Tequila, Langley’s gin, Don Pancho Origenes rum and Adelphi single malt Scotch. The link with Distell added a host of new labels to the lineup, including Amarula liqueur, the Burn Stewart range of Scotch whiskies—such as Bunnahabhain, Deanston, Ledaig, Tobermory and Scottish Leader—and Bain’s Cape Mountain whisky from South Africa.
Last year, TD Artisan Spirits added two new brands—Angostura rum and the Heartland Distillers portfolio—and totaled 100,000 cases in volume. This year, New York City–based Greenhook Ginsmiths is joining the fold. “Greenhook gin is produced in Brooklyn, and right now, it’s sold just in New York, New Jersey and Connecticut,” Bill says. “They’re doing 6,000 cases in just those three states, so we’ll look to expand on that. The spirits group is also looking for other acquisitions, both imports and domestics, with whiskies being a priority.”
Last spring, three-decade drinks industry veteran David Ballew was named COO of TD Artisan Spirits. “We’re looking across all categories for new spirits propositions,” Ballew says, noting a focus on super-premium price points and higher. “If you look at rum, for example, the category is challenged, but there is growth at that upper level. We see opportunities across the super-premium spectrum.”
But something new is always on the horizon. “Most recently, we partnered with Marco Simonit and Pierpaolo Sirch to open a new pruning school in Napa,” Bill says. “They are considered the premier pruning experts in Europe, working across classified Bordeaux and Burgundy, Champagne, and elsewhere.” He notes that Simonit & Sirch, aka the Pruning Guys, have worked on TWG’s vineyards in Italy. “Their methods have delivered dramatic improvement in the life of the vine and the quality of the fruit,” Bill explains. “So we decided to open up a school in Napa to teach these techniques to other wineries.”
While he’s bullish on the state of the fine wine business overall, pointing to the broad premiumization trend that’s occurring across both the on- and off-premise, Bill is also cognizant of the challenges caused by the continually changing nature of the market. “I’m an obsessive person, and I worry about competitive activity,” he says. “I worry about consumer preference, fragmentation and the economy, as well as a potential border tax and currency fluctuations, which affect our cost of goods. I also worry about climate change and crop size and the effects that legalizing marijuana might have on our business over the long term. But I’ve come to realize that the more obsessed you are and the more you think about all these issues, the easier it is to come up with solutions. In the end, every problem is an opportunity in disguise.”
Bill identifies one of the keys to long-term success—maybe multi-generational success. “You constantly have to reassess and reinvent yourself on a daily or at least yearly basis,” he says. John adds that as the family company continues to transform and expand, the decisions it makes today will ultimately set the table for further progress to be undertaken by future generations. “Some of the oldest businesses in the world are wineries,” he notes. “Family businesses are amazing when there’s a shared understanding about where they’re going and how they’re going to get there. The most exciting thing is the opportunity to work together to build this business and hand it off in good shape to the next generation.”
The fourth generation of the Terlato family has now joined the company, with Bill’s children Jo Terlato Giannoulias and Tony Terlato II coming onboard. Jo serves as a marketing analyst in the company’s Estate division, and Tony is Illinois regional manager for its Premier division. “If a family member wants to join the business, they have to work outside in an independent job and be promoted to a management position,” Bill explains. “It’s not just a time commitment outside, but also hinges on achievement. A lot of family businesses have had difficulty because they’ve employed family members who aren’t qualified. That favoritism can also become demoralizing for the professionals around them because it doesn’t seem equitable.”
The tradition of requiring family members to pay their dues and succeed on their own terms was set in place by chairman Tony Terlato. “It was very important to my dad,” Bill explains. “He gave us the worst jobs and expected us to be there before everyone and to leave after everyone—almost to the point that people felt sorry for us. We’ve been going for four generations, and we want to go four more at least. If you don’t set a high bar and make sure that your family leadership is capable and talented, you won’t get there. That’s how we look at it.”