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The Honolulu Advertiser

Posted on: Sunday, January 4, 2004

Case made for selling $1.99 wine

By Jerry Hirsch
Los Angeles Times

LODI, Calif. — Here on the western edge of the Sierra foothills, underneath the soaring cooling towers of the defunct Rancho Seco nuclear power plant, 5,000 acres of rock-strewn vineyards mark the birthplace of Fred Franzia's Two-Buck Chuck.

As the amiable and ample Franzia leads a visitor through neatly planted cabernet sauvignon vines, he discusses why he's perplexed that his Bronco Wine Co., which makes the $1.99 wine sold exclusively at Trader Joe's stores in California, has become the bane of the industry.

Franzia is facing litigation over labeling practices and criticism from retailers and distributors who fear their profit margins will erode if the popularity of low-priced wine grows.

To his thinking, the Charles Shaw brand and inexpensive labels such as Estrella, ForestVille and Napa Ridge have done a lot to promote California wines by fighting the deluge of cheap imports and reducing the state's grape glut.

In a rare interview, Franzia, whose family has made wine in California for 110 years, talked with The Los Angeles Times about California's wine industry, his business and the Two-Buck Chuck phenomenon.

Q: How can you sell wine at a price point so low that Trader Joe's can offer it for $1.99 in California?

A: Our vineyards are so efficient.

Bronco controls 30,000 acres of California vineyards.

We have vineyards where you drive three miles before you have to turn the tractor around. Do you know how much money I save on rubber by turning the tractor less and not using up tires compared to the average farmer who is turning his tractor every quarter mile?

Q: You will sell more than 60 million bottles of Charles Shaw this year. Are you making money?

A: Yes. The margin varies with every batch. But I am not going to give you an answer as to what the margins are. Just remember, we aren't losing weight over this.

Q: What's your company's annual revenue?

A: You would not be out of order guesstimating $250 million. We processed 300,000 tons this year, plus or minus. It is the equivalent of around 20 million cases of wine. We sell over half of that at the retail level. The rest is sold as bulk wine to other wine companies.

Q: Industry lore says you are buying up tanks of high-brow wine on the bulk market and using that for the Shaw label. Or is it most of your own fruit and then you use bulk wine for blending? What's the truth?

A: I can't give you a 100 percent answer that would be true for every variety. It moves around. I am not trying to be evasive; that is just part of the process.

Our winemakers blend to keep consistency in the wine taste. They have access to a wide range of grape products that we have in our wineries to do that. Some wines might be blended with Petit Verdot or Cabernet Franc or Shiraz, depending on the winemaker's taste. It is up to him to keep the consistency.

Overall, our company grows about 60 percent of our grapes and purchases about 40 percent of what we process.

Q: Why don't we see more $1.99 wines in the markets?

A: There is no reason why more retailers in California can't be doing the same. Some retailers are buying similar wine from us at about the same price, and they are selling it to their consumers at a higher markup. I am not going to name names.