E. & J. Gallo Winery and Constellation Brands; Analysis of Agreement Containing Consent Orders To Aid Public Comment, 301-304 [2020-29149]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 86, Number 2 (Tuesday, January 5, 2021)]
[Notices]
[Pages 301-304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-29149]


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FEDERAL TRADE COMMISSION

[File No. 191 0110]


E. & J. Gallo Winery and Constellation Brands; Analysis of 
Agreement Containing Consent Orders To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement; request for comment.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair methods of competition. 
The attached Analysis of Proposed Consent Orders to Aid Public Comment 
describes both the allegations in the complaint and the terms of the 
consent orders--embodied in the consent agreement--that would settle 
these allegations.

DATES: Comments must be received on or before February 4, 2021.

ADDRESSES: Interested parties may file comments online or on paper, by 
following the instructions in the Request for Comment part of the 
SUPPLEMENTARY INFORMATION section below. Please write: ``E. & J. Gallo 
Winery and Constellation Brands; File No. 191 0110'' on your comment, 
and file your comment online at https://www.regulations.gov by 
following the instructions on the web-based form. If you prefer to file 
your comment on paper, please mail your comment to the following 
address: Federal Trade Commission, Office of the Secretary, 600 
Pennsylvania Avenue NW, Suite CC-5610 (Annex D), Washington, DC 20580; 
or deliver your comment to the following address: Federal Trade 
Commission, Office of the Secretary, Constitution Center, 400 7th 
Street SW, 5th Floor, Suite 5610 (Annex D), Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Elizabeth Arens (202-326-3552), Bureau 
of Competition, Federal Trade Commission, 600 Pennsylvania Avenue NW, 
Washington, DC 20580.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 2.34, 16 CFR 2.34, 
notice is hereby given that the above-captioned consent agreement 
containing a consent order to cease and desist, having been filed with 
and accepted, subject to final approval, by the Commission, has been 
placed on the public record for a period of thirty (30) days. The 
following Analysis of Agreement Containing Consent Orders to Aid Public 
Comment describes the terms of the consent agreement and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC website at 
this web address: https://www.ftc.gov/news-events/commission-actions.
    You can file a comment online or on paper. For the Commission to 
consider your comment, we must receive it on or before February 5, 
2021. Write ``E. & J. Gallo Winery and Constellation Brands; File No. 
191 0110'' on your comment. Your comment--including your name and your 
state--will be placed on the public record of this proceeding, 
including, to the extent practicable, on the https://www.regulations.gov website.
    Due to protective actions in response to the COVID-19 pandemic and 
the agency's heightened security screening, postal mail addressed to 
the Commission will be subject to delay. We strongly encourage you to 
submit your comments online through the https://www.regulations.gov 
website.
    If you prefer to file your comment on paper, write ``E. & J. Gallo 
Winery and Constellation Brands; File No. 191 0110'' on your comment 
and on the envelope, and mail your comment to the following address: 
Federal Trade Commission, Office of the Secretary, 600 Pennsylvania 
Avenue NW, Suite CC-5610 (Annex D), Washington, DC 20580; or deliver 
your comment to the following address: Federal Trade Commission, Office 
of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, 
Suite 5610 (Annex D), Washington, DC 20024. If possible, submit your 
paper comment to the Commission by courier or overnight service.
    Because your comment will be placed on the publicly accessible 
website at https://www.regulations.gov, you are solely responsible for 
making sure that your comment does not include any sensitive or 
confidential information. In particular, your comment should not 
include any sensitive personal information, such as your or anyone 
else's Social Security number; date of birth; driver's license number 
or other state identification number, or foreign country equivalent; 
passport number; financial account number; or credit or debit card 
number. You are also solely responsible for making sure your comment 
does not include any sensitive health information, such as medical 
records or other individually identifiable health information. In 
addition, your comment should not include any ``trade secret or any 
commercial or financial information which . . . is privileged or 
confidential''--as provided by Section 6(f) of the FTC Act, 15 U.S.C. 
46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2)--including in 
particular competitively sensitive information such as costs, sales 
statistics, inventories, formulas, patterns, devices, manufacturing 
processes, or customer names.
    Comments containing material for which confidential treatment is 
requested must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with FTC Rule 4.9(c). In particular, 
the written request for confidential treatment that accompanies the 
comment must include the factual and legal basis for the request, and 
must identify the specific portions of the comment to be withheld from 
the public record. See FTC Rule 4.9(c). Your comment will be kept 
confidential only if the General Counsel grants your request in 
accordance with the law and the public interest. Once your comment has 
been posted on the public FTC website--as legally required by FTC Rule 
4.9(b)--we cannot redact or

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remove your comment from the FTC website, unless you submit a 
confidentiality request that meets the requirements for such treatment 
under FTC Rule 4.9(c), and the General Counsel grants that request.
    Visit the FTC website at https://www.ftc.gov to read this Notice and 
the news release describing this matter. The FTC Act and other laws 
that the Commission administers permit the collection of public 
comments to consider and use in this proceeding, as appropriate. The 
Commission will consider all timely and responsive public comments that 
it receives on or before February 5, 2021. For information on the 
Commission's privacy policy, including routine uses permitted by the 
Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

Analysis of Agreement Containing Consent Orders To Aid Public Comment

I. Introduction and Background

    The Federal Trade Commission (``Commission'') has accepted for 
public comment, subject to final approval, an Agreement Containing 
Consent Orders (``Consent Agreement'') from Respondent E. & J. Gallo 
Winery (``Gallo''), a wholly owned subsidiary of Respondent Dry Creek 
Corporation (``Dry Creek''), and Respondent Constellation Brands, Inc. 
(``Constellation'') (collectively, ``Respondents''). The purpose of the 
Consent Agreement is to remedy the anticompetitive effects that would 
likely result from Gallo's acquisition of certain Constellation assets 
(``the Acquisition'').
    To resolve the Commission's concerns, Gallo and Constellation 
elected to remove J Roget, Cook's, Paul Masson brandy, high color 
concentrates (``HCCs''), and the Mission Bell winery from the asset 
purchase agreement. Under the terms of the proposed Decision and Order 
(``Order'') contained in the Consent Agreement, Constellation is 
required to maintain the viability of the J Roget and Cook's assets. 
The Order also requires that (1) Constellation divest its Paul Masson 
brandy to the Sazerac Company, Inc. (``Sazerac''); (2) Gallo divest its 
Sheffield Cellars and Fairbanks low-priced port and sherry brands to 
Precept Brands LLC (``Precept''); and (3) Constellation divest its HCCs 
business to the Vie-Del Company (``Vie-Del'').
    The Commission and the Respondents have also agreed to an Order to 
Maintain Assets. This order requires Gallo and Constellation to retain 
and maintain the assets that the Consent Agreement requires them to 
divest, pending their divestiture. The Commission's Complaint alleges 
that the proposed Acquisition, if consummated, would violate Section 7 
of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the 
Federal Trade Commission Act, as amended, 15 U.S.C. 45, by 
substantially lessening competition in the United States in the product 
markets for: (1) Entry-level on-premise sparkling wine, (2) low-priced 
sparkling wine, (3) low-priced brandy, (4) low-priced port, (5) low-
priced sherry, and (6) HCCs.
    The proposed Consent Agreement has been placed on the public record 
for 30 days for receipt of comments from interested persons. Comments 
received during this period will become part of the public record. 
After 30 days, the Commission will review the comments received and 
decide whether it should withdraw, modify, or finalize the Consent 
Agreement.

II. The Parties

    Gallo is a privately owned company headquartered in Modesto, 
California. Founded in 1933, Gallo is the largest family-owned winery 
in the world, with over 100 wine and spirit brands, and a portfolio 
that includes white wines, red wines, sparkling wines, dessert or 
fortified wines, brandy, and vodka. Gallo owns 15 wineries situated 
throughout California and Washington, over 23,000 acres of vineyards 
across California, glass and bottling facilities, storage facilities, 
and distribution channels in states where legally permitted.
    Headquartered in Victor, New York, Constellation is a publically 
traded alcoholic beverage company. Founded in 1945, Constellation is 
the third-largest producer of beer and one of the world's leading 
premium wine companies. Constellation is one of the three largest wine 
suppliers in the United States; in fiscal year 2018, it generated 
approximately $8.3 billion in gross revenue.
    On April 3, 2019, Gallo entered into an Asset Purchase Agreement 
with Constellation. Pursuant to the agreement, Gallo would acquire more 
than 30 mostly low-priced wine, brandy, concentrate and additive brands 
along with several wine-making facilities from Constellation in a 
transaction originally valued at approximately $1.7 billion.

III. The Relevant Markets

    Gallo's proposed acquisition of certain Constellation assets would 
likely result in substantial competitive harm in the following product 
markets: Entry-level on-premise sparkling wine, low-priced sparkling 
wine, low-priced brandy, low-priced port and low-priced sherry 
fortified wines, and HCCs. The United States is the relevant geographic 
market in which to assess the competitive effects of the proposed 
Acquisition.

A. Entry-Level On-Premise Sparkling Wine

    Entry-level sparkling wine is often sold to on-premise retailers, 
such as restaurants, casinos, and hotels, for specific uses (e.g., 
brunch mimosas, complimentary or ``floor'' pours, banquets, and 
catering). Sparkling wine outside of the entry-level tier is generally 
priced significantly higher than entry-level on-premise sparkling wine.
    Gallo and Constellation are the two largest suppliers, by volume, 
of entry-level on-premise sparkling wine in the United States. Absent 
relief, Gallo would have acquired Constellation's J Roget brand, 
resulting in significant increases in concentration in a highly 
concentrated market, and giving rise to a presumption of increased 
market power under the Horizontal Merger Guidelines. Further, Gallo's 
Wycliff brand and Constellation's J Roget brand are close and vigorous 
competitors in the United States. Absent relief, the Acquisition would 
have substantially lessened the significant head-to-head competition 
between Gallo and Constellation, and would likely have increased 
Gallo's ability and incentive to raise prices post-Acquisition. Entry 
into this market is difficult due to the specialized equipment and 
massive scale needed to produce sparkling wine at a low cost. In 
addition, the need for a nationwide distribution network and sales team 
to work with retailers present further obstacles to entry and 
expansion.

B. Low-Priced Sparkling Wine

    Low-priced sparkling wine (generally described in the industry as 
``popular'' sparkling wine) is predominately sold to off-premise 
retailers such as grocery stores, liquor stores, and convenience 
stores. Low-priced sparkling wine does not significantly compete with 
more expensive ``premium'' brands.
    Gallo's Andr[eacute] and Constellation's Cook's brands are the two 
largest low-priced sparkling wine brands in the United States, with 
other competitors being significantly smaller. Absent relief, Gallo 
would have acquired Constellation's Cook's brand, resulting in 
significant increases in concentration and a highly concentrated 
market, and giving rise to a presumption of increased market power 
under the Horizontal Merger Guidelines. Andr[eacute] and Cook's 
directly compete for shelf

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space and sales in the off-premise retail channel. Absent relief, the 
Acquisition would have substantially lessened the significant head-to-
head competition between Andr[eacute] and Cook's and would likely have 
increased Gallo's ability and incentive to raise prices post-
Acquisition. Entry into this market is difficult due to the specialized 
equipment and massive scale needed to produce low-priced sparkling 
wine. The need for a national distribution network and sales force, and 
retail relationships sufficient to compete with established brands for 
retail shelf space, present additional hurdles to entry and expansion.

C. Low-Priced Brandy

    Brandy is a distilled spirit made from fruit, typically wine 
grapes. After distillation, it must be aged for at least two years in 
order to be labeled and sold as ``brandy'' in the United States. There 
is a large price and quality difference between low-priced brandies, 
which are typically produced domestically, and high-end imported 
brandies (primarily cognacs). Further, low-priced brandies do not 
compete closely with other types of spirits such as whiskeys, rums, 
vodkas, tequilas, and gins, since brandy has a unique taste profile and 
is often consumed straight rather than as a mixer.
    Gallo's E & J Brandy and Constellation's Paul Masson brandy are the 
two largest low-priced brandies. Absent relief, Gallo would have 
acquired Constellation's Paul Masson brand, resulting in significant 
increases in concentration and a highly concentrated market, and giving 
rise to a presumption of increased market power under the Horizontal 
Merger Guidelines. Gallo and Constellation consider each other's 
pricing when determining the price of their own low-priced brandy 
brands and compete to develop new products for these brands. Absent 
relief, the Acquisition would have substantially lessened the 
significant head-to-head competition between E & J Brandy and Paul 
Masson, would likely result in lower quality, and would likely increase 
Gallo's ability and incentive to raise prices post-Acquisition. Entry 
is unlikely to deter or counteract the anticompetitive effects of the 
Acquisition due to the significant capital investment and distribution 
network required for large-scale brandy production. Further, the need 
for certain state and local environmental permits makes entry or 
expansion difficult.

D. Low-Priced Port and Low-Priced Sherry

    Port and sherry are types of fortified wines (wines to which a 
distilled spirit has been added, giving them a higher alcohol by 
volume) that are used for both cooking and consumption. Due to their 
flavor profile, alcohol level, and use, port and sherry brands are 
distinct from table wines and generic cooking wines. Further, there is 
a significant price gap between low-priced, domestic brands of port and 
sherry and high-end imports.
    Gallo, which owns both the Sheffield Cellars and Fairbanks brands, 
and Constellation, which owns the Taylor brand, are the two largest 
suppliers, by volume, of low-priced port and low-priced sherry 
fortified wines in the United States. Absent relief, Gallo would have 
owned three of the top four low-priced port and sherry brands. The 
Acquisition would have resulted in significant increases in 
concentration and lead to highly concentrated markets, resulting in a 
presumption of increased market power under the Horizontal Merger 
Guidelines. Gallo and Constellation are each other's closest 
competitors. Absent relief, the Acquisition would have substantially 
lessened the significant head-to-head competition between Gallo and 
Constellation, and would likely increase Gallo's ability and incentive 
to raise prices post-Acquisition. Entry into these markets is unlikely 
to occur due to the low level of interest in low-priced port and sherry 
from retailers, distributors, and third-party producers. In addition, 
producers of high-end imports have cost structures that render them 
unable to introduce a product at a price similar to domestic brands'.

E. High Color Concentrates

    HCCs are grape-based additives that have been concentrated using 
sophisticated filtration technologies into a thick, shelf-stable syrup. 
HCCs are made from a specific grape varietal, Rubired, and are used by 
winemakers to deepen the color and enhance the taste and texture of red 
wines. HCCs are also used by food and beverage manufacturers in 
jellies, juices, and other products. HCCs have unique qualities that 
are not replicable through the use of lower-level concentrates or other 
winemaking techniques.
    Gallo and Constellation are the two largest HCC producers in the 
United States, and there is only one other domestic producer. Absent 
relief, the Acquisition would have resulted in significant increases in 
concentration and lead to a highly concentrated market, resulting in a 
presumption of increased market power under the Horizontal Merger 
Guidelines. Gallo and Constellation are each other's closest 
competitors. Absent relief, the Acquisition would have substantially 
lessened the significant head-to-head competition between Gallo and 
Constellation, and would likely increase Gallo's ability and incentive 
to raise prices post-Acquisition. Entry into this market is difficult 
due to the need for technical expertise and significant capital 
investments in production equipment. In addition to potentially needing 
certain regulatory permits, firms making attempts at HCC production can 
only do so annually during a narrow harvest window, which results in a 
lengthy development process.

IV. The Proposed Consent Agreement

    The proposed Consent Agreement remedies the likely anticompetitive 
effects in the aforementioned product markets. The proposed Order 
requires that Constellation retain and maintain the assets of the J 
Roget and Cook's brands. The Order also requires the following 
divestitures: Constellation will divest its Paul Masson brandy to 
Sazerac; Gallo will divest its Sheffield Cellars and Fairbanks low-
priced port and sherry brands to Precept; and Constellation will divest 
its HCCs business to Vie-Del, no later than 10 days after the closing 
of the Acquisition. The Order further prohibits Constellation from 
selling or leasing, and Gallo from buying, the Mission Bell production 
facility without prior Commission approval. Constellation produces 
Cook's brand low-priced sparkling wine and HCCs at the Mission Bell 
facility, and will provide an interim supply of HCCs to the purchaser 
of that business.
    The proposed Order and Order to Maintain Assets also appoint 
William Berlin as Monitor. The Monitor will ensure that the parties 
comply with their obligations under the proposed Orders and keep the 
Commission informed about the status of the transfer of the assets and 
rights to the approved acquirers.
    Finally, the proposed Consent Agreement contains standard terms 
regarding each acquirer's access to employees, protection of material 
confidential information, and compliance reporting requirements, among 
other things, to ensure the viability of the divested businesses.

[[Page 304]]

A. Entry-Level On-Premise Sparkling Wine

    The proposed Consent Agreement remedies the likely anticompetitive 
effects of the proposed Acquisition in the entry-level on-premise 
sparkling wine market by requiring that Constellation take all actions 
necessary to retain and maintain the full economic viability, 
marketability, and competitiveness of its J Roget brand until four 
years after entry of the Consent Agreement. This remedy will preserve 
the status quo in the entry-level on-premise sparkling wine market, 
resulting in no change in market concentration.

B. Low-Priced Sparkling Wine

    The proposed Consent Agreement remedies the likely anticompetitive 
effects of the proposed Acquisition in the low-priced sparkling wine 
market by requiring that Constellation take all actions necessary to 
retain and maintain the full economic viability, marketability, and 
competitiveness of its Cook's brand until four years after entry of the 
Consent Agreement. This remedy will preserve the status quo in the low-
priced sparkling wine market, resulting in no change in market 
concentration.

C. Low-Priced Brandy

    The proposed Consent Agreement remedies the likely anticompetitive 
effects of the proposed Acquisition in the low-priced brandy market by 
requiring Constellation to divest the Paul Masson brandy to Sazerac, a 
spirits company based in New Orleans, Louisiana. This remedy would 
allow Sazerac to add a significant lower-priced brandy brand to its 
portfolio while otherwise preserving the status quo in the low-priced 
brandy market, resulting in no change in market concentration.

D. Low-Priced Port and Low-Priced Sherry

    The proposed Consent Agreement remedies the likely anticompetitive 
effects of the proposed Acquisition in the low-priced port and low-
priced sherry markets by requiring Gallo to divest its Sheffield 
Cellars and Fairbanks brands to Precept, a winery based in Seattle, 
Washington. This remedy would launch Precept's entry into the dessert 
and cooking wine categories while otherwise preserving the status quo 
in the low-priced port and low-priced sherry markets, resulting in no 
change in market concentration.

E. High Color Concentrates

    The proposed Consent Agreement remedies the likely anticompetitive 
effects of the proposed Acquisition in the HCCs market by requiring 
Constellation to divest its HCCs business to Vie-Del, a producer of 
wine, spirits, and non-high-color grape concentrate products based in 
Fresno, California. Based on the Commission's due diligence of Vie-Del 
as a divestiture buyer, the Commission deems it necessary to include 
the following provisions in the proposed Consent Agreement to help 
ensure Vie-Del's success in the HCC business. Paragraph IV.B. of the 
proposed Order requires Constellation to provide assistance to Vie-Del 
in establishing production capacity equivalent to that of 
Constellation, and Paragraph IV.D. requires Constellation to produce 
concentrates to Vie-Del until Vie-Del is able to produce HCCs in 
commercial quantities and until transferring Constellation customers 
have qualified Vie-Del's HCCs to meet their specifications. These 
provisions will help ensure Vie-Del is able to expand its customer base 
while otherwise preserving the status quo of three independent HCCs 
producers, resulting in no change in market concentration.
    The purpose of this analysis is to facilitate public comment on the 
proposed Consent Agreement to aid the Commission in determining whether 
it should make the proposed Consent Agreement final. This analysis is 
not an official interpretation of the proposed Consent Agreement and 
does not modify its terms in any way.

    By direction of the Commission.
Joel Christie,
Acting Secretary.
[FR Doc. 2020-29149 Filed 1-4-21; 8:45 am]
BILLING CODE 6750-01-P