Mistake Monday: A Game of Contracts

In 2012, I was buying grapes for E&J Gallo.  My job was to secure the fruit needed for a range of products, including.  Louis M. Martini Sonoma County Cabernet Sauvignon.  This wine is a very large part of the Gallo Premium portfolio, and one that requires many tons at price that worked for our cost of goods.  In 2009 and 2010, Cabernet Sauvignon in Sonoma and Napa could be found pretty easily and pretty cheap.  There were many instances where growers could not sell their grapes, even at prices below the cost to farm it.  By 2012, the market had completely changed.

Many astute wineries signed growers to multi-year contracts in 2010 and 2011 as the overall global economy started to improve.  Growers liked this as it avoided the worry of selling their grapes; many growers saw the improving market as a way to recoup any losses sustained during the recession.  You could say there were two camps of growers: those who were happy to finally have a contract at acceptable prices, even if the prices were lower than they had hoped; those who were not going to sign any long-term contract at any price they didn’t feel was adequate.  With only two camps, there wasn’t a lot of room in the market for typical deals.

Grape buying usually heats up around April in California.  If the market is tight, buying usually gets going around February or March, and if the market is soft, May or even June.  In 2012 the market was hot in January.  It was obvious that if we wanted grapes, we would have to move quickly.  There are many positives working for a multi-billion-dollar company, like Gallo; however, reacting quickly to new market conditions is usually not one of them.

The Process

This is the simplified version of how grape buying would work at Gallo:  1) The Execs, called Grape Supply, would meet once a month to review the sales and grape market data to use in their forecasts;  2) This Grape Supply team would set how many tons their models indicated were needed and at what price.  Let’s say one of these meetings happens on February 1st; 3) The other Grower Relations team members and I would receive Grape Purchase Orders within a few days.  Each Order would say something like, we need to find 2,000 tons of Cabernet Sauvignon for Louis M. Martini Sonoma Cab at an average price of $1,500/ton; 4) Then I searched for grapes that matched the criteria.  5) If I couldn’t find grapes that matched, I let Grape Supply know that we need to pay a different price or find other alternatives.  (For example, maybe we needed to pay $1,600/ton on average or there weren’t 2,000 tons of Cab on the market.)  This approach is fine in a normal market.  I could buy 1,000 tons for $1,750/ton and 1,000 tons for $1,250/ton and still meet the requirements.  We could make a few adjustments over a few months, find mostly what we need, and be fully sourced by June.  Each wine we produced had an Order for the grapes needed.

Cab Sauv – STAT!

In 2012, I received a batch of Grape Purchase Orders on March 1st.  One of the big orders , was to find 2,000 tons of Sonoma County Cabernet Sauvignon at an average price of $1,500/ton.  I had my directive and went hunting.  The trouble was, the market had been active for nearly two months at this point.  I started making calls and visits but couldn’t find anything.  In fact, I was literally laughed at on several occasions.  It was painfully obvious that the market floor price was $2,000/ton.  I was seeking 25% below the lowest price in the market.  Guess what I found?  Zero takers.

I sent the information up the chain of command and said if we wanted Cabernet Sauvignon in Sonoma, $1,500/ton would not secure the grapes needed.  The market was at $2,000/ton and up.  The Grape Supply team met again, noted my concerns, and updated the Grape Purchase Order.  On April 1, they told me I still needed to find 2,000 tons of Cabernet Sauvignon, and I could now pay $1,600/ton.  It took us a month to bump the price $100.  I won’t bore you with additional details because I’m sure you know where this is headed.  We kept bumping the price a little every month while fruit on the market was being contracted.  Somehow, by August, I was able to cobble together 1,100 tons of Cab at a price average of $1,850/ton.  There wasn’t any Cab left for sale at any price.  I called off the hunt.  I was getting moderately beat up in company meetings about my inability to find the grapes we needed at the price we needed. 

Hard Work & Luck: Mostly Luck

In early September, I received a call about 200 tons of Cabernet available on the outskirts of Sonoma for $1,500/ton.  It was up in the Mayacamas mountains.  I pounced.  I raced up the dirt road all the way up steep inclines and sharp curves.  It was a tough vineyard to get to, even in a pickup truck.  I met with the vineyard manager, and we came to a verbal agreement that we would buy 150 tons for $1,500/ton.  Not the 200 he’d said on the phone, but whatever.  I had no idea how we would even haul the grapes out, but I’d figure that out later.  Right then, I had a winning lottery ticket.  I could get this monkey off my back a little, at least.  He gave me the owner’s information and I started prepping the contract.

I called the owners who lived in Arizona.  They said, actually, there were only 100 tons available, not 150, but they were still comfortable with the price.  At this point, alarm bells should have sounded, but they didn’t.  I was out to prove I could find one last deal for the season.  I sent them the contract and told them since we were about a month from harvest, I needed to bring winemakers to the vineyard.  They said they’d sign it and send it back to me.

In the meantime, I started scheduling my winemakers to visit the ranch with me so they could get acquainted with the vineyard.  I think I sent the contract to the owners on a Thursday or Friday, and I took winemakers to the vineyard the following Monday.  By mid-week, I still had not heard back from the owners.  I called to check in.  No answer.  Sent an email to be safe, too.  No response.

I continued to reach out and was getting nothing back.  By the time three weeks had passed, I was calling several times a day; emailing several times a day.  We were about 2 weeks from harvest.  Above the water, my face looked calm.  Below the water, my limbs were pure chaos.  Then it all suddenly changed!

I was used to calling multiple times a day and just getting voicemail.  But on one call, they picked up!  Hallelujah!!!  We made some pleasantries.  I tried my damnedest to pretend like nothing happened and all was fine.  We made nice and then it happened.  They pulled the grenade pin.  I heard it clank to the floor.  They said the contract I sent them was the worst contract they’d ever seen and there was no way they were signing such a one-sided contract. (It should be noted, Gallo used the same contract for every purchase, and it hadn’t been changed in years).  I kept kicking, and told them I could request an amended contract, but they wouldn’t say specifically what verbiage they didn’t like.  The deal was dead.  My continued attempts to keep it alive were just for show.

My lottery ticket had turned into a bomb in the span of a 5-minute phone call.  I let my boss know the deal fell through, and let his bosses know, and their bosses know, and let the winemakers know, which meant the whole business unit was made aware of my failure to complete the deal.  It sucked.  Thankfully, harvest got hot and heavy quickly and it was soon forgotten.  But not by me.  I made my computer background a photo of that vineyard for at least a year.  Not for spite, but to make 100% sure I didn’t make that mistake again.

Chess vs. Checkers

After harvest, I found out that the whole deal was a ruse.  They used my contract to leverage another winery into a better price.  I saw the contract.  They blew up my whole deal for an extra $25/ton.  The contract was for $1,525/ton.  That’s $2,500.  I didn’t even have a chance.  But I did learn a lot from it.

In the end, it turned out that it rained a few times on those sketchy dirt mountain roads causing some of the vineyard not to be harvested.  That soothed some pain, but that’s not the point.  The point is, I operated differently on grape sales going forward.  Gallo had no policy on contract timing; no expiration during the negotiation process.  That was up to me, so I set one for my deals.  I’ve come to learn there’s about a 7-day window.  The success rate of deals is over 90% if I get a contract back from the seller within 7 days.  Longer than 7 days, the likelihood that deal turns into a bomb increases exponentially each passing day.  I have a 7-day timer in my head, and one that I verbally state in deals.  I’ve still had purchases go south since then, though, none like that.  And when they do fall apart, I make sure I’m the one holding the hand grenade.