What happened when Coca-Cola sold wine?

This will probably shock you, but in the early 1980s, Coca-Cola was actually the world's number 2 producer of wine. But by 1983, after dominating the wine aisle, they decided to give up on that business entirely. This video is the story of how Coca-Cola got into the wine business, grew to dominate it, and then gave up on it right at the top.

Oh, and by the way, this video is done in partnership with Surfshark. More about them later.

In the mid-1970s, American wine consumption was modest by European standards, but still growing. In 1970, Americans had drank 1.3 gallons of wine per person per year. By 1975, that number was 1.7 gallons. Pretty attractive number for a big beverage giant like Coca-Cola. So Coke's executives believed they could do to wine what they had done in the soft drink business. So they decided to go for it. In 1977, Coca-Cola bought struggling 6th place winemaker Taylor Wine Company and bought themselves a spot in the wine industry. But there was a problem. Taylor Vineyards was an East Coast brand, so they needed to make themselves into a nationwide brand. And the way to do that was to go acquire a couple more companies. They bought one company called Monterey Vineyards and another one called Sterling, both out in California. Together they became the Taylor California Wine Company, backed by Coca-Cola's vast resources. Something that will prove really important for this story is that Gallo Wine is the basically dominant player in the wine industry by far. So Coca-Cola went and recruited a guy named Dick Peterson from Gallo to come in and run their wine operation. And I love what Coca-Cola did next. I mean, this is a company with big ambitions and a lot of self-confidence, and they told Dick, we want nothing less than total victory in the wine market. Crazy. In 1978, they hatched a plan straight out of the soda marketing playbook. They were going to prepare their own wines and do a national Pepsi Challenge-style taste test against big brands like Inglebrook and Almaden, proving Coke could make really good wine. Since Coke ran this taste test, uh, you can imagine what happened. The judges placed them in first place for 3 wines and, uh, tied for first in a fourth. It was a brilliant marketing ploy. Basically, they got free press coverage, like a bunch of commercials, for their new Taylor California brand of wine. And seemingly it had worked. Taylor, California. Taylor, California, South. And you can imagine what was going on in Atlanta, the headquarters of Coca-Cola at this time, where people are like, yeah, look at us, man. We really have our act together. This Coca-Cola stuff and all these beverage techniques, man, we're gonna teach these wine guys a lesson. Coca-Cola leaned even further in. They ran commercials with things like, better wine, judge for yourself. Even going so far as to call out competitor brands by name. In their advertisement. But there was a problem. This kind of sharp-elbow advertising was almost unheard of in the genteel world of the wine business. And it turned out there was a pretty good reason they acted that way. You see, some industries, and wine is one of them, they operate by a set of unwritten rules that everybody kind of behaves by so nobody gets out of line. Well, here was Coca-Cola getting way out of line. And so the first thing the folks did who were established vendors was go in and start to sue Coca-Cola, saying, "Hey, you can't name us by name. What's going on?" Well, Coca-Cola won all those lawsuits, but it wasn't going to win the war. But meanwhile, the Coca-Cola wine business was growing incredible. Taylor sold 500,000 cases in its first 6 months, 1.2 million in its first 2 years, and then by year 5 sold an astonishing 8.6 million cases of wine. And so by the early 1980s, Coca-Cola's wine spectrum business, what they called Taylor and all the other stuff, had accomplished something kind of unheard of for a soda company. They had gone from nothing to 6.2% of the United States market share in wine, making it the number 2 overall producer. But even with all that growth, they were still light years beyond the number 1 producer, Gallo, who had an astounding 27.7% of the wine market themselves. But Coca-Cola kept being aggressive. They tried a number of innovations that today you look around and be like, who thought of that? Well, it turns out it was Coca-Cola. Things like boxed wine, which they sold to restaurants and eventually sold to consumers. And even canned wine was invented during this time when they sold it to Delta Airlines. But at that moment when it seemed like things would never go wrong for Coca-Cola's wine business, that's when they did.

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The first thing to go wrong for Coca-Cola was that sales growth started to stall from its breakneck pace. Coca-Cola's wine business only grew by 17% in 1982, a far cry from the over 100% triple-digit growth that they'd had years previous. But the worst problem was Coca-Cola wasn't making as much money as they were accustomed to. You see, in the soft drink business, those typical brands like Coca-Cola and others, they operate at 10 to 15% gross margins. But in a business like wine, they're operating at like 4 to 6% gross margins. It's a big difference. And Coca-Cola was starting to discover that operating wine businesses was hugely capital intensive. Unlike sodas, which are ready the moment you make them, wine takes years to ferment and be ready. And so Coca-Cola had done things besides buying these companies, like spend $40 million for a new winery in Gonzales, California. And I've talked about on this channel what matters more than profits or revenue is return on invested capital. And Coca-Cola was quickly discovering that the wine business, while a big one, was one where you invest a lot of money, but you don't necessarily get the same returns on it that you would get out of, say, the soda business. The second thing to come back to bite Coca-Cola was that their growth tactics and their aggressive soda marketing had worked well and grown the market, but it had angered the wine establishment. And the biggest member of that wine establishment was number one provider Gallo. And you remember they had over 27% of the market. They were a vertically integrated, privately held behemoth and had been in business for a long time, meaning they could operate at razor-thin margins for longer than Coca-Cola could probably stay patient. And to defend its turf against this new rival, Gallo came in in the 1980s and slashed prices and pushed a ton of supply out on the market. The idea of fighting back against its new upstart competitor in Coca-Cola. Gallo also used the same tactics Coca-Cola uses to get large in the soda business to defend their turf in the wine business. See, Coca-Cola's scale in soft drinks allows them to put pressure on folks like distributors and retailers to carry their brands and push out other brands. And so Gallo, at this point in the early 1980s, used their scale and the same Coca-Cola playbook to go push out Coca-Cola's wines from shelves and distributors in favor of Gallo's brands. And all this play worked. And in 1983, after doing the numbers and seeing the results, despite being the number 2 wine producer in the United States, Coca-Cola announced it was going to exit the business entirely. They sold the wine business to liquor giant Seagram Sons for $200 million. This made Seagram the number 2 wine producer in the United States with an 11.2% share. And Coca-Cola, well, basically they got their money back. This is about what they had spent assembling the entire business. Many in the industry saw Coca-Cola's retreat here as a win for Gallo defending their dominant market position. Other analysts blame this outcome on Coca-Cola's culture and expectations. They just weren't used to playing a hard mode game where they weren't the big boy on the block. And in a kind of sad end for Coca-Cola's wine business, Seagram's over the next couple of decades basically ran the wine business into the ground. It was a sad ending for what had been kind of a promising number 2 producer over time. These missteps by Seagram's meant that eventually, a few years later, a lot of these storied brands that Coca-Cola had built up were suddenly just junky commodity wines on the bottom shelf of stores near you, sold at a rock bottom price at low quality. Sales kept shrinking, and by 1995, the Taylor brand, once number 2, was an all but forgotten brand in American winemaking. There's a lot of lessons here, but the number 1 for me is this idea that the business that you're in and the game you choose to play is more important than how well you play it. And here was Coca-Cola that seemingly was a juggernaut and knew all of this stuff about how to run businesses really well. And they went into a game where basically they had an unfair disadvantage. Gallo was eventually going to crush them no matter what they did. And, uh, you know, I think that's a great lesson for all of us. Like, if you're going to be an entrepreneur, you could pick different games. Do you want to be in a hard game? It's going to be very difficult. Or do you want to try to get yourself into an easy game where you can win? And I think the Coca-Cola executives were geniuses here to pull the ripcord the moment they saw that this wasn't going to be as easy as they'd hoped. And getting out with their money back was a great outcome for the business. All right, that's it for this video. Let me know what you think about this story. I found it fascinating. Let me know in the comments below. I try to read them all. Catch you next time.