By William E. Sheeline

(FORTUNE Magazine) – If you've noticed your friends serving a higher grade of white wine this summer -- join the party. America's taste in wine, never especially elevated, is ratcheting up, and that means a shakeout ahead for California vintners. Inexpensive jug wines, made from lesser-quality grape varieties and blends, have always been the broad foundation of the U.S. wine industry. Now that market is shrinking and a new category of higher-quality wines is grabbing an increasing share of sales and profits. Dubbed the fighting varietals, they are generally made from a single type of grape -- chardonnay, cabernet sauvignon, zinfandel -- and retail for $4 to $6 a bottle. California's wineries are in a mad rush for position in this lower-priced premium market, and some probably won't make it. The standout success so far is Glen Ellen Winery, which first produced wine in 1982. Founded by Bruno Benziger, who brought his family to California from New York in 1980 after 25 years in the wine and spirits importing business, Glen Ellen sold 1.5 million cases last year, vs. just 6,450 in 1982. The winery expects to sell about 2.6 million cases this year. ''You couldn't give zinfandel or chardonnay grapes away three years ago,'' says Michael Benziger, managing general partner of Glen Ellen and, at 37, eldest of the six Benziger children who work there. To stay lean, the winery has an array of short- and long-term contracts with about 200 growers. ''Our expertise is in making and marketing wine,'' says Benziger. The company sells mainly through large retailers, restaurants, and supermarkets. Other wineries succeeding in the booming category are Fetzer Vineyards, Robert Mondavi Winery, Sebastiani Vineyards, Wine World, Sutter Home Winery, and Round Hill Cellars. Among jug wine producers that have felt the pinch: Almaden Vineyards and Vintners International, owners of Taylor and Paul Masson. Perhaps the greatest challenge faces E.&J. Gallo Winery, which became America's largest vintner mainly by selling jug wines and may now be a victim of its own success. Gallo's low-priced varietals show only sluggish growth , within the segment. How to align its image with America's new tastes is the $70-million-a-year question facing seven ad agencies hotly competing for Gallo's account.- W.E.S.