Becoming Trader Joe

[A] view of profit and wealth-creation as inevitable by-products of doing other things well. Money is a useful yardstick for measuring quantitative performance and profit and an obligation to investors. But … making money as an end in itself ranks low.

I genuinely believe he believes this. He wants to do good, and yes, make money, but making money purely for the sake of it does not interest him. In this he’s very similar to the things Mrs B. and Rockefeller have said.

Unique Goods

We witnessed something very interesting: the United States had a quota for imported tuna. Once Peru’s quota had been filled, a biological miracle occurred right there on the canning line. What had been tuna was now pilchard, a member of the herring family, on which there was no quota. The like hasn’t been seen since the Sea of Galilee! To this day, Trader Joe’s is virtually the only retailer of pilchard.

This happens over and over, by the way. It’s one of the reasons they have such ‘unique’ goods. They have a mix of healthy disdain for the law (healthy in that they will not openly flout it, just find creative ways around it) and simultaneously a total willingness to buck the trend and do unique things.

Then the Feds intervened. Shipping butter from Oregon to California was interstate commerce. Federal regulations do not recognize such a thing as whey butter. So Tillamook had to take the “whey” designation off the label. This confused our customers to no end: all they saw was “second quality.” So we found a California producer who would make whey butter for us. By exiting interstate commerce we were again able to label it whey butter. But, of course, still second quality. Without the prestigious Tillamook name, we changed the label to “Trader Joe’s La Cuisine de Beurre.” It was still 15 percent cheaper than regular butter, and better.

Example 2. How much is the brand name really worth?

When I got into the grocery business, I couldn’t understand the scant attention paid to this greatest of all syrups. All the major brands like Aunt Jemima were mostly cane syrup with a little maple thrown in.

We not only broke the price of maple syrup, but we were the only retailers selling the rare, first-run maple syrup. For many years, there was none available at all. It was water-white, and most Californians neither recognized it nor liked it. They were accustomed to Grade B, dark syrup with a kicker of a taste. But we persevered and became outstanding not only for prices but for our assortment of maple syrup. From time to time we also brought in syrup from Wisconsin, another first here. As far as I know, Trader Joe’s is the largest retailer of maple syrup in the United States.

Example 3! Is it any wonder so many love Trader Joe’s?

No strong brand demand, nobody interested in helping the public buy it right. Putting Intensive Buying and Virtual Distribution to work, we became the largest retailer of wild rice in the United States.

Example 4. They really pioneered selling wild rice!

The processing of almonds leaves a lot of bits and pieces of almonds behind. Doug Rauch came up with the idea of grinding almonds into an analog for peanut butter.

For years we were almost the only retailer with almond butter. In some years, we could sell it cheaper than peanut butter.

Example 5. They invented the concept of almond butter!

The Feds have “standards of identity” for certain products like mayonnaise and catsup. If your product doesn’t have all the ingredients specified you can’t use the name. Unfortunately, the standard for catsup requires 30 percent sugar.

Example 6. Why does ketchup need to have sugar? The absolute state of American food…

He had a problem: too many Extra Large AA eggs. He offered them to me at the same cost as Large AA, the size that all the supermarkets advertised. I would be able to sell Extra Large, which by state regulation weighed about 12 percent more than Large, for the same price as Large! And, even more importantly, the supermarkets couldn’t follow. The supply of Extra Large simply wasn’t great enough to cover a Safeway ad. A moment’s reflection makes one grasp that Extra Large are laid only by the eldest hens, the ones approaching, uh, retirement. There just aren’t that many of those old girls.

Example 7. They are willing to find and use deals even if they are not a sustainable or scalable source of alpha. Use their lack of size to their advantage.

The United States is one of the most protectionist countries in the world when it comes to cheese, thanks to restrictive laws bought and paid for in the 1950s by the Wisconsin cheese lobby. Leroy dug into these regulations the same way we had dug into the Master Wine Grower regulations.

[sic]

Because Wisconsin had no native Brie industry in the 1950s, it had neglected to shut off imports of Brie: there were no restrictions. We tore into this like we had torn into Fair Trade on imported wine and became the largest retailer of Brie in the United States. No other retailer was interested in selling Brie at a reasonable price. Hell, we sold it for less than Velveeta!

Example 8. What’s funny is that they originally pursued cheese because Trader Joe’s was pivoting from a mostly wine dispenser to a health foods store, and back in the day cheese was considered a health food!

To this day, the promotion of Extra Large AA eggs is one of the foundations of Trader Joe’s merchandising, not just because of the program per se, but because it set me to wondering whether there weren’t other discontinuities out there in the supplies of merchandise.

This overall philosophy of differentiated alpha continues to this day in Trader Joe’s.

Corruption

I never realized how much corruption and back room dealing there was in groceries. The next time someone extolls the benefits of unions and how they’re just there to ‘stand up for the little guy’, I’ll point them to this section in the book. It’s just pure protectionism and rent seeking.

Adohr was slowly sinking because Merritt was a rare ethical player in the now wholly corrupt California milk business. In 1935, in the pit of the Depression, when milk was being sold below cost, Merritt’s father had helped write the “milk control” laws, which partly govern California’s milk business…

The more I researched into this, the angrier I got. Corruption in California is nothing new, but they would regularly send thugs to beat you up if you bought from the wrong person or got a better deal!

When Merritt Adamson Sr. wrote the laws, most milk was sold by home delivery; there were hardly any supermarkets. After the war, Adohr was stuck with home delivery while the new suburbs shifted their milk purchases massively to the newly dominant supermarkets. But to get supermarket business, Merritt Jr. would have had to go against his own father’s legislation. He refused to play ball, and Adohr was sinking.

It’s amazing how ethical the son was to stand up to his own father’s corruption.

I’d had a bellyful of under-the-table offers from creameries. “We’ll pay you in cash, if you’ll just meet us anywhere outside the United States—our foreign subsidiaries will fund it, and the IRS will never know.” That was a typical pitch. I was prudent enough to guess, however, that it would expose me to blackmail should I ever try to switch brands.

Very much the modern-China way. The only way to do business is break the law, and once you’ve broken it they have you by the balls forever.

The institution of blackmail was not unknown in the grocery industry. At the big conventions, innocent (I’m positive!) grocers found themselves trapped—yes, trapped!—in hotel rooms with awfully friendly ladies, and hidden cameras. Some bread companies were notorious for this.

Insane.

California had Fair Trade on all alcoholic beverages: the manufacturer set a minimum retail price, and the state enforced it with criminal—not just civil—penalties. This was another of the quasi-fascist laws that was born of the Great Depression. Owning a liquor license meant owning a guaranteed income stream. That’s why the licenses cost so much.

Classic rent seeking.

The fact that the audit came out of left field made us suspect that a competitor had a relative in the Department of Labor. This is not paranoia. Time and again when we tried to get a liquor license in a particular location, competitors instigated phony “protests” to the Department of Alcoholic Beverage Control. That sort of thing is so common that I consider it a Matrix Problem. But a Department of Labor audit is not common: they just don’t have that many field auditors.

If you try and undercut the others, they’ll sic the Department of Labor on you.

Months later, I happened to encounter the Department’s field auditor in a coffee shop. We shook hands and he said very quietly, “We think you handled yourself very well in that matter.” I consider this one of the most memorable compliments I have ever received.

Fortunately, Trader Joe’s played by the rules to such a degree that they could find nothing.

After that I became somewhat of a connoisseur of the Fair Labor Standards Act, and of California’s Labor Department’s own interpretations of it. This knowledge has served me in good stead…

Basically, he was the subject of so many complaints by competitors that he ultimately memorized the book, so to speak and became a veritable legal expert.

…a representative of the United Farm Workers showed up unannounced at our office and delivered an ultimatum: either we drop the wines of the Napa Valley Eight wineries—wineries, he said, they were trying to organize—or they would picket our stores. This had nothing to do with table grapes. We did not carry produce in our stores to any extent in those days, and I was totally opposed to selling table grapes, union or non-union, because table grapes are the largest single cause of slip-and-fall accidents in grocery stores.

Imagine saying you must sell our goods or we’ll strike for not being a customer. Insanity.

Because farmworker unions were never covered by federal labor laws, it was okay for them to organize a “secondary boycott,” which their picketing of Trader Joe’s would be. If the UFW were an industrial union, it would not be legal for them to picket.

Laws for thee but not for me. Lovely.

If you’re going to enter a business, the first question you should ask is the extent to which governments—federal, state, and local—intervene in its affairs.

This guy has more scars dealing with the government than most people.

…some of my most serious business problems were created by government regulations, both the nationwide regulations like Fair Labor Standards Act, which had me choking on the hairball Department of Labor audit, and state regulations on milk and alcohol. For years after the federal government had deregulated interstate trucking rates, California’s bureaucracy clung to anti-competitive intra-state rates, which forced Trader Joe’s into all kinds of acrobatics to stay legal in its contracts with independent truckers…

Sad, honestly.

Left Handers

This is completely unrelated to anything, but I just found it funny.

I think that handedness is the most important thing one can know about a person. The question was never on the employment application forms, and it’s probably verboten to ask these days. But dyslexia lurks in the brain of every left-hander, which means, we see the world differently, sometimes profitably.

Differentiation is vital in everything, from marketing to your own abilities. There are so many CEO’s that are grateful for being dyslexic (Richard Branson, Walt Disney, Charles Schwab) because it forced them to see the world differently and attack a problem in a new way.

At one point I was accused of running a cabal of left-handers at Trader Joe’s.

The Origin of Trader Joe’s

Justin Dart, the famous President of Rexall (twenty-two years later he was a member of President Reagan’s kitchen cabinet) bought Tupperware, against, I am told, the unanimous vote of his board of directors (“nothing but a goddamned party formula!”). Within a year, Tupperware was generating a third of Rexall’s profits. Dart gave orders to liquidate all 1,100 drugstores he owned (Lane Drug in the South, Liggett Drug in the East, and Owl) to raise cash so he could go into partnership with El Paso Natural Gas and produce all the plastic that he needed for Tupperware.

Joe Coulombe gets going because his parent company pivots from the convenience store business to entirely selling Tupperware, and he decides he wants to buy his stake out.

I walked into the office of the treasurer of Rexall one day in May 1962. He was on the phone with the Wall Street Journal, trying to explain why Rexall’s stock had just gone from 60 to 21. I put a note on his desk: “I will buy Pronto Markets for book value.” He cupped his hand over the phone and muttered, “Ten thousand dollars over book and you’ve got it.” I shook his hand. I needed to raise the money within ninety days.

Love the conviction - they had to mortage their house, and it still wasn’t enough. So he went to all the employees and begged for the remaining balance.

Seventeen years later, when I finally sold the company, the cost basis of my total investment was only $25,000. And I sold half the stock to my employees (at book value, no blue sky). God bless those people who had such faith in me!

Reward loyalty and the people who believed in you!

[W]e were still way short when I went to see Tom Deane at Bank of America. I presented my case; and—on the spot (!)—he loaned me the money on our (Alice’s and mine) personal signatures. Years later, I asked him how he had been so ballsy. “It’s simple,” he replied. “Rexall was on Pronto’s leases, and I figured they wouldn’t let you go bankrupt.”

This is not the first or the last time a daring entrepreneur was, against all odds, approved for a loan that they really should not have been. The same thing happened to John Mackey, founder of Whole Foods, when the banker personally guaranteed a $100k loan. And a very similar thing happened to James Dyson, when the banker personally vouched for James and went to the bank’s head office in Cardiff to plead Dyson’s case on his behalf. If you’re a missionary who is sincere, life conspires to help you.

We were leveraged to the gills.

Always important to remember how much risk they were taking in the moment. Looking back it’s easy to say ‘of course it would work.’\ It is never so obvious in the moment.

…the county had opened a massive flood control project outside our new, seventh Culver City store. For six months, no one could enter the store except by walking a plank over a twenty-foot ditch. Culver City, along with the servicing costs of the leveraged balance sheet, was consuming all the profits of the other stores. Chapter 11 was a possibility.

Almost went bankrupt - an all too common story even in the most successful businesses of all time.

The Pronto Market chain, at the time of 7-Eleven’s arrival, had the highest sales per store of any convenience store chain in America by a factor of three…

And this is the business that Rexall wanted to abandon!

I realized that convenience store retailing was an opportunity far too “good” for my financial resources. There was no way I could exploit it. Many other guys who tried the convenience store business in the United States didn’t wise up soon enough, and were wiped out in the collapse of the industry in the late 1980s: Southland wasn’t the only one that failed, just the biggest. The basic problem is that convenience store retailing is a commodity business that is hard to differentiate. What I needed was a good but small opportunity for my good but small company: a non-commodity, differentiated kind of retailing. Yes, I could have sold out to 7-Eleven and gone to work for them, or somebody else. But the Byzantine management atmosphere at first Rexall and then Hughes Aircraft had convinced me that the only real security lies in having your own business, and this left-hander was well ahead of the curve on that one.

This insight is the true beginning of Trader Joe’s. The pursuit of differentiation is the first starting point - very similar to NVIDIA starting headlong into CUDA. It was either find differentiation or die.

Anticipating Peter Drucker’s advice by almost thirty years, Trader Joe’s was conceived from those two demographic news stories. What I saw here was a small but growing demographic opportunity in people who were well educated. 7-Eleven, and the whole convenience store genre, served the most basic needs of the most mindless demographics with cigarettes, Coca-Cola, milk, Budweiser, candy, bread, eggs. Dimly, I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream people.

He’s starting down the process of finding his target demographic: well educated but relatively poor people. In other words, young professionals.

As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.

An extremely contrarian move! This one decision basically sets Trader Joe’s down the path of pursuing the opposite strategy of every other major grocer, even to this day.

The end of Fair Trade on alcohol and of Retail Price Maintenance on milk in 1977–78 created shocks so great that many grocers didn’t know what hit them.

At long last he finds his opportunity. Until this happened, he was just a wine merchant who also sold cigarettes and porn magazines. But with this change, he realized there was a new opportunity for the first time.

For forty years supermarkets in California had operated on a simple formula: run weekend ads, promoting Best Foods Mayonnaise and Folgers coffee below cost to get the people in the door, and sell them full-profit milk and alcohol. Suddenly, well, they didn’t know quite what to do. The guaranteed profit on milk was gone, sure, but they were slow in coming to grips with the end of Fair Trade on alcohol. Their sales began eroding, partly because Safeway, Von’s and Lucky all tried experimental chains of discount liquor stores.

In come the discount chains for liquor.

Freedom can be an unwelcome thing. Within six weeks, our gross profit on milk went from 22 percent to 2 percent. Things like that tend to sober a guy. Fortunately, the end of Fair Trade on alcohol was being fought in the courts, and it was not finally abolished until 1978. This gave me time to develop the new operational parameters…

This is how quickly the deregulation took hold.

Perseverance

If all the facts could be known, idiots could make the decisions. —Tex Thornton, cofounder of Litton Industries, quoted in the Los Angeles Times in the mid-1960s. This is my favorite of all managerial quotes.

I love this quotation. If you have to wait for all the data, you do not have conviction. Leadership is, by definition, making tough calls on small slices of data - and being right.

…if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance.

Urgency is everything. Pick a decent strategy and just go. And once the going gets tough - because it will - stick to it! It’s why Paul Graham says determination is the most important quality, even over talent. Jensen Huang agrees, by the way.

Trying to find an optimum solution in business is a waste of time: the factors in the equation are changing all the time.

The message is always the same: just get going.

Employee Friendly

I did not want to destroy the faith that Pronto Markets’ then-handful of employees had in me and in our common future. After all, they had just ponied up half the equity money needed to buy out Rexall. This is the most important single business decision I ever made: to pay people well. First Pronto Markets and then Trader Joe’s had the highest-paid, highest-benefited people in retailing.

This is basically Ford’s efficiency wages idea but applied to groceries. In an industry where 50% (yes, fifty) of your employees turn over every year, you cannot run an efficient business. The knowledge walks out the door and you get basically no compounding. For Trader Joe’s, the strategy is the opposite. Pay people well and make it a lifetime gig. Over time, the stores run more efficiently as the learnings stay within the company.

Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract—and keep—the quality of people who work at Trader Joe’s.

You get what you pay for. It’s also in the DNA of the company given that it really wouldn’t have even gotten off the ground without the employees’ contributions.

We really didn’t pay more per hour than union scale, but we gave people hours. Because union scale is so high, the supermarkets are very stingy with hours and will do anything to avoid paying overtime. I simply built overtime into the system: everyone was to work a five day, forty-eight-hour week.

Unions are so irrelevant in the modern day.

The problem with unions is not their pay scales; it’s their work rules and seniority rules. Union membership in the U.S. had collapsed since I left Stanford in 1954, largely because employers struggle to dump the work rules. Europe, where work rules were imposed more by law than by union contracts, faces the same problem today; it is not dealing well with it.

Yup.

Equally important was our practice of giving every full-time employee an interview every six months. At Stanford I’d been taught that employees never organize because of money: they organize because of un-listened-to grievances. We set up a program under which each employee (including some part-timers) was interviewed, not by the immediate superior, the store manager, but by the manager’s superior. The principal purpose of this program was to vent grievances and address them where possible. And I think this program was as important as pay in keeping employees with us. Productivity in part is the product of tenure. That’s why I believe that turnover is the most expensive form of labor expense.

The other benefit to treating employees well is simply to keep unions out. Once your workers start to unionize, the game is over. Might as well sell your business. This quote is especially true by the way. Starbucks pays more than any union rate, but the workers still unionized - not because of the monetary comp, but because of the unheard grievances.

“But how could you afford to pay so much more than your competition?” The answer, of course, is that good people pay by their extra productivity. You can’t afford to have cheap employees.

He explains this later in the book, but employees that are well-paid believe they have a stake in the company. They will steal less, leave to other jobs less frequently, and overall treat the store as an owner would. This has a massive impact on margins and productivity.

I don’t use the euphemism “associates.” It joins “vertically challenged,” “significant other,” and other obfuscations in the contemporary lexicon. —Sam Walton

You have to appreciate the man quoting his greatest competitor! (I suppose he would argue that, due to Trader Joe’s differentiation, they have no competitors.) Nevertheless, the philosophy is the same - treat your exmployees well, and make it sincere.

For years I used to take all new employees to lunch. Among other admonitions, I told them that if they ever got a better offer, they should take it. As soon as they could, my field supervisors ended those lunches. Another frank idea was vetoed by my top people: I wanted to publish their salaries and bonuses, and mine, every year when we issued our annual compensation bulletins.

People like secrets, because secrets bring power.

There’s a place for secrets, and it’s usually in the office of the head of Human Resources. But it should not be in the chain of command, where the CEO’s secretary too often gets inserted by force of circumstance if not by force of personality.

…in thirty years we never had a layoff of full-time employees. Seasonal swings in business were handled with overtime pay to full-time employees, and by adjusting part-time hours. The stability of full-time employment at Trader Joe’s was due in part to caution in opening new stores, and insisting on high-volume stores.

The proof is in the actions. Trader Joe’s treats its employees well.

The Captains had that salary plus a bonus that theoretically had no limit. The bonus was based on Trader Joe’s overall profit, allocated among the stores based on each store’s contribution. Sure, we massaged the numbers to avoid perceived unfairness, but that was basically the system. In 1988, several Captains made bonuses of more than 70 percent of their base pay. And our 15.4 percent retirement accrual applied to bonuses as well as base pay! I don’t believe in bologna-slice bonuses. Unless a bonus system promises, and delivers, big rewards, it should be abandoned.

Show me the incentives and I will show you the outcomes.

My ideal, often stated to everybody, was that Captains should have the chance to make more than executives in the office. In a traditional chain store, managers aspire to become bureaucrats with cushy, high-paying jobs in the office. I wanted to kill such aspirations at the start.

This is also very Walton-esque. The store managers are the most valuable employees, more than the home office. Don’t be surprised that Walmart managers make more than corporate office workers.

…labor expense in grocery retailing is relatively small, compared with manufacturing or the professions or restaurants. This was one reason I could get away with Trader Joe’s high compensation policies. Cost of Goods is the dominant expense. The funny thing is that grocers seem to spend more effort squeezing payroll than squeezing Cost of Goods Sold, though there is at least five times more opportunity to save money in the latter.

This is kind of true, but also you can’t really sell Coke for that much cheaper. Basically only Trader Joe’s can pursue this opportunity because they don’t stock the big brands, and thus they have much more leverage and buying power.

Another way of looking at our high compensation policy: it was an effort to loosen the Supply Side constraints created by the nature of human beings. By attracting the more competent people, and keeping them, you can gain some degrees of freedom.

I love that he’s wise enough to provide both the moral and the cold, hard economic justification for the way he operates. It’s very clear that he’s not solely a missionary. He’s a really smart guy.

As soon as we got into Whole Earth Harry, we started to attract health food nuts who probably believed more in what we were doing than we did. To a considerable extent, they kept us on the straight and narrow: management was policed by its own employees!

Hire missionaries! They make the best employees.

Bezos?

Early in my career I learned there are two kinds of decisions: the ones that are easily reversible and the ones that aren’t. Fifteen-year leases are the least-reversible decisions you can make. That’s why, throughout my career, I kept absolute control of real estate decisions…

Hello Bezos!¹

Trust

Nate Bershon died at ninety-three in 1985, still able to make out his own tax returns for his real estate empire. More than anything, he taught me that there are people out there whose handshake is better than any contract. When I finally sold Trader Joe’s, it was basically on a handshake.

As Charlie Munger says, trust is one of the greatest economic forces on Earth.

In Search of Excellence, Tom Peter’s best-selling book on management that appeared in 1983. He called it “The Power of Chunking”: The essential building block of a company is the section [which] within its sphere does not await executive orders but takes initiatives. The key factor for success is getting one’s arms around almost any practical problem and knocking it off… . The small group is the most visible of the chunking devices. The fundamental “chunk” of Trader Joe’s is the individual store with its highly paid Captain and staff: people who are capable of exercising discretion. I admire Nordstrom’s fundamental instruction to its employees: use your best judgment.

This is an incredible insight. If you chunk too much, you pay the cost of coordinating people for little to no benefit. Since the problem is not the responsibility of any single person or group, it’s almost guaranteed to not get solved properly. On the flip side, if you don’t chunk enough, it’s simply too much for any small group to meaningfully solve. Finding the right-sized chunk for your business is an art.

Each time we shortened hours, we made more money: there were fewer “shifts” and more interaction among the staff.

Keep reducing the chunk size until you find the optimal balance!

Read!

Other elements of design are owed to David Ogilvy’s Confessions of an Advertising Man. The numbered paragraphs, the boxes drawn around the articles, are all Ogilvy’s ideas. I still think his books are the best on advertising that I’ve ever read and I recommend them.

In general, Joe reads a lot. His autobiography is littered with historical and literary references. Heck, the book starts with an etymology of his own last name. Most great entrepreneurs read, so this is not surprising.

Customer First

There are no such things as consumers—dolts who are driven by drivel to buy stuff they don’t need or even want. There are only customers, people who are reasonably well informed, and very well focused in their buying habits. (This caused me grief later in my career when I took over a chain that was so terrible it had attracted only dysfunctional shoppers. They did not respond well to my treating them as adults.)

Sol Price’s main genius with Costco is that you can choose your customers. The $100 / year entry fee keeps out most of the dysfunctional shoppers. Same thing Trader Joe’s does with its branding and product selection.

We always looked up to the customers in the text of the Fearless Flyer. We assumed they knew more than they did; we never talked down to them.

Given that Trader Joe’s customer base is almost exclusively well-educated people, this is a good policy.

…we assumed that our readers had a thirst for knowledge, 180 degrees opposite from supermarket ads. We emphasized “informative advertising,” a term borrowed from the famous entrepreneur Paul Hawken, who started publishing in the Whole Earth Review in the early 1980s. These informative texts were intended to stress how our products were differentiated from ordinary stuff.

Even their advertising appeals to educated pepole.

Doing a mailing to individual addresses, however, was a rotten chore: Americans move about every three years. In 1980, I attended a marketing lecture that taught me that, when someone moves, someone just like them is likely to occupy the same address. This proved to be correct. By mailing to addresses rather than to individuals—by blanketing entire ZIP codes—we were able to tremendously expand the distribution…

Even if a well educated young person leaves, the person who next takes their place is very likely to be of the same demographic! So just advertise to the whole zip code and don’t bother with tracking individual buyers.

This massive increase in the mailing massively increased our advertising costs in the short run. I don’t believe, however, in advertising budgets that are based on a percentage of sales. You figure out the dollars needed to do the job right, and go ahead and spend them. As it turned out, the big sales generated by the Fearless Flyer dropped the cost of advertising as a percentage of sales after the fact.

Basically, if done right, brand marketing will justify itself - and quickly.

One of the fundamental tenets of Trader Joe’s is that its retail prices don’t change unless its costs change. There are no weekend ad prices, no in-and-out pricing.

Very much like Costco. Absolutely no sales.

I have always believed that supermarket pricing is a shell game and I wanted no part of it.

Mostly, however, the value of the broadcasts lay in my being forced to research and write all those broadcasts. It was a discipline that forced me to study the field of food and wine. Again, I must emphasize how ignorant I was even at age forty-six, nine years into Trader Joe’s. I had a long way to go. (I still do.) So I tried hard never to repeat a given broadcast: as much as possible, each of the 3,300 scripts was unique. These broadcasts were in no way commercials.

Each of the 3,300 ads were hand written and tailored to a specific product! There are no general ‘buy this asap’ type of ads. He wants to convey a sense that Trader Joe’s is permanent. A sense of calm - even if you miss this sale there will be another. We aren’t going anywhere.

The tagline “thanks for listening,” which has been so copied and admired, derived from the successful 1976 senatorial campaign of S. I. Hayakawa. Hayakawa was a professor of linguistics at San Francisco State University (before he became university president). He knew how to use the English language. The calm manner of his radio commercials, his thanking the listener for staying tuned, really impressed me and, six years later, provided the chassis and the closer for Trader Joe’s commercials.

This is how he wants to treat the customers - with respect and calm.

As everyone knows, word of mouth is the most effective advertising of all. Or, when in my cups, I have been known to say that there’s no better business to run than a cult. Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our clientele.

There aren’t many cult retailers who successfully retain their cult status over a long period of time. A couple in California are In ’n Out Burger and Fry’s Electronics.

The In N’ Out story is incredible but also very, very sad. No human should be treated the way Esther was, and to be frank, I’ve lost most of my love for the chain after reading about Lynsi Snyder.

No Venting

All businesses have problems. It’s the problems that create the opportunities. If a business is easy, every simple bastard would enter it.

My point is that a businessperson who complains about problems doesn’t understand where his bread is coming from.

There’s a reason why I’m so firm on never venting. Problems are a good thing! I don’t want to talk to people who cannot recognize that.

The economist, Joseph Schumpeter, was absolutely right: Innovation is less an act of intellect than an act of will.

Buyer-First

…no outsiders of any sort were permitted in the store. All the work was done by employees. The closest thing to it that I see these days is Costco, which shares many features with Trader Joe’s. We fundamentally changed the point of view of the business from customer-oriented to buyer-oriented. I put our buyers in charge of the company.

Very, very similar in so many ways to Costco. Buyers, for those unaware, are the employees who decide what goods to stock in the first place. They meet with vendors, handle pricing, etc.

Each store probably had access to ten thousand stock keeping units (SKUs), of which about three thousand were actually stocked in any given week. By the time I left in 1989, we were down to a band of 1,100 to 1,500 SKUs, all of which were delivered through a central distribution system.

Similar to Costco but taken to an extreme - very, very few skews.

And along the way not only did we drop a lot of products that our customers would have liked us to sell, even at not-outstanding prices, but we stopped cashing checks in excess of the amount of purchase, we stopped all full-case discounts, and we persistently shortened the hours. We violated every received-wisdom of retailing except one: we delivered great value, which is where most retailers fail.

I love this. Go against all of the ‘wisdom’ in the industry and make that your entire strategy.

Be willing to discontinue any product if we are unable to offer the right deal to the customer.

Yup. The customer is always right.

By 1982, the store would have most of its merchandise displayed in stacks with very little shelving. This implied a lower SKU count: a high-SKU store needs lots of shelves. The average supermarket carries about 27,000 SKUs in 30,000 square feet of sales area, or roughly one SKU per square foot. Trader Joe’s, by 1988, carried one SKU per five square feet! Price-Costco, one of my heroes, carried about one SKU per twenty square feet.

Imagine being 4x as profitable as Costco, wild.

Each SKU would stand on its own two feet as a profit center. We would earn a gross profit on each SKU that was justified by the cost of handling that item. There would be no “loss leaders.”

In fact, they had separate employees in charge of buying each product, thereby guaranteeing that each product would have to justify its own existance.

Vendors should get prompt decisions. Some of our greatest coups were generated by our commitment to make an offer within twenty-four hours of a presentation.

Treating vendors well becomes a competitive advantage.

Treasure entrepreneurial vendors and maintain entrepreneurial buying hours: on holidays, or very early or very late. Whenever a vendor claimed to be truly desperate, we offered to meet him at 6:00 p.m. on Friday night. That separates the wheat from the chaff!

Work hard! You securing a product is literally what separates you from the competition.

Trust the vendor: This is part of the genius of Marks & Spencer, which accepts deliveries from its long-established vendors without counting the cases.

The speed of trust.

One thing that never failed to astonish me was how well samples from vendors actually matched the delivered products.

Again, the speed of trust.

Another element of our Intensive Buying was our willingness to pay cash on delivery. Few retailers are willing to do that. We simply computed our economic cost in paying COD and reflected it in our offer to the vendor.

This is crazy by the way. Most people rely on floating expenses for 30 or 60 days.

A Guideline: No private label product was introduced for the sake of having private label. This is 100 percent contrary to the policy of supermarkets. The supermarkets try to have a private label copy of every branded product, which they usually sell for less, but in these days of double coupons, “customer loyalty programs,” and God knows what else—who can tell? Even when we dropped all branded bakery products in 1982, we did not, for example, introduce a Trader Joe’s “balloon loaf” of white bread, nor hamburger buns, nor hot dog buns. We simply did without these products. The willingness to do without any given product is one of the cornerstones of Trader Joe’s merchandising philosophy.

It’s now part of the brand. You never know what you’re going to get when you go into a Trader Joe’s, but you know it’s going to be good. And that’s all that matters.

Whole Earth

As we got into Whole Earth Harry, every private label food product had to meet the current shibboleths of the health food movement: no monosodium glutamate, no added sugar, no added salt, no artificial coloring. And as we moved into frozen seafood, no sulfites.

As far as I can tell, Trader Joe’s was the earliest major grocer who got aboard the health food movement. Probably because his target demographic were primarily educated people.

Molasses without sulfur, made from sun-ripened cane. Prunes without preservatives. Did you know that most dried prunes are preserved with sorbates? I didn’t until Doug Rauch gave me the background to write up.

And they take this principle seriously.

Solder-free cans. In the early 1980s, the dangers of lead in soldered cans were publicized and we took advantage of the news. Vanilla extract with no alcohol; low sodium baking powder. We also campaigned against aluminum in deodorants because of suspicion in the medical community in 1986 that it was linked to Alzheimer’s. This has since been borne out as false, but nevertheless … Most of the Trader Darwin vitamins were introduced in response to specific medical news. For example, we introduced Trader Darwin’s Metamorphosis for special needs children based on a Medical Tribune story in 1981.

Basically every freaking thing is cancer these days. I’m glad they did this.

Albacore caught on long lines (instead of nets). Phosphate-free detergents. (We were one of the first grocers in America to promote this.)

Yikes.

I believe in the wisdom that you gain customers one by one, but you lose them in droves.

Honestly, it does add up. The knowledge that they don’t use food dyes in any of their products makes me far more willing to give my own children food from Trader Joe’s as opposed to elsewhere.

Coke, Budweiser, et al., refused to deliver to our warehouses. That violated my policy of no direct-store deliveries. It’s just as well: there is no way to make money selling Bud and Coke, even if they did permit warehouse shipments, if you want to be outstanding.

There will be a cost to standing up to your principles! So be it.

Our dropping cigarettes raised a furor. I was interviewed on the TV news channels, etc. But it had a very positive response from the public, even from smokers. We got a bonus from dropping cigarettes: burglaries of the stores stopped cold. Most burglars enter and exit through the roof, because they have to boost the booty back up the way they came. Cigarettes, with the highest value per pound, are the target of choice.

This is the funniest unintended consequence of all time.

Sometimes you can be outstanding for what you don’t sell. We were one of the first to drop Zig Zag papers once it became apparent they were no longer being sold to roll tobacco. I was also happy to get out of the girlie magazine business.

The transition to the modern Trader Joe’s.

Contrarian

Giving discounts to people over sixty is, to borrow a phrase from Charlie Munger, “a type of dementia I can’t even classify.” Here you have the fastest-growing, most affluent part of the population, and you give them a discount? If anyone should get a discount, it’s the shrinking workforce, which subsidizes the old folks through their income and social security taxes.

Of course he is a Munger fan.

After we made a deliberate effort to employ women full-time in the stores (c. 1975), we made an effort to get rid of any single case that weighed more than forty pounds (champagne and milk are the heaviest cases in Trader Joe’s). Otherwise, the male employees get turned into beasts of burden: many women have difficulty with the heaviest cases, and there is still a reservoir of male chivalry out there, especially when you hire people of the quality of Trader Joe’s employees.

Too much of modern liberalism seems to be in the vein of pretending that women are exactly the same as men in every aspect and how dare you for even suggesting otherwise. Only when we acknoweldge the differences can we really create policies that work for everyone.

Peter Drucker has said, in the context of troubled companies, that it’s impossible to change a company’s “culture” but you can change its “habits.” “The Way You Do Things” is the most limiting Supply Side factor in any company: Are you entrepreneurial or “corporate”? I want to make it quite clear that I called the shots. I reject management by committee. I think, however, that my regime was somewhat short of despotic.

“I’ve searched all the parks in all the cities and found no statues of committes.” There is not a single good leader who values committes. Get rid of them.

…you have a system for everything that has to happen in your business—you just may not be conscious of it. And you probably have still other systems that are not needed. That’s why The Winning Performance calls for a “constitutional contempt for business as usual.” To practice “constitutional contempt,” you have to arrive at work every day with the attitude, “Why do we do such-and-such that way? Better yet, why do we do it at all?” Usually the answer is, “We’ve always done it that way,” “That’s the way we did it at my last job,” or “All our competitors are doing it.”

Challenge every assumption. This is what makes founders great - and usually what also makes them terrible employees.

The best program you can offer an insurance company in California is to have a workforce with no females over thirty-nine, and no males over fifty-four. And of course even if you wanted to pull that one off, you run smack-on to another Supply Side constraint, the government.

Stop trying to hyper-optimize around these. Accept it as the cost of doing business and focus on what you can control. By eliminating heavy cases and removing sharp boxes, they minimized 90% of workplace injuries anyway.

The same vendors also won’t let you distribute their product because they want to run your store. All the potato chip and corn chip guys, cupcake guys, cracker guys, etc. The curious thing is that the supermarket chains welcome these vendors, because they provide “free” labor. What the vendor salesmen are actually doing is fighting over shelf space, physically shoving competitive products aside. One of my grand objectives in Five Year Plan ’77 was to eliminate all outsiders from our stores and to halt all direct store deliveries. This was one of the most radical features of Trader Joe’s, vis-a-vis the rest of the grocery industry.

This is yet another contrarian thing Trader Joe’s does. No outside labor. Everything is done by the employees!

Selling Trader Joe’s

We, the employees and I, sold Trader Joe’s to the Theodore Albrecht family of Essen, Germany, in 1979; to my surprise, I stayed on for another ten years after that.

This is how you know it’s a good deal. The parent company kept their word, and as a result, everyone stays on for basically a decade.

I responded that the sales contract could be no more than one page long. No holdbacks, givebacks, or whatever. Theo wired word that he’d take the one-page contract, if I would guarantee that I had conducted the business for the past five years as a prudent man would. He knew damn well that I had. So now we had to have the one-page contract. Back in 1977, at my instigation, the Germans had hired a prominent law firm to represent them in those negotiations. When they got word that the 1979 contract was to be a one-pager, they threw up their hands and refused to write it. So my attorney wrote the contract.

Love this. Very Berkshire Hathaway.

How about our children? Weren’t they going to go into the business? This is another question I’m frequently asked. The answer: no way. In France I’d seen all those family wine businesses where, generation after generation, the father and son sit facing each other at a desk specially designed for that very purpose! The son, if competent, was miserable and felt the weight of ages hanging on his shoulders. I have always felt sorry for people who inherit the family business.

This is a very interesting perspective. Sure, it’s not good to force your kids into it. But why not have the option?

…one of the really nice things about my career is that I was never an absentee dad. Workaholic, yes, but not absentee.

Fair enough. As a fellow workaholic father, I empathize.

I detest the term “exit strategy” when I hear young entrepreneurs bragging about theirs, as if a business is something one builds and casts off. My financial “exit strategy” had been the Employee Stock Ownership Plan. I had never planned to exit by way of sale to outsiders. In fact, in the year just prior to deregulation, I had turned down offers from two major supermarket chains. I said I would never sell to a big American corporation. They would make me write all kinds of reports; worse, they would strip Trader Joe’s of its cash reserve, putting it, my employees’ jobs, and my name at risk. That was something I liked about the Albrechts. They were as financially conservative as I was: do things for cash except for real estate. And I was confident they would never “flip” it. Europeans tend to buy and hold. My personal “exit strategy,” pre-sale, was to work in the business as long as I was able.

Yes! This generation (and I include mine when I say this) seems to value “optionality” over everything, so they just never end up committing. What’s the option value of something you never intend to exercise? What is the point of collecting all of these options? Stop focusing on exit strategies, it disgusts me. It’s the lowest form of risk aversion: one where you cannot even admit you are risk averse. Instead you need to disguise it. Just scream “I am a fucking coward” and be done with it.

My deal with the Albrechts called for no changes in the way we ran Trader Joe’s. The only overt change was that we merged all eight corporations into one, something we would have been forced to do anyway because the ownership no longer was diluted enough to save the eight surtax exemptions.

One of the wisest things the Albrechts have done, especially given Trader Joe’s growth. Don’t mess with a winning formula.

Do I regret having quit? No. The succeeding ten years were so full of fascinating experiences that I am glad I exited. Furthermore, I simply do not make a good employee.

Not surprising - almost all founders eventually end up quitting post acquisition.

But do I regret having sold? Yes. I admit it. To mine own self I was not true when I sold. I regret not having had the guts to ride out the loss of the surtax exemptions, the employee ownership problem, the threat of death taxes, Carter’s threat to eliminate capital gains preference, and all the other fears, real or phantom, of late 1978. There exists an obvious fact that seems utterly moral: namely, that a man is always a prey to his truths. Once he has admitted them, he cannot free himself from them. One has to pay something. —Albert Camus, The Myth of Sisyphus I have to admit the truth, that I regret having sold Trader Joe’s. And I have had to pay something for this, beyond the loss of my shadow. Thanks for listening, Joe Coulombe.

This is the sad, harsh truth of the business world. Kudos to Joe for being so honest. It’s a bittersweet ending, and a cautionary tale for other entrepreneurs.

This is one of the most important things I can impart: in any troubled company the people at lower levels know what ought to be done in terms of day-to-day operations. If you just ask them, you can find answers. In the case of Thrifty Drug, those poor, beat-up store managers gave me an earful. A deeply troubled company is always the fault of the CEO, the board of directors, and the controlling stockholders who appoint those worthies. It is never the fault of frontline troops.

All I’ll say is: there’s a reason he chose to end the book on this point.

So long, and thanks for reading.

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¹ From Bezos’ decision making framework regarding type 1 and type 2 decisions.

² Since I read this book, the Acquired podcast has done a rather excellent episode of Trader Joe’s!