Becoming Trader Joe

Published on February 17, 2022

“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 problems, the threat of death taxes, Carter’s threat to eliminate capital gains preference, and all the other fears, real or phantom, of late 1978.”

— Joe Coulombe

It was a couple of days before Christmas. I was shopping at Trader Joe’s on an unusually crowded afternoon and an elderly man with a large shopping cart bumped into a young woman who was browsing the store’s large wine selection. She lost her grip on the bottle and it went crashing down to the floor below, shattering into dozens of pieces and spilling dark red wine all over the floor. The man with the shopping cart muttered something but moved on, leaving the young woman mortified by the mess.

No more than a few seconds later, a Trader Joe’s “crew member” appeared with a broom, mop, and words of reassurance. “This happens all the time! No big deal!” Suffice it to say that the corporate ethos of Trader Joe’s is not the unfriendly “you break it, you buy it” attitude that prevails in so many retail establishments.

I have been a customer of Trader Joe’s for nearly three decades. What initially attracted me to the chain after I graduated from college was the huge selection of frozen and prepared foods, all available at a reasonable price. This was a perfect combination for a young person just starting out who didn’t have a lot of money to spare and had no clue when it came to cooking.

The presence of a Trader Joe’s location near my home at the time in the Silicon Valley was no accident. Founder Joe Coulombe’s longstanding policy was to locate stores in areas with a high concentration of well-educated but price conscious customers. Founded in Pasadena, California in 1967, the chain expanded into Northern California in the 1980s and has since expanded to 42 states as well as the District of Columbia.

Running a grocery store is a constant exercise of daily blocking and tackling needed to keep an assortment of well-priced inventory on the shelves. But it was the combination of two major insights that Joe Coulombe had in the 1960s that set Trader Joe’s distinctive strategy for decades to come. First, he realized that the population of highly educated consumers was growing rapidly due to the surge of young people entering college after the Second World War because of the G.I. Bill. Second, he noted that many of these increasingly affluent young people were traveling more frequently and that the introduction of the Boeing 747 in 1970 was likely to accelerate this trend. Coulombe believed that well-traveled people were likely to be more adventurous when it comes to food choices. From this underlying premise, he built the Trader Joe’s brand, recounted in his memoir, Becoming Trader Joe: How I did Business My Way and Still Beat the Big Guys.

Trader Joe’s is difficult to describe to those who have never been in one of its stores. It is not really a “health food” store despite the fact that many products can be used as building blocks for a healthy diet. It is not a true competitor to higher end grocery stores such as Whole Foods Markets which has a much wider assortment of fresh produce along with a more extensive meat and seafood department. Trader Joe’s is certainly not similar to a full line conventional grocery store such as Safeway since it has a very limited number of SKUs. Still, it has what can only be described as a cult following. Why?

The vibe of Trader Joe’s is nautical in nature. Store managers are “captains”, assistant managers are “first mates”, and everyone else is a “crew member”. Everyone, including management, takes turns at the checkout counters, stocking products, and interacting with customers. The chain is known for its unusually generous pay and employees seem uniformly happy.

What are some of the key elements that Joe Coulombe leveraged to build Trader Joe’s? Here are five elements that I think made the most impact:

#1: Well Paid Crew Members

Joe Coulombe’s goal was for the average full-time employee of Trader Joe’s to earn the median family income for California. This figure was around $7,000 in the early days of the business. Assuming an average of 2,000 hours per year, this worked out to about $3.50 per hour, a very high figure for a time when the minimum wage in California was $1.65 per hour.

How did Trader Joe’s pay such high wages? Coulombe is quick to admit that altruism had little to do with the policy. He wanted higher quality workers and also wanted to avoid unionization. Trader Joe’s introduced a standard 48-hour workweek which was a stark contrast to the limited hours many unionized grocery stores offered employees who often wanted more hours. He also implemented flexible scheduling making it possible for employees to alternate between six and four day workweeks which created many three-day weekends.

Coulombe attributes low turnover to the combination of high pay and giving each employee an opportunity to provide feedback to their “captain’s” supervisor every six months. Full-time employees stayed for years, part-time employees often converted to full-time, and the company regularly promoted from within. As Coulombe says, “good people pay by their extra productivity. You cannot afford to have cheap employees.”

Trader Joe’s practice of offering higher than average pay in exchange for better than average productivity makes a great deal of sense and is very similar to the policies of other successful retailers such as Costco. In fact, Coulombe mentions Costco over ten times in his book. Great minds think alike.

#2 Betting on Wine

Joe Coulombe knew very little about wine when he started Trader Joe’s but recognized that his target demographic of highly educated but underpaid people would be attracted to a well-priced selection. There was also a bit of serendipity involved. The company’s original store was larger than Coulombe thought was ideal. To utilize some of the extra space, he expanded the wine selection. Initially, Trader Joe’s offered seventeen vintages of California wines. Wine became wildly popular.

The market for wine was heavily regulated in the late 1960s due to “fair trade” laws and the remnants of prohibition era laws that remained on the books of states. Wine wholesalers posted minimum consumer prices designed to guarantee retailers a minimum profit. By a careful reading of the regulations at the time, Coulombe spotted ways in which he could break the prevailing retail prices of imported wine. He soon set a goal of making it possible for every family to afford a decent bottle of wine every night with a target price of $1.49 per bottle.

The intricacies of Coulombe’s maneuvering in the wine market are too detailed to go into here, but interested readers can refer to his chapter, Uncorked, for a full account of how Trader Joe’s broke into the wine category. The assortment of well-priced wines at or below the $10-15 level is still a major draw for customers half a century later.

#3: Embracing Discontinuities

Mainstream American retailing emphasizes what are known as “continuous” products. Coca-Cola is an excellent example of a continuous product. One expects to be able to purchase a brand such as Coca-Cola on a standardized basis at any time. The same is true for nearly every branded product on the shelves of grocery stores today. In contrast, each vintage of wine is separate, distinct, and discrete. With the exception of mass-produced jug wines or “wine in a box”, there is no expectation for continuity in supply of wine vintages.

What Coulombe learned from his experience in wine is that Trader Joe’s should embrace discontinuity in all of its product offerings. This was in stark contrast to the rise of continuous brands that had been making headway in America for decades and was greatly accelerated by the mass adoption of television in the 1950s. Trader Joe’s was going against the major trend of uniformity that characterized post-WWII retailing.

Initially, Coulombe experimented with close-out sales. Trader Joe’s offered lines of products from well-known brands that were discontinuing certain lines. This made it possible to offer deep discounts to customers, but it was nerve-racking to manage inventory and satisfy customer demand. More importantly, it made it difficult for Trader Joe’s to establish itself as a brand.

Coulombe shifted to what he calls the “Brooks Brothers” strategy. Brooks Brothers had created a business that exclusively sold its own products at what was perceived to be a great value. For Trader Joe’s, this meant maintaining a limited assortment of SKUs that were continuous products but differentiated in various ways to avoid direct price comparisons with branded products.

As we can see today, Trader Joe’s itself is a brand and the products are almost exclusively private label items that have unique elements that one cannot find in traditional grocery stores. Many are continuously available, but it is not uncommon for products to be available for a limited time only. This creates a sense of scarcity and promotes a “treasure hunt” environment that can also be fun for customers.

#4: Transparent Value Pricing

Chain grocery stores are well known for playing games with pricing. Every week, certain products are priced at unusually low levels in order to get customers into the stores who will hopefully also purchase merchandise at full price. Loyalty programs take this a step further while giving traditional grocers great insight into how to market optimally to individual customers. Smartphone apps have made it possible for value-oriented customers to seek out great deals at traditional grocers.

The problem with games is that they can become tiring. Joe Coulombe refused to play games with pricing. Instead, one of his fundamental tenets was that pricing would be set at a level that provides solid everyday value and prices would not change frequently. The driver for prices changing at Trader Joe’s is when costs change.

We can see that this pricing approach remains intact today. When I go to Trader Joe’s, I know that I will pay $2.29 for peanut butter, $4.99 per pound for sharp cheddar cheese, $4.99 for olive oil, and $0.79 for a can of black beans. Trader Joe’s did not offer produce when Joe Coulombe ran the company, but it does today. Even in the produce section, prices remain unusually stable. An avocado at Safeway might cost $2 one week and suddenly drop to three for $5 the next week, but the price has been constant at $1.79 at Trader Joe’s for a few months. When avocados rose from $1.49 to $1.79 in the fall, I assume it was to maintain a constant gross margin.

Coulombe did not want to “baffle customers with bullshit” and Trader Joe’s still holds to that policy today. In recent months, prices have slowly crept up on various products at Trader Joe’s as the Federal Reserve’s prediction of “transitory” inflation turned into more persistent and entrenched inflation. However, one does not get the sense that management is playing games. Pricing is changing because costs are rising.

#5: Corporate Culture

Joe Coulombe ran Trader Joe’s until 1989 and the narrative of the book runs straight from the founding of the company in the 1960s through the 1980s. However, Coulombe sold the business in 1979. The reality is that almost nothing changed after Coulombe sold the company. For another decade, he ran the company just as he had before with very minimal communication with the new owners.

Coulombe tells the story of his sale of Trader Joe’s to the Albrechts, a family that had started the Aldi chain in Germany and was interested in expanding into the United States. Coulombe did not want to sell Trader Joe’s at all. His long-term vision was to continue his employee stock ownership (ESOP) plan and he felt that he could gain all of the personal liquidity he needed with that approach. However, a combination of high income taxes, the prospect of taxing capital gains at ordinary income tax rates, and punitive estate taxes led him to explore a sale in the late 1970s.

As the quote at the beginning of this article shows, Coulombe ultimately regretted selling the business. But on the bright side, he had insisted on a “one page contract” in which he retained the ability to manage the business as he had before. For a decade, that is exactly what he was able to do with almost no interference from the Albrechts. Coulombe did not regret his decade of working with the Albrechts. However, when he wanted to make a change in management that the family blocked, he decided to resign and went on to a career in consulting and serving on corporate boards.

Ultimately, the Trader Joe’s culture that Joe Coulombe created and insisted on retaining after the sale of the business still remains intact today. Coulombe, who passed away in 2020 at the age of 89, must have gained a great deal of satisfaction from seeing his creation maintain its character decades after his involvement in the business ended.

There are very few businesses that attract cult followings. Trader Joe’s is one of them. Joe Coulombe mentioned that he would often receive letters and inquiries from customers who had moved to areas without a Trader Joe’s. I can relate to this. After over twenty years of shopping at Trader Joe’s, in 2017 I moved to a city that did not have a single Trader Joe’s location. The only Trader Joe’s in the area was in the suburbs and very inconvenient to get to. The few times I made my way to that store, it was jam packed with customers. I almost considered a letter writing campaign to convince the company to open a more convenient location.

In 2020, I moved again, and I am now less than two miles away from two Trader Joe’s locations. The value proposition is real and was reflected in a significant reduction in my grocery spending for 2021. With the exception of mid-afternoon hours, the stores are always busy. The employees are almost always friendly. And the assortment of goods and prices are almost always attractive.

As I read the book, I could not help but think that Trader Joe’s would have been an ideal acquisition for Berkshire Hathaway in 1979. Although Warren Buffett was probably not familiar with the chain, it is a good bet that Charlie Munger was familiar with it given his location in Southern California. Was Joe Coulombe familiar with Berkshire Hathaway? I don’t know the answer to that question, but he does quote Charlie Munger in the book regarding the absurdity of senior discounts:

“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?”

Becoming Trader Joe, p. 172

Did Joe Coulombe ever meet Charlie Munger or just know him by reputation? They were both prominent businessmen in the Los Angeles region in the 1970s, so it is possible that they were acquainted. The grocery business is not exactly one known for differentiation or economic moats, but Trader Joe’s is an exception. My guess is that Warren Buffett and Charlie Munger would have been interested back in 1979, especially given the fact that the company was run by a remarkable entrepreneur who wanted to keep running the business.

Becoming Trader Joe
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