Trader Joe’s

0:00 I decided today needed to be an all trader Joe's day. Actually I gotta show you. Check out my hall. Oh ho

0:08 Tote bag. You are styling. Take that to Europe. I've got Some two buck chuck. Nice.

0:16 Got so many nuts. So many nuts. Some chocolate, some cheese. Little picnic we're gonna have here in the recording studio. All right, here I am popping.

0:27 This bottle of Charles Shaw And We are ready to go. Or That might be the nicest wine opener that has ever been used for too bad check.

0:40 Alright. Let's do it. Who got the truth? Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you

0:52 Me down Straight! Another story on the way Welcome to the fall twenty twenty five season of Acquired, the podcast about great companies and the stories and playbooks behind them.

1:05 I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Peanut butter filled pretzel nuggets. Some hold the cone mini ice cream cones. Plantain ships. And Mandarin Orange Chicken. These are a few of the items I picked up this week on my trip to Trader Drows.

1:22 You know, David had to do a research trip. It was mandatory. Had to do. I don't think I've ever spent more money at Trader Joe's because I just said yes to everything. Felt like I needed to have it all. Uh But you couldn't have spent that much money. That's part of the point.

1:38 Listeners, America seems to have an obsession with this grocery store, Trader Joe's. It's a strange mashup of a health food store that carries interesting and quirky products. Inspired by travelling the South Seas But for value conscious shoppers. And they break every rule in grocery retailing.

1:58 It's not that convenient. They don't stock all the things you need to buy each week. You can't buy online. You can't get it delivered in any way, even as the whole world turns to grocery e commerce. Parking is

2:12 reliably horrible. I mean every trader shows I've ever been to. Part of the strategy, Ben. It's part of the strategy. Apparently. The stores are small and I'm always bumping into other shoppers. There's never any sales or discounts, and they don't offer any coupons. They sell almost none of your favorite known brand names.

2:32 And their produce Leaves a lot to be desired. And yet. People love it. I mean, in an era where most grocery chains are being disrupted, Trader Joe's cult following has driven it to be more successful than ever.

2:46 As far as we can tell from the outside at least, because it is an intensely private company. Yes, it is. But This is the perfect example.

2:54 Of something that we talk a lot about on acquired. Aligning all the trade offs you make in your business to all work together. In a beautiful self reinforcing puzzle. Trader Joe's is not the best grocery store. But it might be your favorite store.

3:10 And today we dive into how this travel themed pseudo healthy national neighborhood grocery chain came to exist. From the unlikeliest of places. As a clone Trying to rip off seven eleven in the nineteen sixties. I mean I wrote this whole script and everything you just said is accurate.

3:31 But it sounds ridiculous. Should we just stop the episode there? Do you feel that's sufficient? All right. Well, listeners, if you want to know every time an episode drops, join our email list. You will also get to vote on future episode topic, get corrections from past episodes, see all the images that we are talking about in episodes. That's acquired. Fm slash. Email. After you listen, come talk about this with the entire Slack community, acquire.fm slash Slack. If you want more acquired.

4:00 Check out our interview show, ACQ two. Search A CQ two in any podcast player to listen. So with that David. Happy ten year anniversary.

4:09 Happy ten year anniversary. Toast my two buck chuck to you right now. You've got the two buck chuck open. Ben, I've got mine sitting right here. I'm waiting to open it until the end of the episode when I Tell the amazing story of how it came to be. Cheers. Well cheers. Listeners, we are recording this on the ten year anniversary of posting our very first episode.

4:27 It has been an amazing ten years with all of you. Thank you so much for listening. What a journey together. With that listeners. This show is not investment advice. Dave and I may have investments in the companies we discuss, and this show is for informational and entertainment.

4:40 Purposes. Only David Rosenthal, where are we starting our story? Oh man. Well I wish That you and I had investments. In this company.

4:50 Only one person in the world Does it be a good thing. And he's deceased as we will see at the end of the episode. Yes. We start.

4:59 With trader, Joe Himself. Joe Calm. Because you can't separate Trader Joe's.

5:07 From Trader Joe. Joe Colombia. Was born. In nineteen thirty in San Diego, California. The same.

5:15 hotbed of American retailing innovation that produced Salt price. Price club and Everything that would become Costco. So

5:24 So lovingly talked about. On that episode a few years ago. Joe's father. Was an engineer at Conveyor, an aircraft manufacturer in Southern California in the defense industry there. And his mother was a school teacher.

5:39 and perhaps inspired by his mother. Joe is a very good student. He ends up going to Stanford. For his undergrad. He gets his undergrad degree in economics in nineteen fifty two. And then

5:53 Somewhat unusually for the time. He stays on At Stanford for an extra two years and he gets An NBA. the Stanford Graduate School of Business in nineteen

6:03 Fifty four. You know, there's a lot of famous Stanford alumni. This is not one that people are walking around quoting, you know, Joe Colomb was a G S B alum. Like he's not the you know, the Phil Knights come to mind. Back then. Not that many people were going to business school, or at least Not Stanford Business School. And

6:21 Reflecting that. Joe goes to get a job after GSP. And the only job he can get It's back in Southern California.

6:30 At the Lowley Owl Drug Company. Which is a subsidiary of the Larger Rexol. drug company. A line of regional

6:40 drug stores throughout America. And this is a Struggling company. How times have changed for new GSP. grads these days in the job market. So what was Al?

6:51 Ow. was a chain of three hundred drug stores up and down the West Coast. So Joe gets hired by an executive named Bud Fisher. who specifically wanted to bring in

7:02 A recent MBA grad to research alternatives for turning around Ow. The company is struggling. So Joe goes off. And he

7:12 Scours the country. And comes across A relatively new Concept. Coming out of Texas.

7:20 Launched by a company called The Southland. Corporation. Called the convenience store. And Southland has just recently rebranded. their stores that they are operating very successfully in Texas in this convenience store model.

7:35 Called. Seven elevens. Uh yes. The history of seven eleven and the Southland Corporation.

7:43 is fascinating and probably merits an acquired episode of its own someday. Here is a list of crazy things. About seven eleven. One. Today.

7:52 twenty twenty five. They have more stores. than any other retailer in the entire world. They're the largest retailer in the world by number of stores. Which is not the way that you should be impressed by a a retail company, but it is impressive. No, their market cap is about thirty billion dollars. So like a small fraction of Walmart and Costco and Amazon, et cetera.

8:14 Two. They invented the to-go coffee cup. That's why. And also The self serve soda fountain.

8:22 And then this is my favorite. In the seventy's The Southland Corporation franchise the seven eleven concept. to a company in Japan, a supermarket chain there. It became so successful in Japan, and seven elevens in Japan are like so deeply part of the Japanese culture.

8:39 That in the naдіs. Seven eleven Japan bought out the seven eleven parent and now own the company. Seven eleven today is a publicly traded Japanese company. On the Tokyo Stock Exchange. Founded in Dallas, Texas.

8:53 that operates the largest global retail chain in the world. Of course. Of course. Incredible. But For our purposes today, back to its original instantiation,

9:03 It's part of the Southland Corporation. How did this come to be? So Southland was founded in the nineteen twenties.

9:11 Ice company. Oh yes. This is before Home refrigerators were a thing. People had ice boxes in their houses and they had to get their ice somewhere. I've actually got the whole history on this. Can I take it? Yeah, go for it.

9:22 All right, so listeners, this comes from Benjamin Lore. Who wrote the exceptional book? The secret life of groceries, which we're going to reference a bunch in this episode. So Southland had a chain, David, of what you're talking about, these ice docks. Where people would bring their Mule drawn wagons.

9:38 And pick up ice in the Texas heat. Pre cars. Pre refrigerators, pre freezers, pre anything. So This innovation happens where in nineteen twenty seven a guy named John Jefferson Green

9:52 Figures out hey. I don't think people want to leave their house in the middle of the Texas heat in the summer. to bring their mule and wagon over to get the ice. I think we should do it when it's a little bit cooler outside. What if we open at like

10:06 Seven AM. And we stay open late till like eleven PM. So our customers. Can come get their ice for their ice boxes. When it's not gonna melt on the way home.

10:16 That is exactly right. This meant, of course, that his hours are now even longer than the general stores where people are going and getting their goods. So as legend has it, a woman comes up to his ice dock. and says, you know, you're the only thing open right now. I really wish you stocked milk. In addition to your ice.

10:35 Makes sense. I buy my ice for my ice box from you, why can't I buy the Things that I put in my icebox. Exactly. And so John Jefferson Green immediately calls the folks he knows at the South Incorporation. kind of the parent and says, If you give me the money All sorts of

10:50 milk and eggs and bread, and I'll split the profits with you. This way you can kind of be in another line of business. We've got this stand, we may as well do this too. And the convenience store was born. or more effectively, the first seven eleven, even though it wouldn't be fully rebranded yet. This becomes seven eleven. And this of course seems

11:09 obvious today, like oh why didn't anybody try this before? This is the heyday of The milkman. Yeah. Produce man and uh Poultry man, yeah. These things get delivered, or you pick'em up in a market in town.

11:21 The modern Supermarket, let alone convenience store. Doesn't exist yet. Oh, we're so far from that. Yeah. So this was a truly kind of wild idea. And over the next few years they start adding other

11:33 Daily items you might want. Bread, beer, cigarettes, magazines, et cetera. People love it. Then Fast forward to after World War Two when the American economy is booming.

11:45 People have cars, people are moving to suburbs. People get refrigerators. They no longer need ice anymore. The company just completely sheds the ice business. And becomes The seven eleven business.

11:58 Nineteen forty six, they officially changed the name Of the stores too. Their operating hours seven eleven. And David, you're talking about the rise of the automobile and refrigerators happening. That technology change

12:11 And the post World War Two shift. means this thing has perfect product market fit. By nineteen fifty one. It becomes Texas's largest retailer of beverages, milk, and bread.

12:24 They've got a little under a hundred stores. This is like a movement. They found the formula. And they just expanded incredibly fast to meet the desire of customers. So if you fast forward then fourteen more years in nineteen sixty five.

12:38 What does this look like? In that year, they opened three hundred and ninety-eight stores. In a single year. I think all in Texas. Yeah.

12:48 For context. Trader Joe's today. in twenty twenty five has six hundred stores. So seven eleven is blowing the doors off. This is true. blitz scaling that's happening to sort of fulce this opportunity that people are

13:02 clearly going crazy for. Like we said, they are the largest retailer in the world by number of stores today. Great. There's this sort of delicious thing in the history of retail and the history of grocery where when we're sitting here today, you sort of look at these models and you're like, There's nothing innovative about that. This is completely obvious.

13:18 And at the time This was breakthrough. This was completely innovative. Yeah. Yes. Well, speaking of Completely obvious. Back to Joe.

13:29 And the Trader Joe's story. He's working an owl. For Bud. And this is like the mid fifties, so this is right as seven eleven is starting to really scale up, but before it's hitting those sort of crazy hundreds of stores per year number.

13:44 Yep. They get wind of what's happening. Joe travels to Texas and they're like There is absolutely no reason that this won't work in California. We gotta turn around out. Let's just copy paste this seven eleven thing.

13:56 Now Remember, Al is part of this bigger conglomerate of Rex all the slow moving ship. So he comes back, they're like, Oh, we're gonna do this, and Rexel's like, I don't know. Wait, you know, it's corporate bureaucracy, it gets slowed down, Bud can't push it through with the powers that be. And I guess a drugstore was actually pretty different than a convenience store at this point. So then.

14:17 This is like the path almost taken for Joe. He gets a Call. From another Southern California company one day.

14:25 That is also looking to recruit Recent. MBA grads this time to help them with their management of their new successful startup business line that they've started.

14:38 This is the semiconductor division, the new startup division. Of the Hughes Aircraft Company. And Joe actually jumped ship for eighteen months. And goes and works at Hughes and he's basically like the CFO. Of their semiconductor division. Joe works in semiconductors?

14:55 Yes, during which time It grows seven hundred percent. Shock leak semiconductor just gotten started. We're about to hit Fairchild and Intel Silicon Valley's about to boom. There was this whole alternative path. The traitor Joe might have actually been like a traitoress eight or something like Wow. Totally wild. So he's on this path. But then he leaves

15:17 Hughes? So then Bud calls him back up after eighteen months that he's been at Hughes and he's like All right. I've finally persuaded Rexall.

15:27 to go ahead with the cloning seven eleven. Concept. We've got to go ahead. You did all the research. You've been there on the ground. You are the guy to run this. I want to hire you back. I'm gonna make you president. Of our new

15:41 Division within Al that is gonna copy seven eleven and bring convenience stores. To Southern California. Just a few years out of business school and I get to be the president of something that's corporate approved, let's go. So at age twenty seven. He comes back.

15:55 President. The newly christened Pronto Markets. Okay. Pronto. Convenience store. You're in, you're out. Pronto. GD. Yeah.

16:07 They build six Pronto convenience stores in the LA metro area as a pilot. And Off to the races. As you would expect.

16:18 It works great. Instant product market fit. Tons of demand. They're blowing the doors off. And I should say.

16:24 I looked up some of the stuff they were selling. This is awesome. Of course it's like cheese and eggs and bread and stuff. It's also ammo. Ammunition for guns, yes. Like very successful

16:36 High volume business. Tobacco. selling what Joe calls girly magazines. Pornographic magazines. This is not the trader jazz that you know today. That's exactly right. And that might have been the story. Joe might have built.

16:53 The seven eleven of The West Coast. Except That the parent company Rexall had a couple different Irons in the fire for turnarounds here.

17:03 And one of the other irons was they had bought Another little startup company. Called. Tupperware. Oh yes.

17:11 The multi-level marketing maker of food containers. Right. Come over, we'll have a little party at my house and I'll sell you some Tupperware because you're my neighbor. You can't make this stuff up. is they bought Tupperware, it becomes so successful that The management team that's running Rexal is like, screw this crappy retail business. We're going all in on Products and multi level marketing.

17:32 They decide that they're gonna sell off. The entire retail division piece by piece. And buy a bunch of other product company. They end up buying Duracell, the battery company.

17:42 Which would eventually be owned by Berkshire? Crazy. And isn't there something with oil here where like the owners of Rexall wanted to fulfill of Tupperware, so they bought into like an oil business and they needed to free up the capital to do that. They were

18:00 Super all in on Deplare. Yes. Interesting. So This leaves Joe, you know, he's Twenty seven, twenty eight, he just quit his job at semiconductors, right? Like he's got a wife, he's got like a young family. And he's got a successful early

18:18 So he goes to Rexall and he says. Hey. Rather than just selling off Pronto is part of all the drugstore operations.

18:28 What if I buy just these six pronto markets from you. Do like a management buyout. But of course Joe has no money. Yes, he has no money. He doesn't come from a wealthy family. He hasn't really earned money yet. Yes. So

18:42 The Rexall CFO says All right. I'll tell you what. I will sell these things to you for ten thousand dollars over the book value that we essentially have these leases on on our books. And what's book value on this? Book value is fifteen thousand dollars.

18:58 So if you can scrape together twenty five thousand dollars, I will sell you Pronto Markets. And inflation adjusted. This is now the early sixties. This would have been about Two hundred and fifty thousand dollars today. Joe and his wife Alice sell their house. To raise money for this. Wow. They borrow money from their parents. This is like full on Savannah bananas.

19:18 Full on Savannah Bananas, you know, Jesse Cole. May as well be on a air mattress in a garage. Instead of a yellow tuxedo, uh, you know, Joe is wearing a Hawaiian shirt here. Yes. That only gets them to like Fourteen thousand dollars. He needs another eleven thousand dollars. So it's like his whole net worth now,'cause he doesn't own a home and he's borrowed money from his parents. He decides to do a combination of two things.

19:41 For the remaining eleven thousand dollars. One He goes to Bank of America. Takes out a loan. Still.

19:48 They won't want him enough money to Get all the way to the twenty five thousand. He goes. to the current employees.

19:57 And he says, Look, I believe in this. I have sold my house. I have borrowed money. You guys obviously believe in this with me. We see how it's working. I Well

20:09 Offer to you. To also invest in this buyout. At book value. So I will give you the valuation that it is on the books at Rexall. Even though I'm buying it at ten thousand dollars above.

20:22 book. So he's giving him what, a forty percent discount. on the price that he's paying for his shares. Yes, and collectively with equity dollars invested by The employees, his partners. They get to the twenty five thousand dollars summer in nineteen sixty two. They close the deal.

20:38 And Joe and the employees. Become the owners of the newly incorporated Pronto. markets. Joe writes in his great

20:47 great, great, great autobiography called Becoming Trader Joe. That came out a couple years ago. that employees owned About half. the company. I don't think it's quite half. That doesn't pencil out, but I it was a significant chunk. At least a quarter, if not a third, of the company is owned by these early Employees.

21:03 It's interesting that their entry price is actually lower than his. I was doing the research and I tried to figure out the total return since Joe bought in his employees actually got a better multiple. So anybody who held from that original date all the way through till uh spoiler alert, he sells the business later. Would have beat Joe by, you know, almost two X. Yeah.

21:23 But even more importantly though. Almost nothing from Pronto Markets survives to Trader Joe's today, you know, not the ammo, not the cigarettes, not the girly magazines, but this does. But The sort of respect for employees. The spirit of treating your employees as partners. Yes. And I think right after he takes it over, is when he sets his really aggressive employee comp plan.

21:45 A thing you commonly hear about Trader Joe's today that he did right away is Is we're gonna have some of the highest paid employees in the industry and we're gonna attract the best talent by just effectively overpaying for everyone. Basically every employee at Trader Joe's.

21:59 Get paid. Between forty and a hundred and fifty percent over what average. Compensation is for their roles in retail. I saw sixty percent over. So it kind of falls in that range. I say overpaid, but Joe's philosophy on this is it's not overpaying. Because we're attracting the best people and because we're setting up all the right incentives, they're just gonna make the product that much better for customers. We're gonna do clever things like rotate the employees around. No one's just a cashier.

22:24 They're working in all the different jobs. So they get to know the business really well. They get to be really knowledgeable about the products. And then if anybody asks us anything about them, literally anybody on staff. could have the right answer. also carries through right to this day. Every Trader Joe's you go to There's a captain who's essentially the manager of the store. There's a first mate who's an assistant manager. And then everybody else does the same job.

22:46 Uh the nautical naming. There's no dedicated cashier, there's no dedicated baggers, there's no dedicated stalkers. Everybody does everything. Alright, so everything's gonna go great, right? He pulled together this capital, he's leveraged to the gills, he owes money all over town, all these employees have bet their life savings on him too. So

23:04 He's leveraged to the gills just to Do the buyout. You're not gonna get far. just with the bio. You also need like a balance sheet to have working capital, to get product, to expand. He also doesn't want to have Just six convenience stores here, he wants to expand, open new stores.

23:21 So shortly after doing the buyout. He goes to one of his biggest suppliers. A dairy company called Ador Milk Farms, A D H O R Which is Rhoda. Spelled backwards.

23:36 Come back to that in a minute. He goes to the owner and president of Ador. Guy named Merritt Adamson Junior. And says, Hey, let's do a deal here. I need financing for working capital expansion, all these things. You need distribution. You give me

23:51 debt financing. And Pronto will exclusively Carry Ador. Dairy products, you know, milk, ice cream. Nothing like borrowing money from your most important supplier. Yeah, right, right, right.

24:03 It's good'cause they know your business really well and you're working together anyway, but It can work great. But you're really leveraged now on this one supplier. Yes. I really need your goods. And I also really need your money and I really need you to stay happy with me so that nothing bad happens to any of these covenants or whatever in the debt. Yeah.

24:22 So over the first couple of years it does go great. Pronto becomes Ador's Largest retailer. And then In October of nineteen sixty five,

24:32 Joe goes to meet Merritt for his monthly lunch meeting with him. Monthly lunch meetings to check K in about. The business, the relationship, then Merit starts drinking. The orders. One Jinn and Bermouth, two ginn and burmouth, three

24:47 He orders his fourth gin cocktail and Joe's like, all right. He's got something he needs to tell me and uh it's not gonna be good news. Yes. And listeners, before David breaks the news to us of what is gonna happen, there are three pieces of background. That are worth knowing. about Ador and about the dairy industry at this moment in time that sets up this meeting. One Refrigeration has gone mainstream at this point. Yes. Nineteen sixty five, we're well past the icebox era.

25:16 People's buying patterns have changed. convenience stores have now popped up everywhere. So this sort of Dampened demand for milkmen. since people are now picking up their own milk and so the Adore company has had to do this Crazy rejiggering.

25:30 of who is actually selling their product. And I said it a minute ago. Yeah. Pronto. Still relatively little pronto markets in

25:39 LA Is Addors now largest seller of their products. That is not a good sign for Ador. They are not doing good here. Alright, so why are they not doing well?

25:51 Well The American preference was shifting from whole milk to skim milk. And you might just say, Oh, well, I'm sure they just skim the fat off. That's part of the process. I assume that's what happens. There are different Cows.

26:05 that produce milk that is well suited to be whole milk versus well suit to be skim milk. There's Holstein cows, which produce white, chalky milk that you sort of expect to become skin milk. There's these Guernsey cows. The milk has this yellowish hue to them. It produces this really rich, creamy milk. Unfortunately.

26:26 Ador had mostly Guernsey cows. And Add or It's not like they have just a few of these. They are the nation's largest dairy farm.

26:36 And they have the wrong kind of cow. for where the future is going. In one minute. It will all become clear to you why they are the nation's largest dairy farm. Bye.

26:48 Real estate at least. And why their cows are real fat and real happy. But continue for the moment. And then third. There's another thing happening which is It's not

26:59 Just Joe. Who realizes that seven eleven is a good idea in California. It's also seven eleven. And other competitors that pop up too. Yes.

27:09 So What is the news? Well After the fourth drink. The news.

27:17 That Merritt finally shares with Joe. Is that He's made the difficult decision. To sell. The family business.

27:26 That or Dairy operation. That's troubling enough to Joe. This is his biggest financing partner, biggest supplier. It's like all right, well

27:37 Who's the buyer? Yeah, it's like The buyer is the Southland Corporation. Seven eleven is coming. To California.

27:46 And He needed a dairy supplier and um Yeah, I sold our operations to them. Brutal. Not good. NUT

27:55 Good. Not great, Bob. All right, so what's really going on here? So at the same time as Merritt is having these problems with the family operations of running a dairy farm. He also has a incredible opportunity that is the flip side of the coin.

28:15 Why are the cattle so fat, so happy, and distributed across so much land? And what has Merit inherited that's been passed down through generations of his family? Why is it called Ador and what is Rhoda? His mother Rhoda was the descendant An inheritor. Of the original California Spanish Land Grant.

28:36 Of the area that is now the entire city of Malibu. The most Today, expensive, attractive. Real estate. In perhaps the entire country.

28:51 They own the entire city. This is the dairy farm. The cows are grazing in Malibu. Yes. You can't make this up. And so they have Finally made the rational decision here to sell off The dairy. operations and

29:07 develop this as real estate, which they had already been doing. Little by little. So Pronto Markets is toast. Seven eleven is at least a thousand times bigger. And Any landlord is gonna wanna sign them.

29:21 over little pronto markets in Real estate having the bigger balance sheet is the way to be the preferred tenant, especially if You can promise, hey, longer leases and we're more credit worthy. And the operating history. Yeah. You're a landlord. Would you rather have seven eleven be your tenant or start up pronto markets? You're gonna bet on seven eleven. Yes. And that not only takes away his milk supply, that's also his current debt holder.

29:45 who he owes money to, and he's in this business. that has no structural or strategic barriers at all. He is doing the exact same thing as seven eleven. at smaller scale. And so the core insight is that pronto markets is effectively just an empty vessel.

30:01 to sell the same products. In a situation like that. It is a race to the bottom on your margins and scale will determine the winner. So in other words Pronto Markets is toast.

30:12 Yes. So Joe Has some soul searching to do. He needs a retreat. He goes on vacation. Takes his wife and children. First to a little cabin in California with his family. Then he goes to Saint Bart's in the Caribbean.

30:28 He somehow gets in touch with a friend who offers this insane beach house and he's like, Well, I've never flown internationally before and I don't really have the money, but I really do need a reset. We are royally screwed. He needs to come up with a plan. Yes. And that plan

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33:08 All right. So David. The origin of Trader Joe's Joe is there in Saint Bart's

33:15 In his beach house. Cocktail in hand, looking out over the ocean, thinking about how absolutely screwed he is. He effectively plan is cocktails. Effectively. The plan is tiki. Yeah. The crazy thing that he does. On this vacation And then

33:34 henceforth his management style. He is a genius. He premeditates the entire shifting landscover over the next thirty years ahead of him. And he does it five years at a time.

33:47 in what he calls white papers or at other times theory papers that he publishes internally. He carefully thinks through things like social change and cultural shifts and geopolitics and currency fluctuations Shifts in the how people will be educated and consumer buying preferences and travel patterns.

34:05 As I really dug into this Joe's somewhat of a macro economist who once he realized where all the world was going, He places his bet in the form of a highly opinionated grocery store. And then he would execute much of that vision himself. I mean, like physically moving pallets and Type setting newsletters for customers.

34:23 He is a complete unicorn. Okay, so Joe comes back from this vacation and what does he do? Yes, he's a genius. But he also he's got like a real back against the wall problem. Right.

34:35 He's thought through all these implications. He's forecasted the future, and he's gonna go out of business. He needs to make his rent this month. So He needs to find something that he can start selling. That is basically the Venn diagram intersection of high enough value that he can get real gross margin dollars. Out the bottom from his small handful number of stores.

34:57 to meet his obligations. He needs it to quickly become a good business. Quickly Provide returns. And Is protected from the seven eleven juggernaut that's coming. 'Cause you never want to compete with someone

35:11 bigger, more established, better capitalized than you on the exact same footing that they're on. You need to do something different that they can't or won't do. Yeah. And he lands. On hard alcohol. This is the hilarious thing about Trader Joe's. It actually starts

35:28 As a hard liquor company. It's a ammo and tobacco company that gets into hard liquor. Right. So Hard liquor is actually very, very, very attractive here.

35:43 It's very high value. There are a set of laws called Fair Trade Laws that impact Everything that's retailers sell in this era. It's actually kind of crazy. It's a holdover from the depression. We talked about it on the Costco episode. Where it was

35:57 Illegal. For retailers to sell goods below the minimum price set by manufacturers. Right. It's not just MSRP. It's not just a suggested retail price. It's You will go to jail. If we catch you selling below

36:12 the price that the cabal of producers of any given good set. Yes, once all this stuff gets thrown out and rolled in constitutional, et cetera. Now it's suggested. Back then it was like mandated. But the net of that is

36:26 If you can find a way to sell hard alcohol, because they're high dollar value, you know you're gonna get a certain amount of profit. out of it. And the way this works is you need to make sure you get liquor licenses, which are hard. But if you have a liquor license

36:39 Then it's like an annuity. people are definitely gonna come to your store, they're definitely gonna buy liquor and you have a regulatorily protected Profit. on that liquor.

36:49 Yes. And that's The moat. Against seven eleven. Seven eleven, Giant Southland Corporation. They're not gonna come to California and

36:57 get liquor licenses for all these stores that they're gonna open. They're out of state corporation. Like Joe can be much more nimble. He can invest the time and the money. These things cost a lot of money. back in the day,'cause they're basically, like you said, a guaranteed Annuity, profit stream. And he can invest at a small scale.

37:16 Raise more debt. To do this. And this is his way out. And that was basically his bet is seven eleven because this is like a small little arm of their operation, they're not gonna change their sort of national business model to in this little pocket.

37:31 Have liquor. I think that's right. And I think they did not sell hard liquor. Period, at that point in time. It just wasn't part of their strategy. Okay, I see. And there's one Other than

37:42 Perhaps unforeseen at the time. But ultimately incredibly Strategic. benefit to this decision to go all in on hard liquor. Which is it's

37:53 Also a moat. Against supermarkets. And the grossity industry. They're not gonna do hard liquor either. At least at this point in time.

38:01 So he goes. Raises more capital, gets the licenses. This is like the third tranche of debt that he's taken on now. Yeah. Yeah. Yeah. Yeah. So It works.

38:13 For a couple of years. Pronto Markets. Basically transforms into a liquor store. And it buys Joe a couple of years to figure out The bigger business plan.

38:25 And stave off the invasion. From seven eleven. They're still selling other stuff in the stores, but they start devoting more and more and more space to liquor'cause it's Highest value per square foot. They have a regulated, protected

38:39 right to sell it that their competitors don't have. I mean there's an alternative world where Trader Joe's basically becomes total wine or Vebmo or something like that. Yeah, if they had just kept scaling the strategy linearly instead of completely changing tracks and going in this other direction. Yeah.

38:55 All right, so let's talk about supermarkets. Listeners, I did sort of a brief history of supermarkets in America. to come up to speed on what Trader Joe's does differently and how we got here. So You go way back all the way to pre civil war America and you've got general stores.

39:10 We all sort of have this loose idea of what this looks like. You got one counter. There's a bunch of goods that you can see, but it's not self served. You don't get to go pick up any goods yourself. the employee of the general store or more than likely the owner. is just gonna be the person who fetches it for you and then checks you out. That is kind of the retail experience in America pre civil war.

39:32 Then there's this series of innovations that advanced from this Two the grocery store. So the first is the box.

39:41 The cardboard box and specifically pre-cut corrugated cardboard boxes happen. In the eighteen nineties. It's rigid. It's cheap. and it enables shipping at scale.

39:54 So suddenly you can have regular shipments in predictable quantities. Inexpensively. between producer and retailer. That's puzzle piece number one. Then you've got the flat bottomed paper bag that had happened a little bit before in the Civil War.

40:10 They used to use cotton bags, but it's in short supply. because you need cotton for the soldiers. And so necessity is the mother of invention. We get the brown paper bag. You have canning. Before this, you only had glass. it would break, it was fragile, it was expensive. Suddenly you can use tin and you can manufacture this at scale.

40:28 You can keep goods fresh for a long period of time. It's durable. And again, it's in this easy to manufacture fixed quantity size. You then get card stock. This enables real consumer packaged goods like cereal, cracker boxes, you know, that's still most food today.

40:46 Or most food. Sold in supermarkets. Yes. All containers really move from bespoke one-off containers to mass manufactured, quantifiable, fixed sizes. By nineteen hundred, One fifth of all US manufacturing

41:01 is packaged food. That is how significant the shift is. This is the rise. Of the Great C P G companies on the

41:10 Product supplier. Side of The supermarket market. Yeah, consumer package goods. That's exactly right. And in nineteen sixteen, the real break from the general store of old happens.

41:21 А гай нем Кленс Сондерс. Launches a store. Where thanks to packaged and branded products You no longer need an associate for help. So consumers can actually go and touch the products for themselves instead of asking the man behind the counter to get it for you.

41:38 Which was Complete heresy. At the time. And it is the way that all stores work now. Just like the convenience store innovation. Yes. Equally obvious today and equally wild back then. Yes.

41:52 And that store that Clarence Saunders started. Was Piggly Wiggly. That's right. With five hundred stores today. So David, you mentioned

42:00 C P G the sort of Cousin. of the supermarket. These two entangled characters in our story, the rise of the supermarket and the rise of the consumer package good. What role does that play in the development of the grocery store?

42:14 Proctor and Gamble. Unilever. Kellogg's, Gillette, Coca-Cola, Nestle. Note. all companies and products that you're not gonna find in trader toes today. Not today. Yeah.

42:27 So once you get this scale of packaging and consistency of products You basically paved the way for food brands to emerge. You can start to promise quality to customers in a way that was previously reserved for the merchant. You used to trust the store owner. Not the granola maker.

42:44 And now the maker of granola can take on this new job to be done. Which is taking a heterogeneous amount of natural products. Remember like we were talking about with milk or grains or any of these fruits, vegetables that turn into a CPG thing. They are at one point natural products. And then putting them through some sort of manufacturing process to come out the other side as one predictable promised. Homogenous product.

43:09 standardized nationally available product. Yep. Yes, that lives up to a brand promise of whatever it is, it's probably quality, but it's probably other things too. You start to get companies like the National Biscuit Company realizing well we should lean into this. Oh boy, that sounds like Nabisco, doesn't it? It is.

43:28 So you get them for the very first time slapping Nabisco on a cardboard box. So this is a profound change for the entire value chain where the trust is now with the brand. Not with the retailer. And retailers basically are shifting to serve as a vessel just to sell these trusted branded products. Once

43:47 Brands, these producers of product realize this power and realize, oh my God. It's all shifted to us now. They press this advantage, so they start advertising. First you get newspaper and magazine and then radio and then The most perfect instantiated you could ever ask for a brand. Television.

44:08 The idea that you could build trust with consumers through sight, sound, and motion. Beamed over the air into everyone's homes. In the nineteen fifties and sixties. It's Nirvana. for this whole ecosystem to kind of come together.

44:22 And the net of all this. For Joe and Trader Joe's and being about to get into this market. Is that Supermarkets basically become real estate companies. This is something I had no idea about until

44:37 Doing this research. They essentially stop having their core competency. be the taste and opinion of a merchant. They used to be in this great business where they would choose what to stock. And then they would be the source of trust. And now consumers are just saying, Hey, you need to have these things. Hey, I'm here for the Cheerios. Right.

44:57 You say you need Cheerios, I'll go try and get Cheerios. We're just getting whiplashed around as a commodity. Actually They do become real estate companies. They become scaled real estate companies. And they offload a lot of the merchandising operations.

45:12 To the brands. For a lot of items, the grocery store employees Don't stock the shelves. The brands the CPG companies Come in with their employees.

45:23 And stock the shelves. It's crazy if you walk into a large scale traditional supermarket today. How many quote unquote employees of the store are actually representatives of the producer of the brand or

45:35 more likely the distributor. because the brands aren't gonna directly show up to those stores. Yep. It's funny, when I finished reading Joe's book One of the takeaways was it seems like if you can master a negotiating real estate leases.

45:49 Two regulatory stuff, like if you can figure out regulatory arbitrage, and three, if you can figure out how to not have your employees and customers steal from you. then you're gonna run a good grocery store. That's actually the core of this industry is those three things. Now, of course there's way more to it. And

46:06 those way more things are the things you kind of want the business to be, but it's shocking how much of the bedrock of just not losing money comes down to your real estate leases. Not getting stolen from And understanding the regulatory environment you exist in and not running afoul of it. Yeah.

46:23 So Back to Joe and his pronto dilemma and what's gonna become Trader Joe's here. The hard liquor thing. was a competitive response.

46:33 To seven eleven. Turns out it's also a great Competitive. response to supermarkets. So after a year or two.

46:41 Stabilizing the ship. Joe's ambitious, he wants to do more than just hard liquor. And he realizes Yeah. This state of play in the supermarket industry between the big brands

46:52 And the supermarkets who have essentially become real estate companies. Actually has created a wide open vacuum. For a new Different kind of gross, sir. To come in.

47:06 And actually return to merchandising. And product knowledge. Yes. So as the legend goes In the late sixties

47:14 He's hit by two simultaneous bolts of inspiration. The first is an article that he reads in Scientific American. That states.

47:25 That starting with the GI Bill after World War Two. The rate of college education in America. Went from two percent of high school graduates to sixty percent. Of high school graduates.

47:38 By nineteen sixty four, thanks to the GI Bill. Basically in America it went from Nobody went to college after high school except the very privileged elite. Two. sixty percent of high school graduates now go to college. This is a massive

47:50 Demographic change. In America. And it's not Just that everyone gets educated when they're in college. They sort of become more aware of the world.

48:00 Yes. So that leads into The second bolt of inspiration that he has from another article he reads, this time in the Wall Street Journal. Which is that Boeing Oh yes.

48:12 is going to be launching the seven forty seven. Commercially. And that it would dramatically reduce The cost of international overseas travel.

48:24 And make it accessible. To the average American. So the stat on this is insane. The seven forty seven immediately cut the cost of international travel to Europe by fifty percent. And within ten years. the real cost of travelling to Europe was cut by a factor of fifteen.

48:42 Wow. So you go from this insane thing where Eighty percent of Americans in nineteen sixty five. had not ever set foot on a plane.

48:52 it going down by fifteen X to get to Europe. Americans are about to be well traveled. And well educated. And in Joe's mind These Two pieces of information from these two articles coalesce.

49:06 into this massive epiphany that he has about the future. Of the American public. He writes in the book. Seven eleven. And the whole convenience store genre.

49:16 Served only the most basic needs of the most mindless demographics with cigarettes, Coca-Cola, milk, Budweiser, candy, bread, and eggs. Dimly I saw an opportunity to differentiate ourselves radically. From mainstream retailing. to mainstream people. I mean this is it. This is the core insight.

49:37 You hit me with a quote, I'm hitting you with a quote. This is from the secret life of groceries. Back in 1970, trader Joe Colomb looked at the grocery industry and saw two paths. The first required becoming an active retailer, which for him meant rejecting a passive role as a supermarket landlord and applying an intensive effort to seek out or create, quote, discontinuous products that could not be imitated by competitors. The second was to grow big. Sell goods that are available an infinite supply. Remind you of the everything store.

50:06 Yep. and compete ruthlessly on price. This latter path was essentially what every single one of his competitors was attempting. They would spend the next decades scaling up to carry bigger and bigger inventories, gobbling up larger and larger warehouse spaces, forever looking over their shoulders at competitors and trying to shave down costs. He saw his own ruin there. the biggest chain in the world would always win, and however many competed, there would only be one or two that survived to the end. That's it. It's this realization that look, I don't think I'm gonna eventually be Walmart if I'm not gonna be Walmart or Kroger or Albertsons or you know, one of the big giant quote unquote winners. Let's go in the extreme other direction. Right. And oh by the way, there are these two intertwine

50:47 Massive demographic trends that are starting with the young people coming out of college and are soon gonna become the whole country that are in my favor. But the thing that's not obvious that takes a Joe Coulomb to like figure out is How is it that well-traveled, well-educated people are gonna let you take a non-traditional path in grocery? This is the genius insight.

51:10 of the thing that he delivered that we didn't know that we needed. You know, it's like Steve Jobs giving us the iPod and we didn't all know that we needed that thing. Why is it that well traveled Well educated people needed a divergent grocery store. Yes, and this is also where it's so crazy path dependent. At this time In the late nineteen sixties, early nineteen seventies.

51:31 The Best. Way. To target. These types of consumers that differentiates them.

51:38 From Other mass market consumers. The best way to do so is their alcohol consumption preferences. Like it couldn't be more perfect. He's already a liquor store. It's so true. I didn't realize how important basically being a liquor store was to the Trader Joe story. the rest of Trader Joe's kind of falls out of selling liquor.

51:57 Yes. So At the time in the late sixties, early seventies. There is a sharp divide along these lines in the country. Blue collar Americans drank beer.

52:07 Educated Americans. Drink cocktails and spirits. And soon to be wine. Thanks to Trader Joe's. Fascinating. It was the mark of sophistication back then.

52:18 So Joe decides That His store. The newly survived pronto markets.

52:26 Should create a new tagline. Designed For this target new customer base. The world's largest assortment.

52:35 Beverages. Which becomes A hundred different brands of scotch. Seventy different brands of bourbon. Fifty different brands of rum, and so on and so on and so on. You weren't kidding when you said it could have easily become a Bevmo or total wine.

52:49 Absolutely. So He knows This is a wholly different unique retail concept.

52:56 Versus pronto. He needs a new name because this is a new store. So in another Almost completely foreign thing to today. The culture

53:07 Back then, especially Joe's target market of educated Soon to be travelled folks. Was completely obsessed in America. With a fad known As

53:20 Tiki culture. Yes. And it was inspired by what people You know, Americans who were about to be able to travel But here to four had not actually traveled around the world. Thought.

53:31 That Polynesia and South Pacific Culture was like. And you know, there's like movies, there's the James Bond movies. Yeah, yeah. It started with the South Pacific movie and it bled into cocktails, into drinks. So drinks like the Mai Thai, these like South Pacific. Caribbean was a bit of a version of this. Drinks were super popular among this educated class of people.

53:53 If you go to Disney World, you can still see some vestiges of this. There's the Polynesian resort. The Dole Whip and the um what's the bird um Remember Nolan Bushnell told us on the Atari episode that he was inspired by all the animatronic birds. which is right next to the Dole Whip stand, and not too far over is the Jungle Cruise. And Joe Colomb says the jungle cruise was one of his two inspirations for embracing this traitor idea, this tiki traitor thing.

54:21 The other of which is a book that he was reading called White Shadows in the South Seas. And when you look at it, the cover is like evocative of this We'll put it in the email newsletter. It's very Trader Josian looking. And then the final piece of this sort of branding stew in Joe's mind.

54:38 Is that cornerstone cultural elements of Tiki culture. Were these two competing

54:46 Restaurant chains. That scaled across America and cities across America. Oh, Trader Vicks? Don the Beachcomber was the first one. And then Their competitor. Trader Vicks.

54:59 And they were these tiki themed restaurants. And so Borrowing from Trader Vicks, along with all this other influence and Disney World and Hollywood and movies and books. Joe gets the idea. It should feel like traders on the high seas.

55:16 It should have a maritime element. and a tiki trader element. And we're gonna call it. Trader jazz. Too perfect.

55:24 So in August nineteen sixty seven. Joe opens. The first Trader Joe's. On Arroyo Parkway.

55:33 In Pasadena, California. Joe decides that. Pasadena is the perfect first target market because Caltech and a whole bunch of universities are there. Got professors, you got graduates coming out.

55:45 And was this one of the pronto markets before? Was he in the same real estate? No, this is a new store. Uh And when it opens, August nineteen sixty seven, it's got a lot of the elements of Trader Joe's today. Employees are called crew members. Star manager is a captain. There's the assistant manager first mate.

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57:51 And just tell them. That Ben and David sent you. Alright, so David. What is strategically different? What are the choices? that Joe made when he opened that first Trader Joe's in Pasadena.

58:04 Other than of course putting everyone in Hawaiian shirts. So the first obviously is the target market, like we just talked about, you know, these Newly educated college grads who are about to travel the world. Joe has his sort of folksy shorthand for this in the book of the over educated and underpaid.

58:21 Yes. It's interesting at this point it's not branded products, really, the way that Trader Joe's is today. It's just a convenience slash grocery store that happens to target people who value authenticity, quality, sophistication, but also want affordability. It's sort of this early career post grad.

58:40 type of person. So it's near college campuses. It's near large hospitals. Interestingly, it's also near retirees. Yes. Because retirees sort of behave similarly to Younger. Pre-family folks. This is the

58:54 Dual pillars of Trader Joe's target customers. It's Young professionals starting out. And retirees. Yes. It's funny, the retirees also very value focused. And uh large consumers of liquor.

59:07 Candy, high fiber foods. Vitamins, it's a big profit center. A thing that they do here to sort of play into the over educated or I would say highly educated, underpaid. І Вікторіан Арт.

59:22 with the sort of cheesy humorous captions, they adopt this as their visual identity. It's a double win. It plays off this educated customer base where they can make jokes like if you go buy the Is it the guacamole that they call Avocado's number as a play on Avo Godro's number? Yes. In Is that chemistry? I think so. Or they used to have the Sir Isaac Newton's Of course. But two

59:46 Victorian imagery Is royalty free. Anything before nineteen oh six is public domain, so this is just Joe being cheap. All the packaging is just ripping off these old royalty free images. That's Trader Joe's right there. It's amazing. And so he really comes up with this thing he calls the four tests.

1:00:04 Which is one We wanna stock goods that are high value per cubic inch. Yes, but Starts, of course, with liquor, as we talked about. Yes. And then of course.

1:00:14 vitamins and You walk into a trader Joe's city, you can almost feel that It's stocked with things that are high value density, even though the goods aren't expensive. the way it's all jammed into the store, it feels dense. Yes. And trader shows today

1:00:29 Average about Call it fifteen thousand ish, maybe a little less square feet. The average supermarket is like fifty thousand square feet. And the average Walmart is like a hundred and fifty thousand square feet. And back then Trader Joe's was like four thousand square feet. I mean these were tiny stores, so they needed

1:00:48 high value density in them. Or I'm gonna come back to that in a minute. He wanted them to be four thousand square feet. Two high rate of consumption. You want customers coming back over and over again. Vitamins

1:01:01 Three. Goods that are easily handled. So much of Trader Joe's Business. stems out of this.

1:01:09 that they are unwilling to start doing things that are hard to handle, that are logistically difficult, and they kind of have this ethos of, If we can make it so people are willing to overlook the fact that we don't have some stuff that's hard to handle. Then great. All the better business for us if we can keep customers coming back and we only have to deal with easily handleable goods. And then the fourth is probably the most important.

1:01:31 Something that Trader Joe's can be outstanding. in terms of price or assortment. Yes. This is the counter positioning. This is how can we be different than what every other player in the market is doing.

1:01:44 So this last Strategic cannon. Is I think Most perfectly.

1:01:54 Perhaps in Trader Joe's entire history exemplified in the first new product category. That they added. Beyond liquor. To this official new

1:02:05 First. Trader Joe's store. You mentioned a minute ago. That Joe's Target square footage size.

1:02:13 For the new Trader Joe's store concept. was like four thousand, forty five hundred. Square feet. Yeah. The first location on Arroyo in Pasadena, even though it's small today.

1:02:26 was actually about twice that size. It was like seven or eight thousand square feet. Not by design. We wanna be in Pasadena. That's the perfect first market. I'm willing to trade off having a bigger store than I would actually like. And he was meticulous about location picking. It wasn't just let's look at some census data and figure out

1:02:44 incomes. I mean it was the soft factors of is there a university close, but he would just go drive up and down all the neighborhoods around it and try to figure out, hey, are these my customers? How easy is it to access my store if I put it on this block versus that block? Oh, if I'm on the wrong side of a divided highway. Then I actually can't. access all the people who have to, you know, make a left turn into traffic. It was really this

1:03:08 six cents for developing what is my actual easy addressable customer base from this store who is going to make this store their home spot. Yeah. So they move in. Got the train of joys concept with hard liquor being the cornerstone sort of first.

1:03:23 Yeah, what was the second? Well. They gotta figure out what to do with all this extra space. And at first They try

1:03:32 Bringing in a meat department, a meat butcher, as a concession, as a subtenant. Which they don't have now, right? No, no, no. Long gun. Too hard to handle. Too hard to handle and not differentiated. I mean, that's what the supermarkets do. He's building the anti supermarket. Right.

1:03:46 And then. One of the store managers in the portfolio Says. Hey. I know this other meat guy, well we're thinking meats here.

1:03:54 He used to have the shop next to one of their other pronto markets. Here in LA. He moved up to Northern California to Napa County. He's gotten to know some of the wine guys up in Napa. Now this is like late sixties, early seventies. This is before California wine in Napa is a thing. Which I didn't know until starting this episode that

1:04:14 the whole concept of Napa is like a sixty year old Yeah. Oh yeah. We're gonna do it. So this manager, this captain, is like well, Joe Alcohol's, you know, our sort of core product here. What if we try expanding? Into Wine.

1:04:28 Joe's like. All right, great, let's try it. Meanwhile, Joe doesn't drink wine. Yeah. Yet. Yet. Yeah. He would become a Huge.

1:04:38 Aenophile? Anaphile? How do you pronounce it? I have no idea. I think it's like O E N O P H I L E the wine lover own a file and learn something new every day. Yeah. So just like great, let's try it. They use

1:04:52 A whole bunch of that extra space that they have in the Arroyo. Boulevard store. And they install The quote unquote. World's greatest variety

1:05:02 Of California wine. Right there in the Trident Joe store. And the world's greatest variety was Seventeen Different kinds of wine from

1:05:12 different wineries in Napa. Seventeen. Now the crazy thing That's so funny. I actually think there's a pretty good chance that this was the world's greatest variety of California wine. In one retailer.

1:05:27 Because it wasn't a market yet. Americans were not yet drinking wine, let alone Napa wine or Sonoma wine. It's Trader Joe's that makes it a thing. Wow. It becomes a huge hit, as you could imagine, with the Trader Joe's. target demographic. I mean what

1:05:45 More sophisticated worldly thing could you offer them? I mean it makes so much sense. In retrospect. Wine is the ultimate non commodity commodity. Oh yeah, there's this great line that

1:05:57 You can't sell wine. You have to sell wines. Yes. The Consumer psyche around wine is is that we are trained to believe that's this heterogeneous product.

1:06:10 Vitamin D whole milk is vitamin D whole milk. Milk is milk. It's all interchangeable. Wines aren't that way at all. They're the complete opposite side of the spectrum. Amazing thing if you're trying to be this merchant who is selecting goods on behalf of your customers and your brand promise as the merchant is just come to my store and be delighted. And you don't need to just say like, hey, I'll always have milk for you. You say come to my store and I will pick out interesting wines.

1:06:39 And when the wines are gone, they're gone. So Their small batch, their boutique. I'm buying however much supply I can get. of a thing that I think is great. You can build a much better business.

1:06:51 On Being known for I will be surprised and delighted when I come to the store and you have selected interesting items for me, than you can on you are an empty vessel through which to provide me milk. Yeah, or Nobisco or you know, whatever large CPG brand. It's so perfect. And

1:07:09 Wine comes with all of these other Amazing aspects to it too. Drinking it makes you seem sophisticated. European. It has this rich tradition going back

1:07:21 for all of recorded human history. You can spend a whole lifetime studying it. And still never come close to learning. Everything about wine. High repeat purchase. high density. I mean it really fits the four tests super easy to handle.

1:07:38 And now a great way to be differentiated, because no one else is doing the California wine thing. This is new. They can build a brand around being California wine proveyors. So Yeah. happened by accident. that they had this extra space.

1:07:52 that the old store manager knew the meat guy who moved to Napa who knew the wine guys But I think this probably becomes the most important factor. In

1:08:05 Trader Joe's success. And they also timed it. Perfectly. This is the unlock. For thinking about Trader Joe's.

1:08:13 They are wine merchants. And they merchandise everything in the same way you would merchandise wine. Yes, they really asked themselves this question of Could grocery be the same? Could we

1:08:25 actively seek out and purchase things in small finite batches. that we think would be interesting. to provide to our customers and would people buy in to a store where you go and

1:08:39 you don't always know exactly what you're gonna get, but you can trust that the person who found it for you found a great treasure. Yes, it's perfect. And like I said. They nailed the timing. So this is

1:08:50 the late sixties, early seventies, where they're starting out. Becoming a California wine merchant. American and specifically Californian wine. Is about To have

1:09:02 A rocket ship ascendancy. If you've ever seen the movie Bottle Shock, which came out a couple years ago. It's about this thing that really happened, the nineteen seventy six judgment of Paris. Which is one of the most seminal events in the history of the wine industry. It was a blind taste test.

1:09:20 Where Parisian Wine critics. Did blind tasting of all the top French wines. The Bordeaux, the everything, all the famous, all the old world Great. Against

1:09:32 Napa Valley. Wines. And The Napa wines trounce the top Bordeaux in like every category. And it was this bomb that went off in the wine industry.

1:09:45 And started the whole culture of Napa and Sonoma and American wines. And the tourism there and the romance. And Trader Joe's is like a few years into being the number one seller of the widest variety of California wines. Yes. And their target market. is exactly who is gonna consume this stuff and love it. It's so great.

1:10:07 So the early days of the Trader Joe's wine program where Unbelievable. Joe and all the employees, they start Learning about wine, going up to Napa, conducting tastings, meeting all these wine makers who are You know, essentially guys in the garage at this point in time. They bring it back to Pasadena.

1:10:25 Take it. Heights. Fremark Abbey, like some of the best wines and wine makers in the entire world in history. are being sold for ten bucks a bottle in Trader Joe's in Southern California. So they start evangelizing it to their customer base.

1:10:40 Like you said, meets all the tests. Like we're all in. In nineteen seventy They start publishing a free newsletter. to all their customers to educate them about wine and update them about all the new shipments that are coming in. Do they already have the fearless flyer? Is this like in addition to that? This is how the fearless flyer starts. Ah They call it the Trader Joe's

1:11:02 Wine Insiders Report. Mm. And it's this whole newsletter. I imagine you're a wine merchant. This eventually

1:11:11 Once they get more into Grocery in nineteen eighty five, this becomes the fearless flyer. But it's the same Approach. It's merchandising. It's telling the stories of these products just like you would With a wine.

1:11:24 Fascinating. It's incredible. No other grocery is doing anything like this. No. So by nineteen seventy, the year they launched the insider's report, and three years after this first Trader Joe's launches on a Royal Boulevard. Trader Joe's becomes the largest wine retailer. In California. Which is on the one hand completely insane.

1:11:46 But on the other hand, shows just how young And knew the wine drinking market was in America and that Trader Joe's was the one making it happen, starting in California. And they still have what, single digit stores at this point? Yeah. Pretty quickly. They add imported wine too. So not just domestic Californian wine. They go to Europe, they go to France, they go to Spain, they go to Portugal, all the great wine making countries.

1:12:09 Yeah, they go to Italy. And they start bringing imported wines back too. That also sells like wildfire. They also do this really clever thing where Fair trade laws applied To wines.

1:12:23 And with imported wines They didn't actually set the minimum prices Based on The wine label it was based on The distributor, the importer that brought it in to the country. Which makes it different than the way that domestic products worked. And multiple importers would import the same labels and wines.

1:12:43 From Europe. And so Trader Joe's just like, Oh, this is an arbitrage. We'll just go find importers. that are willing to set the lowest minimum price for the wines that they're importing. And we can break The street price.

1:12:58 From the other importers. 'Cause in other fair trade categories you'd have to go to the entire distributed group of producers and say, Hey, all you know, milk producers or all whiskey producers, can you guys agree to lower the fair trade price? And they'd all be like, No. It was uniform across the whole product. Yeah. But in this scenario you just have to go to one distributor and say Hey, you're importing the French wine. Can you set the price a little lower? I want to sell it lower.

1:13:27 Yeah. Then pretty quickly Wine collecting. Starts to become A thing.

1:13:35 And Trader Joe's is just blowing out wine, they're the number one retail in California. At one point Joe decides. He's gonna set up a wine bank. For his customers. Did you read about this? Yes. This is awesome.

1:13:47 It's like great, how am I gonna sell more to my customers and give them something they want, meet their needs. Sell it to them, and then also sell them a place to put it. Yes. Brilliant, right? Chader Jazz does not have

1:13:58 Wine banks today. It turns out It's a bad business idea because when couples get divorced The first thing is go raid the wine bank. pull out all the wine that is now worth a lot of money and then the other spouse will sue the wine bank. So they're just like in the middle of these divorces all the time. They get dragged into all these divorce lawsuits.

1:14:19 Brutal. But what you're starting to see here with the ability to find clever ways to do regulatory arbitrage or sell below the fair trade price. Joe is a master of reading all the regulations, not trusting what anybody tells him. of like, Oh, this is the way you're supposed to do it. He's like, show me the regulation.

1:14:39 And he pours over the regulation and he synthesizes it all from all the different bodies, whether it's the USDA or the FTC or the State of California or the Interstate Commerce Commission or Just understanding the full landscape, holding it all in his head and saying I have it. I know a way that we can provide value to customers because his whole thing is like how do we give people the best value possible.

1:15:02 high value items at low prices. And do it. In a legal way. And then I can market the heck out of it. I can make it

1:15:10 A thing. that people know it's just one more great thing you'll get from coming to Trader Joe's is one more thing that we only have here that you can't get anywhere else. and you're going to get a great value by doing it. high value to customers in differentiated products. And wine is so perfect.

1:15:27 So all that Takes us through the early seventies in this sort of First era of Trader Joe's on the back of liquor and then wines. Yeah, this is uh what he calls good time Charlie. Building this party store.

1:15:41 Trader Chest would be amazing. Bring out the products from the different areas that we have. Awesome. And that leads into the next era that Joe Also sort of in goofy fashion. Calls whole earth hairy.

1:15:53 The health food era of Trader Joe's. So I think You could say about Joe. That he was A genius.

1:16:02 At many, many things. Just about every critical aspect of retailing. But I think maybe his Greatest genius. was

1:16:13 Identifying major Demographic and cultural trends. That were just starting in America. And then creating the products and the merchandising to capitalize on them. It is astonishing.

1:16:28 How he had his finger on the pulse and how he was willing to either change what Trader Joe's was or adapt it and add a new layer on top. to turn Trader Joe's into the next version of what it needed to be.

1:16:41 You mentioned some attributes on Joe himself. This is a beautiful excerpt from Benjamin Lor's book that I think is just the best description of him. Joe is a man frequently described as a genius by other very smart men. And I should say Benjamin Laura, the guy writing this.

1:16:57 Very critical very journalistic in his approach. The whole rest of the book is applying a lot of scrutiny. to the grocery industry.

1:17:06 The fact that he talks about Joe this way actually has a lot of credibility. When asking his employees and competitors and industry observers about him, I hear the word visionary so many times it becomes worrisome. I hear he is brilliant. Incredible. Wise.

1:17:21 Grown men tell me they are awestruck. Chilled. Giddy in his presence. Executives who worked for him, stuffed C suite dullards of the grotesquely self confident variety. will drop all pretense and describe wanting to wake up early in the morning to race to work because they can't wait to hear what Joe has to say.

1:17:39 They tell me he has a photographic memory that he can read up to twelve hundred words per minute, that he adds, multiplies, or divides lists of figures in his brain quicker than they could ever scan them, that he knows the names of all his employees, their spouses' names, and their dates of hire, and their birthdays and their wedding anniversaries. But beyond all this awe, The steel cage memory, the gymnastic cognitive quickness. The genius of Joe that impresses me most is his ability to project this integrity and decency when he wants to. He keeps you guessing exactly where the line lies between calculating businessman and wholesome self-taught founder in a way that allows almost everyone who meets him to underestimate his abilities, yet simultaneously. afford him huge amounts of respect. It is an awesome talent, especially in a business built on negotiation, trust.

1:18:27 And quick decisive deals. That is so awesome. I'm telling this whole book is just beautiful prose, but that's a great encapsulation. And when you layer on top, that intelligence with that interpersonal ability. And then this thing you're talking about, David, this Seemingly ability to

1:18:44 predict the cultural future of where America is heading and then build Trader Joe's as the product for that future. It's unbelievable. Is amazing. So this whole earth hairy era where we wrap ourselves in a blanket of

1:18:58 Granola and health food and Almond butter and nuts and dried fruits. So at the end of the sixties and into the seventies. The California hippie counterculture summer of love movement. kind of bifurcated and went off in a whole bunch of different directions.

1:19:17 And one of those directions was Silicon Valley. And tech and computers and Steve Jobs and Nolan Bushnell and Waz and that becomes Apple and everything. The hate Ashbury. Yeah, yeah. Another one of those directions. Was the organic

1:19:31 Health food movement. And for Joe and the target audience of Over educated, underpaid. Consumers. This just like wine is right in the sweet spot.

1:19:43 You can merchandise it just like wine. You can tell the stories about what these foods are, why they're better, why they're great for your body. It's high value per cubic inch. It's more expensive than regular food. Joe has this amazing quote on this. He says, We prepared to marry the health food store.

1:20:02 To the liquor store. This concept obviously was founded in schizophrenia. But it occurred to me. That people who really thought about what they ingested, whether they were wine connoisseurs or health food nuts We're basically on the same radar beam. Both groups were fragmented from the masses who willingly consumed Folders coffee.

1:20:22 Best foods, mayonnaise, wonder bread, Coca-Cola, et cetera. Both groups were the kind of people Who I was hoping Represented a breakup of mainstream consumption. In America.

1:20:34 And so by the spring of nineteen seventy one, the caterpillar Good time, Charlie. had emerged from his chrysalis as whole earth hairy. A party store cum health food store. It's amazing.

1:20:47 This is All happening. Call it five to eight years. before John Mackie starts Whole Foods in Austin, Texas. So this is how on the pulse

1:20:58 Joe was. And Whole foods would obviously become Closest. substitute competitor that Trader Joe's has.

1:21:07 out there. I mean they're still pretty far apart. But yeah, it's wild, Joe. That John would then see and create whole foods. And he saw um

1:21:17 Five plus years before. Yeah. It's about aligning your trade offs. The other amazing aligned thing about this customer base that he's trying to serve is and the business that he's trying to create of be this sort of anti supermarket.

1:21:31 With health foods You can Bye. Batches of food from suppliers and That the big chains

1:21:39 won't or can't because they're just not set up to do it. The C P G companies are never gonna touch this stuff. At least in the seventies. There's this amazing story of someone comes to visit Trader Joe's saying, Hey I have a whole bunch of extra large eggs.

1:21:54 That I just can't sell to the supermarket chains. Can you help me out? Yeah. And Joe says, Sure, what's going on with them? And he says well they only want large eggs.

1:22:05 I'll sell you these extra large eggs that are at least twelve percent bigger. But for a lower price,'cause I can't seem to unload him. And he's like Why the deal? And the Suppliers.

1:22:15 Well The large supermarket chains only want continuous items. And I'm actually not sure I can regularly produce enough of these extra large eggs. The

1:22:26 kind of disturbing part about this is it's because it's at the end of the chicken's life. that they produce these extra large eggs, so it's kind of the last eggs they'll lay. And unless I can promise a certain volume and certainty that I'll be able to supply There's not a market for it. The big supermarket industry just isn't interested. Trader Joe's is like, We've got the perfect consumer for you. They're value conscious.

1:22:47 Our message to them is sometimes we'll have stuff, sometimes we won't. And so If you just want to sell those to me, I'm sure I can unload them on our customers. They're gonna love the deal. And then it's actually not a big deal for me when I run out. Because that's not a part of our value proposition the way it is for the big supermarkets. So this begins what Joe calls intensive buying.

1:23:06 If we have line of sight on something that we can uniquely sell, that we're gonna get a great deal on, that we know our customers are gonna love. We should do all we can. to go and suck up all the supply of that thing so we can get the lowest per unit price. For our customers.

1:23:21 Yeah. We'll tell the story. They'll get it. It's this storytelling. That's exactly right. It's just like selling wines. They really start to bring that into foods in this era. So for this whole earth hairy era of Trader Joe's these health foods

1:23:35 Are the perfect vessel for all this. Yeah, they basically create a blacklist of things that over the years becomes No GMOs. No high fructose corn syrup, no artificial flavors, no MSG, no bleached flour, no added hormones. In their dairy products.

1:23:51 Excellent. Blossoms into this big list of You can just trust. the foods that we are giving to you is healthy in some way. The funny thing is

1:24:00 Today most of what you're buying from them Is processed. Packaged food. It's just story told very well. And like, you know, you go to grab stuff in the freezer, it's a lot of salt. There's a lot of deep fried stuff. You can't make giant frozen meals at this scale without being very processed, but

1:24:15 They have this brand that they've built over fifty years. Of paying attention to the ingredients of doing what they can. of looking a lot more granola during this nineteen seventies era. So they are able to carry that brand with them. And they regularly update what they will and won't stock and what they let their suppliers put in. So

1:24:33 There is sort of this funny dichotomy of it being A quote unquote health food store. There have been other layers that have been added since then. Yes. So it's fitting you say granola. the really strategic critical element of adding health foods.

1:24:49 To Trader Joe's. Isn't just That it also fits all The same criteria that wine does and that it's a perfect fit for the Trader Joe's target customer.

1:25:00 All that is true. It's different than wine. In one critical aspect. One. By nature is branded.

1:25:08 It's not big brands. But it's the brand of The winery. And the label. And that carries a huge amount of Value.

1:25:16 Health foods. Nuts. Dried fruit. Brand. Granola. This stuff is unbranded, yeah at the time.

1:25:25 And Thus emerges. The opportunity. For trader Joe's to start. Introducing their own.

1:25:32 Product brands. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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1:27:10 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale. Go check out service now dot com slash acquired and tell'em that Ben and David sent you. All right, so David. Private label. Let's go. What was the very first Trader Joe's private label product? Also, it's crazy to imagine Trader Joe's without private label. Right?

1:27:33 I mean you walk in today, you look around Over eighty percent of the stuff is Trader Joe's. Except one. And some other things here and there. There's R X bar as I noticed. They used to have spin drifts for a while. I don't know if they still do. Some of their cheeses

1:27:47 Yep. But wine and spirits are the one big category left where it's mostly not private label. Including Charles Shaw, as we will talk about at the end of the episode. All right. So how did they start? All right.

1:27:59 The first private label product. is naturally enough for whole earth, Harry. Granola. Perfect. And you can still buy Trader Joe's granola today. I'm sure it's not the same recipe. And it's like

1:28:12 Kinda the easiest thing, right? You just take in a giant truckload of generic granola. It's not that hard to throw it into bags. And it's literally the product that is used as the euphemism for this whole health food category. Yes. Granola. Yes. So uh Granola quickly to private label honey. freshly squeezed orange juice, which they have in the stores for a long time. They eventually out'cause it's too operationally complex. It's such a Trader Joe's thing, right? Totally. Not easy to handle. Doesn't pass one of the four tests. Get it out of there.

1:28:42 Vitamins. Private label. Bran and Bran Flakes. And then The big one, the wine equivalent of health foods.

1:28:51 their vendor there in Southern California that they are sourcing their brand and Brand flakes from. Turns out Also Does it

1:28:59 Nuts. And Dried fruits. And so Joe and Trader Joe's on a whim because their vendor of brand also offered it, decide like Hey, let's get some nuts and dried fruit in here too. All right. Now is a great time.

1:29:13 To eat some roasted and salted fancy mixed nuts. Branded by Trader Joe's. Got any dried fruit in there, too? Uh not this package. I will say now when you go and

1:29:25 Grab. They're not just like commodity nuts. They have Stuff that you can't get anywhere else. Like weird chili lime blends or sesame crusted cashews or Interesting trail mixes that are not the generic thing.

1:29:38 Yeah. So Nuts. And dried fruits. Become the next.

1:29:44 Rocket ship product category. For Trader Joe's and just like wine in the alcohol era. I mean Customers. Love it. Still do I mean this is Gotta be one of the biggest product categories for trader Joe's.

1:29:57 To this day. Yep. Certainly in terms of space that I see in the stores, you know, the nut and dried fruit section is huge. Just like with wine. Trader Joe's quickly becomes the largest nut and dried fruit retailer in the whole state of California. And it's all

1:30:13 Either unbranded or Trader Joe's private label products that they're selling. Incredible. Also Very high value per cubic inch. As high or higher than wine.

1:30:23 And just everything about it is great for Trader Joe's business model. It's yet another thing where they're not carving off a piece of themselves and giving it to a brand. They're saying, Nope, this is a Trader Joe's thing and when people come in here, they have a relationship with Us. that we're not this vessel for other people.

1:30:39 We're now slowly getting to make A hundred percent of the brand promise. and the experience of Trader Joe's be our stores with our items in it. And

1:30:50 All of our operations. example of the difference between the supermarket CPG brand industrial unholy alliance. versus the Trader Joe's approach. Than nuts.

1:31:06 What is the one CPG brand at this time that sells nuts. Planters? Planters. Compare that. It's the same nuts.

1:31:15 A nut is a nut. But what is the brand promise and product experience and job to be done by planters. versus the nuts and dried fruit that you're buying at Whole Earth Harry Trader Joe's. Polar Universe Opposites. It's funny if I'm eating the same thing of

1:31:33 Mixed nuts that are salted. From planters, it feels like I should be drinking it with a beer. And watching football. And it's like bad for you. And it feels like if I'm eating it out of this bag that I just ate the exact same nuts out of. With this nippy dippy little.

1:31:49 Basket that shows some like Roots and a sunshine on the bag and This makes me feel good. This is health food. You're being discerning about what you're putting in your body.

1:32:00 So funny. It's the same nuts. So once they realize this, I mean They really just start moving product category by product category. Obviously. Trader Joe's is not getting into the business of making these

1:32:14 Products themselves. But what they are doing. Is Finding People.

1:32:20 That Currently make something And working with them to make something slightly different. Almost always slightly different. putting it in Trader Joe's packaging that is

1:32:30 in some way unique. It's kinda like what Costco does. They want a unique skew for Costco, so you're never price comparing it against something else. Like I remember my classic example at Costco was I went and bought a Sonic hair at Costco. But it turns out the way it was packaged. It came with different accessories. So there was no apples to apples with the Sonic hair that I was buying elsewhere. This takes it one step further.

1:32:51 They're saying for most of these items. There is no equivalent somewhere else. Yeah, there's a few like the pretzel fins. But a lot of these things as a different set of spices, one or two more or less ingredients in the pre made meal. Or maybe Trader Joe's merchandisers are collaborating.

1:33:08 With a supplier to create a meal from scratch based on their market intelligence and insights about what consumers want. Trader Joe's is actually making almost none of this. But they're integrating up the supply chain. in a way where they can say, Hey, we need a Trader Joe's

1:33:25 unique product that you are making just for us. And by the way. You will never tell a damn soul that you are the one who makes it. My uh Favorite example of this, obviously not from the

1:33:37 health food era of Trader Joe's. Is that there is a period of time it may still be the case. That Wolfgang Pucks made the frozen pizzas for Trader Joe's. But this illustrates the concept of we gotta deliver unique and compelling value for our customers. It's a Wolfgang puck frozen pizza. You can go buy it in a supermarket.

1:33:55 The Trader Joe's version. Is smaller in diameter. So that it fits in a toas oven. There you go. Compelling convenience value for our customers. You don't have to turn on your whole big oven to Make this pizza. And also I would bet

1:34:11 That It also is just cheaper. by getting rid of the brand and thus getting rid of the brand's need to market and have overhead costs in marketing. They just eliminate some of the waste in the system. and pass that along with our customers. So you're always getting a little bit of a better value in addition to a little bit of a unique product.

1:34:31 Oh, totally. One thing we didn't talk about in the description of the brand supermarket industrial complex. Is how much Of the totality of marketing is falling on the brands in this world.

1:34:46 It's not just the national advertising on television. It's the couponic. Uh. What is the definitive experience At least in the until recent past of the

1:34:55 modern American supermarket, you go in with your wad of coupons that you got from the circular Who's paying for those coupons? It's not the supermarket. It's the manufacturers. And then you get into all the dirty stuff around like slotting fees. Did you read it all about this? Oh, yeah, yeah, yeah. Totally. It's so extractive. The brands have to pay money to the supermarkets. Just for the right.

1:35:17 To put their products on the shelves. And then even in modern days It's hey, we've got in store signage, we've got in store T V screens. They call it retail media. You should pay us to advertise in the store at the point of sale. Trader Joe's is like

1:35:32 Let's just eliminate all of that. The brand is just our brand. If you make the food for us, we will pay you for that. But it's our brand, you don't have to pay in marketing costs, you don't have to pay the slotting fees to get on our shelves. We don't have retail media in our stores. The whole thing is about. Just compressing all of the margin out of all the

1:35:51 activities that need to happen in the traditional system. for this streamline system. And in Joe's mind, and I think even Two The next

1:35:59 generations of Trader Joe's CEOs and all the way up through Yeah. That practice of the supermarket CPG industrial complex. It's just like gross. It's just disgusting. It's like morally repugnant to them. Like I genuinely think they feel that way. And it's another take on the same thing that Costco and Sol Price and Jim Sinekle had about Why they don't do sales and Trader Joe's also doesn't do sales and doesn't have coupones. It's like you're insulting your customers.

1:36:24 You're pitching to them as if this is this discount and great thing and benefit for them. But actually It's the result of this highly pernicious system that inflates costs across the board for them. Right. It's a privileged position to be in, though, where you're lobbing bombs. Probably somebody has to have a fifty thousand SKU store. I mean Trader Joe's and Costco both only stock about four thousand items at a time. It's a better business to be in. It's a more pleasant business to get to run. It's a better business to work in.

1:36:52 And at the end of the day, there probably also is going to be a much larger market. For a system that exists the other way to sell all these branded products. Walmart and Kroger's and They're all much bigger businesses. Exactly. So While we're on branded products. This is a great little tidbit.

1:37:13 Either the website. Submitted a FOIA request. To the US government. To the USDA and the FDA. Oh, I remember this. This is awesome. To figure out Via food recalls.

1:37:25 Who makes Trader Joe's items. By the Freedom of Information Act. They have to provide that information. And so there's a whole bunch of these on the internet where you can actually see

1:37:36 The Trader Joe's pita chips are made by Stacey's, which is Fritole Pepsi. The yogurt is Dan and Stonyfield Farm. Tasty Bite makes a lot of Trader Joe's Indian food, the uh Tasty Bite Punjab eggplant. ran three thirty nine at Whole Foods and the seemingly identical or very similar is a whole dollar cheaper. So even for these ones that are like extremely similar, by cutting out the brand, by buying a mass quantity of it, and by eliminating all these slotting fees and retail media, you really knock a huge amount. I mean a dollar off of a three thirty nine price is a huge percentage. Yeah. Trader Joe's smoothies are very likely the same or very similar as naked juice.

1:38:15 Plus or minus one or two ingredients. The hummus is very likely tribe hummus. The whole thing is great. So the health food era really has two

1:38:25 Huge. strategic impacts on trader Joe's. It's getting them into private label, which It becomes a cornerstone of the company all the way to this day. The other

1:38:36 Equally important thing is it diversifies them. out of Wine and liquor as their sole core differentiated. Which is hugely important.

1:38:47 Because Right as health food is really ramping up and hitting its stride. In nineteen seventy seven. California. repeals

1:38:57 The fair trade laws. On alcohol and nearly everything else. Which means that any retailer can now price wine and alcohol at any price. They want. And this leads to all the alcohol discounters.

1:39:11 Coming in. Total wine and Bevmo and et cetera, et cetera, et cetera. Now, of course. Trader Joe's is still in a great position and still does great. But all of a sudden they had this category. Basically all to themselves.

1:39:24 With a regulatory pseudo monopoly on it, or at least a scarce number of Yeah, right. A price regulated monopoly, you know, set profit margins. But now you've got Bevmo showing up. Now you've got total one, you've got discounters dedicated Big box liquor stores that can just blow it out on prices. And becomes a big thing.

1:39:43 Competitive vector for Trader Joe's. And this plays out most viscerally in wine and liquor. But it's everything across the board. Every product they sell now that Fair Trade is Gone. profit margins just start getting eroded in basically every category.

1:39:58 So this is like a Big. big strategic challenge, not just for trader Joe's, but for every retailer in the industry. And with deregulation like this. It's good for consumers because prices are gonna drop.

1:40:11 In some ways it's good to be a retailer because now you have more control. You can move prices up and down when before you were prohibited from doing so. It's bad because your guaranteed profit margin is going away. But what it does do is it shifts the entire competitive playing field. To how

1:40:29 good are you at your operations. How tight are you at running your business? controlling your costs, accounting for everything, and understanding all the impacts. now that your profit margins are shrinking of things that ripple through your business. Yes.

1:40:44 And Trader Joe's certainly. does do all of those things coming out of this. However, what you just said is true for the majority of retailers out there. But if you could somehow find a way. To make the majority of what you sell

1:41:00 Or maybe even eventually everything you sell. Truly differentiated. One of one product. Well then you would be insulated. from this price competition have no direct competitors.

1:41:15 And Man, it's really nice. The Trader Joe's has just built up this private label. Expertise. in the health food market.

1:41:24 Yep. So Joe decides, all right. End of fair trade and deregulation. I don't wanna undersell This is a massive

1:41:34 Tidal wave that hits the industry. Retailers go out of business left and right. And Trader Joe's is not immune from this either. People think the company is gonna go under, like employees think the company is gonna go under, just like everyone else. Joe says our way out. is of course operational excellence.

1:41:52 But really in the long run, it's we gotta differentiate and be one of one in everything. So he calls this phase. Of the company. Mac the knife. This is really obscure. Is Mac the Knife like the song Mac the Knife from three penny opera. That's funny. I had no idea where that came from. Joe writes in the book.

1:42:10 Friends, Mac the knife has no competition. That's why I called it Mac the Knife. My years at Pronto Markets convinced me. That where there is no competition today. There will be tomorrow.

1:42:23 You must assume that competitors will open all around you. The answer is to design a store that has no competition. After nineteen seventy eight, after the end of Fair Trade. I paid no heed. To nearby supermarkets, liquor stores.

1:42:38 Health food stores. Or anything else. The whole strategy becomes Double down on private label. double down on differentiation become

1:42:48 One of one. Become one of one. I love it. Obviously I love it because This is how you and I think about acquired.

1:42:55 Trader Joe's is a very looking in a mirror of the type of business we hope to build. And so I think All of this is preaching to the choir. How can you be more niche, but serve the shit out of your niche? How can you provide an incredible amount of value to your core customer base and not care about anybody outside your customer target? How can you be N of one? How can you provide only the most unique thing?

1:43:18 I can't decide if these are just the best principles to run a business, or if these are just the ones that happen to appeal to us. Almost as an act of vanity. It's probably not the best way to run a scale business. But it's an amazing way to dominate a niche.

1:43:34 Well, Yes, I think that's true. And if you can somehow find a scale business that you can run with these properties. It's amazing. That's when you get the apples, the Costco's, the Trader Joe's.

1:43:46 Right. Having no competition is a nice it's a nice thing. So heading into this Mac the knife era. Joe Institutes a rule that I assume is still in effect at Trader Joe's to this day.

1:43:58 Which is that Okay, everybody, obviously private label, that's the strategy, that's for the future here. But Trader Joe's will never introduce Any private label product.

1:44:09 just for the sake of having a private label product in that category. Which is the opposite. Of most of these generic like you go to Walmart, the great value brand is A crappier version. of the exact same branded product, but it's priceless.

1:44:25 So Exactly. Trader Joe's private label products. Must be differentiated on some dimension. And that doesn't necessarily have to be the item itself, like we talked about with Wolfgang puck pizza, et cetera. It could be the packaging.

1:44:39 It could be the price. It could be the merchandising. But you must have a differentiating Factor. And yeah, Ben, like you said, this is the polar opposite.

1:44:49 of the private label strategy at all the big supermarkets. For them, it's like same product. Are Amazon basics batteries differentiated. No, they're just cheaper. Yes. Also, it's kind of interesting that

1:45:00 Walmart has great value, Target has good and gather, Amazon has basics. Costco has Kirkland signature. Trader Joe's has Trader Joe's. How come nobody else's house brand is just the name of the retailer? I think actually it exposes.

1:45:15 That Trader Joe's is all in. Yeah. Whereas these other brands sort of wanna play both sides. We've got a house brand, but we also work great. With third parties, Trader Joe's is like The Trader Joe's experience is walking into our store that is called Trader Joe's and buying our products that are called Trader Joe's and everything around it is just wrapped in a big Trader Joe's blanket and you couldn't possibly decouple the two.

1:45:37 And I don't think other retailers feel that way. Yes, this is all To the point of it's doing a totally different job at the other retailers. The other retailers want to use The house brand.

1:45:49 brand name to signal to customers This is the same product at a cheaper price. Yes. Trader Joe's wants to signal to customers with all of their products this is an N of One product. Yep. And it's almost always true.

1:46:02 These pretzels I'm eating with the peanut butter inside, I'm pretty sure there's a Costco equivalent of these. But A lot of the things are truly unique. Yeah. Well, we'll get into after Josera. How Trader Joe's changes a bit as it scales. Yes.

1:46:15 But for now, this is like Core core tenants here. A great one that started during the health food era, but then becomes so emblematic of this. Is Trader Joe's.

1:46:27 Basically invented Packaged almond butter. Yes. Almond butter wasn't a thing. I couldn't believe this. Almond butter is one of my favorite foods in the world. I eat it every day just like I eat a spinach feta wrap. It is like a part of my identity is almond butter. And reading this book and realizing that Trader Joe's invented it. It's like the coolest thing. Yes, almond processing.

1:46:48 leaves lots of leftover little almond bits that are almonds but are just little Bits of almonds. And there's actually a different technological process that you need to then turn that into butter versus what you need to use for bits of peanuts to turn into peanut butter.

1:47:03 So none of the big brands did this, even though peanut butter was this staple CPG good in America. Peanuts are also way cheaper to source than almonds, so you have to be willing to mark up your almond butter. Or maybe use exclusively waste products like all the bits. To make it.

1:47:20 Exactly. But the big CPG companies. Almonds aren't a big part of what they're doing back in these days. Right, at this point. So Trader Joe's goes and learns the process and the technology. Of how to do this. Find suppliers that are willing to do it.

1:47:35 And Brings. Packaged almond butter to Store shelves in grocery stores for the first time. Yep.

1:47:42 And the secret weapon. To really making all this work. was the fearless flyer. And back to the wine merchandising strategy. They had The direct channel.

1:47:54 to their customers to tell long form stories and merchandise these products. And make them N of one. It's a physical newsletter. And it's all about the product stories of these products that they're bringing to market. It only comes, I don't know if it's four times a year, six times a year, but there's some scarcity to it. So you actually kinda pay attention when you get it.

1:48:14 There's also a funny thing where At first, Joe was resistant to doing it. For two reasons. One it was really expensive to publish your own newspaper. You'd have to work with a real publisher printer sort of thing.

1:48:29 a typesetter. And two. You don't wanna be in the business of asking all these customers for their address and then maintaining P. I on them and tracking them when they move.

1:48:41 And so that one is great because Joe just realized, well, actually, if I'm so good at targeting neighborhoods, That have disposable income. and are highly educated. Like I have a very particular sense of who my customer is. If they move. The person that moves into their house

1:48:56 It's probably also gonna be my customer. Yes. So I can just do zip code targeting. And so he's like this is great. We'll just mail them out to everybody in in the area around the store that I wanna serve. And then for the first one. This is amazing. The the timing of this is right around the time that the original Mac is released. And so he was doing the fearless flyer.

1:49:17 Himself Yes. Using desktop publishing software on the original Macintosh. And I will say when you pull up the fearless flyer, you can kinda tell. It looks like one of these amateurishly laid out desktop publishing software

1:49:31 Publications. Which today is part of the charm, but Yeah, was done by Joe himself back in the day. As is the goofy tagline that is very Trader Joe's in their sense of humor of Terrible dad jokes and puns.

1:49:44 Trader Joe's Fearless Flyer. As always, free. and worth every penny.

1:49:52 Yes. So this leads into As far as I know, The One

1:49:58 Only other marketing advertising activity that Trader Joe's does. Oh, on the radio? Yeah, radio. And I believe yeah, the only paid one. Which also starts as an organic free thing. Yes.

1:50:10 Radio advertising. So the classical music radio station in LA. Which again, target customer. Educated and underpaid. Ask Joe To come on.

1:50:24 Once a week. This is especially during the wine era of Trader Joe's. And uh Do a one minute segment on on wine that they're Bring into town.

1:50:34 And of course like amazing, I'm gonna do that. And then it Broadens out to food. And it works so well. that they eventually decide, hey, we should actually do this as paid radio advertising, but unlike everybody else who advertises on the radio.

1:50:48 These aren't gonna be generic ads. It's gonna be Joe written himself. Speaking himself, Telling the product story of one singular product in every ad. And we're always gonna end with thank you for listening.

1:51:01 I love it. It's a non advertisement advertisement. Joe basically discovered the power of podcasts to reach your audience back in the nineteen seventies. They realized They should actually go pretty hard into this.

1:51:14 And in order to justify all the radio ad spend They needed a density of stores. In a certain area. And so when they were gonna launch a new city they would have to make sure they had sufficient number of stores to amoritize

1:51:27 buying radio ads for all the different areas it was gonna reach. Right. 'Cause it's gonna reach the whole city. Right. They wouldn't just launch one store, they would go into a city and launch several at a time. So you can get the economies of scale of that. There is one other place that they did paid marketing. Do you know what it is? I don't know that I found this. Donations to the arts. Ah yes, yes.

1:51:48 Again, on this theme of the uh highly educated and trying to reach them where they are. They would do things like Go to plays or go to the ballet, make donations, appear in the playbill. In the pamphlet and the magazine. Yeah.

1:52:01 My wife Jenny, who's a executive at the ballet here in San Francisco, will be very mad at me if I don't underscore for everyone listening that supporting the arts is a great effective form of marketing for your company. Because it is also tax deductible. Also tax deductible. And for trader Joe's. Reaching exactly your target audience. Yeah. So coming out of that

1:52:21 Mid seventies whole earth hairy health food era of Trader Joe's. It really was these Two huge strategic things. for the company. One was diversifying them out of just wine and liquor into a Nothing new product category.

1:52:36 That they could be really differentiated in. And then the bigger one of just getting them into this private label strategy as a whole that they could then blow out with Mac the knife and eventually transform the whole store, basically, except wine and liquor into private label. There was One other thing, though, that Joe did as a

1:52:56 sort of strategic hedge. Against all the chaos that the uh repeal of Fair Trade Unleashed in the California retail sector. Yeah, he sold the company. Yeah. Yeah, he sold the company. Just a little hedge. So

1:53:12 What's the story? In nineteen seventy nine. Joe. And all the other employee shareholders. Completely sold out.

1:53:20 One hundred percent of the company's equity. And they sold it. Tateo Albrecht. The owner. Of Aldi Nord.

1:53:31 which is one half of the all the global mega store super chain. Headquartered. In Germany. The even crazier twist though. Is that Joe remained as the CEO of Trader Joe's

1:53:46 For another ten years after selling the company. Until he retired. In nineteen. Mm-hmm. This is not the brother.

1:53:53 that owns the store called Aldi. In the United States. Yes. To be super clear. Aldi does not own

1:54:02 Trader Joe's. One. the Aldi that exists in the United States. Is Aldi Sud. the other half of the Aldi Empire that split in the like late sixties, early seventies.

1:54:13 The relationship that owns Trader Joe's is the founder of Aldi Nord. The other half. And the entity Aldi Nord never actually bought Joe's. Tao bought it himself personally. And yes, Trader Joe's is now owned.

1:54:29 by the three German foundations that he Set up. For after his passing. And if you look lots of places on the internet, it will tell you that Aldi owns Trader Joe's and that is not true. Okay.

1:54:39 How Did this happen? So as we said. When Joe.

1:54:44 Did the management buyout of Pronto Markets, the predecessor entity to Trader Joe's from Rex All Drugs? Joe was the founder and the largest shareholder Bye. About like a quarter to a third of the company was owned by the other early employees. And so by the time you get to the mid to late seventies here, a bunch of those folks

1:55:06 had either retired or passed away. And they started having estate planning needs'cause Trainer Joe starts becoming uh Valuable. And they had bought in for like a hundred bucks. Yes, a valuation of fifteen thousand dollars.

1:55:19 Right. So Yes, this Stock is worth a lot. They've got some giant capital gain. So

1:55:26 Joe and the company know this is a problem coming. And During the mid seventies They're Couple years.

1:55:33 Setting up a whole Ownership structure. to transfer ownership of the company into an official employee stock option plan or uh ESOP. as it's known in corporate finance. This is the exact same kind of structure.

1:55:47 by the way that Domenico De Sole and Tom Ford used to Protect Gucci as the mechanism by which they rebuff Bernard and Lv M H in the Handbag wars between Q T and L VM H. Amazing. Yeah. So The thing though about setting up

1:56:01 this eSop ownership plan and transferring ownership of the company into it. Is It was Predicated on there being a valuation for the company and right as it's about to happen is when

1:56:13 Fair trade. Gets repealed. And interestingly, there had not been any primary capital infusions to look at. The only valuation that ever happened. was the twenty five thousand dollar transaction when Joe bought Pronto.

1:56:26 Right. It's a big deal for whoever is coming in to create the valuation for this because that'll be the basis. For which this entire corporate structure, reorg, employees owning it in E ESOP. is gonna be predicated on. Yep. And the value that the original shareholders can cash out, et cetera, et cetera. So then the end of fair trade hits.

1:56:47 the whole industry is in disarray and nobody can Agree on evaluation.'Cause you don't know if the company's gonna survive. You don't know if it's actually way more valuable now. The confidence that you have in the valuation is shot.

1:57:00 So it doesn't get issued. Yep. So the Esau plan Goes out the window. Meanwhile. At the same time.

1:57:08 Aldea. had been expanding Into America. out of Germany. And again, Aldi sued.

1:57:16 The other brothers company. was the one doing that. That's not Aldi Nord. Taylor Albrich's company. Who has no exposure to the US market at this point. Right. But he's a little jealous of his brother and he really would like Some US.

1:57:29 Market exposure. Aldi, by the way, uh I didn't know this till um Doing research is a acronym. For Albricht. Discount. So there you go. That's where Aldi comes from.

1:57:39 So Tao and Aldi North, they start looking at the US market too. They actually hire investment bankers to go over from Germany and start scouring the US looking for other grocers or retailers in the US that they could acquire and have Aldi Nord also. Enter. America. And that's how they find.

1:57:56 Trader Just. 'Cause at this point it's still twenty stores all in California. Yep. But clearly they've got some magic here. Yeah. Tao is

1:58:05 Enraptured. He meets Joe, they hit it off. He's like this is Incredible. He spends years Trying to convince Joe to sell and Joe's like No way. You know, you're very nice. I respect you. I appreciate what Aldi's done, but

1:58:18 One. I'm not selling, like why on earth would I sell? Two. No way in hell am I gonna sell to Aldi. Trader Joe's is special. Like this will never be turned into Aldi. And then

1:58:30 The East. Blows up a couple years later. So Joe reengages with Tao. He basically says. I will sell to you.

1:58:39 Part of the reason I'm gonna sell to you is the current situation is that so much of the income flows through me personally. And I have a marginal tax rate of seventy-three percent. Right. The highest marginal tax bracket in the US at this point in time is seventy three percent. Yeah. Imagine for every dollar you make seventy three cents.

1:58:59 Is getting paid in taxes, he's like, This is the worst structure imaginable. Whatever it is, it has to be different than this. Yep. So he says to Tao, All right. I will sell to you, but Here.

1:59:12 Number one. Trader Joe's. will not become part of Aldi. We will share nothing. These are totally different businesses. You won't use Trader Joe's as a vehicle for Al Dinord.

1:59:22 To come to America. Two, Ben, like you're saying. We will have complete management autonomy. And the strategic operating plan that we are going with.

1:59:32 Now and for the future is private label. Not the all the massive discount operating plan. You either believe that and are in Or there's no deal. Three.

1:59:42 I can stay on as CEO for as long or as short as I like. No management contract, it is one hundred percent up to me. Four. The price you're gonna pay for the company is three times what you offered me a couple years ago. And then number five. The real kicker.

2:00:00 We're gonna put all this in contract. It is going to be a one page deal. We're gonna put these deal points in here. One page contract, no diligence. No definitive merger agreement, BS.

2:00:11 That's it. One page. With these points, I will draft it. Sign the paper if you like it. Pay me and my employees the money.

2:00:19 Or no deal. Great. Amen. Awesome. So they do the deal. That's it.

2:00:25 God, the value of a we trust each other one page contract thing is just you just see it over and over again in the best businesses and the best partnerships of all time. I mean, I was reading this in it becoming Trader Joe in Joe's autobiography, and I'm just like, hold on, like Well, this is why Warren Buffett wins. Yeah. This is why Berkshire is Berkshire. So Tao Albrecht.

2:00:46 Owns Trader Joe's. And then now His three separate foundations kind of just like the IKEA structure. From that episode. On trainer toes.

2:00:55 And neither Tao Nor certainly all the Ever invest a single incremental dollar. Beyond the price that they bought it for. It is

2:01:06 Very profitable cash flow positive, throwing off cash for the foundations ever since. Yeah, as of nineteen seventy six, so three years before the sale. Trader Joe's carried no fixed interest bearing debt. Never recorded a loss and became more profitable every year. Incredible.

2:01:23 It's crazy. I'm actually not sure we've covered a business on acquired like this. That starts with a giant amount of leverage. Where the founder just Mortgages is life.

2:01:33 Sells his house. Yeah. Yeah. And then manages to, what, within There. get out from under it and then just incrementally pile up more cash in the business every year.

2:01:45 Maybe Nike. Mm. Yeah, maybe Nike. The Japanese trading company is a little bit of a Twist, but Yeah. I mean Tao Albrecht is a bit of a twist here too. But again, that didn't impact the business at all.

2:01:57 He just Became the shareholder. So Meanwhile There's a whole nother parallel story, which is not for this episode.

2:02:04 Which is all he sued. Aldi is one of the biggest groceries in America now. Yes. There are twenty five hundred Aldi's in the US. It is the fastest growing grocer in the US since Covid. And they plan to open eight hundred more stores in the next couple of years. But it has absolutely nothing to do with trader test.

2:02:23 Or even this branch of the family. Yeah. Crazy. Okay, so This feels like it's some sort of climax, like it's like the end of the story. The show is called acquired. This used to be where we would end the story. There's like twenty something stores. when this transaction happens. They're still in Southern California.

2:02:42 The company has now six hundred stores. We are so far from Today. In Yeah. beginning of the transition to private label.

2:02:55 The Trader Joe's as we know it today has barely been started at the time of the sale. to Teo's family. It's the craziest thing. It really is just a change in ownership. And nothing else. That does not interrupt the compounding of the business itself. Yeah.

2:03:09 There's some kind of great lesson in there for investors. Yes. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on static, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah.

2:03:32 In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you ship next. This is where StatsIG comes in. It brings experimentation, feature flags and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

2:04:04 So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, David, the big expansion. So what happens after the sale? Well, the immediate answer, of course, as we said, is nothing. Joe sticks around as CO for the next ten years. running the private label strategy. And it works great.

2:04:29 In southern California. As you were saying, but Here's the thing about Joe. He really is like Soul Price. He's this incredible entrepreneur. Absolute genius.

2:04:40 All of this. Truly. innovative orthogonal genius strategies that nobody else in the industry was pursuing. Saw Price did the same thing at Costco.

2:04:53 But Saul Price isn't the one who. Really built Costco. Jim Sinegal. built Costco, the scale Costco we know today. It's the same thing for Joe. He built Trader Joe's, but he really didn't have any interest in

2:05:03 Scaling it. And taking it outside of Southern California. I kinda think reading between the lines of some of the things some of his successors said about him and some of the stuff in his obituaries and press. I think he just really didn't want to travel. I think he wanted to

2:05:17 be close to his family. I think he wanted all The stores within a Day's drive to and from from his house. So when he retires in nineteen eighty eight.

2:05:28 Again, ten years after he sold the company. They're only just shy of thirty total stores. They had just expanded to Northern California. The first Northern California store was in San Rafael, my wife's hometown in Marin. Great little town.

2:05:43 I think for Joe that's sort of What his ambition was was to build One of the greatest retailers of all time. Regional chain. But he was indifferent whether it was regional or national. It's so interesting how some of the entrepreneurs we study have this empire builder strain to them. We're

2:06:00 They're never satisfied. They have to build the biggest thing in the world and build something of consequence to the world. And if there's an opportunity to do that. They must go seize it. It's impossible. To not spend their time, effort, life doing that.

2:06:13 And Joe just wasn't one of those people. The Mark Zuckerbergs. I think he kinda looked at it and thought Well to what end? What is the point of building something giant? I'm

2:06:23 The shareholder. I like this business. I have this great life. I've very positively impacted all the people who work for me, all of our customers who shop for us. I've helped

2:06:33 Birth the wine industry in California and America. This is a thing I can obsessively polish. I do like constantly making it better and making it more resilient and all these things but Bigger wasn't necessarily The goal. Yeah.

2:06:47 I can totally relate to it. But National expansion. Clearly is what should happen. Next year with the business. Yes.

2:06:56 So in nineteen eighty seven As Joe's getting ready to retire. He hires an old friend From Stanford. From his G SP days.

2:07:06 Name John Shields. to come in as president and COO Under him for a year and then Be thee. anointed successor to take over.

2:07:17 John after G S B. had gone and worked at Macy's And then at Mervin's the huge retailer that got acquired by Target. So John

2:07:27 New retail. New national expansion and operations. And most importantly, Joe had known him for a long time going all the way back to Stanford and Trusted him.

2:07:38 So On January first. Nineteen eighty nine. John. Takes over as CEO.

2:07:44 From Joe. Second CEO in Trader Joe's history. It's crazy. This is thirty six years ago. The modern trainer Joe's

2:07:52 Is all formed. After the sale. After this. Joe lays down the strategy. Yes. And All the execution happens after, with some tweaks along the way, as we'll talk about. John

2:08:04 does as expected, you know, what he was hired to do, basically. He does national expansion. So he takes Trader Joe's from I think as best as I can tell, I think it was twenty seven stores. To a hundred and seventy five. over the next twelve, thirteen years that he's CEO.

2:08:20 And importantly. He made the jump across the country. Yes. Let's hop all the way to the east coast. So they decided to start in Boston and build out a set of stores in the five hundred mile corridor from Boston to DC.

2:08:34 At this point you should be able to go, I know why they did that. It is the most dense population of universities in America. All along that corridor. It's

2:08:45 Kinda crazy. Dan Bain, who would take over as the third CEO of Trader Jones in Two thousand one. He did a podcast just recently and he he actually talked about it. He's like Yeah, I probably wouldn't have made that decision if I were CEO at the time. Really?

2:08:59 You taking a regional Southern California Company. Where all the culture, all the DNA, all the learning, it's all there, and you're saying The North East seems like a good place. Yeah, yeah. So that's really the strategy for the nineties and the John Shields era. It's all about

2:09:16 Taking The strategy. The retail concept. That Joe built. And just scaling it up across the country.

2:09:24 That and fuling the private label plan. That took A decade, decades. to shift everything that they were selling to Trader Joe's branded. So the third Trader Joe's CEO, Dan Bain.

2:09:36 comes into the company in nineteen ninety eight. First as president of the West Coast operation. And he previously had been the CFO of a grocery wholesale business. And like John Shield's New Joe and Trader Joe's

2:09:51 Intimately over a long period of time. Because his wife was the company's auditor for like twenty years, like tax auditor and accountant. So what Dan really does It's create the Trader Joe's.

2:10:03 That we all know. Today. And it's the same core strategy that Joe had developed. Especially with the focus on private label, the value to customers, the same target audience. But Dan expands it to

2:10:17 All categories of grocery. So here's the thing. When Dan started at the company in the late nineties, we've alluded to this a little bit throughout the episode. Trader Joe's was Actually a pretty different store. Than it is today.

2:10:31 The average Trader Joe's customer Came in once per month. And Dan says in a podcast interview about when he started At the time We weren't really a grocery store.

2:10:44 We were that store. That sold wine, cheese, and nuts. We were sort of a party store. And this is about the late nineties. Yeah. Party is in like when you are throwing a party. You go to trainer Joe's.

2:10:57 Mm. Hey, there's actually a pretty obvious opportunity for us. Here to Really gross same store sales.

2:11:06 And it's People love us. We're such a great Fit. For our target customer base. We just need to give them

2:11:14 the right product assortment to keep coming back more often. We need to be more of a grocery store. And less of a Party store. And this is quite different than Joe's strategy. So Joe actually

2:11:25 Rights. In his autobiography We made no effort to have a complete assortment. No sugar, no salt. No flower.

2:11:34 Et cetera, unless we could be outstanding in it. And make a sufficient number of dollars from it. Obviously that is very different than Trader Joe's today. It's funny, I still think about them as they're not a complete grocery store. Like I kinda have to go to Trader Joe's in addition to my normal grocery store run. But they're a lot closer now.

2:11:50 You can buy sugar, you can buy flour, you can buy salt, exactly. Yeah. Joe had no interest in being in those categories. He was really all about that N of one, every product must be differentiated. Dan came in and said.

2:12:05 We can still have that ethos and most of our products can be that way. But we can also serve our customers in their weekly grocery needs. Now you can look at this as That's a great insight and he was right because he massively increased the frequency that people come to the store. Or you could look at it as

2:12:24 That is the first little chipping away at the foundation of what makes Trader Joe special and we might see great revenue growth and all the numbers ticking up in the near term, but does it take a bite out of their soul? In a way that We'll catch up to them eventually when they become just like everyone else. Yep.

2:12:42 And we don't know. But that is the continuum that that choice exists on. Yes. Given that he started down this path. twenty four years ago and people still really love Trader Joe's I I think they're doing pretty good. So

2:12:56 Before Dan took over, Trader Joe's stores. carried about fifteen hundred SKUs. Wow, that's really few. Really few.

2:13:05 He takes that up. To about four thousand. So that's what this is, you know. It's The sugar, the flour, the salt. It's more than doubling the number of SKUs. But importantly, he says, We're not gonna become a supermarket. So A, four thousand SKUs is still way, way, way less than the average supermarket, again, has fifty thousand SKUs. The average Walmart has like a hundred and fifty thousand. Right.

2:13:27 He says the way we're gonna do this Is we are not gonna change the footprint. Other stores. Same square footage. Hm. Same concept. we need to re merchandise the stores to serve our customers and give them what they need on a weekly basis.

2:13:41 Without changing the nature of what the store is. So we're gonna fit. Two and a half times the amount of stuff in the same square footage. Yes. And we're gonna do it.

2:13:52 Such that Every product on every shelf in every aisle passes the five foot test. For every customer who is at least five feet tall. They should be able to reach every aisle. So we can't just stack to the ceiling like Costco. Fascinating.

2:14:06 And so when you go into trader Joe's It really is very dense. Oh, it's unbelievably dense. I mean that's my complaint too is that Whenever I'm reaching for something, there's like a guy behind me trying to get it, there's a woman in front of me trying to like back out of that area.

2:14:21 It's funny, I've stopped thinking about Trader Joe's as the wine and cheese shop. And more as the It's defined to me by that one diagonal aisle down the middle with the open freezer chests. That has An amazing assortment of glorified T V dinners.

2:14:35 Yes. But also on top of the glorified TV dinners, there's like the shelves with all the amazing nuts and chocolate. Snacks. And then there's like the thin ribbon in between the shelves and the open freezers. Where they have one more

2:14:50 inventory area for all the little things. There's so much in that aisle. And there's always like Forty people in it. Also, how genius is it?

2:14:59 The freezers are open. So I'm sure it's very costly wasting the cold air. But Think about how much

2:15:07 more likely you are to just reach in and grab some Indian food or some Mandarin orange chicken or whatever. Well also they gotta be when you've got fifty or a hundred people in that same aisle all reaching in, you can't have people opening and closing doors all the time. Right. So I'm sure the psychological thing of Oh, just go grab that little box of food Plus how many more people they can jam in that aisle.

2:15:31 Makes the open Freezer chest totally worth it. So you are Absolutely hitting on The other

2:15:39 part of the Trader Joe's tapestry. Trader Joe's. is a social experience. Whether you like it or not. But for their target customers This is what they want. So

2:15:55 If you think about The grocery retail landscape. It's predicated on Basically two things. Efficiency and convenience.

2:16:06 Which means Lots of skews, real efficient to get in and out of the stores. You want e commerce? We got e commerce. Omni channel, baby. You want to drive? We got a big parking lot for you. All these things. And then The other side of that coin is our target customer.

2:16:23 His family is. We want the American family To shop here because you got a Big whole hunk of buying power and you're buying a lot of stuff. Yep. That's not Trader Joe's.

2:16:37 No, it's not. Trader Joe's. Is the opposite of that. On every dimension. It's not efficient to shop here.

2:16:44 Our parking lots are a mess. You're gonna be packed into these much smaller stores. With a whole lot of other people. It's gonna be unpleasant if you have a toddler with you. Oh yeah, you don't want to bring your kids here. I mean sure, yeah, they've got the treasure hunt thing and people do bring their kids to Trader Joe's, but

2:16:59 I really had this emotional and mental struggle throughout This whole Episode research process. Because I'm reading all about how great Trader Joe's is. I have so much admiration for this company. Of course I love it.

2:17:11 And I'm just thinking about my own life. I'm like I used to shop at Trader Joe's All the time. I was a Trader Joe's customer and then something happened in the last couple of years and I never shopped there anymore. Could have happened. I'm rocking my brain, is it like acquired has been too successful. Is that the problem? Am I now like one of those people? And then

2:17:34 I read This other book for research called Build a Brand Like Trader Joe's. By this guy, Mark Gardner. Oh, is he the guy that got the job at Trader Joe's? So

2:17:44 Mark. was an advertising executive. And he always wondered How Trader Joe's had built this incredible brand. And so he was like, Yeah, what the hell?

2:17:54 I'll just go work at Trader Joe's. I'm gonna find out. I'm gonna be an employee. I'm be a a man on the inside. And see what it's like. So he did it and he wrote a book about it. And I'm reading this book and I'm like Oh my God, this is why I stopped being a Trader Joe's custom. It's not for families. I had kids.

2:18:09 That's what happened. So Everything about the Trader Joe's experience. naturally lends itself to young professionals and retirees. In the Dan Bain era.

2:18:20 They go all in on this. So Intentionally the experience there. is to socialize with other people. And the crew members of the store. They hire specifically for extra version. in the people that they hire.

2:18:33 Part of the reason Why all the employees and trader Joe's work every part of the store and everybody does the cash register and everybody does bagging. is to maximize interaction with customers. Wow.

2:18:46 There's a bunch of Reddit comments. around, hey, was this Trader Joe's employee hitting on me? It's like no, they're just that friendly. They are screening for this in the hiring process. They're looking for former theater kids, basically. Yeah.

2:18:58 I would argue on this not for families thing. I I was actually talking to my friend who's a mom of two. And she pointed out that It is so tiring making food for kids every night. And Trader Joe's, while the shopping experience is not optimized to bring your family in. It's actually amazing to just go and get

2:19:17 Pretty healthy totally ready to eat, grab it out of the freezer, throw it in the microwave meals. And there's a pretty big variety of it and you can mix and match and get different Ideas so it's like Even though that's not the target, it can work really well. They're not intentionally trying to alienate, but this extends to the product strategy too.

2:19:36 The frozen meals, which are such a part of Trader Joe's today. They're individually packaged, individual serving sizes. Oh yeah. This is the exact opposite of the supermarkets. We ran out of beef bulgogey last night, made it, and it was like well I guess that's all there is. You're not finding family size at Trader Joe's. Right. Once I realized this, I was like Oh my god. This is genius.

2:20:00 They're doing What Joe's Always done. They're differentiating versus Other retailers.

2:20:07 Every other grocery out there. It's all about the families. Right. Bring your big car, bring your whole family. Binger kids will get you in and out. Not Trader Joe's.

2:20:17 We should move on. I am a skeptic on the whole social thing. I don't Talk to people when I go there. I don't want to talk to people when I go there. Most people that are in there don't seem to want to talk to anyone. We're all just in close quarters. But the stuff that we want is there, so we're all there. I think most people

2:20:32 don't care that much about the other shoppers there. They do actually care about the employees, though. You have a store that you're going to Every week. With a very low turnover employee base.

2:20:46 Trader Joe's employee turnover. I think is five or six percent annually. So super low. Unbelievably low. The Average tenure of a crew member is like

2:20:56 Ten to twelve years. You're really gonna get to know those people. Like I mean, imagine, especially if you're a retiree. Which is a core part of the demographic here. You really want the social experience. Yeah.

2:21:07 Anyway. Dan really puts all this into strategy at the company. Make sense. Well, David, I know there's one more big chapter. that you've been uh holding back from telling the story.

2:21:18 Ready to uncork here. So The crowning Product achievement. Of the Dan Bane.

2:21:26 Era of Trader Joe's. Starts pretty early in his tenure. In two thousand two. I'm sure you have all been waiting for it. Two buck check, baby. Not

2:21:38 A private label product. Interestingly enough. So interesting. For the volume that they do, it's unbelievable. But is an exclusive. Product.

2:21:47 So the story is wild. But first I'm going to open my bottle of Charles Shaw here that I've been saving the whole episode. So I got a Sauvignon Blanc. I assumed the red blend would be the cheapest. Amazingly, all the Charles Shaw are the same price, and at Seattle Trader Joe's it was three ninety nine, which

2:22:04 Come on. It's supposed to be two buck chuck, but Inflation kills ya. Been a lot of inflation since two thousand two, Ben. I'm curious what you are opening. I am opening a uh California cab. Twenty twenty three?

2:22:17 Nice. Beautiful label with a uh Beautiful looking gazebo here in the image. Established nineteen seventy nine. Really? Gosh there must be a story behind all this. Why is there a gazebo?

2:22:30 This whole thing looks very generic to me. Amazingly, it is not. Really? That is part of what makes the story so incredible. Who is Charles Shaw? So

2:22:41 Cab here. Cheers, by the way. Ten years have acquired. To ten years have acquired. What better way to celebrate ten years of acquired?

2:22:53 them with. A glass of Two Buck Chuck as we are recording the episode on Trader Jess. So There is a real Charles Shaw.

2:23:03 And Charles Shaw. Founded a winery in Napa. In nineteen Seventy four.

2:23:12 Right. At the very beginning Of the bottle shock era. The come up of Napa. Changing wine in America.

2:23:20 And Charles. And the Eponymous Charles Shaw. Winery and label.

2:23:27 Was a high end winemaker. Right there. With Heights and Free Market and all the other he was like A real player. In the Napa ecosystem. This is wild. And that was all through the seventies and the eighties.

2:23:39 Well I mean He's still the biggest player in the NAPA ecosystem by volume. Well unfortunately for Charles, he's not. I see. His name is. So Then In

2:23:52 The ninety three. He has a series of missteps. And The winery, Charles Shaw.

2:24:00 Ends up Going bankrupt. Now This is not a uh uncommon story in Wine. The list of bankrupt wineries in Napa and Sonoma Is long. Have you ever heard that aphorism, How do you uh become a millionaire winemaker?

2:24:15 Start as a billionaire. Yes. Exactly. So he's part of the first wave of wealthy people that get into The wine business. Have success and then

2:24:27 Have some missteps and lose it all. Yep. So he goes bankrupt. In nineteen ninety five. And The

2:24:35 label. The brand name and the trade name, Charles Shaw and literally the label. With the gazebo. And the font, and the design and everything. Gets bought out of bankruptcy.

2:24:46 In nineteen ninety five. Not the winery. Separate, not the real estate, not the grapes, not the nothing. Just the label. by an entity called Bronco Wines.

2:24:56 For twenty seven thousand Dollars. Ben, have you ever heard of Bronco Wines? No, I've never heard of Bronco Wines. At least

2:25:05 Mm, there's like something the back of my head that makes me feel like it's the parent company of something I have heard of, though. Well, let me tell you about Bronco once. It is Short for broth and cousins. And it was founded

2:25:18 In nineteen seventy three Same era as all of this stuff. By one Fred Franzi uh And his brother Joe.

2:25:30 And his cousin John. All named Francia. The name Franzy, huh? Might mean something. To people. Ben I see you lighting up too.

2:25:42 So the frandzi is this the story goes deeper. Not what you would expect. Have you ever done a tour de Francia? Yeah, yeah, yeah. We used to do that in Princeton. That was an Ohio State thing too? Yes. Must be just a general American college experience thing.

2:25:56 I'm glad we opened the wine for this section of the story. So Like I said, it goes deeper. The frandzi is, it turns out. Ворнефюс

2:26:06 Of Ernest Gallow. That name might also mean something to you. The Franzias are part of the Gallo family? It's almost more like the gallows are part of the Francia family, but you could argue either way. Wow. So

2:26:18 The frenzy is Completely separate from the gallows is Had their own Big time. California wine business.

2:26:27 In the era before Bottle shock and Napa and Snoba coming up and then During and after. The Francia business The older generation, so the generation above

2:26:39 Fred and John and Joe. Sold out. In nineteen seventy three, right as wines are starting to have their moment in America. To none other. Then Coca-Cola.

2:26:51 Wow. So Franz's we're making real wine at this point. Francia, as you know, at the boxed wine. Does not exist yet. Coca Cola operates it for a few years and then decides, you know what? We don't actually want to be in the wine business. They

2:27:05 Cell Franzi, uh To an entity called the wine group. And the wine group is then what makes The boxed wine. Here in the US. So the Franza that you know

2:27:17 Is the same family, but two business owners later. Okay. There's a theme here though of Taking a brand name and Repurposing it for a more mass market, shall we say.

2:27:27 So When the older generation of the Franzias sell the business to Coke Fred and His generation of his brother and his cousin, like they're pissed.

2:27:36 They like Screw you guys. Like we wanted to run the business. We want to be in the wine business. Why didn't you sell the company? We were gonna take this thing over. So they're like Affid. We're just gonna go out and start our own wine company. And recreate the family business and that's Bronco Wines, but it's gonna be informed by everything that's happened since.

2:27:53 So This first generation of the rich people that come To Napa and Sonoma, start these wineries, lose their shirts, go bankrupt, of which Charles Shaw is. Part. Fred.

2:28:04 And The new Bronco wines. Develop a business plan. They Are essentially gonna become

2:28:12 A distressed winery buyout shop. They are just gonna vacuum up. This is what Bronco Wines is. This is what Bronco Wines is. Okay. And that's how they end up. Buying Charles Shaw. Shaw among hundreds of other wineries and brands. Sometimes they buy The grapes, sometimes they buy the wineries, sometimes they buy

2:28:32 The vineyards sometimes they just buy the labels. And the brands. Which is what they do with Charles Shaw in nineteen ninety five for twenty seven thousand dollars. Listeners, just so you know. There have been a billion bottles sold of Charles Shaw. Well over a billion. Yeah.

2:28:49 There were a billion sold, like Probably ten ish years ago, so probably at least two. If not three billion by now. Twenty seven thousand dollars. Twenty seven thousand dollars. So as you would imagine

2:29:02 This doesn't make the younger Franzias uh popular characters in uh Napa, shall we say. I bet. Lot of resentment from the rich snotty folks that were building these wineries and then going out of business and Fred and his brother and cousin are vacuuming them up for pennies and trading on their brands. But This actually

2:29:22 Is the other Of wine becoming big in America. You've got all the great wineries and the great awards that they're winning and

2:29:31 NAPA and Sonoma becoming real players. And it is crazy, I don't think most people know this that Trader Joe's Gets a lot of the credit. for bringing California wines to people, to the masses in the US. And here's where

2:29:46 These two parts of the market. Intersect. What Fred and Franzi M Branco. Are doing.

2:29:52 is they're bringing it to the beer drinking population. They saw what happened to the family name with the box wine with Francia. They saw what their cousins over at Gallo were doing. And They're like, Well, shoot, we can do this too. Like Why should wine just be for snobs? F that. Amazing.

2:30:10 Fred's perspective on this is like, Hey, look, there's a huge opportunity. To make wine the new beer. And You people in Napa are completely missing the boat on this.

2:30:21 He was once asked in an interview how he could sell wine for less than the price of bottled water. And his reply was, Don't you get it, they're overcharging for the water. Uh So A couple years into two buck check here.

2:30:38 The New Yorker interviews him and it runs this big profile, I'm like What is Charles Shaw? Who is Fred Francia? Where did it come from? What is this phenomenon? Fred starts off the interview. By saying. Take that and shove it, Napa. When asked about the success of Charles Shaw.

2:30:56 He's a real Maverick. Ten percent. of Trader Joe's forty million bottles of wine that they sell every year. Is Charles Shaw. It's amazing.

2:31:05 I mean w we didn't tee up this section. enough for how meaningful This is. We both just kinda like opened our Charles Shaw bottles and cheers, but Ten percent of the time when someone walks in to get some wine from Trader Joe's, they walk out with this. Yes.

2:31:21 Often a giant case or two of this. Yes. Okay. So It was nineteen ninety five when Bronco buys the Charles Shaw label. For twenty seven thousand dollars. Out of bankruptcy.

2:31:34 Two buck chuck. Doesn't actually launch until two thousand two. What happens? Well, they gotta somehow go grow a ton of grapes, right? And have a giant processing facility and You are not thinking like Fred Francia. So He's vacuuming up this whole portfolio of assets. That he figures he will find a use for eventually.

2:31:56 So Fast forward to two thousand one. There is a Huge. overproduction surplus.

2:32:03 Of Wine? In California. I think both it was a bumper year for grapes. And then demand was way down in two thousand one. A major misjudgment. So there's lots of surplus wine out there. And uh a lot of paper rich people in San Francisco are not rich, just fifty miles south.

2:32:21 Exactly. So Fred. Sees the opportunity. Of a lifetime, really. He and Bronco come in.

2:32:29 And they buy up. Basically. All of this surplus finished, already made, produced. Wine. Uh dirt cheap.

2:32:40 below the cost of production. What do they just like mix it all together? I think they kept it separate. But He's got this huge, huge amount of unbranded surplus wine on his hands that is good wine from a lot of different wineries. And he needs

2:32:56 An outlet. And uh a vehicle, a vessel, you might say. Wait, but aren't they all gonna taste different? Sure. Who cares? And this is when he hooks up. With Dampane and Trader Jazz.

2:33:10 Wow. It is the perfect wine for Trader Joe's. It is the perfect marriage here. So they take this

2:33:18 Mostly genuinely good wine. They Bottle it up. They use the Charles Shaw label, they pull it out of the portfolio. Dust it off the bin.

2:33:29 And they throw it up? In Trader Joe's for a buck ninety nine. Yeah. I'm gonna read a few quotes here from This amazing oral history of Two Buck Chuck.

2:33:39 that ran in Thrillist a couple years ago and was the main source for all this. Francia used The exact same name And the exact same label on the bottle. As the old Charles Shaw back when it was a real winery.

2:33:53 Even the same original artwork. A picture of a little pagoda. It's funny that the Thrillist article calls it a pagoda. Listeners, we reached out to Elizabeth Shaw. the daughter of Charles Shaw. And she informed us it was not a pagoda, but a gazebo. Yes, thank you, Elizabeth.

2:34:11 The thrillist quo continues. That used to sit by the tennis court on Charles Shaw's Napa property. He being Fred Francia shocked the world by slapping a one ninety nine label on it. Everybody in the industry thought it was impossible.

2:34:28 He had the testicles that nobody else had. To sell wine at that price. He'd shoot over to Portugal or France. And knock on the door of a cork or glass producer and say If I write you a check for two million dollars today

2:34:42 Will you fill up this boat with cork? I don't care about quality. It gets better. People went Ape shit. This was around two thousand two. Articles were saying this wine is amazing and actually drinkable.

2:34:58 It was a fad, the Macarena of Wine. I would always hear about it from college students. And it was this blue collar pride thing. People thought this bottle is just as good as the one that's twenty dollars. Screw those snobs. Together. Fred Francia and Bronco. And Trader Joe's

2:35:18 Unlock. replacing beer, not replacing, but you know, wrestling in on beer as the alcoholic drink. Of the masses. Amazing. Okay, so

2:35:28 what grapes go into it now because there's not this glut anymore. Can't find that information. Yeah. Classic Trader Joe's. Yeah. Bronco isn't saying and Trader Joe's isn't saying either. But at least for those first few years. And this really helps establish The brand and the product. It's genuinely really good wine. That just was surplus on the market that was going into two buck check.

2:35:50 So obviously this becomes a like Grand slam. Home run success for everybody. As you noted, Ben, prices have increased. with inflation.

2:36:01 Two buck chuck is now generally somewhere between two ninety nine and three ninety nine. But yeah, completely. revolutionizes mass consumption of wine. You know, before that yes, Franzi and boxed wine existed, but this is Real wine.

2:36:14 Right. In a bottle. Priced it. Two bucks. Yeah.

2:36:18 In the secret life of groceries, he calls it essentially unquenchable demand. So here are the stats that I could find. Two thousand nine, so seven years after the launch. They pass four hundred million bottles sold. Three years after that.

2:36:35 They passed. Eight hundred million. Bottle salt. Broncos slash Trader Joe's have confirmed out there that over a billion Bottles have been sold.

2:36:46 I'm sure that is grossly underestimating how many have been sold. Several billions, I'm sure. So if they're selling a hundred and fifty million a year. Which might be a little low on the estimate. That's two hundred and fifty thousand bottles per store. That's nuts. Which would put it at Six

2:37:05 hundred bottles per day per store. What did you say uh a minute ago? Unquenchable demand for this? Unquenchable demand. I mean, but where else are you gonna go and get a legitimate bottle of wine for three bucks, four bucks, nowhere? Nowhere. So Fred Francia dies in uh twenty twenty two.

2:37:24 And the York Times runs a big obituary about him. In which they quote Zach Gabale, who's a Somalia and host of the Vine Pear podcast and has been in the industry for a long time. I looked at stuff like Charles Shaw with a lot of condescension. But it really helped create in this country what had long existed in Europe.

2:37:46 This very affordable, very accessible. widely available wine that people who wanted to drink wine essentially daily could afford to do so no matter what their income. It's incredible. And you gotta wonder.

2:37:58 How often are people walking into Trader Joe's to get a bottle of two buck chuck? and walking out with fifty bucks of other stuff. Yes. of high dollar density items that are sprinkled all over the store. Would love to have some nuts to go with my two buck check. Yes.

2:38:16 All right, David. Should I catch us up to the business today? Six hundred stores. Six hundred stores. Well it's worth saying Trader Joe's has become a little less differentiated today, as you said. The stores are bigger. And actually some of this is a quote. from Joe before he passed away. to Benjamin Lore as he's writing this book.

2:38:34 He says, The stores are bigger, the SKU count is higher than in the old days. You really can't do the limited batches of amazing deals anymore because You know, they really are at scale. It's not like they're just gonna be like, Oh, great You got this one pile of obscure nuts.

2:38:50 that we just need to unload in the next couple of weeks. Great. No problem. We'll take that. They really do need to be able to distribute at scale. They try to keep that ethos. with the sort of seasonal stuff. Like right now I'm enjoying the the mini hold the cones. That are the holiday themed, but

2:39:07 This is very planned and seasonal. it's harder to find suppliers that can manufacture at this scale, so they're constrained to a certain set. of suppliers they can work with. But clearly, it's still working, and it's working better than ever. So perhaps the lesson is

2:39:23 you can't be too precious once you establish your differentiation. There are ways to take advantage of your scale, but still keep the soul of what made you different. even though you're not living it to the extreme, the way that you had to when you were younger. So by revenue

2:39:38 David, you found this. There are lots of incorrect sources around the internet estimating their revenue. You found a podcast. With Dan Bain. Where he throws out

2:39:50 a significantly higher revenue figure than the rest of the internet thinks. Yeah, so he says on this podcast that when he retired in twenty twenty three. They were doing north of twenty billion a year in revenue. And they had just hit one billion when he joined the company in the late nineties.

2:40:09 The estimates that had been going around the internet and are still out there if you search are what more like sixteen, seventeen We know in twenty twenty three it was over twenty. Yes. How did you find that podcast?

2:40:20 A lot of Googly. We'll link to it in our sources. It's a really obscure leadership podcast that Dan randomly went on in January of this year in twenty twenty five. So North of twenty billion in revenue two years ago. So we can kind of extrapolate when we get to growth rate where that is today.

2:40:38 Earnings, we truly have no idea other than knowing that every year they've generated more absolute dollars of profit than the previous year. On growth. Since selling to the Albrecht family They've grown stores. at about ten percent each year. And over the last twenty years or so, they've grown revenue

2:40:55 at a little over eleven percent per year. So That puts us in the twenty four, twenty five billion Of revenue. This year

2:41:04 Ballpark. Yep. Again, way higher than I saw anywhere reported on the rest of the internet. Yep. The really interesting stat though is

2:41:13 Sales per square foot. So the sales per square foot is estimated to be over two thousand dollars today. That is the single highest sales per foot of any grocery store. and twice its nearest competitor in whole foods.

2:41:28 Yeah. It's over four X the industry average. Even Costco, who we extold On the Costco episode. is twelve hundred a foot.

2:41:38 Yeah. Costco's have really big stores. Trader Joe's has really small stores that are Densely. Densely packed.

2:41:46 with high revenue items. I mean this is really incredible. They are twice as good by this metric, which is really like the key metric in the retail industry. It's efficiency.

2:41:58 I mean, it doesn't include everything in your overhead, but you know, rent is a giant part of your costs. So the your efficiency on your rent. is effectively the sales per foot. If you look at margins, people estimate their gross margins are in the low to mid twenty percent. Which again we should underscore

2:42:16 all this brilliant business strategy, customers are getting a great deal. Their gross margins are only low to mid 20%. most of the grocery industry is in the kind of twenty seven, twenty eight, twenty nine, thirty percent. But Trader Joe's just doesn't need as much margin since they have lower overhead and lower operating costs compared to those bigger stores. In terms of geography where they are

2:42:38 They're in forty three states. They now have six hundred and eight stores. They have seventy thousand employees and a hundred percent of their captains. This is the store manager. were promoted from the first mate. role or the mate roll. Which is effectively the number two, and eighty percent of those came from crew members. So it is a 70,000 person organization.

2:42:59 Most of which is promoted. internally, which is amazing. And as best as I could tell, I don't know about you. I think headquarters staff like corporate staff is still pretty tiny.

2:43:10 I think that and at least has a goal. I think it's a value of theirs is to do that. You know, they get all kinds of great benefits and stuff. for grocery store workers, they get fifteen percent put into a retirement plan. They have healthcare benefits, dental, all that stuff. But the real kicker, they get a twenty percent discount at Trader Joe's. Which no one gets'cause they never have any sort of discounts. The one way.

2:43:34 To get a sale at Trader Joe's. It's to work at Trader Jesus. Yes. But it is crazy, like this whole thing about the employees is a belief that if you pay more, you can get better people who will retain longer. that lower your new employee training costs, that lower your overhead, each employee will be more productive, be able to do higher quality work, and most importantly, They'll be happy employees. That are there to delight customers.

2:43:56 Yes. And As I was talking about earlier, this plays into the social aspect and the extraversion and that's really important for the customer base. I do really genuinely believe that's true. The biggest thing here though.

2:44:09 Is turnover. So grocery store employee turnover. It's gotta be like fifty plus percent per year. Is some of the highest In the entire labor market. I think it might be like sixty five, maybe even seventy percent. Trader Joe's is one tenth. Of that.

2:44:24 Compared to industry average. Yeah. I mean, that means that for your average grocery store, you are turning over your entire store workforce. Every year and a half. The answer of how you run a business like that is you don't actually run the business, you are a real estate company.

2:44:38 And you hire the brands to go do everything. Yeah. And you make money from the brands. Trader Joe's has this philosophy of we only make money one way, and that's when someone checks out an item and pays money to us. We don't make money from our suppliers. Whereas those other grocery stores

2:44:55 They actually make a lot of money from the suppliers. They make a lot of money in slotting fees and in advertising and it sets up a bad incentive. Where You Are happy.

2:45:06 to put stuff on your shelves that doesn't sell as long as they're gonna pay you a lot in slotting fees and in advertising. 'Cause you're not really making your profits from selling the goods. Right. And you might be making some, but you can also make money another way. And Trader Joe's is like, No, this way we're only putting stuff on our shelves that people actually want. Now the real question

2:45:25 before we sort of wind this home is If they were publicly traded, what would they be worth? And this is an exercise I always like to do every time we do private companies. This is a fascinating one because Gross. industry

2:45:39 revenue multiples of publicly traded companies are extremely low. They're like one X, maybe one point five X. It's much worse than that. So First let's look at Costco.

2:45:49 the most similar business in some ways. Costco's growing about eight percent per year, so probably a little slower than Trader Joe's by most estimates. and has a three percent net income margin. Costco trades it. one point six X revenue.

2:46:02 Sky high. And that is the jewel of the industry. Yes. For a second comp, Walmart, which isn't all grocery, but a lot of it is grocery. has similar net income margins. Similar growth, maybe it grows a little slower than Costco.

2:46:16 Walmart trades at one point three X revenue. Okay. What is Kirger trade at? Kroger trades at zero point three X revenue and Albertsons at zero point one X revenue. Oh those are much slower growth businesses and Kroger's actually shrinking.

2:46:32 with razor thin net income margins between one and two percent. But The question then is where do you put Trader Joe's in this? Trader Joe's probably trades at north of one X, but probably not all the way at Costco 1.6 X. I don't know, maybe around there.

2:46:47 So on that twenty three, twenty four billion in revenue that we estimated. Call it a thirty two to thirty four billion dollar company, maybe a thirty five billion dollar company. Which delightfully

2:47:02 Puts them. Worth slightly more. That's great. So here's what I think is really interesting about that.

2:47:12 We don't cover many thirty billion dollar, forty billion dollar companies unacquire these days. I literally have in my notes this might be the smallest company we've covered in recent memory by value. So If the takeaway from that is Wow, this is really an outlier and it's a much smaller business than they usually cover unacquired. I think that's actually the wrong takeaway. Yeah. Trader Joe's

2:47:35 First Joe. And now under the ownership of the Albrich Foundations. Is willing to play such a long game. In the fullness of time.

2:47:46 I bet Trader Joe's will be worth at least Ted X that. Ooh, what a stock pick. Well, okay. Simply because They have

2:47:56 nearly infinite expansion potential ahead of them. internationally. They're Only in the US. And maybe management has decided we will only ever be in the US. Is Kroger international?

2:48:09 Is Safeway International? Alde works internationally. Costco works internationally. Walmart works internationally. Seven eleven works internationally. There is no reason. Why Trader Joe's.

2:48:21 Wouldn't work. In other words. geographies around the world. And work just as well. They could sell American food as exotic like cheeseburgers. Okay. So just to prove my point on this, I have a whole list of miscellaneous fun stuff about Trader Joe's that didn't make it into the rest of the episode. My number one thing is Pirate Joe's?

2:48:43 Which is A native Canadian Who was living in the US. decided there would be an opportunity to bring Trader Joe's products to Canada. He went all up and down the West Coast.

2:48:53 buying Trader Joe's products out of stores. Set up a warehouse. In Vancouver. And sold Trader Joe's products. And there was like infinite demand. It created this whole international legal incident. There is demand in other countries for trader Joe's.

2:49:08 I think on that alone. In the fullness of time. Can be worth at least ten X. Interesting. And the question is

2:49:16 Does the concept work? Let's say they're even just scoped to America, where they haven't fully saturated yet. Does the concept work to address a larger audience than the current audience we've talked about all episode. Hm, interesting.

2:49:29 I'm not sure if it does. But I also don't think it matters. San Francisco's a perfect case study for this. There were already several trader Joes in San Francisco. And recently one opened in Hays Valley. It's nuts. The lines are

2:49:43 Ridiculous. Right. That's the Costco thing where they keep actually being able to open way more Costco anywhere than they thought they could. They could probably open three or four more trader Joes in San Francisco with the same target audience and Still not be able to serve all the demand. Yeah. It's funny. My takeaway on the market cap, on it being small in value is Grocery as a category is so much more important than it is valuable.

2:50:09 It's almost like the Lockheed Martin episode that we did. It's not a super valuable company. by the standards of what we typically cover on acquired. It is one of the most important companies in the world. And grocery is sort of the same way in any given community. You're in a food desert without it. It's essential for life.

2:50:25 We need oxygen, water, and grocery stores. And Trader Joe's happens to have built one of the most or probably the most culturally relevant brand. In an essential category. Even if it ends up financially not being

2:50:41 as valuable as these other companies we cover. Yep. I totally agree with that. Their cultural relevance really is crazy, though. Have you seen the prices of these limited edition tote bags on the resale markets? Oh yeah. They're like fashion items in Europe.

2:50:55 I almost was like stocking up at the store yesterday when we were there. You could start a Pirate Joe's for uh Amazing. All right, well you were pitching me before we started on when we wind down the story. we should lay out the entire ballet. With

2:51:12 What is the way that all these puzzle pieces fit together. And what sort of drives the flywheel. Great, let's do it. So I would throw out

2:51:21 It all starts with this insight. that we don't need to stock everything. People just need to trust us that they'll find great stuff when they come here. And if you have that then you can flip all the assumptions of the grocery business on its head.

2:51:35 Yep, I totally agree. You should always remember that Trader Joe's started as a wine merchant and they merchandise everything like wines. And that's exactly how you would behave as a wine merch. There's no way you could ever stock every wine. In the world. You need to

2:51:50 Be a merchant and have an assortment. Yes. So you need to be a merchant. You need high dollar density items, avoid taking up large amounts of space for things like paper towels. And a corollary to that.

2:52:01 they aren't focused on the margin percentage of each item. We didn't talk about this yet, but They actually don't apply a consistent markup. They focus on the absolute dollars of margin in each item. So if something is twenty dollars and you only make a couple bucks a margin on it. That's actually not bad as long as it doesn't take up too much shelf space.

2:52:20 You'd much rather have that than sell something for four dollars. Where you're only making like a dollar of margin, even though on a percentage basis It sounds better. Trader Joe's is like, No, no, the scarce thing is the square inches. On the shelf.

2:52:34 you then get very quickly into okay So they've got this low SKU count, not as low as the old days, but still only like four thousand SKUs. And if you keep this constraint really aggressively, it means that you're not wasting money on your less productive square feet. Every square foot is sort of being used to its highest capacity. Everybody, of course, wish they could do this. Why doesn't everybody else just do this?

2:52:58 Trader Joe's has spent decades making every customer comfortable with the idea that you won't find everything there. It works with their brand promise in a way that Walmart Mini would totally fail. A Walmart with less stuff?

2:53:12 Cool, I'm not going there. The whole premise of Walmart is all the stuff. Yep. And of course The way that works is if you're only buying relatively very few SKUs.

2:53:22 then you can consolidate your buying power. Buying a lot of that skew. That's exactly right. And so when you're buying a lot of any given SKU from your supplier, it means you can lower your unit prices with economies of scale, because you're a bulk buyer. Which you can then pass on to your customers. So they get additional savings and value. It also means you can usually avoid a middleman or a distributor.

2:53:46 And you can go directly to the manufacturer, again cutting out random margin that gets made that ends up Costing more to your customer. And if you're going directly to the manufacturer, I feel like this is if you give a mouse a cookie for business. Yes. I read that all the time. Same. Then you can say, Well, hey We need you to drop this off at our distribution center. We'll take care of the distribution to our stores, but please do not arrive at our store. Which is great because then A, it's not clogging up your very limited parking lot space.

2:54:15 But B. Then you actually can stock stuff in your stores with your own employees. You don't have representatives of brands wandering around working in your stores. without aligned interests kinda like steering the direction of your business without you realizing it. And we didn't talk that much about all this, but

2:54:31 Theft is a huge problem. And being able to only have your own employees in your own stores. Is just much better security. So you've got all that combined with then better coordination of labor schedules, because you're the one paying all the people who are showing up to your stores. So it's his better customer experience.

2:54:48 And it lets you pass on The discounts to your customers, but again, it all stems from that one promise of When you show up to a trader Joe's as a customer. I may not get everything I need.

2:55:01 But I will get great stuff. Yep. And this also plays into The social experience. Trader Joe's.

2:55:09 Intentionally mostly does The shelf stocking during opening hours. This is very different than other groceries. that do almost all of their stocking. At night.

2:55:20 when the store is either closed or if it's a twenty four hour store where very few customers are there. Trader Joe. Once their employees Doing the self stocking. With the customers as they're shopping. Well, you kinda have to because of the rapid inventory turnover. I mean, if you're only stocking four thousand SKUs.

2:55:37 And you're doing a ton of sales in that store. It means you're selling through that whole inventory. really fast. I mean I saw one stat that they turn over their inventory sixty times per year. Which is more than once a week they sell through everything in the store.

2:55:52 You found one in that podcast with Dan Bain where he said that There are some stores that actually sell through twice a week. Yeah. And That's

2:56:01 On in. average across the whole product assortment. Twice a week, that's like a hundred times a year. On a product level, this is what you were saying a minute ago about why you need to be stocking while customers are shopping. For the most popular products

2:56:15 In the most Popular stores. You're turning multiple times a day. Yeah, that's true. The entire store would get emptied out.

2:56:23 Every three to six days. Which means products will probably get emptied out every few hours. Think about two buck chuck. That Display.

2:56:32 has to be replenished multiple times a day in most stores. Such a good point. It's funny that I was been thinking about all the ways as a similar and different to Costco,'cause a lot of this will rhyme. On that episode, we pointed out that the rapid inventory turns meant that you could

2:56:47 sell through your inventory before the net thirty payment was due. And the benefit there is that your suppliers are effectively financing your entire inventory and you don't have to tie up your own working capital. in the inventory. This is amazing. I know where you're going. Complete opposite with Trader Joe's. Trader Joe's does the opposite. Yes. They pay up front.

2:57:08 And they pay on delivery. Yes, they pay cash on delivery. You just have cash as soon as you drop something off at their loading dock. This gives them a huge edge of being a preferred customer for these vendors that those companies never have any cash flow issue or waiting issue as soon as they drop it off. Trader Joe's makes good on the payment.

2:57:27 I have never heard of any other retailer that does this. Cash on delivery. of inventory everybody else Costco Amazon Walmart. Yeah. Oh pay in sixty days, ninety days.

2:57:40 Yeah. A critical part of the business model is the cash float, yeah. That they are selling the items before they pay for them. Trader Joe's has said, No, we don't care about that whole part of the industry. we would rather have the benefit that we get from paying suppliers quickly. than the benefit we get from the vendors financing our inventory.

2:57:59 We're not worried that we're gonna sell the inventory. Yeah. Yes. That is true. They actually take risk too. A lot of traditional grocery stores are kinda like a consignment basis. Where you still own the inventory even though It's sitting on the retailers' shelves. the brands are actually still taking risk even though it's in the store. That's not the Trader Joe's philosophy. That's right.

2:58:21 Which of course gets to private label. Which dramatically simplifies your business model if you can get customers to be game for it. Well I think There are couple things you gotta keep in mind about private label at Trader Joe's, and the most important is that

2:58:35 The job private label is doing for Trader Joe's. is completely different than the job private label is doing at every other retailer. Everywhere else. Private label is code for same but cheaper. Right. It's generic. It's unbranded.

2:58:49 At Trader Joe's Private label is code for this is a differentiated product. The other critical thing I think about Private label. For Trader Joe's that fits into

2:58:59 The next puzzle piece. Is The marketing strategy. Hm Trader Joe's is built. On

2:59:07 story based product marketing. Just like a wine merchant. Nobody else is built that way. They're built on brand based marketing where most of if not all the marketing is being done By the brands.

2:59:21 on a mass market, often price and deal driven. Basis. Whereas Trader Joe's marketing strategy is all about long form storytelling. And

2:59:34 That only works because they have Differentiated unique products. Yep. Totally does.

2:59:41 All of this really leads to low overhead. When you need to do fewer things in your business, you just need fewer fixed costs. And so when you have fewer SKUs And smaller stores. And more narrowly scoped operations and fewer suppliers you have to work with. Fewer media channels and marketing initiatives. Yes.

3:00:00 higher employee pay or deeper product knowledge. Or Just less overhead overall, which means you can charge your customers less for items. That to me is the puzzle. I have a bunch of things they don't do and why, but they're all kinda obvious at this point.

3:00:15 No sales or coupons that just drives your customers to wait for sales. No loyalty programs,'cause again. overhead costs to administer. They have a funny quote on this. We're loyal to all of our customers rather than trying to buy loyalty through rewards or discounts. There's also this amazing thing about Trader Joe's that's so different than the rest of the retail industry.

3:00:35 As Best as I or anybody else can tell. They don't collect any data. I know! I was trying to figure that out too. Every other retailer.

3:00:44 Basically are like Data operations. Yes. How much can we personalize a circular for you? Trader Joe's doesn't care about any of it. It's so true. There's no account when I'm checking out. They have no individual shopper data. Like I'm sure they have store data and product data, but

3:00:59 Nothing about You. And on the whole like We don't do technology thing. So they have no PA system in the store. They use a bell, which is cute.

3:01:09 And actually feels much nicer than the sort of oppressive PA system of a grocery store. There's no screens in a store, there's no computers on the floor. They didn't even have price scanners until Dan Bain became CEO in two thousand one. And I think they're not like anti technology

3:01:26 But I think any time they're considering a technology They're not looking around and saying, Oh, we gotta do digital transformation'cause everyone else is doing it. I think they're saying Wait, why would we do that and how does it fit into our particular business model. 'Cause like they adopted desktop publishing to be able to accomplish the fearless flyer for a hundredth of the cost that they would have done it otherwise.

3:01:45 But All of this other technology they've decided doesn't suit them. And just adds overhead costs. And they say like Hey.

3:01:53 We always evaluate this stuff and we compare it against investing in opening the next door. And opening the next door is always wildly more profitable. So we just do that. Yeah. So true. All right. Well that's it for my

3:02:07 ballet of how all of this reinforces each other for why Trader Joe's works. And what a beautiful ballet it is. Uh With that, let's move into analysis.

3:02:19 I actually did basically my whole playbook throughout the story there. Let's do power though and analyze seven powers framework. So for anyone who's new. Power is what enables a business to achieve persistent differential returns. or to be more profitable than their closest competitor and do so sustainably.

3:02:38 So David At various points in Trader Joe's Which Of these do you think they had? You gotta remember about power.

3:02:46 It's all relative to the other players in the industry. Yeah. So Scale economies. The first one that

3:02:55 Exists in so many of the companies we cover Sure, of course Trader Joe's has economies of scale. But relative to their competitors in the grocery industry, they definitely don't.

3:03:07 They're much lower scale. Oh, I disagree. On a per skew basis, I think Trader Joe's sells. More than the

3:03:16 Nuts. Then Oh, okay, that's fair. I mean, think about if it's against Safeway and Safeway has thirty thousand SKUs and they have four, I bet it's actually pretty competitive on who moves more volume. Yeah, okay. Or yeah, look at Two Buck Chuck, too.

3:03:30 Yes. Great example. Okay. I mean it's gotta be the best selling wine in the world. Interesting. So maybe they do have scale economies then. on a skew basis.

3:03:40 How about that? They don't on like a real estate basis or a labor basis or anything like that. Right. That's exactly right. But on a buying power per skew. Yeah, they probably do.

3:03:51 They are still counter positioned. it's rare for a large company to be counter positioned. It's very easy to see the examples of counter positioning in the early days, like stocking liquor when That was too difficult or off strategy for seven eleven to do.

3:04:05 But Things like we're not gonna collect your data. Safeway can't not collect your data. Or we're not gonna participate in the whole shadow economy of the CPG supermarket industrial complex.

3:04:21 We're not gonna do stocking fees, slotting fees, we're not gonna do co op marketing. Right. I think technically no one does slotting fees anymore. Everyone's hiding the ball and found a new way to charge their suppliers. Yeah, that money went somewhere else for sure. Kroger can't not do that. It's part of the business model at this point. You can't

3:04:38 Shake out of it. So I think that Trader Joe's is still counter positioned in that way. I do really think they also have a counter positioning in there. Target customer. Focused on non families. Again, not that trader Joe's can't be good for families, but

3:04:53 Everybody else is a hundred percent catering to families. And Trader Joe's is saying. Crowded stores, great. Small parking lots, great, individual servings, great. We're here for you. Right.

3:05:04 Network economies. I think this is non existent. Yeah. Just because somebody else shops at Trader Joe's doesn't make it better or worse for me to go there. Switching costs. At first I was gonna say there's no switching costs.

3:05:15 But I don't know, you get used to liking some of those foods. You don't want to shop somewhere else that doesn't have'em. In fact, this is funny. My wife Rags on me all the time for this. Covid hit.

3:05:27 We ran out of all of our snacks. And I was sitting there thinking, I really wish I had a dark chocolate peanut butter cup. from Trader Joe's. I love those. And I eat like one a night after dinner and it had been like a week so disciplined. One a night. Of it being completely empty, that little plastic tub. And at some point I was like, How am I gonna get these'cause I can't go to the grocery store.

3:05:52 And I look on Amazon. Now mind you, this is like a three dollar product. And someone's selling it for nineteen dollars. And I was like I'ma buy that. I'ma buy that. And it arrived. And of course it's in like real jank packaging because it's someone bought it and repackaged it. And my wife is just like You gotta be kidding me. You bought this for nineteen dollars. You you paid a seven X markup or whatever on Yeah.

3:06:16 So uh they have switching costs. There you go. Apparently my willingness to pay is actually seven X what they're charging. Amazing. Perhaps somewhat related. They have huge, huge brand power. Yeah, especially today.

3:06:32 They really do have differentiated products. And A lot of the products R differentiated on something

3:06:43 Other than what the actual product is today. Differentiated on packaging. Yeah. And that's where br I think brand Is really playing a part here. Yeah. Take the peanut butter cups.

3:06:53 You can get peanut butter cups elsewhere. Look, if I felt it was the same peanut butter cup that I had grown accustomed to, I would have bought it from elsewhere. Yes. Okay, fair enough. But yeah, I like these peanut butter pretzel nuggets more'cause they're the Trader Joe's one. And I'm confident that there are grocery stores that sell something almost identical and To me, it's just not the same thing. Even though it's probably the same thing.

3:07:17 Process power, this one's always a hard one to nail down. I'm sure they have some of it, but I don't think it's the thing that Sets them apart. And cornered resource. I guess at this point. the supplier relationships are'cause some of these supplier relationships

3:07:31 Make a huge amount of their only product or largest product just for Trader Joe's. So having those contracts locked up is cornered. Yeah.

3:07:41 Sounds right to me. The scale economies is surprising. You're right. They do have it. It's just on a SKU level. It's the same thing with Costco. When Costco buys A skew. They really biased you.

3:07:53 It can be the largest source of revenue for that supplier. Yeah. By the way, we should say for anyone who's wondering, Costco is a much, much, much bigger business than Trader Joe's. They're sort of cousins of each other in business model, different in all the ways we've talked about, but Costco's revenue is Ten X.

3:08:10 Maybe more. Last year it was two hundred and seventy five billion dollars. Now Margins are a different story. They famously only mark up eleven to fourteen percent. And Trader Joe's is probably I don't know, it seems like about twice that.

3:08:23 But Costco's much, much. more scale business. Yep. And my point about international Costco is a International business.

3:08:30 Totally fair point. All right, David, so you've now thought about Trader Joe's specifically for a month, but we've known we were doing this for a while. What is your quintessence as you think about this business?

3:08:43 Yes, I've thought about this a lot. My Quintessence for trader Joe's. Is that There are no

3:08:51 Broken promises. In the chain. So Every aspect of how Trader Joe's works.

3:08:59 Is genuinely a promise ultimately to their customers that they are Keeping. The real estate strategy. We're in your neighborhoods. The product strategy.

3:09:09 We have Differentiated products. That are truly differentiated on some dimension. Product nature. Price.

3:09:18 Packaging. Story. Et cetera. The labor strategy. They genuinely pay their workers.

3:09:25 way more than the industry and their labor force stays with them way longer than the rest of the industry, meaning you will develop actual relationships. With the people who work. At your Trader Joe's store. Yep. The marketing strategy, the storytelling, the merchandising. It's the opposite of the CPG supermarket industrial complex.

3:09:43 It's not the Hey flashy deal, look at this. Fat of the week. It's a Merchandised

3:09:52 Product. Yeah. There's no broken promises all the way through. I like that. Mine is a zoomed out framing of how we've talked.

3:10:00 about all these things on the episode, and that is It all boils down to independence. And control. Trader Joe has built a system Where they are

3:10:11 Just not that dependent. on others in the ecosystem. In a way. that supermarkets traditionally are. Supermarkets are effectively one half of a partnership.

3:10:24 with CPG companies. content is on there too because content is where all the ads are placed on TV. that then drive the people to buy the CPG. products at the grocery store. I feel like Ben Thompson used to write about this, that it was the

3:10:39 American holy trinity of General Motors and the NFL and Procter and Gamble. Yes. It's a partnership. But it's not a great partnership because As soon as the CPG product becomes so wildly differentiated.

3:10:53 They're gonna start commanding somehow squeezing more in the value chain. Or let's say the grocery store got differentiated, they're gonna start squeezing more in the value chain. Trader Joe's has been a fifty year exercise to ensure their independence.

3:11:08 Where No one has leverage over them. individual little things like a landlord has leverage over them in a store negotiation or a supplier does for a given SKU. But At scale overall.

3:11:22 Trader Joe's is really, really Resilient. From External Things.

3:11:29 That could dramatically shake their business. They've built I think we talk about this a lot, stored potential energy. in their business that just make them more resilient. And it's crazy that The internet happened.

3:11:42 And it hasn't been bad for them. They've grown just as fast in the internet era as the non internet era. It's hard to imagine things that could shock them more. There is the perfect existence proof of this. In Covid. Pretty much the only way That all other grocers.

3:11:58 could deal with COVID. was Instacart. Or doing their own delivery, which actually Instacart powers a lot of that now as a white label service, which is fascinating, but anyway. Trigger Joe said Nope.

3:12:09 We're just not gonna do that. We're gonna find a way. To Operate our stores. During Covid.

3:12:17 And they didn't miss a beep. Yeah. So my question for you to close this out is How important do you think private ownership is? to making all this work.

3:12:27 Because on our Rolex episode we said It's really important that there owned by a foundation. And in our IKEA episode, it said really important that it's family and foundation controlled. And on our Mars episode we said It's really important.

3:12:42 Is this really important that they're not a publicly traded company? There's the fascinating other example of Costco. Right. Which is Again, of course, is very different on a lot of dimensions.

3:12:54 But spiritually aligned. Joe actually says in his autobiography. He looks up to them. Yeah, the one store that's out there that is Cut from the same cloth as us as Costco. Yeah. And they're obviously

3:13:07 Doing great. As a successful public company. I think in this case, though Yeah, probably The fact that Tao Albrecht's

3:13:18 Bought it. When Joe needed to sell. made a huge, huge, huge difference. Okay, so play it forward. What do you think it would have affected?

3:13:27 Like in the Rolex scenario, I think they wouldn't have been able to buy the many years Of probably bad financial returns that they had amidst the courts crisis. If they were publicly treated. What do you think

3:13:41 management would face pressure on. Because as best we could tell. In recent years. They've grown eleven percent. For year.

3:13:50 They've gotten more profitable every year. Shareholders should love that. The biggest thing to me is just steadfastly not participating in the CPG Supermarket Industrial Complex.

3:14:03 There would be so much Pressure, I think. From Public markets to be like Well

3:14:11 Can't you just take like a little bit of co op marketing dollars? Uh perfect example. the demos in the store. Trader Joe's has lots of samples and lots of demos. Oh, if you walk up to someone and say, What does that taste like, they rip open a bag and just let you try it. Oh yeah, but there's also an organized program.

3:14:27 Part of the story where they are showing samples. For a while. They had The vendors do that. That's like standard practice in the industry is The vendors, even in private label, whoever makes the stuff, they come to your store.

3:14:39 they do the sampling and the demos because they in theory should be more knowledgeable at the product. And then they also Finance it. So like the free items that are given out. paid for that cost is eaten by the vendors. And Trader Joe's actually did this. For a while.

3:14:55 And then they started running into Problems like you might expect of customers would come up to the people that were doing the sample demos and be like, Oh, where do I find this? You know, what do you think about that? And they'd have to say, Uh sorry, I I don't work here. And this happened enough that Trader Just is like, You know what?

3:15:10 It's not worth it. We're gonna do this in house. We're gonna have our crew members do this. We're gonna train our crew members more on the new products. We're gonna have them rotate and do the sampling. And People in the industry where like

3:15:22 You guys are crazy. What are you doing? Why are you paying for this? Nobody else does this. And they said, Yeah, we know. But we're gonna do it anyway. Yeah. So my take on this is it was really important for a long time. But I think if they went

3:15:35 public any time in the last Ten, fifteen years. It would have been totally fine. Really important for a while. I mean now, yeah, totally. It could be public. It'd be fine. But in the good times, it's always fine to be public. It's about in the catastrophic events, are you able to Control your own destiny.

3:15:50 Yeah. All right. I know you've got some fun Stuff up your sleeve. Yeah. Okay, couple of fun little uh Trader Joe's carve outs before we get to our personal carve outs.

3:16:00 My first one was Pirate Joe's that I talked about earlier. Maybe my favorite thing about Pirate Joes is that if you go to the Pirate Joe's website that used to exist, it now just redirects to the Wikipedia article all about Pirate Joes and the international legal incident that it caused. It's awesome. Second was you mentioned this, but Trader Joe's doesn't use PA systems, it uses bells. I never knew what the bell rings meant. Oh, I got to do it.

3:16:25 Mience Come to the register. Yep, open a new checkout line. Two bells is I need a manager. Nope. That's three bells. Two bells is a customer needs help carrying their bags to their car or whatever.

3:16:37 And then three bells is we need the captain or the first mate. We need a manager. But basically everything can be expressed through those things. So why do you need a PA system? Totally. Okay. And then

3:16:47 My last one. I've got a little quiz for you. So After Joe retired.

3:16:55 From Trader Joe's. He had a whole second career. dabbling in doing a few like retail turnaround jobs. As you might expect, lots of retailers valued Joe's advice. And he started eventually just sitting on corporate boards.

3:17:10 During which He joined the board of a company. That a young entry level employee would work at concurrently During the same time they overlapped.

3:17:21 And that young entry level employee would go on to become A central Character. In the acquired cinematic universe and in modern business history.

3:17:31 Can you guess what company that was? Oof. Give me some hint. What industry? I'll give you a hint. I figured you might need a hint. This might give it away.

3:17:40 It is a restaurant group. Starbucks. Mm good guess. Nope. Denny's.

3:17:48 Danny's oh Joe was on the board of Denny's While a young High school aged Jensen Huan was a bus boy.

3:18:00 And waiter. Slinging sausages at Denny's. Amazing. I am confident they never cross paths. Yes. Me too. But there is a direct connection between Trader Joe's And NVIDIA. Co workers. You heard it here first. Trader Joe and Jensen Huang. We're co workers at one point in time. I was really wondering if you were gonna pick up on that in the research. No. I'm glad I got you. That's amazing. All right, so we do our personal carve outs.

3:18:29 Let's do it. I Because I can't help myself ordering every Apple product and most new tech gadgets that come out and then just having a giant pile of them. I ordered AirPods three on launch day with my new phone.

3:18:43 And They're awesome. It just is crazy how Apple gets better and better and better and better iteratively each time with these things. And I think the sound quality's better. There's days I listen to so many audiobooks and podcasts that I actually don't

3:18:57 notice it as much because I feel like any time I'm listening to something, it's words, not music. But The fit's amazing. It's much more granular now. It's much better. The noise cancellation is insane.

3:19:10 I think a lot of it's physical cancellation. Maybe the algorithms are better too. And they're more comfortable over a long period of time, like on long runs. I noticed they just stay in my ears and are more comfortable. So I think they're great. I can second that.

3:19:21 I got them too. By far the best AirPods yet. I still prefer The metaglasses though, like I just have realized I really don't like Having things in my ears.

3:19:33 Well good thing there's a new one of those too. Yeah. All right. My carve out. Is

3:19:40 An update in my ongoing carve out saga. This summer and fall. Oh, did you buy another video game console? We got A switch.

3:19:51 My older daughter. had her fourth birthday last weekend. And I got her. A switch. We did it. An original switch. I got her an OLED switch. It's part of my thought process. Like she doesn't Need to switch too.

3:20:03 But Mario Kart is gonna be perfect. So Mario Kart eight. I've played a lot of Mario Kart over the last twenty five years Mario Kart eight I think is the best. It's just a basic that we don't Perfect.

3:20:15 And get. We'll be able to play together in tabletop mode. It has been Amazing.

3:20:23 So if I thought about it, maybe I could have predicted this. You know, she's four. And she's obsessed with princesses and being a princess. She doesn't actually care at all about winning. She cares. About

3:20:38 being all the different princesses. And so every race he chooses a different princess. And then this is So fun. What's he has decided she really loves about the game.

3:20:50 Is when You fall off the track. And the little cloud guy comes and picks you up with the fishing pole and tows you back onto the track. She thinks it's a fairy. And so she loves When the fairy comes and picks up her princess and puts her back on the track.

3:21:06 After every race she says, Wanna pick a new princess. And then I want to pick a new course. I want a course where we fall off. And see you guys. Rainbow Road. Every time. Yeah. Is this one where we fall off? Is this one where we fall off? Is this one where we fall off? So funny. And then

3:21:20 I race as fast as I can. And then another like ten minutes go by. Where she just spends the whole time Driving off the road. And the little Cloud guy.

3:21:30 Toes her, you know, incrementally forward each time and she has a blast. It's wonderful. That's awesome. Uh parenting. So unexpected. So fun. Congratulations. All right, well listeners.

3:21:42 We have some thank yous. I have a huge thank you. to Benjamin Lor for writing the fantastic book. The secret life of groceries and as always to Arvin Navarotnam at Worldly Partners for his Amazing write up on Trader Joe's

3:21:56 Linked in the show notes for anyone who wants his awesome analytical take on why the business succeeded. David, I know you've got some too. Yeah. And then continuing on the book front, Mark Gardner's Really fun book Build a Brand Like Trader Joe's about his

3:22:10 Experience. Going and working as a crew member at Trader Joe's for a year. So helpful in the research. A very entertaining read, too, by the way. And then To Calom.

3:22:20 Yes. Writing his autobiography, Becoming Trader Joe. It's a great book. And obviously The main source for this episode.

3:22:28 And then just two specific Research. Thank you for this one. Both to Instacart. First to Ravi Gupta of Sequoia Capital, formerly CFO of Instacart.

3:22:42 when we finalized that we were gonna do this Trader Joe's episode. Ruby was of course our first call because we were like help us with grocery, please. Yo, we don't know anybody in the grocery industry. Help us out. Ruby was incredibly helpful, including Connecting me with Chris Rogers, the current CEO of Instacart. And Chris was Also incredibly helpful. Giving me perspective on

3:23:06 The industry. And e commerce within it. Thank you, Ravi and Chris, and all the other grocery folks and resources who you connected us with and pointed us to. Yeah. Well, if you like this episode, check out our episodes obviously on Costco. I also think you'll probably like Ikea.

3:23:23 Any others to point folks toward, David? Walmart, of course, for sure. Absolutely. Walmart. Perhaps Amazon part one also may be of interest, since this is effectively the anti Amazon. It's the uh everything store and the very few things store. Oh, and Ben.

3:23:39 How could we forget? We made an episode on Whole Foods back in the day. We did. The day that Amazon bought the company. A little bit embarrassing. What was that, twenty sixteen, twenty seventeen? It was uh a little bit amateur hour. I didn't re listen to it for uh this episode. So I don't know if it holds up or not, but we do have an episode on Whole Feeds. I feel good about anything basically twenty twenty onward. Yeah. After you finish this episode, come talk about it with us at acquire.fm slash slack.

3:24:07 Get all the goodies, including the pictures and graphics and stuff that we talked about, and corrections, and help us pick the next episodes by joining our email list that's acquired.fm slash email. And without listeners. We'll see you next time. We'll see you next time. And as Joe would say in his radio slots.

3:24:26 Thank you for listening. Thank you for listening. Who got the truth? Is it you, is it you, is it you Who got the truth now

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