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Becoming Trader Joe by Joe Coulombe & Patty Civalleri

28 December, 2021 - 16 min read


I. Brief Summary

An exceptional business story and book. Though a bit disorganized making it harder to follow at times, it is however a must read! Joe Coulombe exploited all sorts of market arbitrage (loopholes in regulations or creating bargains through buying in bulk) in grocery and retail business. I was fascinated by Joe's creativity and willingness to be first in setting standards in grocery business. The matrix of grocery business is as complex as it can get, both on supply and demand side. Joe's ability to persevere regulatory concerns and market trends is very inspiring and worth looking into. I am a Trader Joe's fanatic so I thoroughly enjoyed learning about its upbringing.

II. Big Ideas

  • Trader Joe’s was Coulombe’s third venture (after Pronto Markets and Rexall) and he started in Southern California with a single-minded focus: to provide value to over-educated, under-paid professionals (think teachers, nurses, musicians).
  • When the competitor 7-Eleven extended it’s footprint into California in the 1970’s, Pronto Markets, the precursor to Trader' Joe’s, already enjoyed the highest sales per store of any convenience operator in America by a factor of three. A high wage policy, strong locations, a few liquor licenses, and the beginnings of a differentiated strategy through product knowledge was the core of their success.
  • He started with wines (allowed in California grocery stores). Trader Joe’s was known for stocking the shelves with good wines for far less than shoppers could get elsewhere. It was also committed to healthy, often organic, real foods. They made and sold their own baked goods, and they had their own distribution system.
  • Coulombe paid above-average wages, which effectively eliminated employees’ desire to unionize. He also didn’t define specific jobs, e.g., checker, stocker, customer service, etc. Trader Joe’s’ employees roam from one department to another so they never get tired of, or feel inferior to, others in different departments. As a result, turnover is much lower than the industry standard.
  • Four tests to meet the product merchandising:

    • A high value per cubic inch, essential to a small store format
    • A high rate of consumption
    • It had to be easily handled
    • Outstanding product
  • Joe wrote the Fearless Flyer (marketing newsletter) for over-educated, under-paid people. It not only helped customers, but also employees. It became a central way to spread product knowledge. He would add silly cartoons from early 1900s as there were not tied to copyright laws. Benefits of Fearless Flyer:

    • There are no such things as consumers—dolts who are driven by drivel to buy stuff they don’t need or even want. There are only customers, people who are reasonably well informed, and very well focused in their buying habits.
    • We always looked up to the customers in the text of the Fearless Flyer. We assumed they knew more than they did, we never talked down to them.
    • Given the first two assumptions, we assumed that our readers had a thirst for knowledge, 180 degrees opposite from supermarket ads. We emphasized ‘informative advertising.’
  • Double Entry Retailing

    • Joe’s concept of Double Entry Retailing was my huge takeaway which was inspired from Double Entry Accounting (both sides should always balance equal). This is a form of second level thinking. Joe recognized that making changes to Demand Side factors had an influence on Supply Side factors which aren’t always obvious. A striking example was the introduction of orange juice freshly squeezed on the premises. While a great Demand Side success—customers embraced the product—it was a total nightmare to administer because of the Supply Side issues; the great variation in sweetness of oranges over the course of a year, difficulty in ensuring machines squeezed the right amount and disposal of the leftover rinds. As a result it was eventually phased out.
    • As in double entry accounting, the change in any factor must be matched by a corresponding change in another factor. For example, a decision to increase geographical convenience (Demand Side) obviously involves some change of policy with landlords (Supply Side) including the amount of rent you're willing to pay. Consider how Barney's paid through the nose because they thought they had to offer the geographical convenience of being in Beverly Hills. How big a factor was this in Barney's subsequent bankruptcy? Was it Demand Side success at the price of Supply Side failure?
    • Factors of the Demand Side:

      • The assortment of merchandise offered for sale.
      • Pricing: stability and relative to competition.
      • Convenience: geographical, in-store, and time.
      • Credit: the accepted methods of payment.
      • Showmanship: the sum of all activities that result in making contact with the customer, from advertising to store architecture to employee cleanliness.
    • Factors on the Supply Side:

      • Merchandise Vendors
      • Employees
      • The way you do things: "habits" and "culture"
      • Systems
      • Non-merchandise vendors
      • Landlords
      • Governments
      • Bankers and investment bankers
      • Stockholders
      • Crime

III. Quotes

  • We found a loophole in the law, and by God we drove a truck through it!
  • Innovation is less an act of an intellect than an act of will. — Michael Schrage
  • When you deliver value, you don't have to worry about in-store convenience.
  • Advertising moves the people to the product; merchandising is what moves the product to the people. — Charles Luckman
  • The world does not have an economic problem, but a design problem. — Buckminster Fuller
  • Perhaps the mission of those who love mankind is to make people laugh at the truth, to make truth laugh, because the only truth lies in learning to free ourselves from insane passion for the truth. — Umberto Eco
  • The most basic conclusion I drew from her book [The Guns of August] was that , if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you'll probably succeed. Tenacity as important as brilliance. The Germans and French both had brilliant general staffs, but neither side had the tenacity to stick with their prewar plans.
  • I concluded that I didn't have to find an optimum solution to Pronto's difficulties, just a reasonable one. Trying to find an optimum solution in business is a waste of time: the factors in the equation are changing all the time.
  • I was never a fan of franchising. We saw terrible abuses in the field.
  • More than anything, Nate Bershon taught me that there are people out there whose handshake is better than any contract. When I finally sold Trader Joe's, it was basically a handshake.
  • In 1966, I made a correct prediction, as usual, for the wrong reasons.
  • 7-Eleven, and the whole convenience store genre, served the most basic needs of the most mindless demographics with cigarettes, Coca-Cola, milk, Budweiser, candy, bread, eggs. I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream people.
  • In 1962, Barbara Tuchman published ‘The Guns of August’, an account of the first ninety days of WWI, It’s the best book on management - and, especially, mismanagement - I’ve ever read. The most basic conclusion I drew from from her book was that, if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance.
  • Trying to find an optimum solution in business is a waste of time; the factors in the equation are changing all the time.
  • You’ve got to have something to hang your hat on. The one core value I chose was our high compensation policies, which I put in place from the very start in 1958… This is the most important single business decision I ever made: to pay people well. First Pronto Markets and then Trader Joe’s had the highest-paid, highest benefitted people in retail.
  • Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract - and keep - the quality of people who work at Trader Joe’s.
  • Equally important was our practice of giving every full-time employee an interview every six months. At Stanford I’d been taught that employees never organize (join unions) because of the money; they organize because of un-listened-to grievances.
  • My idea, often stated to everybody, was that the Captains should have the chance to make more than executives in the office. In a traditional chain store, managers aspire to become bureaucrats with cushy, high-paying jobs in the office. I wanted to kill such aspirations at the start.
  • Part timers...at a time when the minimum wage was $4.35, we often paid $13.00 per hour because these people were worth it.
  • Productivity in part is a product of tenure. That’s why I believe that turnover is the most expensive form of labor expense.
  • We instituted full health and dental insurance back in the 1960's when it was cheap. When I left, we were paying $6,000 per employee per year!
  • In thirty years we never had a layoff of full-time employees.
  • Cost of goods sold is the dominant expense. The funny thing is that grocers seem to spend more effort squeezing payroll than squeezing Cost of Goods Sold, though there is at least five times more opportunity in the latter.
  • First we upped the investment ante by taking only prime locations, which could generate the most sales, even though the rents were higher. A lease is an investment, perhaps the most serious and certainly the least changeable a retailer can make. Financially, a lease is simply a long-term loan… Most retail bankruptcies come from bad real estate leasing decisions… Early in my career I learned there are two kinds of decisions: the ones that are easily reversible and the ones that aren’t. Fifteen-year leases are the least-reversible decisions you can make. That’s why, throughout my career, I kept absolute control of real estate decisions.
  • The keys to management are strong locations with good people.
  • People often ask me, how many stores did we have at such-and-such time? It’s the wrong question to ask. What’s important is dollar sales. For example, from 1980 to 1988, we increased the number of stores by 50 percent but sales were up 340 percent.
  • My preference is to have a few stores, as far apart as possible, and to make them as high volume as possible.
  • I liked semi-decayed neighborhoods, were the census tract income statistics looked terrible, but the mortgages were all paid-down, and the kids had left home. Housing and rental prices tend to be lower, and more suitable for those underpaid academics. Related to this, I was more interested in the number of households in a given area than the number of people in a ZIP code. Trader Joe’s is not a store for kids or big families. One or two adults is just fine.
  • How many trading areas should you enter? As long as you can preserve the culture of the company, and as long as logistics don’t kill you, go ahead.
  • The buyers at the supermarket chains knew nothing about what they sold, and they don’t want to know. What they did know all about was extorting slotting allowances, cooperative ad revenue, failure allowances, and back-haul concessions from the manufacturers.
  • Most of my ideas about how to act as an entrepreneur are derived from ‘The Revolt of the Masses’ by Jose Ortega y Gasset, the greatest Spanish philosopher of the twentieth century. I believe it offers a master ‘plan of action’ for the would-be entrepreneur, who usually has no reputation and few resources.
  • Most of my career has been spent selling ‘plans of action and programmes of collaboration.’ If you want to know what differentiates me from most manager’s that’s it. From the beginning, thanks to Ortega y Gasset, I’ve been aware of the need to sell everybody.
  • Throughout my career, my policy has been full disclosure to employees about the true state of affairs, almost to the point of imprudence. I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn the plans, but that his own troops would not.
  • Growth for the sake of growth still troubles me. It seems unnatural, even perverted. This helps explain why I went from 1974 to 1978 without opening another store. To keep sales increasing during the mid-1970s, we relied on new ideas implemented in existing stores. This was my favorite form of growth. I don’t think that any given store ever fully realizes its potential.
  • Word of Mouth: The Power of True Believers. As everyone knows, word of mouth is the most effective advertising of all. I have been known to say that there’s no better business to run than a cult. Trader Joe’s became a cult of the over-educated and underpaid, partly because we deliberately tried to make it a cult and partly because we kept the implicit promises with our clientele.
  • There aren’t many cult retailers who successfully retain their cult status over a long period of time. A couple in California are In-N-Out Burger and Fry’s Electronics. But across America, in every town, there’s a particular donut shop, pizza parlour, bakery, greengrocer, bar, etc. that has a cult following of True Believers.
  • One of the fundamental tenets of Trader Joe’s is that retail prices don’t change unless costs change. There are no weekend ad prices, no in-and-out pricing… I have always believed that supermarkets pricing is a shell game and I wanted no part of it.
  • The fundamental job of a retailer is to buy goods whole, cut them into pieces, and sell the pieces to the ultimate consumers. This is the most important mental construct I can impart on those of you who want to enter retailing. Most ‘retailers’ have no idea of the formal meaning of the word. Time and again, I had to remind myself just what my role in society was supposed to be.
  • By the time I left in 1989, we were down to a band of 1,100 to 1,500 SKUs, all of which were delivered through a central distribution system.
  • Along the way not only did we drop a lot of products that our customers would have liked us to sell, even at not-outstanding prices, but we stopped cashing checks in excess of the amount of purchase, we stopped full-case discounts, and we persistently shortened the hours. We violated every received wisdom of retailing except one: we delivered great value, which is where most retailers fall.
  • We were willing to discontinue any product if we were are unable to offer the right deal to the customer.
  • Each SKU would stand on its own two feet as a profit centre. We would earn a gross profit on each SKU that was justified by the cost of handling that item. There would be no ‘loss leaders.’
  • Above all we would not carry any item unless we could be outstanding in terms of price (and make a profit at that price) or uniqueness.
  • I do not believe in keeping ‘spoils’ in the back room until some salesperson comes by to pick them up. I believe that products should move in only one direction, never back up the supply chain. When a bottle was broken, a can dented, or a ‘short fill’ was discovered, it went to the trash bin.
  • I believe in the wisdom that you gain customers one by one, but you lose them in droves.
  • We want continuous products. Any sane person does. We want continuous products which are profitable without creating a high-price image.'
  • Showmanship is the sum total of all efforts to make contact with the customer. It’s the most ephemeral, the most difficult, and the most important of the Demand Side activities.
  • Honour thy vendors: After all, these are the guys you’re buying from. They should not be treated as adversaries.
  • Vendors should be regarded as an extension of the retailer, a Marks and Spencer concept. Their employees should be regarded almost as employees of the retailer. Concern for their welfare should be shown, because employee turnover at vendors sometimes can be more costly than turnover of your own employees.
  • Tenants who enter negotiations with the idea of beating the landlord at the objective future game usually get the kind of landlords they deserve. And vice versa.
  • Turnover is the most expensive labor expense!
  • I want to make it quite clear that I called all the shots. I reject management by committee.
  • We tried to stay out of all functions that were not central to our primary job in society: namely, buying and selling merchandise...We’d been getting rid of all functions except those buying and selling. We got rid of our own maintenance people, we sold off almost all the real estate we had acquired during the 1970’s, we never took mainframe computing in-house, etc.
  • All businesses have problems. It’s the problems that create the opportunities. If a business is easy, every simple bastard would enter it.
  • This is one of the most important things I can impart; in any troubled company the people at lower levels know what ought to be done in terms of day-to-day operations. If you just ask them, you can find answers.
  • This lopsided butterfly may cause a retailer to act as if the only people they have to ‘sell’ to are customers: the Demand Side. That’s a major mistake. All the people on the supply side have to be sold, too.”
  • From the beginning of Pronto Markets, one of my basic principles, one of my basic goals, was employee ownership of the business. Getting there, however, was complicated.
  • I tried to explain about marketing, but they wanted to hear about miracles. — Roger Fitzgerald
  • If all facts could be known, idiots could make the decisions.