Inside the secret world of Trader Joe's - Full Version
FORTUNE
-- Apple's retail stores aren't the only place where lines form these
days. It's 7:30 on a July morning, and already a crowd has gathered for
the opening of Trader Joe's newest outpost, in Manhattan's Chelsea
neighborhood. The waiting shoppers chat about their favorite Trader
Joe's foods, and a woman in line launches into a monologue comparing the
retailer's West Coast and East Coast locations. Another customer
suggests that the chain will be good for Chelsea, even though the area
is already brimming with places to buy groceries, including Whole Foods
and several upscale food boutiques.
But Trader Joe's is no
ordinary grocery chain. It's an offbeat, fun discovery zone that
elevates food shopping from a chore to a cultural experience. It stocks
its shelves with a winning combination of low-cost, yuppie-friendly
staples (cage-free eggs and organic blue agave sweetener) and exotic,
affordable luxuries -- Belgian butter waffle cookies or Thai
lime-and-chili cashews -- that you simply can't find anyplace else.
Employees
dress in goofy trademark Hawaiian shirts, hand stickers out to your
squirming kids, and cheerfully refund your money if you're unhappy with a
purchase -- no questions asked. At the Chelsea store opening, workers
greeted customers with high-fives and free cookies. Try getting that
kind of love at the Piggly Wiggly.
It's little wonder that Trader
Joe's is one of the hottest retailers in the U.S. It now boasts 344
stores in 25 states and Washington, D.C., and strip-mall operators and
consumers alike aggressively lobby the chain, based in Monrovia, Calif.,
to come to their towns. A Trader Joe's brings with it good jobs, and
its presence in your community is like an affirmation that you and your
neighbors are worldly and smart.
The privately held company's sales last year were roughly $8 billion, the same size as Whole Foods' (WFMI, Fortune 500) and bigger than those of Bed Bath & Beyond, No. 314 on the Fortune
500 list. Unlike those massive shopping emporiums, Trader Joe's has a
deliberately scaled-down strategy: It is opening just five more
locations this year. The company selects relatively small stores with a
carefully curated selection of items. (Typical grocery stores can carry
50,000 stock-keeping units, or SKUs; Trader Joe's sells about 4,000
SKUs, and about 80% of the stock bears the Trader Joe's brand.) The
result: Its stores sell an estimated $1,750 in merchandise per square
foot, more than double Whole Foods'. The company has no debt and funds
all growth from its own coffers.
You'd think Trader Joe's would be
eager to trumpet its success, but management is obsessively secretive.
There are no signs with the company's name or logo at headquarters in
Monrovia, about 25 miles east of downtown Los Angeles. Few customers
realize the chain is owned by Germany's ultra-private Albrecht family,
the people behind the Aldi Nord supermarket empire. (A different branch
of the family controls Aldi Süd, parent of the U.S. Aldi grocery chain.)
Famous in Germany for not talking to the press, the Albrechts have
passed their tightlipped ways on to their U.S. business: Trader Joe's
and its CEO, Dan Bane, declined repeated requests to speak to Fortune, and the company has never participated in a major story about its business operations.
Some
of that may be because Trader Joe's business tactics are often very
much at odds with its image as the funky shop around the corner that
sources its wares from local farms and food artisans. Sometimes it does,
but big, well-known companies also make many of Trader Joe's products.
Those Trader Joe's pita chips? Made by Stacy's, a division of PepsiCo's (PEP, Fortune 500)
Frito-Lay. On the East Coast much of its yogurt is supplied by Danone's
Stonyfield Farm. And finicky foodies probably don't like to think about
how Trader Joe's scale enables the chain to sell a pound of organic
lemons for $2.
To get inside the mysterious world of Trader Joe's, Fortune
spent two months speaking with former executives, competitors, industry
analysts, and suppliers, most of whom asked not to be named. What
emerged is a picture of a business at a crossroads: As the company
expands into new markets and adds stores -- analysts say the grocer
could easily triple its size in the coming years -- it must find a way
to maintain its small-store vibe with customers. "They see themselves as
a national chain of neighborhood specialty grocery stores," says Mark
Mallinger, a Pepperdine University professor who has done research for
the company. "It means you want to create an image of mom and pop as you
grow." That's no easy task. Just ask Starbucks (SBUX, Fortune 500)
CEO Howard Schultz, whose expansion has been a huge success but has
come at the expense of credibility with some coffee aficionados. The
alternative is to remain a small brand with unflagging devotees, like
outdoor clothier Patagonia. If it can get the balance right, Trader
Joe's may be one of the few retailers to marry cult appeal with scale.
Just don't expect anyone from the company to talk about it.
Who's a fan
of Trader Joe's? Young Hollywood types like Jessica Alba are regularly
photographed brandishing Trader Joe's shopping bags -- but Supreme Court
Justice Sonia Sotomayor reportedly is a fan too. "What's not to like?"
says Costco (COST, Fortune 500)
co-founder and CEO Jim Sinegal. "They're very good retailers, and we
admire them a lot." Visit a Trader Joe's early in the day, and there are
senior citizens on fixed incomes shopping for bargains; on weekends and
evenings a well-heeled crowd takes over. Kevin Kelley, whose consulting
firm Shook Kelley has researched Trader Joe's for its competitors,
jokes that the typical shopper is the "Volvo-driving professor who could
be CEO of a Fortune 100 company if he could get over his capitalist angst."
The
rise of Trader Joe's reflects Americans' changing attitudes about food.
While Trader Joe's is not a health food chain, it stocks a dizzying
array of organics. It sells billions of dollars in food and beverages
that years ago would have been considered gourmet but are now mainstays
of the U.S. diet, such as craft beers and white-cheese popcorn. The
genius of Trader Joe's is staying a step ahead of Americans'
increasingly adventurous palates with interesting new items that
shoppers will collectively buy in big volumes.
The retailer's foodie roots and quirky in-store culture date to the original Joe.
Joe Coulombe (pronounced COO-lomb), now 80, opened the first Trader
Joe's 43 years ago in Pasadena to serve a sophisticated -- but strapped
-- consumer. He named the store Trader Joe's to evoke images of the
South Seas. He stocked it with convenience-store items and good booze,
and at one time his shop boasted the world's largest assortment of
California wine. (Decades later Trader Joe's would again become famous
for wine, specifically its $1.99 Charles Shaw label, better known as
"Two-Buck Chuck.") Coulombe then added health food -- a seemingly odd
combination that totally worked in 1970s California. By the late 1970s
he was operating more than 20 locations.
The company's success did
not go unnoticed. German grocery mogul Theo Albrecht, who died in July
at age 88, coveted Trader Joe's -- not as part of a major U.S. expansion
but as a smart financial investment. Even in the early days, Trader
Joe's appeal was its narrow but zany selection and loyal customers,
recalls Dieter Brandes, who did due diligence on the company for
Albrecht. "It was fantastic. It was different," he says. In 1979,
Coulombe sold his company to Albrecht. Coulombe tells Fortune he "can't remember" the selling price.
The
Albrechts, who own Trader Joe's through a family trust, have generally
stayed out of the business. They visit the U.S. operation about once a
year, and word around the office spreads that "the Germans" are coming.
Coulombe stayed on without a management contract for a decade; in 1987
he hired John Shields, a fraternity brother from his undergraduate days
at Stanford, who was CEO until 2001. Under Shields' reign, Trader Joe's
expanded outside California to Arizona in 1993 and to the Pacific
Northwest in 1995. Although executives worried that Northeastern
shoppers wouldn't "get" Trader Joe's, the company in 1996 leapfrogged
the country and opened two stores in places crawling with college
professors and other bargain-hunting elites: Brookline and Cambridge,
both outside Boston.
Push
your way into the bustling Trader Joe's in Manhattan's Union Square
neighborhood, and it's hard to believe that executives ever worried that
East Coasters wouldn't groove on the experience. Make no mistake: A
typical family couldn't do all its shopping at the store. There's no
baby food, toothpicks, or other necessities. But for this crowd of
urbanites and college kids, Trader Joe's is nirvana.
A closer look
at its selection of items underscores the brilliance of Coulombe's
limited-selection, high-turnover model. Take peanut butter. Trader Joe's
sells 10 varieties. That might sound like a lot, but most supermarkets
sell about 40 SKUs. For simplicity's sake, say both a typical
supermarket and a Trader Joe's sell 40 jars a week. Trader Joe's would
sell an average of four of each type, while the supermarket might sell
only one. With the greater turnover on a smaller number of items, Trader
Joe's can buy large quantities and secure deep discounts. And it makes
the whole business -- from stocking shelves to checking out customers --
much simpler.
Swapping selection for value turns out not to be
much of a tradeoff. Customers may think they want variety, but in
reality too many options can lead to shopping paralysis. "People are
worried they'll regret the choice they made," says Barry Schwartz, a
Swarthmore professor and author of The Paradox of Choice. "People
don't want to feel they made a mistake." Studies have found that buyers
enjoy purchases more if they know the pool of options isn't quite so
large. Trader Joe's organic creamy unsalted peanut butter will be more
satisfying if there are only nine other peanut butters a shopper might
have purchased instead of 39. Having a wide selection may help get
customers in the store, but it won't increase the chances they'll buy.
(It also explains why so often people are on their cellphones at the
supermarket asking their significant other which detergent to get.) "It
takes them out of the purchasing process and puts them into a
decision-making process," explains Stew Leonard Jr., CEO of grocer Stew
Leonard's, which also subscribes to the "less is more" mantra.
Customers
accept that Trader Joe's has only two kinds of pudding or one kind of
polenta because they trust that those few items will be very good. "If
they're going to get behind only one jar of Greek olives, then they're
sure as heck going to make sure it's the most fabulous jar of Greek
olives they can find for the price," explains one former employee. To
ferret out those wow items, Trader Joe's has four top buyers, called
product developers, do some serious globetrotting. A former senior
executive told me that Trader Joe's biggest R&D expense is travel
for those product-finding missions. Trade shows that feature the flavor
of the moment "are for rookies," a former buyer said. Trader Joe's
doesn't pick up on trends -- it sets them.
The other dozen or so
buyers, or category leaders, spend more time in the office, fielding
hundreds of cold calls a week from vendors tripping over themselves to
make Trader Joe's a customer. Trader Joe's is a supplier's dream
account: It pays on time and doesn't mess with extra charges for
advertising, couponing, or slotting fees that traditional supermarkets
charge suppliers to get their products onto the shelves. "It's all
transparent -- no BS," says a former executive. In exchange, suppliers
have to agree to operate under Trader Joe's cloak of secrecy. Fortune
obtained a copy of a standard vendor agreement, which states, "Vendor
shall not publicize its business relationship with TJ's in any manner."
Why
the lockdown? Former executives say that Trader Joe's wants neither its
shoppers nor its competitors to know who's making its products. And
many suppliers aren't that keen on consumers knowing that they produce a
lower-cost version for Trader Joe's either. Take Tasty Bite, which
makes much of Trader Joe's Indian food. The Tasty Bite Punjab Eggplant
ran $3.39 at a Whole Foods in Manhattan. The seemingly identical Punjab
Eggplant that the Stamford, Conn., company makes for Trader Joe's is
more than $1 cheaper.
Over the years Trader Joe's has improved the
way it distributes Joe's-branded goodies to its stores. Management has
sought to minimize the number of hands that touch a product; whenever
possible, Trader Joe's purchases directly from the manufacturers, which
then ship their wares straight to Trader Joe's distribution centers. A
U.S.-made cheese, for example, is sent to distribution centers
nationwide, where it's sometimes cut and wrapped, taking another cost
out of the equation. At a traditional supermarket, that same cheese
would probably go through a distributor first, tacking on another cost.
Trucks leave the distribution centers daily for the stores. Trader Joe's
small stores don't have much of a back room, so ordering from the
distribution centers has to be precise.
This distribution process
helps determine where the company opens its stores. Texas and Florida
have cities that boast consumers Trader Joe's covets, but insiders say
the current distribution infrastructure makes it difficult for the
company to efficiently get products to those states. To pick their next
locales, employees look at demographics such as education level. In the
past they've even looked at who's subscribing to high-end food and
cooking magazines as a way of divining where the epicures are.
On a
Tuesday evening just before dinnertime, retail expert Burt P.
Flickinger III joins the steady hum of foot traffic at the Trader Joe's
in Larchmont, N.Y. Because Trader Joe's won't give Fortune any
information on its stores, Flickinger, of consulting firm Strategic
Resource Group, has agreed to walk through a few suburban locales and
offer feedback. In Larchmont, Flickinger does a little bit of his own
shopping. (It's what happens when you walk into a Trader Joe's -- you
get sucked into buying stuff you didn't plan to.) An employee, noticing
that he has his arms full, brings him a basket. At the register the
perky cashier offers up that the mango sorbet Flickinger has selected is
on her top 10 list of favorite Trader Joe's items.
You can't buy
engagement from employees, but the pay at Trader Joe's helps. Store
managers, "captains" in Trader Joe's parlance -- the nautical titles are
a holdover from Coulombe (newly promoted captains are commanders;
assistant store managers are first mates) -- can make in the low six
figures, and full-time crew members can start in the $40,000 to $60,000
range. But on top of the pay, Trader Joe's annually contributes 15.4% of
employees' gross income to tax-deferred retirement accounts.
All
of that can lead to a better customer experience. A ringing bell instead
of an intercom signals that more help is needed at the registers.
Registers don't have conveyor belts or scales, and perishables are sold
by unit instead of weight, speeding up checkout. Crew members aren't
told the margins on products, so placement decisions are made based not
on profits but on what's best for the shopper. Every employee works all
aspects of the store, and if you ask where the roasted chestnuts are
he'll walk you over instead of just saying "aisle five." Want to know
what they taste like? He can probably tell you, and he might even open
the bag on the spot for you to try.
Can Trader Joe's maintain that
kind of charm as it expands? Former employees worry that the company is
losing its entrepreneurial zeal and that CEO Dan Bane has made the
place more corporate, adding more senior vice presidents, and creating
new titles such as product developer. At headquarters Bane encourages
employees to wear Hawaiian shirts and name tags. But putting systems in
place isn't necessarily a bad thing. "You have to grow up at some
point," says a former employee. "You have to start following rules. You
have to start putting in checks and balances." The stakes are higher now
that Trader Joe's has hundreds of stores. A buying error could cost the
company millions.
Bane, 62, who has a background in accounting,
graduated in 1969 from the University of Southern California, where he
played baseball -- or, as he's said, "spent a lot of the time on the
bench." During a talk at USC, Bane said that he's modeled his leadership
style on his famed coach, Rod Dedeaux. Bane joined the company in 1998
as president of West Coast operations and became CEO only three years
later.
A few former employees describe him as gruff, but he also
has a softer side. In a video tribute to a sixth-grade teacher named
Mrs. Bidwell, he talked about how she helped him adjust to life in El
Dorado, Ark., after the Navy relocated Bane's father there from Southern
California.
Some former employees say Trader Joe's has already
lost its quirky cool. "In the early days we never tried to be the
neighborhood store," says a former employee. They didn't have to: Trader
Joe's was the neighborhood store. And yet walk into the Chelsea
location on a busy weekday night and you'll see something you almost
never see in Manhattan: strangers chatting with one another. Veteran
customers tell newbies what products they absolutely have to try, and
serious cooks share tips on how to spike sauces and semi-prepared foods
to make them even tastier. If Trader Joe's can maintain that kind of
mojo, it could end up the biggest neighborhood store ever. Source: http://money.cnn.com/2010/08/20/news/companies/inside_trader_joes_full_version.fortune/index.htm
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