Becoming Trader Joe:  How I Did Business My Way and Still Beat the Big Guys by Joe Coulombe

Summary

  1. Joe Coulombe shares how Trader Joe’s came to be and some of his core operating principles.

Key Takeaways

  1. His first rule for new ideas was to always think outside the box, but always consider our customers and employees.
  2. I began the transition of Pronto into Trader Joe’s. I resigned at the end of 1988. During those twenty-six years, our sales grew at a compound rate of 19 percent per year. During the same twenty-six years, our net worth grew at a compound rate of 26 percent per year. Furthermore, during the last thirteen years of that period, we had no fixed, interest-bearing debt, only current liabilities. We went from leveraged to the gills in the early days to zero leverage by 1975. Furthermore, we never lost money in a year, and each year was more profitable than the preceding year despite wild swings in income tax rates.
  3. In June 1982, my wife, Alice, and I went to Lima to visit the canning plant. We witnessed something very interesting: the United States had a quota for imported tuna. Once Peru’s quota had been filled, a biological miracle occurred right there on the canning line. What had been tuna was now pilchard, a member of the herring family, on which there was no quota. The like hasn’t been seen since the Sea of Galilee! To this day, Trader Joe’s is virtually the only retailer of pilchard.
  4. technology for grinding almonds is completely different than the technology for grinding peanuts. Finally, Doug, whom you will meet often in these pages, found a religious colony in Oregon who had mastered the trick and taught it to Doug.
  5. If all the facts could be known, idiots could make the decisions. —Tex Thornton, cofounder of Litton Industries, quoted in the Los Angeles Times in the mid-1960s. This is my favorite of all managerial quotes.
  6. In 1962, Barbara Tuchman published The Guns of August, an account of the first ninety days of World War I. It’s the best book on management—and, especially, mismanagement—I’ve ever read. The most basic conclusion I drew 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.
  7. . . non-convex problems . . . are puzzles in which there may be several good but not ideal answers which classical search techniques may wrongly identify as the best one. 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.
  8. This is the most important single business decision I ever made: to pay people well. 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. My standard was simple: the average full-time employee in the stores would make the median family income for California. Back in those days it was about $7,000; as I write this, it is around $40,000. What I didn’t count on back there in the 1960s was that so many spouses would go to work in the national economy. When I started, average family income was about the same as average employee income. The great social change of the 1970s and 1980s moved millions of women into the workplace. Average family income soared ahead. But we stuck with our standard, and it paid off.
  9. We really didn’t pay more per hour than union scale, but we gave people hours. Because union scale is so high, the supermarkets are very stingy with hours and will do anything to avoid paying overtime. I simply built overtime into the system: everyone was to work a five day, forty-eight-hour week. Actually, because of fluctuations in the business, employees often alternate between four-day and six-day weeks (38.5 hours to 57.5 hours). This generates a lot of three-day weekends, which is quite popular with the troops.
  10. Equally important was our practice of giving every full-time employee an interview every six months. At Stanford I’d been taught that employees never organize because of money: they organize because of un-listened-to grievances. We set up a program under which each employee (including some part-timers) was interviewed, not by the immediate superior, the store manager, but by the manager’s superior. The principal purpose of this program was to vent grievances and address them where possible. And I think this program was as important as pay in keeping employees with us.
  11. In a lecture at the University of Southern California Business School, I talked about this. A young woman raised her hand: “But how could you afford to pay so much more than your competition?” The answer, of course, is that good people pay by their extra productivity. You can’t afford to have cheap employees.
  12. 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
  13. To this day, the promotion of Extra Large AA eggs is one of the foundations of Trader Joe’s merchandising, not just because of the program per se, but because it set me to wondering whether there weren’t other discontinuities out there in the supplies of merchandise. Eight years later, we built Trader Joe’s on the principle of discontinuity.
  14. As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.
  15. Still trying to maximize the use of a small store, I looked for other categories that met the Four Tests: high value per cubic inch, high rate of consumption; easily handled; and something in which we could be outstanding in terms of price or assortment.
  16. I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn his plans, but that his own troops would not.
  17. I admire Nordstrom’s fundamental instruction to its employees: use your best judgment.
  18. We became the best place in the world to buy a good bottle of wine for less than $2.00. That’s a position we held for the rest of my days at Trader Joe’s. It absolutely addressed our prime market, the overeducated and underpaid people of California.
  19. Leroy found a hippie outfit in Venice—I think it was called Mom’s Trucking—which would package the bran. But bran is a low-value product. They couldn’t afford to deliver it. Since they also packaged nuts and dried fruits, however, we somewhat reluctantly added them to the order. And that’s how Trader Joe’s became the largest retailer of nuts and dried fruits in California! Brilliant foresight! Astute market analysis!
  20. Growth for the sake of growth still troubles me. It seems unnatural, even perverted.
  21. One of the fundamental tenets of Trader Joe’s is that its retail prices don’t change unless its costs change. There are no weekend ad prices, no in-and-out pricing.
  22. One should never use a mandatory sentence in addressing a customer; should never give orders. The subliminal message of a Trader Joe’s commercial is, “We’re gonna be around for a long time. If you miss out on this bargain, there’ll be another. If you have the time and inclination .
  23. My point is that a businessperson who complains about problems doesn’t understand where his bread is coming from. So by hairballs I don’t mean those fundamental issues such as demand, supply, competition, labor, capital, etc., which create the matrix of a business. By hairballs, I mean those wholly unnecessary thorns that come unexpectedly. Their greatest danger is that they consume management stamina that is needed to deal with the Matrix Issues.
  24. We fundamentally changed the point of view of the business from customer-oriented to buyer-oriented. I put our buyers in charge of the company.
  25. Each SKU would stand on its own two feet as a profit center. We would earn a gross profit on each SKU that was justified by the cost of handling that item. There would be no “loss leaders.”
  26. 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.
  27. Yet it cuts a wide swath in food retailing thanks to Intensive Buying, which is what the 1977 Five Year Plan boiled down to, which I formally named by the end of that plan, and which stressed mobility, irregularity, and adaptability.
  28. Honor Thy Vendors – Many of our best product ideas and special buying opportunities came from our vendors.
  29. Vendors should get prompt decisions. Some of our greatest coups were generated by our commitment to make an offer within twenty-four hours of a presentation.
  30. Vendors should be regarded as extensions of the retailer, a Marks & 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.
  31. adopted a rule: Screw me once, shame on you. Screw me twice, shame on me. The vendor who screwed us twice was through, forever. During all my years in the company, I can recall only a couple of instances of permanent banishment. One thing that never failed to astonish me was how well samples from vendors actually matched the delivered products. Most people, even vendors, act well if you treat them decently.
  32. During the next twelve years under Mac the Knife, we not only radically changed the composition of what we sold; we totally centralized the distribution into our own system, ending all direct store deliveries by vendors!
  33. People often ask me, how many stores did we have at such-and-such a 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.
  34. But my preference is to have a few stores, as far apart as possible, and to make them as high volume as possible. With Mac the Knife we could draw people from twenty-five to fifty miles away. When we opened Ventura in 1983, 30 percent of our business came from Santa Barbara. Sales per store, sales per square foot: those are the measures I look at. Trader Joe’s sales were $1,000 per square foot of total area. The supermarket average is $570, but they use “sales area” not total area. And yes, there is a difference.
  35. I want to brag about something here: in thirty years we never had a layoff of full-time employees. Seasonal swings in business were handled with overtime pay to full-time employees, and by adjusting part-time hours. The stability of full-time employment at Trader Joe’s was due in part to caution in opening new stores, and insisting on high-volume stores.
  36. I believe in ruthlessly dumping the dogs at whatever cost. Why? Because their real cost is in management energy. You always spend more time trying to make the dogs acceptable than in raising the okay stores into winners. And it’s in the dogs that you always have the most personnel problems.
  37. I believe that the sine qua non for successful retailing is demographic coherence: all your locations should have the same demographics whether you are selling clothing or wine. We looked for our demographics: there are lots of overeducated and underpaid people in Southern California.
  38. I liked semi-decayed neighborhoods, where 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 was just fine.
  39. Given the number of households, I would judge the degree of suitability based on my experience since 1954 in looking at California real estate, and then based on driving the area thoroughly. I would never trust a broker’s judgment. If I saw lots of campers and speedboats in the driveways, I’d ax the location. People who consume high levels of fossil fuels don’t fit the Trader Joe’s profile.
  40. The answer is to design a store that has no competition. That’s why Mac the Knife should not carry any SKU in which it is not outstanding.
  41. The bonus was based on Trader Joe’s overall profit, allocated among the stores based on each store’s contribution. Sure, we massaged the numbers to avoid perceived unfairness, but that was basically the system. In 1988, several Captains made bonuses of more than 70 percent of their base pay. And our 15.4 percent retirement accrual applied to bonuses as well as base pay! I don’t believe in bologna-slice bonuses. Unless a bonus system promises, and delivers, big rewards, it should be abandoned.
  42. We instituted full health and dental insurance back in the 1960s when it was cheap. When I left, we were paying about $6,000 per employee per year! Why? If the employees are stressed by medical bills, they may steal. That’s one good reason for Trader Joe’s generous health and dental plans. On the other hand, we were cheap, cheap, cheap on life insurance. Nobody steals because of an inadequate life insurance program.
  43. Each full-timer was supposed to be able to perform every job in the store, including checking, balancing the books, ordering each department, stocking, opening, closing, going to the bank, etc. Everybody worked the check stands in the course of a day, including the Captain.
  44. The people in the stores were long-tenured, partly because most of our full-timers had risen from the ranks of the part-timers; and partly because of the slow growth of the number of stores, so there weren’t scads of promotion opportunities.
  45. The top thirteen people were in the Central Management Bonus Pool. They voted each year how it would be divided among themselves and they usually voted to split the pool evenly, so Leroy got the same bonus as Doug Rauch or our Controller, Mary Genest. Like the Captains’ bonus pool, the bonus pool was determined by profit before taxes, and after the Captain’s bonus had been paid. It was rich, typically 40 percent of a Senior Project Director’s salary. As I recall in 1988, the typical salary and bonus came to $120,000.
  46. Drucker wrote a seminal piece in the July 25, 1989, Wall Street Journal called “Sell the Mail Room.” Every executive should take it to heart.
  47. We tried to stay out of all functions that were not central to our primary job in society: namely, buying and selling merchandise.
  48. From my view, the Demand Side of Retailers can be analyzed in terms of five variables: The assortment of merchandise offered for sale. Pricing: stability (weekend ads?), 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. Here are 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 As in double entry accounting, the change in any factor must be matched by a corresponding change in another factor.
  49. We never had “closeout” sales. What a terrible practice! You train your customers to wait for the “sale.” Any product that failed to sell was given to charity. We were developing new products all the time; sometimes they didn’t pan out. So we gave them away. I do not believe in “market testing” new products.
  50. Lighting, I think, is one of the key elements in successful retailing.
  51. For example, by the time I left Trader Joe’s, we were selling 45 percent of all the Jarlsberg cheese sold in California. Our price was $3.49. The going price in the supermarkets was $6.00. The “cost” of the supermarkets into their stores, however, was about $3.49. Why? Because the supermarkets insisted on advertising allowances, which were credited to the ad budget; cash discounts, which were credited to General Administration; promotional allowances, which were credited to revenue, etc. The apparent cost was inflated by all these accounting decisions. The fact is that most supermarkets don’t know what their true cost is for Jarlsberg because their buyers want to look good. They are incentivized by the amount of revenue and ad allowances they generate.
  52. Trader Joe’s buying objective was to get just one, dead-net price, delivered to our distribution centers. This was quite similar to the policy that Sam Walton was developing at about the same time, a practice called “contract pricing.”
  53. My cash policy was this: we would always have cash at least equal to two weeks’ sales. (I think this is called an “heuristic” decision in business school.) Any month we didn’t meet the test, I would borrow from Bank of America on a five-year term loan ostensibly secured by store fixtures. But I wasn’t borrowing for fixtures and inventory, as I took pains to explain to Bank of America. If I had enough cash to buy fixtures, I didn’t borrow. After 1975, I never borrowed again.
  54. An entire chapter, “Crime Side Retailing,” could be written because that’s how I spent half of my time: dealing with crime with before-the-fact controls, and after-the-fact with detection and action.
  55. One of the most important Supply Side constraints is the stamina of the Chief Executive Officer. I haven’t listed it above, but it’s there. And the sort of thing that wore down this CEO was year after year of employee theft.
  56. It didn’t help that Sol Price had sold FedMart the previous year to another German capitalist, a sale that ended in an explosive exit by Sol, and the subsequent collapse of FedMart.
  57. The calculus of what do I risk if I sell included the fact that Trader Joe’s was my Zen window on the world. I experienced the world mostly through Trader Joe’s. That’s an advantage of being self-employed. That window can never be as open while you’re an employee, even a Frederick-Forsyth rich one, even one given great discretion by absentee owners.
  58. 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.

What I got out of it

  1. A really fun, personal story of Trader Joe’s founding – truly caring about employees and customers, the power of high wages, the power of incremental improvements and always looking to bring innovative products at the cheapest prices, take a simple idea and take it seriously, principle of discontinuity, deep product knowledge, simple and consistent pricing (no games),