I decided today needed to be an all Trader Joe's day. Actually, I got to show you. Check out my haul.
Oh, tote bag. You are styling. Take that to Europe.
I've got some Chobani. Got so many nuts. So many nuts. Some chocolate, some cheese. Little picnic we're going to have here in the recording studio.
All right. Here I am popping this bottle of Charles Shaw and we are ready to go.
That might be the nicest wine opener that has ever been used for Two Buck Chuck.
All right, 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? Sit me down. Say it straight. Another story on the way. Who got the truth?
Welcome to the fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. 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 chips, and mandarin orange chicken. These are a few of the items I picked up this week on my trip to Trader Joe's.
You know, David had to do a research trip. It was mandatory. Had to do the research trip.
I don't think I've ever spent more money at Trader Joe's because I just said yes to everything and it felt like I needed to have it all.
But you couldn't have spent that much money. That's part of the point.
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 traveling the South Seas, but for value-conscious shoppers. And they break every rule in grocery retailing. 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 reliably horrible. I mean, every Trader Joe's 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 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, 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 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. 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 7-Eleven in the 1960s.
I mean, I wrote this whole script and everything you just said is accurate, 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 topics, get corrections from past episodes, see all the images that we are talking about in episodes. That's acquired.fm/email. After you listen, come talk about this with the entire Slack community: acquired.fm/slack. If you want more Acquired, check out our interview show, ACQ2. Search ACQ2 in any podcast player to listen. And before we dive in, we want to briefly thank our presenting partner, JP Morgan Payments.
Yes, just like how we say every company has a story, every company's story is powered by payments. And JP Morgan Payments is a part of so many of their journeys from seed to IPO and beyond.
So with that, David, happy 10-year anniversary.
Happy 10-year anniversary. Toast my Two Buck Chuck to you right now.
You've got the Two Buck Chuck open bit. 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 10-year anniversary of posting our very first episode. It has been an amazing 10 years with all of you. Thank you so much for listening. What a journey together.
With that, listeners, this show is not investment advice. David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only. David Rosenthal, where are we starting our story?
Oh man. Well, I wish that you and I had investments in this company, but unfortunately only one person in the world does, and he's deceased, as we will see at the end of the episode.
Yes. We start with Trader Joe himself, Joe Coulombe, because you can't separate Trader Joe's from Trader Joe.
Joe Coulombe was born in 1930 in San Diego, California, the same hotbed of American retailing innovation that produced Sol Price, Price Club, and everything that would become Costco, which we so lovingly talked about on that episode a few years ago. Joe's father was an engineer at Convair, an aircraft manufacturer in Southern California in the defense industry there, and his mother was a school teacher. 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 1952, and then somewhat unusually for the time, he stays on at Stanford for an extra two years and he gets an MBA at the Stanford Graduate School of Business in 1954.
You know, there's a lot of famous Stanford alumni. This is not one that people are walking around quoting. You know, Joe Coulombe was a GSB 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 reflecting that, Joe goes to get a job after GSB, and the only job he can get is back in Southern California at the lowly Owl Drug Company, which is a subsidiary of the larger Rexall drug company, a line of regional drug stores throughout America. And this is a struggling company.
How times have changed for new GSB grads these days in the job market. So what was Owl?
Owl was a chain of 300 drugstores up and down the West Coast. So Joe gets hired by an executive named Bud Fiser who specifically wanted to bring in a recent MBA grad to research alternatives for turning around Owl. The company is struggling. So Joe goes off and he scours the country and comes across a relatively new concept coming out of Texas, 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 to something called 7-Elevens.
Ah, yes. The history of 7-Eleven and the Southland Corporation is fascinating and probably merits an Acquired episode of its own someday. Here is a list of crazy things about 7-Eleven. One, today, 2025, they have more stores than any other retailer in the entire world. They are the largest retailer in the world by number of stores, which is not the way that you should be impressed by a retail company, but it is impressive.
No, their market cap is about $30 billion. So, like a small fraction of Walmart and Costco and Amazon, etc.
Two, they invented the to-go coffee cup.
That's wild. And also the self-serve soda fountain.
And then this is my favorite. In the 70s, the Southland Corporation franchised the 7-Eleven concept to a company in Japan, a supermarket chain there. It became so successful in Japan, and 7-Elevens in Japan are like so deeply part of the Japanese culture, that in the 90s, 7-Eleven Japan bought out the 7-Eleven parent and now own the company. 7-Eleven today is a publicly traded Japanese company on the Tokyo Stock Exchange, founded in Dallas, Texas, 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 as part of the Southland Corporation, how did this come to be? So, Southland was founded in the 1920s as an 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?
All right. So listeners, this comes from Benjamin Lorr 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 and pick up ice in the Texas heat, pre-cars, pre-refrigerators, pre-freezers, pre-anything. So this innovation happens where in 1927 a guy named John Jefferson Green 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 7 a.m. and we stay open late till like 11 p.m. so our customers can come get their ice for their ice boxes when it's not going to melt on the way home.
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.'
Makes sense. I buy my ice for my ice box from you. Why can't I buy the things that I put in my ice box?
Exactly. And so John Jefferson Green immediately calls the folks he knows at the Southland Corporation, kind of the parent, and says, 'If you give me the money, I'll source 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 7-Eleven, even though it wouldn't be fully rebranded yet, this becomes 7-Eleven. And this, of course, seems obvious today, like, oh, why didn't anybody try this before? This is the heyday of the milkman and the produce man and the poultry man. These things get delivered or you pick them up in a market in town. The modern supermarket, let alone convenience store, doesn't exist yet. 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 daily items you might want. Bread, beer, cigarettes, magazines, etc. People love it. Then fast forward after World War II when the American economy is booming. 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 7-Eleven business. 1946 they officially changed the name of the stores to their operating hours, 7-Eleven.
And David, you're talking about the rise of the automobile and refrigerators happening. That technology change and the post-World War II shift means this thing has perfect product-market fit. By 1951, it becomes Texas's largest retailer of beverages, milk, and bread. They've got a little under 100 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 14 more years in 1965, what does this look like? In that year, they opened 398 stores in a single year. I think all in Texas.
Yeah. For context, Trader Joe's today in 2025 has 600 stores. So 7-Eleven is blowing the doors off. This is true blitzscaling that's happening to sort of fully seize this opportunity that people are clearly going crazy for. Like we said, they are the largest retailer in the world by number of stores today. Crazy.
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. And at the time, this was breakthrough. This was completely innovative.
Yeah. Yes. Well, speaking of completely obvious, back to Joe and the Trader Joe's story. He's working at Owl for Bud.
And this is like the mid-50s. So, this is right as 7-Eleven is starting to really scale up, but before it's hitting those sort of crazy hundreds of stores per year number.
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 got to turn around Owl. Let's just copy-paste this 7-Eleven thing.
Now remember, Owl is part of this bigger conglomerate of Rexall, this slow-moving ship. So he comes back, they're like, 'Oh, we're going to do this.' And Rexall's like, 'I don't know.' 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 this is like the path almost taken for Joe. He gets a call from another Southern California company one day 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. This is the semiconductor division, the new startup division of the Hughes Aircraft Company. And Joe actually jumps ship for 18 months and goes and works at Hughes and he's basically like the CFO of their semiconductor division.
Joe works in semiconductors.
Yes. During which time it grows 700%.
Shock semiconductor had just gotten started. We're about to hit Fairchild and Intel. Silicon Valley is about to boom. There was this whole alternative path that Trader Joe might have actually been like a Traitor 8 or something like.
Wow. Totally wild. So he's on this path, but then he leaves Hughes. So then Bud calls him back up after 18 months that he's been at Hughes and he's like, 'All right, I've finally persuaded Rexall to go ahead with the cloning 7-Eleven concept. We've got the 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 going to make you president of our new division within Owl that is going to copy 7-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 27, he comes back to Owl/Rexall as the new president of the newly christened Pronto Markets.
Pronto convenience store. You're in, you're out. Pronto. Giddy up.
They build six Pronto convenience stores in the LA metro area as a pilot and off to the races as you would expect. It works great. Instant product-market fit. Tons of demand. They're blowing the doors off.
And I should say, 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, high-volume business, tobacco, selling what Joe calls girly magazines, pornographic magazines.
This is not the Trader Joe's that you know today.
That's exactly right. And that might have been the story. Joe might have built the 7-Eleven of the West Coast, except that the parent company Rexall had a couple different irons in the fire for turnarounds here. And one of the other irons was they had bought another little startup company called Tupperware.
Oh yes. 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.
As they bought Tupperware, it becomes so successful that the management team that's running Rexall is like, 'Screw this crappy retail business. We're going all in on products and multi-level marketing.' They decide that they're going to sell off the entire retail division piece by piece and buy a bunch of other product. They end up buying Duracell, the battery company, which would eventually be owned by Berkshire.
Crazy. And isn't there something with oil here where like the owners of Rexall wanted to fully invest in the supplier of Tupperware? So, they bought into like an oil business.
Yes. And they needed to free up the capital to do that. They were super all in on Tupperware.
So, this leaves Joe, you know, he's 27, 28. He just quit his job in semiconductors, right? Like he's got a wife, he's got like a young family, and he's got a successful early business here that he's running. So he goes to Rexall and he says, 'Hey, rather than just selling off Pronto as part of all the drugstore operations, 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 the Rexall CFO says, 'All right, I'll tell you what. I will sell these things to you for $10,000 over the book value that we essentially have these leases on on our books.'
And what's book value on this?
Book value is $15,000. So if you can scrape together $25,000, I will sell you Pronto Markets. And inflation-adjusted, this is now the early 60s. This would have been about $250,000 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.
Full-on Savannah Bananas. You know, Jesse Cole may as well be on an air mattress in a garage instead of a yellow tuxedo. You know, Joe is wearing a Hawaiian shirt here.
Yes. That only gets them to like $14,000. He needs another $11,000. So, it's like his whole net worth now because he doesn't own a home and he's borrowed money from his parents. He decides to do a combination of two things for the remaining $11,000. One, he goes to Bank of America, takes out a loan. Still, they won't loan him enough money to get all the way to the $25,000. He goes to the current employees of the six Pronto stores 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 will 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 $10,000 above book.'
So he's giving them what, a 40% 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 $25,000. Summer of 1962, they close the deal and Joe and the employees become the owners of the newly incorporated Pronto Markets. Joe writes in his 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 it was a significant chunk. At least a quarter, if not a third of the company is owned by these early employees.
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, well, spoiler alert, he sells the business later, would have beat Joe by, you know, almost 2x.
Yeah. 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. A thing you commonly hear about Trader Joe's today that he did right away is, 'We're going to have some of the highest paid employees in the industry and we're going to attract the best talent by just effectively overpaying for everyone.' Basically, every employee at Trader Joe's gets paid between 40 and 150% over what average compensation is for their roles in retail.
I saw 60% 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 going to make the product that much better for customers. We're going to do clever things like rotate the employees around. No one's just a cashier. 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.
The nautical naming. There's no dedicated cashiers. There's no dedicated baggers. There's no dedicated stockers. Everybody does everything.
All right. So, everything's going to 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 he's leveraged to the gills just to do the buyout. You're not going to get far just with the buyout. 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. So shortly after doing the buyout, he goes to one of his biggest suppliers, a dairy company called Adohr Milk Farms, A-D-O-H-R, which is ROA spelled backwards. Come back to that in a minute. He goes to the owner and president of Adohr, a guy named Merritt Adamson Jr., 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 debt financing and Pronto will exclusively carry Adohr dairy products, you know, milk, ice cream.'
Nothing like borrowing money from your most important supplier.
Yeah. Right, right, right. It's good because 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.
Yep. So over the first couple years it does go great. Pronto becomes Adohr's largest retailer and then in October of 1965, Joe goes to meet Merritt for his monthly lunch meeting with him. They have monthly lunch meetings to check in about the business, the relationship. Then Merritt starts drinking. He orders one gin and vermouth, two gin and vermouth, three. He orders his fourth gin cocktail. And Joe's like, 'All right, he's got something he needs to tell me.' And it's not going to be good news.
Yes. And listeners, before David breaks the news to us of what is going to happen, there are three pieces of background that are worth knowing about Adohr and about the dairy industry at this moment in time that sets up this meeting. One, refrigeration has gone mainstream at this point. Yes, 1965, we're well past the ice box era. 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 Adohr company has had to do this crazy rejiggering of who is actually selling their product. And I said it a minute ago that Pronto, still relatively little Pronto Markets in LA, is Adohr's now largest seller of their products. That is not a good sign for Adohr. They are not doing good here.
All right. So why are they not doing well? 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 that produce milk that is well suited to be whole milk versus well suited to be skim milk. There's Holstein cows which produce white chalky milk that you sort of expect to become skim milk. There's these Guernsey cows. The milk has this yellowish hue to them. It produces this really rich creamy milk. Unfortunately, Adohr had mostly Guernsey cows. And Adohr, it's not like they have just a few of these. They are the nation's largest dairy farm 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 by 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 just Joe who realizes that 7-Eleven is a good idea in California. It's also 7-Eleven and other competitors that pop up, too.
Yes. So, what is the news?
Well, after the fourth drink, the news that Merritt finally shares with Joe is that he has made the difficult decision to sell the family business, the dairy operation.
That's troubling enough to Joe. This is his biggest financing partner, biggest supplier. It's like, all right, well, who's the buyer?
And Merritt's like, 'The buyer is the Southland Corporation. 7-Eleven is coming to California and they needed a dairy supplier and yeah, I sold our operations to them.'
Brutal. Not good. Not 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 an incredible opportunity that is the flip side of the coin. Why are the cattle so fat, so happy, and distributed across so much land? And what has Merritt inherited that's been passed down through generations of his family? Why is it called Adohr and what is Rhoda? His mother Rhoda was the descendant and inheritor of the original California Spanish land grant of the area that is now the entire city of Malibu. The most today expensive attractive real estate in perhaps the entire country. 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 develop this as real estate, which they had already been doing little by little. So Pronto Markets is toast. 7-Eleven is at least a thousand times bigger and any landlord is going to want to sign them 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 creditworthy and the operating history.
Yeah. You're a landlord. Would you rather have 7-Eleven be your tenant or startup Pronto Markets? You're going to bet on 7-Eleven.
Yes. And that not only takes away his milk supply, that's also his current debt holder 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 7-Eleven at smaller scale. And so the core insight is that Pronto Markets is effectively just an empty vessel 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.
Yes. So, Joe has some soul-searching to do. He needs a retreat. He goes on vacation. He takes his wife and children first to a little cabin in California with his family. Then he goes to St. Barts in the Caribbean. 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 would become Trader Joe's.
But before we tell that story, now is a great time to thank our presenting partner, JP Morgan Payments.
Yes. And listeners, this episode with Trader Joe's, supply chain is much more important than your typical Acquired episode. We're sort of touching on it here, but the whole rest of the episode is going to be about supply chain. When you are talking about supply chain, payments are a huge part of keeping shelves stocked and products moving. So, let's consider a typical manufacturer. They're trying to balance paying their suppliers quickly to keep good relationships while also optimizing their own working capital. And meanwhile, their suppliers, especially the smaller ones, often struggle with cash flow while they wait 30 or 60 or 90 days to get paid. This is where JP Morgan's payments technology and global expertise come in. They've transformed supply chain financing into a dynamic tech-driven solution. Their platform, which supports multiple languages and currencies, links buyers to more than 18,000 suppliers, streamlining payables and giving suppliers the option for early payment at favorable rates based on the buyer's credit rating. Businesses can easily switch between supply chain finance and dynamic discounting as their needs change. It's all real-time with full visibility, so you can track invoices and optimize payment timing in one place.
While supply chains like Trader Joe's prioritize simplicity, which spoiler alert, that is like a huge thing that we're going to talk about later in the episode. The reality for most grocery retailers is different. They have massive numbers of suppliers stocking shelves with a diverse mix of products. But managing these relationships is complex, especially when it comes to negotiating payment terms and maintaining a steady flow of goods. And this is not unique to grocery. Many other industries like restaurants, automotive, hardware, technology, and more depend on a large network of suppliers. And in all likelihood, your industry can benefit from optimizing payment cycles and strengthening supplier relationships. That's why over 2 million suppliers worldwide use these solutions. It's a win-win, making supply chains more resilient and efficient. JP Morgan Payments is at the forefront, providing trusted, innovative financial and operational infrastructure. So whether you want to unlock more flexibility in your finances or build a supply chain that's ready for anything, visit jpmorgan.com/acquired to learn how JP Morgan Payments can help you build your business.
And listeners, for anyone going to AWS re:Invent, we will be there with the JP Morgan Payments team. We're doing a big interview on stage with AWS CEO Matt Garman and more. You can find all of the details on that, plus a re:Invent discount for Acquired listeners in the show notes.
All right. So, David, the origin of Trader Joe's. Joe is there in St. Barts in his beach house, cocktail in hand, looking out over the ocean, thinking about how absolutely screwed he is. He effectively...
And the plan is cocktails.
Effectively, the plan is tiki.
Yeah. The crazy thing that he does on this vacation and then henceforth his management style, he is a genius. He premeditates the entire shifting landscape over the next 30 years ahead of him and he does it five years at a time 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 how people will be educated and consumer buying preferences and travel patterns. As I really dug into this, Joe's somewhat of a macroeconomist who once he realized where 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 typesetting newsletters for customers. 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? He's thought through all these implications. He's forecasted the future and he's going to 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 to meet his obligations. He needs it to quickly become a good business, quickly provide returns, and is protected from the 7-Eleven juggernaut that's coming because you never want to compete with someone 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.
Yep. And he lands on hard alcohol.
This is the hilarious thing about Trader Joe's. It actually starts as a hard liquor company.
It's an ammo and tobacco company that gets into hard liquor.
Right. Right. Right. So hard liquor is actually very, very, very attractive here. It's very high value. There are a set of laws called fair trade laws that impact everything that 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 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 the price that the cabal of producers of any given good set.
Yes. Once all this stuff gets thrown out and ruled unconstitutional, etc. Now it's suggested. Back then it was like mandated.
But the net of that is if you can find a way to sell hard alcohol because they're high dollar value, you know, you're going to 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, then it's like an annuity. People are definitely going to come to your store. They're definitely going to buy liquor and you have a regulatory protected profit on that liquor.
Yes. And that's the moat against 7-Eleven. 7-Eleven, giant Southland Corporation. They're not going to come to California and get liquor licenses for all these stores that they're going to open. They're an 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 because they're basically, like you said, a guaranteed annuity profit stream. And he can invest at a small scale, raise more debt to do this. And this is his way out. And that was basically his bet is 7-Eleven because this is like a small little arm of their operation. They're not going to change their sort of national business model to in this little pocket 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 perhaps unforeseen at the time, but ultimately incredibly strategic benefit to this decision to go all in on hard liquor, which is it's also a moat against supermarkets and the grocery industry. They're not going to do hard liquor either, at least at this point in time.
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 for a couple years. Pronto Markets basically transforms into a liquor store and it buys Joe a couple years to figure out the bigger business plan and stave off the invasion from 7-Eleven. They're still selling other stuff in the stores, but they start devoting more and more and more space to liquor because it's highest value per square foot. They have a regulated, protected 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 BevMo 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.
Yep. 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. 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 going to 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. Then there's this series of innovations that advanced from this to the grocery store. So the first is the box, the cardboard box and specifically pre-cut corrugated cardboard boxes happen in the 1890s. It's rigid, it's cheap, and it enables shipping at scale. 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. 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. 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 package goods like cereal, cracker boxes, you know, that's still most food today or most food sold in supermarkets.
Yes. All containers really move from bespoke one-off containers to mass-manufactured quantifiable fixed sizes. By 1900, one-fifth of all US manufacturing is packaged food. That is how significant the shift is. This is the rise of the great CPG companies on the product supplier side of the supermarket market.
Yeah, consumer package goods. That's exactly right. And in 1916, the real break from the general store of old happens. A guy named Clarence Saunders 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, 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. And that store that Clarence Saunders started was Piggly Wiggly.
That's right. With 500 stores today. So David, you mentioned CPG, 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? Procter & Gamble, Unilever, Kellogg's, Gillette, Coca-Cola, Nestlé, all companies and products that you're not going to find in Trader Joe's today.
Not today. Yeah. So, once you get this scale of packaging and consistency of products, you've 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. 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, homogeneous product.
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. 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 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 instantiation you could ever ask for a brand, television. The idea that you could build trust with consumers through sight, sound, and motion beamed over the air into everyone's homes in the 1950s and 60s. It's nirvana for this whole ecosystem to kind of come together.
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 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? You say you need Cheerios, I'll go try and get Cheerios.' Oh, we're just getting whiplashed around as a commodity. And that makes it sound bad, but actually they do become real estate companies. They become scaled real estate companies. And they offload a lot of the merchandising operations 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 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, the brand, or more likely the distributor because the brands aren't going to directly show up to those stores.
Yeah, it's funny. When I finished reading Joe's book, one of the takeaways was it seems like if you can master one, negotiating real estate leases, 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 going to 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 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.
Yep. So, back to Joe and his Pronto dilemma and what's going to become Trader Joe's here. The hard liquor thing was a competitive response to 7-Eleven. Turns out it's also a great competitive response to supermarkets. So, after a year or two of stabilizing the ship, Joe's ambitious. He wants to do more than just hard liquor. And he realizes that this state of play in the supermarket industry between the big brands and the supermarkets who have essentially become real estate companies actually has created a wide open vacuum for a new different kind of grocer to come in and actually return to merchandising and product knowledge.
Yes. So, as the legend goes, in the late 60s, he's hit by two simultaneous bolts of inspiration. The first is an article that he reads in Scientific American that states that starting with the GI Bill after World War II, the rate of college education in America went from 2% of high school graduates to 60% of high school graduates by 1964 thanks to the GI Bill. Basically, in America, it went from nobody went to college after high school except the very privileged elite to 60% of high school graduates now go to college. There's a massive 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.
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. The aircraft company is going to be launching the 747 commercially and that it would dramatically reduce the cost of international overseas travel and make it accessible to the average American.
So the stat on this is insane. The 747 immediately cut the cost of international travel to Europe by 50%. And within 10 years, the real cost of traveling to Europe was cut by a factor of 15.
Wow. So you go from this insane thing where 80% of Americans in 1965 had not ever set foot on a plane to suddenly it going down by 15x 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 into this massive epiphany that he has about the future of the American public. He writes in the book, '7-Eleven and the whole convenience store genre 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. 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 Coulombe 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 in infinite supply.'
Remind you of The Everything Store?
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 decade 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 going to eventually be Walmart if I'm not going to 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 intertwined massive demographic trends that are starting with the young people coming out of college and are soon going to become the whole country that are in my favor. But the thing that's not obvious that takes a Joe Coulombe to like figure out is how is it that well-traveled, well-educated people are going to let you take a non-traditional path in grocery. This is the genius insight 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 1960s, early 1970s, the best way to target these types of consumers that differentiates them 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's story. The rest of Trader Joe's kind of falls out of selling liquor.
Yes. So, at the time in the late 60s, early 70s, there was a sharp divide along these lines in the country. Blue-collar Americans drank beer. Educated Americans drank cocktails and spirits and soon to be wine thanks to Trader Joe's.
Fascinating. It was the mark of sophistication back then.
So Joe decides that his store, the newly survived Pronto Markets, should create a new tagline designed for this target new customer base. 'The world's largest assortment of alcoholic beverages,' which becomes 100 different brands of scotch, 70 different brands of bourbon, 50 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.
Absolutely. So, he knows this is a wholly different unique retail concept versus Pronto. He needs a new name because this is a new store. So, in another almost completely foreign thing to today, the culture back then, especially Joe's target market of educated, soon-to-be traveled folks, was completely obsessed in America with a fad known as tiki culture.
Yes. And it was inspired by what people, you know, Americans who were about to be able to travel, but heretofore had not actually traveled around the world, thought that Polynesia and South Pacific culture was like.
And you know there's like movies, there's the James Bond movies.
Yeah. Yeah. I started with the South Pacific movie and it bled into cocktails, into drinks. Drinks like the Mai Tai. These like South Pacific, Caribbean was a bit of a version of this. Drinks were super popular among this educated class of people. 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 Coulombe says the Jungle Cruise was one of his two inspirations for embracing this trader idea, this tiki trader thing. 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 Joe's looking.
And then the final piece of this sort of branding stew in Joe's mind is that one of the cornerstone cultural elements of tiki culture were these two competing restaurant chains that scaled across America in cities across America.
Don the Beachcomber was the first one and then their competitor Trader Vic's and they were these tiki-themed restaurants. And so borrowing from Trader Vic's 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. It should have a maritime element and a tiki trader element. And we're going to call it Trader Joe's too.
Perfect. So, in August 1967, Joe opens the first Trader Joe's on Arroyo Parkway in Pasadena, California. Joe decides that Pasadena is the perfect first target market because Caltech and a whole bunch of universities are there. You got professors, you got graduates coming out.
And was this one of the Pronto Markets before? Was he in the same real estate?
Ah. And when it opens August 1967, it's got a lot of the elements of Trader Joe's today. Employees are called crew members. Store manager is a captain. There's the assistant manager, first mate. The employees all wear Hawaiian shirts. And it's got a new strategy.
But before we talk about what that new strategy is, yes, we want to thank one of our favorite companies, Shopify.
Okay, David, I had an idea for this one. I want to take listeners on a tour of my house and point out some of the products that I own from businesses built on Shopify. Are you game?
This is awesome. You referenced this on our last read. This is great. Let's go.
All right. So, upstairs I'm sleeping on Brooklinen sheets and Parachute pillows, all from founders that built amazing businesses on Shopify. My wife's jewelry collection includes pieces from At Present. That's the company that our friend Mark Bridge started.
Of course. Shout out Mark. Yep. Thanks on the Rolex episode.
And in my closet, Marine Layer. Got some Rothy's and of course Warby Parker. All built on Shopify.
That is quite the entrepreneurial set of items in your house there.
Keeps going downstairs and in the kitchen. There's of course Dandelion Chocolate, Athletic Brewing, and a few Phony Negronis in the fridge.
My coffee mug right here is from MiiR. I love how light these stainless steel mugs are. And I've got a Cotopaxi bag by the door over there. Another amazing founder story built on Shopify. And then here's one that surprised me. In my toddler's playroom, we've got Hot Wheels and Fisher-Price because Mattel runs their online stores on Shopify.
That might be my favorite big Shopify customer because I guess that means Barbie runs on Shopify, too, since it's part of Mattel, which means a huge part of my house with my four-year-old girl also runs on Shopify.
And listeners, it's not just creator brands or small startups. David, those books on the shelf behind you from Penguin Publishing, they sell through Shopify. The New York Times store, Shopify.
Yeah. And get this, my old house had an air conditioner from Carrier, a 110-year-old public company that also sells on Shopify.
Yeah. Basically invented air conditioning. Amazing story. Sells on Shopify.
It is breakout founders and the biggest enterprises that are powered by Shopify today.
Yes. And for these smaller niche brands, Shopify obviously is everywhere. That purple Shop Pay button at checkout has become so trustworthy and so insanely easy to buy things you want. And for the bigger enterprise brands, it's proof that Shopify isn't just for startups. They power some of the largest and most established retailers in the world. So if you run a business, whether you're just starting out or operating at global scale, Shopify is the platform built for you. Head to shopify.com/acquired. That's shopify.com/acquired and just tell them that Ben and David sent you.
All right. So David, what is strategically different? What are the choices that Joe made when he opened that first Trader Joe's in Pasadena? 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 overeducated and underpaid.
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/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 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 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 large consumers of liquor, candy, high-fiber foods, vitamins. It's a big profit center.
A thing that they do here to sort of play into the overeducated or I would say highly educated, underpaid is the Victorian art 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 by the, is it the guacamole that they call Avocado's Number as a play on Avogadro's Number?
I think so. Or they used to have the Sir Isaac Newton's, of course. But two, Victorian imagery is royalty-free. Anything before 1906 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, which is one, we want to stock goods that are high value per cubic inch.
Yes. That starts of course with liquor as we talked about.
Yes. And then of course vitamins. And you walk into a Trader Joe's today, 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 Joe's today average about call it 15,000-ish, maybe a little less square feet per store. The average supermarket is like 50,000 square feet. And the average Walmart is like 150,000 square feet. And back then, Trader Joe's was like 4,000 square feet. I mean, these were tiny stores, so they needed high value density in them.
Or I'm going to come back to that in a minute. He wanted them to be 4,000 square feet. Two, high rate of consumption. You want customers coming back over and over again. Vitamins. Three, goods that are easily handled. So much of Trader Joe's business stems out of this 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, 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.
So, this last strategic tenant is, I think, most perfectly perhaps in Trader Joe's entire history, exemplified in the first new product category that they add beyond liquor to this official new first Trader Joe's store. You mentioned a minute ago that Joe's target square footage size for the new Trader Joe's store concept was like 4,000, 4,500 square feet. The first location on Arroyo in Pasadena, even though it's small today, was actually about twice that size. It was like 7 or 8,000 square feet. Not by design. We want to 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 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 sixth sense for developing what is my actual easy addressable customer base from this store who is going to make this store their home spot.
Yep. So, they move in, got the Trader Joe's concept with hard liquor being the cornerstone sort of first. Yeah. What was the second?
Well, they got to figure out what to do with all this extra space. And at first, they try bringing in a meat department, a meat butcher as a concession, as a subtenant.
Which they don't have now, right?
Too hard to handle and not differentiated. I mean, that's what the supermarkets do. He's building the anti-supermarket, right? And then one of the store managers in the portfolio says, 'Hey, I know this other meat guy.' Well, we're thinking meats here. 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 60s, early 70s. This is before California wine in Napa is a thing, which I didn't know until starting this episode that the whole concept of Napa is like a 60-year-old thing.
Yeah. Oh, yeah. We're going to 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?' And Joe's like, 'All right, great. Let's try it.'
Meanwhile, Joe doesn't drink wine.
Yet. He would become a huge oenophile.
Oenophile. 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. Oenophile. Learn something new every day.
Yeah. So, just like, great, let's try it. They use 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 of California wine right there in the Trader Joe's store. And the world's greatest variety was 17 different kinds of wine from different wineries in Napa. 17.
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 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. Because by God, it becomes a huge hit, as you could imagine, with the Trader Joe's target demographic. I mean, what 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 you can't sell wine, you have to sell wines.
Yes. The consumer psyche around wine is that we are trained to believe it's this heterogeneous product. Whereas milk, 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. I will pick out interesting wines and when the wines are gone, they're gone. So, they're small batch. They're 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 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 Nabisco or, you know, whatever large CPG brand.
It's so perfect. And 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 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 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 purveyors. So, it happened by accident that they had this extra space 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 Trader Joe's...
Joe's success. And they also timed it perfectly. This is the unlock for thinking about Trader Joe's. They are wine merchants and they merchandise everything in the same way you would merchandise wine.
Yes. They really ask themselves this question of could grocery be the same? Could we 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 you don't always know exactly what you're going to 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 the late '60s, early '70s where they're starting out becoming a California wine merchant. American and specifically Californian wine is about to have 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 1976 Judgment of Paris, which is one of the most seminal events in the history of the wine industry. It was a blind taste test where Parisian wine critics did blind tasting of all the top French wines, the Bordeaux, everything, all the famous, all the old world greats against Napa Valley wines, and the Napa wines trounced the top Bordeaux in like every category. And it was this bomb that went off in the wine industry 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 going to consume this stuff and love it. It's so great.
So the early days of the Trader Joe's wine program were 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 Heights, Freemark Abbey, like some of the best wines and wine makers in the entire world in history are being sold for 10 bucks a bottle in Trader Joe's in Southern California. So, they start evangelizing it to their customer base. Like you said, meets all the tests. Like, we're all in. In 1970, 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 Wine Insiders Report. And it's this whole newsletter. You imagine you're a wine merchant. This eventually once they get more into grocery in 1985, this becomes the Fearless Flyer, but it's the same approach to it. It's merchandising. It's telling the stories of these products just like you would with a wine.
Fascinating. It's incredible. No other grocer is doing anything like this.
No. So by 1970, the year they launched the Insiders Report and three years after this first Trader Joe's launches on Arroyo Boulevard, Trader Joe's becomes the largest wine retailer in California, which is on the one hand completely insane, but on the other hand shows just how young and new the wine drinking market was in America and that Trader Joe's was the one making it happen starting in California.
Yeah. And they still have what? Single-digit stores at this point.
Yeah. Pretty quickly they add imported wine, too. So, not just domestic California wine. They go to Europe, they go to France, they go to Spain, they go to Portugal, all the great wine-making countries. 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 as well. 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 from Europe. And so Trader Joe's is 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 from the other importers.'
That's interesting cuz in other fair trade categories, you'd have to go to the entire distributed group of producers and say, 'Hey, all you milk producers or all you 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.' Yeah. Then pretty quickly, wine collecting starts to become a thing. And Trader Joe's is just blowing out wine. They're the number one retail in California. At one point, Joe decides he's going to set up a wine bank for his customers. Did you read about this?
He's like, 'Great. How am I going to 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?'
Right. Trader Joe's does not have 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.
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.' And he pores 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 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 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. So all that takes us through the early '70s and this sort of first era of Trader Joe's on the back of liquor and then wines.
Yeah, this is what he calls Good Time Charlie building this party store.
Somebody needs to do the Eras Tour of Trader Joe's. That'd be amazing. Bring out the products from the different eras.
Awesome. And that leads into the next era that Joe also sort of in goofy fashion calls Whole Earth Harry. The health food era of Trader Joe's. So, I think you could say about Joe that he was a genius at many, many things, just about every critical aspect of retailing. But I think maybe his greatest genius was identifying major demographic and cultural trends.
Yes. That were just starting in America and then creating the products and the merchandising to capitalize on them.
It is astonishing 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.
You mentioned some attributes on Joe himself. This is a beautiful excerpt from Benjamin Lorr'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 Lorr, the guy who's writing this, very critical, very journalistic in his approach. The whole rest of the book is applying a lot of scrutiny to the grocery industry. 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. Grown men tell me they are awestruck, chilled, giddy in his presence. Executives who worked for him, stuffed suits, 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. They tell me he has a photographic memory, that he can read up to 1,200 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-trap 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, and quick decisive deals.' That is so awesome. I'm telling you, 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 predict the cultural future of where America is heading and then build Trader Joe's as the product for that future. It's unbelievable.
It is amazing. So this Whole Earth Harry era where we wrap ourselves in a blanket of granola and health food and almond butter and nuts and dried fruits. So at the end of the '60s and into the '70s the California hippie counterculture Summer of Love movement kind of bifurcated and went off in a whole bunch of different directions. And one of those directions was Silicon Valley and tech and computers and Steve Jobs and Nolan Bushnell and that becomes Apple and everything.
Yeah. Yeah. Another one of those directions was the organic health food movement. And for Joe and the target audience of overeducated, underpaid consumers, this just like wine is right in the sweet spot. 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 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, were basically on the same radar beam. Both groups were fragmented from the masses who willingly consumed Folgers coffee, Best Foods mayonnaise, Wonder Bread, Coca-Cola, etc. Both groups were the kind of people who I was hoping represented a breakup of mainstream consumption in America.' And so by the spring of 1971, the caterpillar, Good Time Charlie, had emerged from his chrysalis as Whole Earth Harry, a party store come health food store.
It's amazing. This is all happening, call it five to eight years before John Mackey starts Whole Foods in Austin, Texas. So, this is how on the pulse Joe was. And Whole Foods would obviously become the closest substitute competitor that Trader Joe's has out there.
I mean, they're still pretty far apart, but yeah, it's wild. Joe sees all the things that John would then see and create Whole Foods and he saw them five plus years before.
Yep. It's about aligning your tradeoffs. The other amazing aligned thing about this customer base that he's trying to serve and the business that he's trying to create of be this sort of anti-supermarket with health foods. You can buy batches of food from suppliers that the big chains won't or can't because they're just not set up to do it. The CPG companies are never going to touch this stuff. At least in the '70s. There's this amazing story of someone comes to visit Trader Joe's saying, 'Hey, I have a whole bunch of extra-large eggs that I just can't sell to the supermarket chains. Can you help me out? They only want large eggs.' And Joe says, 'Sure. What's going on with them?' And he says, 'Well, they only want large eggs. I'll sell you these extra-large eggs that are at least 12% bigger, but for a lower price because I can't seem to unload them.' And he's like, 'Why the deal?' And the supplier says, '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 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. 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 going to 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. If we have line of sight on something that we can uniquely sell, that we're going to get a great deal on, that we know our customers are going to 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.
Yep. 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 Harry era of Trader Joe's, these health foods 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. It kind of blossoms into this big list of you can just trust the foods that we are giving to you as healthy in some way. The funny thing is 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 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 they have this brand that they've built over 50 years of paying attention to the ingredients, of doing what they can, of looking a lot more granola during this 1970s 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 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 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. All that is true. It's different than wine in one critical aspect. Wine by nature is branded. It's not big brands, but it's the brand of the winery and the label. And that carries a huge amount of value. Health foods, nuts, dried fruit, bran, granola. This stuff is unbranded at the time. And thus emerges the opportunity for Trader Joe's to start introducing their own product brands. But first, before we tell the story of private label and Trader Joe's, this is a great time to thank good friend of the show, Sentry. That's S-N-T-R-Y, like someone standing guard.
Yes. Sentry helps developers debug everything from errors to performance issues and fix them before users get mad.
Specifically, David, I've started describing it this way. You know when you open an app and it just kind of hangs or you click a button and then an error pops up?
The people making those apps need to know about this and Sentry tells them so you don't have to. Listeners, you have almost certainly used something today that relies on Sentry. 140,000 organizations, basically all of your favorite apps use Sentry to run better. So I asked the team for some examples. If you're tracking a workout with Tonal, Sentry is there. Or checking your kid into preschool with Brightwheel, Sentry. Or brushing up on your Spanish in Duolingo. Or going for the win in Valorant. That is even helping to keep satellites in space. Or if I literally just read off Sentry's website, Disney Plus, Cloudflare, GitHub, Anthropic, Vercel, Atlassian all use Sentry. And they do more than just tell you about the issues. It helps you figure out how to fix them, too. Sentry now has an AI debugging agent called Seer, which can find the cause of even the gnarliest issues with nearly 95% accuracy. Seer pulls from all the context that Sentry already has, your errors, logs, traces, codebase, etc. to understand the root cause, offer a fix, and get you back to building. Their new AI code review feature even can help you look at pull requests and predict the bugs before you ship them into production.
So, our thanks to Sentry for making sure that all of our favorite stuff just works. You can check out sentry.io/acquired. That's s-n-t-r-y.io/acquired. And just tell them 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? I mean, you walk in today, you look around, over 80% of the stuff is Trader Joe's, except wine and some other things here and there.
There's RXBARs. I noticed they used to have Spindrifts for a while. I don't know if they still do. Some of their cheeses.
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. 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 kind of 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, granola quickly leads them to private label honey, freshly squeezed orange juice, which they have in the stores for a long time. They eventually pull it out cuz 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.
Vitamins, private label bran and bran flakes. And then the big one, the wine equivalent of health foods, their vendor there in Southern California that they are sourcing their bran and bran flakes from, turns out also does nuts and dried fruits. And so Joe and Trader Joe's on a whim, because their vendor of bran also offered it, decided like, hey, let's get some nuts and dried fruit in here, too.
All right, now is a great time to eat some roasted and salted fancy mixed nuts branded by Trader Joe's. Got any dried fruit in there, too?
I will say now when you go and 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.
Yep. So, nuts and dried fruits become the next 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 has got to be one of the biggest product categories for Trader Joe's 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 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. 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. We're now slowly getting to make 100% of the brand promise and the experience of Trader Joe's be our stores with our items in it and all of our operations. There is no greater example of the difference between the supermarket CPG brand industrial unholy alliance versus the Trader Joe's approach than nuts. What is the one CPG brand at this time that sells nuts?
Planters. Compare that. It's the same nuts. 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 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, right, with this hippie dippy little 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.
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 products themselves, but what they are doing is finding people 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 in some way unique. It's kind of like what Costco does. They want a unique SKU 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 Sonicare 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 Sonicare that I was buying elsewhere. This takes it one step further. They're saying for most of these items, there is no equivalent somewhere else.
Yeah, there's a few like the pretzel thins, but a lot of these things is 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 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 are integrating up the supply chain in a way where they can say, 'Hey, we need a Trader Joe's 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 favorite example of this, obviously not from the health food era of Trader Joe's, was that there was a period of time, it may still be the case, that Wolfgang Puck's made the frozen pizzas for Trader Joe's. But this illustrates the concept of we got to deliver unique and compelling value for our customers. It's a Wolfgang Puck frozen pizza. You can go buy it in a supermarket. The Trader Joe's version is smaller in diameter so that it fits in a toaster oven.
Ah, there you go. Compelling convenience value for our customers. You don't have to turn on your whole bake oven to make this pizza. And also, I would bet 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 to their customers. So you're always getting a little bit of a better value in addition to a little bit of a unique product.
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. It's not just the national advertising on television. It's the couponing. What is the definitive experience at least in the until recent past of the 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 at 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 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 TV 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, 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. So 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 activities that need to happen in the traditional system for this streamlined system. And in Joe's mind, and I think even through the next generations of Trader Joe's CEOs and all the way up through the company today, that practice of the supermarket CPG industrial complex is 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 Sinegal had about why they don't do sales and Trader Joe's also doesn't do sales and doesn't have coupons. It's like you're insulting your customers. You're pitching to them as if this is this discounting 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 50,000 SKU store. I mean, Trader Joe's and Costco both only stock about 4,000 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. 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. There's a reason that Walmart and Kroger and they're all much bigger businesses.
Exactly. So, while we're on branded products, this is a great little tidbit. 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 who makes Trader Joe's items and 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 the Trader Joe's pita chips are made by Stacy's, which is Frito-Lay Pepsi. The yogurt is Dannon and Stonyfield Farm. Tasty Bite makes a lot of Trader Joe's Indian food. The Tasty Bite Punjab eggplant ran $3.39 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 $3.39 price is a huge percentage.
Yeah. Trader Joe's smoothies are very likely the same or very similar as Naked Juice, 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 huge strategic impacts on Trader Joe's. It's getting them into private label which you know becomes cornerstone of the company all the way to this day. The other equally important thing is it diversifies them out of wine and liquor as their sole core differentiated thing for their target customers. Which is hugely important because right as health food is really ramping up and hitting its stride in 1977, California repeals 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 coming in. Total Wine and BevMo and etc etc etc. 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 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 Wine. You've got discounters, dedicated big box liquor stores that can just blow it out on prices and becomes a big 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. 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 going to drop 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 you're guaranteed profit margin is going away. But what it does do is it shifts the entire competitive playing field to how 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. 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 or maybe even eventually everything you sell truly differentiated one-of-one products. Well then you would be insulated from this price competition. Have no direct competitors. And man, it's really nice that Trader Joe's has just built up this private label expertise in the health food market.
Yep. So Joe decides, all right, end of fair trade and deregulation. I don't want to underell. This is a massive 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 going to go under. Like employees think the company is going to go under just like everyone else. Joe says our way out is of course operational excellence but really in the long run it's we got to differentiate and be one of one in everything. So he calls this phase of the company Mack the Knife which this is really obscure is Mack the Knife like the song Mack the Knife from Threepenny Opera.
That's funny. I had no idea where that came from.
Joe writes in the book, 'Friends, Mack the Knife has no competition. That's why I called it Mack the Knife. My years at Pronto Markets convinced me that where there is no competition today, there will be tomorrow. You must assume that competitors will open all around you. The answer is to design a store that has no competition. After 1978, after the end of fair trade, I paid no heed to nearby supermarkets, liquor stores, health food stores, or anything else.' The whole strategy becomes double down on private label, double down on differentiation, become one of one.
Become one of one. I love it. Obviously, I love it because this is how you and I think about Acquired. 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 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? 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. 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 Costcos, the Trader Joe's, right? Having no competition is a nice It's a nice thing.
So heading into this Mack the Knife era, Joe institutes a rule that I assume is still in effect at Trader Joe's to this day, 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 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 priced less. 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, etc. It could be the packaging, 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 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 Walmart has Great Value, Target has Good & 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 that Trader Joe's is all-in.
Yeah. Whereas these other brands sort of want to 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 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 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. 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 Joe's era how Trader Joe's changes a bit as it scales.
Yes. But for now, this is like core core tenets here.
A great one that started during the health food era, but then becomes so emblematic of this is Trader Joe's 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 is like the coolest thing.
