Founders - #188 Joe Coulombe (Founder of Trader Joes)

Starting point is 00:00:00 I wrote this book to help entrepreneurs and would-be entrepreneurs. That's why there's a lack of miracles and a surplus of marketing details, including buying, advertising, distributing, and running stores. And lots of discussion on how we built a successful business on high wages. In a 1958 partnership with Rexall Drug Company, we started Pronto Markets. After growing it to six stores, I bought out Rexall shares in 1962. And then in 1967, when I had reached 18 pronto locations, I began the transition of pronto into Trader Joe's. I resigned at the end of 1988. During those 26 years, our sales grew at a compound rate of 19%.

Starting point is 00:00:43 During the same 26 years, our net worth grew at a compound rate of 19%. During the same 26 years, our net worth grew at a compound rate of 26%. Furthermore, during the last 13 years of that period, we had no fixed interest-bearing debt, only current liabilities. We went from leverage to the gills in the early days to zero leverage by 1975. Furthermore, we never lost money in a year, and each year was more profitable than the preceding year despite wild swings in income tax rates. Still, judgment can be rendered that I failed, that I fell short of what I should have achieved. We will examine this late in the book, but I hope you'll consider the following. My favorite quote from my favorite book on management. The book is called The Winning

Starting point is 00:01:31 Performance, and here's the quote. The general theme in winning corporations is a view of profit and wealth creation as inevitable byproducts of doing other things well. Money is a useful yardstick for measuring quantitative performance and profit and an obligation to investors, but making money as an end in and itself ranks low. Along the way in this book, you'll find the angst of a struggling entrepreneur and the slings and arrows of outrageous good and bad fortune. So here we go to an autumn afternoon in 1965 in a bar where Trader Joe's was not so much born as extruded. All right, so that's from the preface of the book that I'm going to talk to you about today, which is Becoming Trader Joe, How I Did Business My Way and Still Beat the Big Guys. And it was written by the founder of Trader Joe, Joe Colombe. I want to read some excerpts

Starting point is 00:02:22 from the back cover of the book, actually. And I didn't read the back cover until I already finished reading the book. And I found a lot of what's on the back cover to be accurate based on my reading of the book. So here's some blurbs that I think gives us an idea of why this book is worth spending time reading. I really enjoyed it. I had a hard time. It was similar. I had a similar experience a few weeks ago when I read the Ritz and Escoffier book. I had a really hard time putting it down and devoured it in just a few days. So here's some blurbs on the back. We should all be inspired to think like Joe. He shares how to get from where you are to where you want to be by thinking outside the box. What a fascinating life. I guess I should pause here. This is something normally I read a

Starting point is 00:02:59 lot of old books for the podcast. This book just came out. I actually got the book on the day it came out. And Joe passed away last year at 89 years old. So that's why they're speaking of him in past tense. Here's another blurb. Joe's amazing book on how he built Trader Joe's is a masterclass for entrepreneurs. I definitely agree with that. And all people interested in successfully building a business. The story highlights how a thoughtful disruptor uses insights, product knowledge, and courage to rewrite the rules of a very large and established industry. And that's what makes it why I wanted to read the book in general, that last sentence where it says that he rewrote the rules of a very large and established industry. And I love this idea that even though it's a very ancient industry, I mean, one of the oldest industries that ever existed in human civilization, he can rethink the things that have existed for very long times. That was actually fascinating. I'll go into a lot more detail about that today. Joe Bill Trader Joe's on innovative management, creative marketing,

Starting point is 00:03:57 and keen storytelling. This book is a wonderful account of how he did it and of entrepreneurial spirit and action. Joe shows readers of all types how moving from an analytical approach to a more creative problem-solving approach can drive innovation, how finding an affluent niche, these are the reasons I'm reading this too, because I think the lessons he learned applies to any domain, not just selling food to people or selling groceries to people, how finding an affluent niche of passionate customers can be a better strategy than competing on price and volume. How quite, and this is probably the single most important lesson in the entire book and something we've seen over and over again in the lives of these biographies that we're reading, how questioning

Starting point is 00:04:36 all aspects of the way you do business leads to powerful results. Okay, so I want to start at the birth of Trader Joe's. And he says Trader Joe's got its start in a bar in Los Angeles, where a crisis broke out over my head on a Friday afternoon in October 1965. My host Merritt Addison Jr. had just finished drinking his normal ration of three Gibsons. When he ordered a fourth, I knew something was up. I was 35 years old, president and controlling stockholder of Pronto Markets, a 16-store chain of convenience markets in Los Angeles. Just three years earlier, we had hovered on the edge of bankruptcy with the six stores I had bought from the giant Rexel drug company, under whose aegis I had founded Pronto in 1958. After

Starting point is 00:05:22 I bought Pronto using extreme leverage, I had no money, Merritt had provided much of the capital, which had helped me fuel our expansion to 16 stores and a recovery to lots of black ink. Merritt wasn't much older than I, but he'd been thrust into the presidency of Rhonda Milk Farms 10 years earlier when his father had suddenly died. Merritt and I were having our monthly business luncheon because Pronto, as small as it was, had become his largest customer for milk and ice cream. Our business wasn't enough, however, and Rhonda was slowly sinking because Merritt was a rare ethical player in the now wholly corrupt California milk business. So there

Starting point is 00:06:02 is all kinds of the way to think about joe is he's definitely a pirate he's definitely a misfit he's definitely a rebel even the way he so this applies not only how he ran his business but how he writes this this book is insane all the crazy it's a very interesting read um but he he approaches the construction of the book to make sure that it's wildly fascinating for the reader. That's why I had a hard time putting it down. But this idea, he goes into detail about how corrupt, and I didn't know this, that at the time in the 1960s, grocery stores made a lot of their profit on milk. And because there was such large profits, there was a large amount of corruptions in the business. So he tells insane stories in the book about how milk companies would hire prostitutes for their customers and then set up cameras, hidden cameras.

Starting point is 00:06:50 So they would set their own customers up. They'd hire prostitutes, give them a hotel room, film them having sex with the prostitutes. Then they would keep that footage secret. So if they ever if their customers ever went and said, hey, we're switching business to this other milk company, they'd be like, oh yeah, no, you're not. Because here I have this video of you with this prostitute. So they're blackmailing their own customers just so they could sell them more milk. I mean, it's just, it's just absolutely crazy. But let's go back to this meeting at this bar because this is going to be the birth of Trader Joe's or what, what will eventually turn into Trader Joe's. And it's really just a reminder that, you know, problems are just opportunities and work clothes. He does not see that at the time,

Starting point is 00:07:29 though. He's freaking out. After drinking the fourth one, he finally got the story out. Painfully, he confessed, Joe, I've sold Ronda and I've sold it to Southland Corporation. Southland, for the uninitiated, is the owner of 7-Eleven Markets. Now, this is a wild fact. He says, I had started Pronto in 1958 as a copy of 7-Eleven because there were no 7-Elevens in California. So Pronto is going to change into Trader Joe's. So we could think about the prehistory of Trader Joe's as the fact that Trader Joe's started as an imitation of 7-Eleven. I thought that was really interesting. So he says there was no 7-Elevens in California at the time.

Starting point is 00:08:11 What Merritt was telling me was that, A, my source of financing was cut off, and B, a competitor a thousand times greater in wealth was coming to town, and C, they had found a way to avoid California's high labor costs. And this is what I mean about problems with just opportunities and work clothes. I knew that we would be crushed by this monster. The convenience store business is 90% real estate and 10% everything else. In real estate, it's the tenant's balance sheet that counts.

Starting point is 00:08:37 Between Southland, this giant company with all these assets, and Pronto, that has no assets and is tiny, it would be no contest. Suddenly, suddenly stone sober. I drove home. I got my wife and the kids and I hold up for two days in a cabin at Lake Arrowhead in California, where I tried to figure out what the hell to do. And that is how Trader Joe's got started. OK, so at this point in the story, he goes back in time. So we're going to go into the prehistory of Trader Joe's. He's a young, he just got out of school. He's one of the first people, I think he says he got his MBA from Stanford. And I think at the time, I forget the exact number, but there was like just a couple hundred people in the entire school.

Starting point is 00:09:14 So it was not very common to get an MBA at this time. And he gets hired. And we've seen this example over and over again. There's usually someone older, wiser that becomes a mentor of sorts. And he's going to introduce us to a very important character and somebody that led him to founding Pronto, which obviously is how he becomes the Trader Joe. So he says, I was very lucky to get hired for $325 a month. I was even luckier in the man who hired me, who put up with me, who encouraged me, and who taught me everything I know about being a CEO. Wayne Bud Fisher Jr.

Starting point is 00:09:49 For a while, I wondered how this association, which lasted almost 40 years until his death in 1993, was forged. Until I realized it was simple. This made me laugh. I laughed out loud. I don't even think he was joking. We were both left-handed. I think that handedness is the most important thing one can know about a person. Dyslexia lurks in the brain of every left-hander, which means we see the world differently, sometimes profitably.

Starting point is 00:10:17 At one point, I was accused. say in his interviews, he would convince people to, he would like on a sly, try to get them to, he wanted to see them right in front of him so he could, he could slyly see what hand they were. And so he would be heavily, it's so ridiculous, right? He'd be heavily biased to higher left handers. And I think it's funny because I'm left-handed, but so he says, that's why when I interview people, I try to get them to write something. And this is the part that made me laugh. At one point I was accused of running a cab cabal of left handers at Trader Joe's. And so I laugh. I was laughing at the part.

Starting point is 00:10:51 I think he's I think he's being serious, though. The idea that this is the most important thing one can know about a person because he does think that, you know, if you are left handed, you know this, that you do approach a lot of the things in life are designed for right handed people. I think it's like a 90-10 split, something like that. So he's saying, listen, we're forced to see the world differently, sometimes profitably. That kind of echoes what we learned a few weeks ago from Paul Orfala, the founder of Kinko's, which he was convinced because everybody told him it was stupid. They couldn't read, he couldn't write. And he thought that forced him to look at the world differently. And that's where he discovered what was obvious to him, but not obvious to others, the actual opportunity for Kinko's. I think the book is

Starting point is 00:11:29 called Copy This. And it's a few episodes back, if you haven't got a chance to listen or read the book yet. So Bud's going to hire him. There's these giant companies. I'm not going to go into too much detail, but they own a lot of drug stores and small grocery stores and convenience stores. And they're having issues because one of their competitors is experimenting and innovating in what they're calling self-service retailing. And it's this company called Savon. And Savon's destroying the company that Bud is running. So it says every time one Savon opened, three Al drugstores closed. Bud hired me to find out why this was happening. And so this is very

Starting point is 00:12:05 important that he got this job because he starts to do research. He says, in the course of my research on alternatives for Al, we discovered 7-Eleven stores in Texas. There were none in California. Grocery stores intrigued me. And that's obviously very important because he's going to start Pronto as a copy for 7-Eleven. Pronto is going to morph into Trader Joe's. Okay. So that's extremely important. This is going to echo where David Shaw hires Jeff Bezos to do research about what kind of business makes sense in context of all this extremely fast growth on the Internet.

Starting point is 00:12:39 And that's where they come up with the idea for the Everything Store. So in the meantime, Joe is going to actually quit. He goes to work for Hughes Aircraft. and Bud winds up recruiting him back 18 months with the opportunity to become an owner. So he says 18 months after I quit, Bud called me. He persuaded me. He persuaded Rexall, which is a parent company, to hire me back to clone 7-Eleven. And that's how at age 27, I became president of Pronto Markets. So he's 27, president of Pronto. He starts the book, he's 35, still running Pronto and had greatly expanded it. So that's what he was doing from the age of 27 to the age of 35. Now, how did he wind up buying Pronto? That was very fascinating.

Starting point is 00:13:16 So there's this guy, he says he's famous. I've never heard of him before. I guess he went on to be part of the government, but his name justin dart so justin dart was the famous president of rexel and this is really fascinating and so that you know they own a bunch of drug and convenience stores and everything else justin gets this idea he's like i'm gonna buy the company tupperware right and this the reason i found this fascinating is because he did this against the unanimous his board of directors said unanimously said, don't do this. So he says Justin Dart brought Tupperware against the unanimous vote of his board of directors. There's a quote from one of his directors.

Starting point is 00:13:54 Tupperware is nothing but a goddamn party formula. Now, here's why Justin was right to listen to his and follow his own instincts. Right. Within a year, Tupperware was generating a third of Rexall's profits. So Rexall's like, or excuse me, Dart's like, okay, well, that means I'm going to, I'm going to get out of this, this crappy business where we're, you know, our stores are closing and not as profitable. I'm going to focus on the part of the business that's generating one third of all of our profits. Dart gave the order to liquidate all 1,100 drug stores he owned. And this is why he

Starting point is 00:14:26 did it, which is really fascinating. To raise cash so he could go into partnership with a gas company and produce all the plastic that he needed for Tupperware. This is a fantastic sentence. What was vertical integration for Tupperware was going to be horizontal disintegration for the Al drug company and pronto. And this leads us to why am I telling you this whole point? This one sentence, I either had to buy pronto or find a new job. But that's a big problem. And he says, and this is what I love.

Starting point is 00:14:59 I almost feel this is a blasphemous what I'm about to say, that entrepreneurs write better books than writers do. If I have the choice between if let's say there's a hypothetical entrepreneur, right? And you can read their autobiography or a biography of them. I would always go with autobiography first. That doesn't mean you only read one book. I mean, if you're interested in somebody, you know, read a bunch. You've seen me do that over and over again, and I will continue doing that. I've just ordered another book on David Ogilvie. How many books can I read on this guy? I will read every single one I will find by the way. Um, but I just feel like he doesn't bury the lead. Uh, the book is, you know, only 250 pages. He will tell you, this is, Hey, pay attention here. This

Starting point is 00:15:34 is the most important decision I made. Hey, this is the problem I had. He just lays it out. Very. There's just no fluff, I guess is what I'm saying. Like entrepreneurs seem to realize, hey, this is the important parts. I'm going to, I mean, part of being a successful entrepreneur are a huge part, I would say, is obviously teaching and communicating with other people, right? And that shows in the books they write. So his whole point here is, I mean, I'm going to buy Pronto or I'm out of a job, but how the hell am I going to buy Pronto? I don't have any money. So he says, there's a huge heading in big, bold letters. The problem was I didn't have any money. He's not making us, like he does the work for us to some degree, right? We had $4,000 from Alice's, his wife, we had $4,000 from Alice's savings from her teaching school before she had kids. We were able to live on my $325 salary. We sold our little

Starting point is 00:16:26 house in which we had equity of $7,000. I borrowed $2,000 from my grandmother and $5,000 from my father. Seven, this is such a remarkable sentence. 17 years later, when I finally sold the company, the cost basis of my total investment was only $25,000. I sold half the stock to my employees at book value and God bless those people who had such faith in me. But we were still way short when I went to see Tom Dean at Bank of America. I presented my case and on the spot, he loaned me the money on Allison Minds' personal signature. So first of all, how bad do you really want it? Think about what the crazy thing this guy is going. He's all in. He now he's going deep into debt, but he's willing to sell his house and then

Starting point is 00:17:10 personally guarantee the bank loan that he needs to buy Pronto. Years later, I asked Tom how he'd been so ballsy. It's simple, he replied. Rexall was on Pronto's leases and I figured they wouldn't let you go bankrupt. So he's going to talk about leases. Anytime you read a book, I think of Danny Meyer, his fantastic book Setting the Table. He goes into detail about it. The main advice he would give aspiring restaurateurs is he has a lot of insights into into leases and what you want to avoid. And we see the same thing with Joe. And I'll go into more detail about that later. So Tom at Bank of America is like, listen, Rexall is a huge company there. It's not like you can get out of these leases. These are 15, 25, sometimes 30 year agreements.

Starting point is 00:17:57 They're on pronto leases. I figured they wouldn't let you go bankrupt. So there I was, the controlling stockholder of seven pronto markets living with Alice, who did our accounts payable from home and two kids in a house we rented for $150 a month. We were leveraged to the gills. Chapter 11 was a possibility. And then this next sentence is fantastic. But I was reading The Guns of August by Barbara Tuchman with an implicit concept of multiple solutions to non-convex problems. And that's one of another thing that makes reading this book so enjoyable is that he's extremely well read. So all he's constantly talking about, hey, I read this book, I took

Starting point is 00:18:35 this idea, I applied it to my business, the whole thesis behind founders, obviously. He starts every chapter with quotes from, you know, sometimes their biographies, sometimes their ancient, like, philosophy, literature, all kinds of stuff, articles he's reading. It's just really fascinating how he's taking, like, he's developed his own personal curriculum, and then he applies it to his business, and then obviously applies it to the writing of the book. He starts the next chapter where he's going to talk about why he stole his philosophy on running a business from this book, Guns of August. But he starts the next chapter with this. Well, let me just read you the quote. I'll tell you why this person's important. If all the facts could be known, idiots could make the decisions. That was Tex Thornton. He's the co-founder of Lytton Industries. And he did that quote back in the

Starting point is 00:19:20 1960s. He says, Joe says, this is my favorite of all managerial quotes. If all the facts could be known, idiots can make the decisions. We, Tex Thornton will be familiar to some of you because when I did, one of the most important people I discovered through the research of the podcast is Henry Singleton. And I discovered that because I was reading all about, I was reading everything. I get my hands on a Warren Buffett and Charlie Munger, and they both repeatedly, you could even, when you study the career of Henry Singleton, and I've done a couple of podcasts, I think it was back in the nineties on him. You could think of Henry Singleton as like a proto Buffett, right? The way Singleton ran Teledyne, and there's a lot of overlap with the way Buffett runs Berkshire,

Starting point is 00:19:57 but they would say, hey, Buffett said something like he had the single best record in American business history, that if you took the hundred best graduates of business schools and you combine their record, they still wouldn't be as good as Singleton's. Munger said in the most succinct way possible why you would study his. He says his returns or his results were utterly ridiculous. So anyway, Singleton winds up working for Tex at Lytton, winds up realizing, hey, I'm not going to go any further. So when he jumps out and found Teledyne, he winds up having this concentrated portfolio. I think at the time, I haven't read the book in a while, but I'm pretty sure he had five investments and 25, I want to say 25 or 40%, something like that was in a single company and it was Lytton Industries and that's also Lytton is also where the company where Claude Shannon made a lot of his returns from as well so I found that I just love how all this stuff winds up tying together the more of these books we read the more these founders we study we realize they all link together. They all think differently in the same way.

Starting point is 00:21:13 In fact, what blew my mind was Sol Price, which I would argue is the most influential retailer to ever live. He influenced people like Sam Walton, Jeff Bezos, Jim Sinegal. Jim Sinegal, actually, the founder of Costco, wrote the book. There's only one biography I found on Sol Price, and the foreword is written by Jim Sinegal. And he's like, people would ask him like, what'd you, he's like, oh, did you learn something from Sol Price? He's like, no, no, I learned everything from him. He was actually a mentee of Sol Price. Anyways, in this book, Joe talks, he mentioned Sol Price over and over again, that how he was influenced, that he admired what Sol Price was doing. And I don't have the Kindle version of this book, but if I had to guess, I don't think there's another other company mentioned more times in the story of Trader Joe's than Costco. And obviously the idea, the very idea from Costco came from sole price. So I don't know. That just

Starting point is 00:21:54 gets me really excited when I see how everybody's constantly borrowing ideas from their predecessors. And then they're not, you know, you can see the sign of an amateur when they denigrate the people that came before them. All the best founders are historians. All the best investors, they don't talk shit about the people that came before them. They admire them. And you see this in sports, in business, in investing, in any complex endeavor. And so Joe is no different than that. Let me go back to this.

Starting point is 00:22:22 That was a hell of a tangent. In 1962, Barbara Tuchman published The Guns of August, an account of the first 90 days of World War One. It is the best book on management and especially mismanagement I'd ever read. The most basic conclusions I drew from her book was that if you adopt a reasonable strategy as opposed to want to waiting for an optimal strategy and stick with it, you'll probably succeed. Tenacity is as important as brilliance. So that's important. Let me read that actually again. So it says, the most basic conclusion I drew from her book was that if you adopt a reasonable strategy, as opposed to waiting for an optimal strategy and stick with it, you'll probably succeed. Tenacity is as important as brilliance.

Starting point is 00:23:11 And while I was reading that, I just remembered something. That whole diatribe I just made about the importance of honoring the predecessors. There's a tweet from this investor named Bill Gurley that I saw a few weeks ago that I saved on my phone that I think ties that idea a lot better than the rambling mess I just did, right? So he says, the greats, people like Bob Dylan and Bobby Knight and Danny Meyer studied and idolized their predecessors. This modern finance world where loud voices are disrespecting and dismissing people like Howard Marks and Warren Buffett is unsettling to me. Okay, so let me go back to this part. So now he's

Starting point is 00:23:52 quoting, we're still on the same page where he's saying tenacity is important as brilliance. Go with a reasonable strategy that you won't quit instead of an optimal one that you have to sit around and wait for. So he says, non-convex problems are puzzles in which there may be several good but not ideal answers, which classical search techniques may wrongly identify as the best one. And now he's going to give us an insight into his thinking at this time. I concluded that I didn't have to find an optimal solution to Pronto's difficulties, just a reasonable one. Trying to find an optimal solution in business is a waste of time. And so he's going to go into more detail on that later. This is the most important single business decision I have ever made to pay people well. And so he's going to go into more detail on that later. What Joe would tell us is like the wages that you pay, paying the highest wage as possible is an asset, not a liability.

Starting point is 00:24:56 And I think a lot of businesses look at it, you know, as a cost. And he'll go into more reason about why. And he talks about how expensive turnover is. And if you can limit that by paying people more, you get better quality just over and over again. It all ties together. So we'll get there, though. I'm ahead of myself. He's giving us some ideas, though, specific ideas about how he ran Trader Joe's. And I thought this idea was unique and interesting. Equally important was our practice of giving every full time employee an interview every six months.

Starting point is 00:25:26 At the time, he was doing this to avoid union unionization, which was occurring a lot in different industries, especially in Southern California at the time. And he says a huge part for employees wanting to unionize is because they have a bunch of unlisted to grievances. So how do you solve the root problem? Right. Each employee, including each employee, was interviewed not by the immediate superior, which would be the store manager, but by the manager's superior. The principal purpose of this program was to vent grievances and address them. I think this program was as important as pay in keeping employees with us turnover is the most expensive form of labor expense good and this is he's going to get right to the point what i was just trying to tell you good people pay for their extra productivity you can't afford to have cheap employees so he's

Starting point is 00:26:19 realizing this we're in the 1960s around the same time that david ogilvy is realizing this in his books he says, listen, if you pay peanuts, you get monkeys. Ogilvie's point was that most people are focused on the wrong side of the equation. They're looking at price and not value. Price is what you pay, value is what you get. You should be focused on the value that you actually get, not the price you pay. He talks about the best people are not going to work for what you want to pay them. Moving on, I would say this echoes Jeff Bezos' idea where he talks about over and over again that there's one-way and

Starting point is 00:26:49 two-way door decisions. One way you have to think long and hard about because they're not easily reversible. Two-way decisions you should be optimizing for speed. And so Joe's saying similar things here. Early in my career, I learned that there are two kinds of decisions, the ones that are easily reversible and the ones that aren't. 15-year leases are the least reversible decisions you can make. That's why I kept absolute control of real estate decisions. Okay, so now we get to one of the most important realizations of his entire career. He's realizing the emperor has no clothes, that grocers don't know anything about the products they sell, and that he can carve out an advantage just by knowing more, which seems mind-blowing, right?

Starting point is 00:27:31 So it says that 30, he's describing himself, that 32-year-old almost bankrupt president of Pronto knew nothing about wine or anything else he sold. In this, he was like all grocers of the day, of that day and today. The buyers at the supermarket chains knew nothing about what they sold, and they don't want to know. Our first product knowledge breakthrough was extra large eggs, a story that graduate students love to hear. So into my timey office came the Eggman. He had a problem. Too many extra large AA eggs. He offered them to me at the same cost as large AA eggs, the size that all supermarkets advertised.

Starting point is 00:28:15 I would be able to sell extra large, which by state regulations weighed about 12% more than large, for the same price as large. So the benefits of the consumers, very straightforward and obvious. You pay the same price, but you get 12% more. And even more importantly, the supermarkets couldn't follow. The supply of extra large simply wasn't great enough. And that is the whole thesis. And it's going to take him close to 20 years of running Trader Joe's to realize that. The power of differentiation, the fact that when you go into Trader Joe's to realize that. The power of differentiation, the fact that when you go into Trader Joe's today, they are selling you products that you can't get anywhere

Starting point is 00:28:50 else. It took him, there's three different variations of Trader Joe's and he has funny names for all of them. And we'll go through some of them and I'll explain why. But the last one's called Mac the Knife. And that is Trader Joe's as it is today. We have a small, intentionally small store, intentionally reduced hours, selling largely all your own products. The ads that we began running for these extra large eggs revolutionized pronto markets, and they helped to generate the profits that I needed to stay afloat. And later to build the profits I needed to build Trader Joe's. To this day, the promotion of extra large AA eggs is one of the foundations of Trader Joe's merchandising, not just because of the program per se, but because it set me to wondering whether there weren't other discontinuities out there in the supplies of merchandise.

Starting point is 00:29:42 Eight years later, we built Trader Joe's on the principle of discontinuity. So let's define, before I finish that paragraph, let's define discontinuity, a sharp difference of characteristics between parts of something. The pronto markets chain at the time of 7-Eleven's arrival had the highest sales per store of any convenience store chain in America by a factor of three. And this is what he says why. That was thanks to high wage policy, meaning he's got better people, better locations, a few liquor licenses, and the beginnings of differentiation through product knowledge exemplified by the egg program.

Starting point is 00:30:22 Now, where were we going to go with it? We didn't know it yet, but we were well on the road to Trader Joe's. And so now we see his mindset, this inner monologue that's happening, where he's like, okay, well, Pronto, why he's going to morph Pronto into Trader Joe's. The basic problem is that convenience store retailing is a commodity business that is hard to differentiate. That is the essence of Trader Joe's. Reminds me of a quote from Peter Thiel in the book, is that convenience store retailing is a commodity business that is hard to differentiate. That is the essence of Trader Joe's. Reminds me of a quote from Peter Thiel in the book Zero to One.

Starting point is 00:30:54 You want to create and capture lasting value. Don't build an undifferentiated commodity business. That's a quote from Zero to One. We see Joe is saying the same thing here. He's like, there's going to be a ton of competitors that can come in. The more convenience stores that are built around me, the less profit I'm going to build. Like, there is no way for me to actually stand out. I've got to figure out a different concept.

Starting point is 00:31:17 What I needed was a good but small opportunity for my good but small company. And that's another way I think of Trader Joe's. He's not into growth for growth's sake. He prefers small stores, small crews. He'll go into detail about studying the history of the retail industry in America and realizing they're all going bankrupt because they can't stop building. They're just growing for growth's sake, like cancer. Yes, I could have sold out to 7-Eleven and gone to work for them or somebody else, but the only, this is really important, but the only real security lies in having your own business. And this left-hander

Starting point is 00:31:43 was well ahead of the curve on that one. And so around the time that he's struggling with this problem, like what should I do next? This is the next section I'm going to read to you. This is what a way to connect dots here. So he says, the clue, the keystone of the Arch of Trader Joe's was a small news item in Scientific American in 1965. In terms of creating my fortune,

Starting point is 00:32:02 it is the most important magazine I've ever read. See what I mean about him? He's not bearing the lead. Pay attention to this part is what he's telling us. The news item said that of all the people in the United States who were qualified to go to college in 1932, only 2% actually did. But by 1964, of all the people qualified to go to college, 60% actually did. The big change was the GI Bill of Rights that went into effect in 1940s. A second news item, so this is how he's connecting everything, right? A second news item from the Wall Street Journal told me that the Boeing 747 would go into service in 1970 and that it would slash the cost of international travel. In pronto markets, we had noticed people that had traveled

Starting point is 00:32:39 were far more adventurous in what they were willing to put in their stomachs. Travel is, after all, a form of education. What I saw here, this is how he connects the dots, was a small but growing demographic opportunity in people who were well-educated. 7-Eleven and the whole convenience store genre served the most basic needs of the most mindless demographics with cigarettes, Coca-Cola, Budweiser, candy, bread, and eggs. I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream

Starting point is 00:33:15 people. He's finding his edge. He's finding his niche. Just how homogenized America had become by 1966 deserves its own chapter. This is I saw in those new, this is his opportunity right here. What I saw in those news stories were the first cracks in the homogenization. And so before I get into why he, he, he felt where, where he actually saw his opportunity, this is a description of his edge. As we evolved Trader Joe's, its greatest departure from the norm wasn't its size or its decor. It was commitment to product knowledge something which was totally foreign to the mass merchant culture and are turning and and are turning our backs to branded merchandise so he at a point he's not talking about his brand there he's saying that if you if you analyze what grocery stores are all doing at the time they all sell the

Starting point is 00:34:00 same thing they're getting their stuff from procter and Gamble, from Coca-Cola, from Budweiser, and they're just competing on price. And so you'd pick up like a Sunday newspaper and you'd see all the grocery stores in your area. They would advertise all the same products and they would just say, hey, this is a double coupon or this is 30% off. And Joe saw that as just a race to the dead end. He had no desire to do that. He wanted a product that was vastly different that was available nowhere else. It just took him two decades to figure that out. And there's a lot of pain and struggle. So this is where he saw the opportunity. Television was the most powerful advertising medium ever invented. And it began to homogenize American culture to a startling degree. And the way we can think about the world that we live in is the internet has reversed this trend.

Starting point is 00:34:41 So now there's all kinds of deep, small but deep niches on all kinds of different things. You know, back then you could watch three TV shows, or excuse me, three television networks. Now you have millions of people all over the world producing content. This is where we were in 1966, the nations whose regional accents, modes of dress, and menus were being reduced to a common, what he calls a low denominator, and he's giving some examples of that. They would eat Swanson TV dinners, drink Minute Maid orange juice, use Best Foods mayonnaise, and drink Folgers coffee. Grocers, and this is his whole point about, I guess it's something we've talked about

Starting point is 00:35:17 over and over again in the podcast, it can be reduced to David Ogilvie's maxim, the good ones no more. Grocers didn't need to know anything except what was going to be advertised next on I Love Lucy or Gunsmoke or any other popular TV show of the day. And so Joe's whole point is like this homogenization is slowly degrading because now you have people that are being more educated, they're traveling more. And even if they're a smaller amount of people, they're going to want, they want to set themselves apart by not just consuming the same products as everyone else. That's his opportunity. I felt this newly educated group that was slowly emerging would be dissatisfied with mass culture.

Starting point is 00:35:55 They would want something different. And he talks about this fragmentation. I just said this. Now, the Internet has fragmented electronic media almost to an infinite extent. Trader Joe's was part of this fragmentation. It created an opportunity for independent minded people to split off the main track. You might think of Trader Joe's as one of the most as one of the more esoteric cable channels and the supermarkets is NBC, CBS and ABC. So that's a good metaphor. OK, before I go any further, I got to go all the way to the beginning of the book at the table of contents because he has three different variations of Trader Joe's. And he has funny names for them.

Starting point is 00:36:29 I mean, this guy's a born marketer. If you've been to Trader Joe's, you know that. But the first one was Good Time Charlie and his description. Aloha, the first version of Trader Joe's, 1967, and it was the fun leisure party store. And he talks about the morphing. And again, I'm giving you the basics, but this happens over two decades. The second version was whole earth hairy. A serious recession forces me to marry the health food store to the party store.

Starting point is 00:36:56 And I got whole earth religion in the process. So he talks about becoming a little bit of a hippie, not wanting to grow, being worried about climate change and organic food and health food and all that other stuff, not selling cigarettes, et cetera, et cetera. And then the last incarnation of Trader Joe's, which is the one that exists today, which is called Mac the Knife. And again, he doesn't tell us why. Good time Charlie makes sense. Horrors Harry makes sense.

Starting point is 00:37:24 I have no idea what the hell Mac the Knife means. I Google it. It winds up being some kind of the only thing that comes up is there was like the pseudo anonymous or anonymous Apple blogger that was under Mac the Knife. So I don't understand the connection. But he says it started because the end of fair trade on milk and alcohol in 1977 leads to the third and final version, which I call Mac the Knife. And that is where these small stores,

Starting point is 00:37:47 limited hours, I'll go into more differentiation, but essentially say, hey, he calls it the Brook Brothers strategy, a chain of retail stores that only sell their own products. So right now we're in the Good Time Charlie section. This is the note of myself

Starting point is 00:38:03 as Trader Joe's final form took a while to discover. He says, I'm going to disillusion those dear souls who myself as Trader Joe's final form took a while to discover. He says, I'm going to disillusion those dear souls who think that Trader Joe's sprang fully developed from my brain, like Athena from the head of Zeus to continue the metaphor. It was more like an elbow here,

Starting point is 00:38:17 a toenail there over a period of 11 years with an occasional painful delivery of a major hunk of torso. Okay. So we go to another, another influence of his that came from a book. So more ideas on entrepreneurship from a book and then the need to sell everybody. Most of my ideas about how to act as an entrepreneur are derived from the revolt of the masses by Jose Ortega, the greatest Spanish philosopher of the 20th century. I believe this book still offers the clearest explanation of the times in which we live. And I believe it offers a master plan of action for the would-be entrepreneur

Starting point is 00:38:51 who usually has no reputation and few resources. And so he's going to take an idea directly from the book. And he's saying, essentially, this is what I did my whole career. Ortega offers an explanation of how such a person can get on can get an enterprise started in the context of the career of Julius Caesar an entrepreneur who started without power Ortega says human life by its very nature has to be dedicated to something an enterprise glorious or humble a destiny illustrious or trivial so in Caesar's case case, it's the state. The state begins when groups naturally divided find themselves obliged to live in common.

Starting point is 00:39:30 This obligation implies an impelling purpose, a common task, which is set before the dispersed group. Before all, the state is a plan of action and a program of collaboration. So those are the two most important terms, a plan of action and a program of collaboration. The men are called upon so that together they may do something. It is pure dynamism, the will to do something in common. Okay, so that's the end of Ortega's words. Now, this is what Joe says about that. Most of my career has been spent selling plans of action and programs of collaboration, whether to Rexall to start up Pronto Markets or Bank of America to buy out Pronto or landlords or vendors, many of whom were skeptical, if not hostile to my plans and above all to my employees. If you want to know what differentiates me from most managers,

Starting point is 00:40:27 that's it. From the beginning, thanks to Ortega, I've been aware of the need to sell everybody. I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn his plans, but that his own troops would not. Okay, so that brings us to a main theme of this book that is repeated over and over again. He's going to give us an example here in a minute. He says, as I learned time and time again, success in business often rests on a minute reading of the regulations that impact your business. Now, it's funny he said that because when I read that, I thought of what Kobe Bryant wrote in the Mamba Mentality, which I thought was so clever. So Kobe says, I made a point of reading the referee's handbook. So think about reading your regulations. It's a

Starting point is 00:41:16 referee's handbook, right? One of the rules I gleaned from it was that each referee had a designated slot where he is supposed to be on the floor. If the ball, for instance, is in place, W referees, X, Y, and Z each have an area of the court assigned to them. When they do that, it creates dead zones, areas on the floor where they can't see certain things. I learned where those zones were and I took advantage of them. I would get away with holds and travels and all sorts of minor violations simply because I took the time to understand the official's limitations. he learned those principles in trying to sell wine first, and then he would apply what he learned in wine to selling food. And so we're in the part where he's going to start getting into wine

Starting point is 00:42:13 because he thinks this is an opportunity well before they do their own branded food. Again, a close reading of the regulations is a main theme of this book. Why not have a winery? A close reading of the regulations showed that a retailer could own a master's wine grower license the same kind that say he's talking about lists a bunch of wine producers robert mondavi owned we could have gotten a new one for the state for about 300 dollars but we wanted an old one uh so we found one that this guy from the 1930s decided to sell his license, which had been issued in 1933, and bought it for $10,000.

Starting point is 00:42:51 So why the hell? He could buy a new one for $300 or an old one for $10,000. Why is he buying one for $10,000? New master wine grower licenses didn't have the same grandfather privileges of that 1933 license. With that license, we could legally hold wine tastings of any wine, even if we didn't have our own label on it. We could also legally act as a wholesaler of any wine. And this led to the sales of thousands of cases to some of the best private clubs and restaurants of Los Angeles, essentially paying for the additional cost.

Starting point is 00:43:24 Right. The wholesaling privilege was internally valuable to us too. For tax reasons, we operated the stores under eight separate corporations. Technically, these stores could not buy wine as a group. But since one of the markets held the master wine grower license, it could in effect wholesale Trader Joe label wines to the other seven corporations. There's a bunch of different privileges that the older wine licenses have that the new ones don't. He's going to continue to list them. The license also gave us special rights in dealing with California wine growers. For example, when one winery went bankrupt, we could buy the whole inventory and then have it labeled under our own name. Without the license, we could not have bought the inventory

Starting point is 00:44:10 directly from them. And so that's an idea that private label wine that they add to private label food later. This is funny. There was a little catch, however, we had to operate a winery. So they have like a 5000 square foot office building at the time. And it used to be a factory. And so it says the old factory had added assorted tool sheds. So we took about 400 square feet of a tool shed and declared it Trader Joe's Winery. We bought a crusher, a stainless steel formation tank, and we bought truckloads of grapes. And the whole office staff pitched in including their kids to crush grapes and so it was during this uh all those learning about how to sell wine he finds his target market this is the target market that trader joe's is built on being king of the low price high value

Starting point is 00:44:56 wine trade in california was one of the greatest satisfactions of my career that's the punchline his prime market uh for wine winded being overeducated and underpaid Californians. And so a lot of the early Trader Joe's would be around areas where there might be a lot of colleges, highly educated population, but regular middle class workers, though. This I mentioned earlier, growth for the sake of growth still troubles me. It seems unnatural, even perverted. He prefers small teams, small stores. At the start of the next chapter, he has a quote from Samuel Johnson, who said in all the way back in 1759, promise, large promise is the soul of an advertisement. I wrote my note on that page sounds like Olga V. Hopkins, Claude Hopkins, I did, I think all the way back on 19, our founders number 170, somewhere in there.

Starting point is 00:45:46 And he was probably the greatest copywriter, the most influential copywriter of all time. A lot of the ideas that we learned from Ogilvy, he learned from Hopkins. He readily admits he read his books and stole his ideas and used them in his career. And as I turned the page, this blew my mind because I had mentioned Ogilvy

Starting point is 00:46:03 before turning the page. One of the main drivers of growth at Trader Joe's was this thing. It's still in existence today. It's called Fearless Flyer. It's like the combination of a newsletter, a catalog, and a comic book. And so he winds up designing it and using Ogilvy's ideas. So let me just read this to you. Sorry, I don't want to run over my own point.

Starting point is 00:46:23 It started off as just a way to report, like to educate people on wines and wine tasting. So it says, to report these results, I designed the Insider Food Report, which beganising Man, which I read that book and did a podcast on. The numbered paragraphs, the boxes drawn around the articles, are all his ideas. I still think his books are the best on advertising that I've ever read, and I recommend them. And we're also going to see he took Ogilvie's ideas because, and Hopkins' ideas, because Hopkins discovered the more you tell, the more you sell.

Starting point is 00:47:03 And so a lot of people that had no way to track the effectiveness of their advertising would think, okay, people have short attention spans, let's do just these tiny little ads. And what Ogilvy discovered and Hopkins discovered is the more information you give to interested people, the more likely they are to sell. And that's what the fearless flyer is. It winds up becoming almost like this, not even the size of a book, but it winds up being multiple pages, I think over 20 pages long. And people would save it.

Starting point is 00:47:27 I mean, it's a educational tool disguised as an advertisement, I guess is the way to think about it. So he says, we assume that our readers had a thirst for knowledge. This was 180 degrees opposite from supermarket ads. We emphasized informative advertising, a term borrowed from the famous entrepreneur Paul Hawken, who started publishing the Whole Earth Review in the early 1980s. These informative texts were intended to stress how our products were differentiated from ordinary stuff. And he's going to go into more of like the nuts and bolts of how they discovered the proper way. He starts off by sending them to specific people and he realizes that's the wrong move. Originally, we distributed the fearless flyer

Starting point is 00:48:07 only in the stores and to a small subscriber list. Doing a mailing to individual addresses, however, was a rotten chore. Americans move about every three years. In 1980, I attended a marketing lecture that taught me that when someone moves, someone just like them is likely to occupy the same address. This proved to be correct.

Starting point is 00:48:23 By mailing to addresses rather than individuals, we were able to blanket entire zip codes. We tremendously expanded the distribution of the fearless flyer. He's going to go into more of his beliefs on advertising. I don't believe in advertising budgets that are based on a percentage of sales. So he's comparing, again, comparing and contrasting

Starting point is 00:48:40 how the conclusion he arrived at with how most other companies, the decisions made by most of the companies, you figure out the dollar needed to do the job right, and then you go ahead and spend it. As it turned out, the big sales generated by the fearless flyer dropped the cost of advertising a percentage of sales after the fact. The expansion of the fearless flyer to 20 pages was an important factor in the jump of Trader Joe's sales. So that's the more you tell, the more you sell. Down deep, the fearless flyer was an educational medium and hundreds of customers

Starting point is 00:49:13 kept three ring notebook collections of the issues so they could refer back to the articles. And so his whole point is that, oh, yes, it's advertising what we have in the store, but even if you never came into the store, you still get value. That is so important. Okay, so moving on. He talks about intentionally trying to make Trader Joe's a cult. And this is why. Word of mouth is the most effective advertising of all.

Starting point is 00:49:38 I have been known to say that there's no better business to run than a cult. Trader Joe's became a cult of the overeducated and underpaid, partly because we deliberately tried to make than a cult. Trader Joe's became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult. And partly because we kept the implicit promises with our clientele. There are not many cult retailers who successfully retain their cult status over a long period of time. And that's just a whole point about not optimizing just for size. This is the contrast here. So not many successfully large retailers are going to hold their cult status, right? And part of that is because as you grow, the larger you get, the harder it is to actually keep your promises, your implicit promises to your foundation, like what created the enthusiastic customers that created the cult in the beginning with but across america in every town there's a particular donut shop pizza parlor bakery bar etc that has a cult following of true believers beware of ever

Starting point is 00:50:32 betraying the true believers so another thing i learned from danny meyer he's sitting next to he's complaining about something or maybe yeah i think he was like venting to there's a the guy from i find his name was it stanley marcus there's a guy from, I forgot his name, was it Stanley Marcus? There's a guy from the Neiman Marcus retailer and the family. And he, you know, why am I winging it? I can just look up the quote real quick. This is from Danny Marcus, Danny Meyer's book, Setting the Table. He's at a dinner or something with Stanley Marcus of Lehman Marcus,

Starting point is 00:51:05 and he's talking to him. He says, opening this new restaurant might be the worst mistake I've ever made. Stanley set his martini down, looked at me in the eye and said, so you made a mistake. You need to understand something important and listen to me carefully. The road to success is paved with mistakes well handled. His words remained with me throughout the night. I repeated them over and over to myself, and it led to a turning point in the way I approached business. Stanley's lesson reminded me of something that my grandfather Irving Harris had always told me. The definition of business is problems. His philosophy came down to a simple fact of business life.

Starting point is 00:51:36 Success lies not in the elimination of problems, but in the art of creative, profitable problem solving. The best companies are those that distinguish themselves by solving problems most effectively. So the way I reduce that for my own self so I can remember is that business is problems and companies are just effective problem-solving machines. Great companies are effective problem-solving machines, right? So we're seeing the exact same thing. He has an entire chapter. Joe has an entire chapter called Hairballs. And that are just these, these random odd problems that

Starting point is 00:52:06 businesses throw off from time to time. And his point is like, that, that is your bread and butter. That is so important. Solving that is why you're successful. All businesses have problems. It's the problems that create the opportunities. If a business is easy, every simple bastard would enter it. My point is that a business person who complains about problems doesn't understand where his bread is coming from. Okay, so now we got to the Mac the knife part. This is where Trader Joe's becomes Trader Joe's. It's been known as Trader Joe's for like a decade and a half. And they're this part and they're finally figuring out their formula, right? This part is very important and very, very long. I got highlights that go

Starting point is 00:52:47 over multiple, multiple pages. All right, so let's just jump into it. First, he starts this chapter with another quote, innovation is less an act of intellect than an act of will. I love that. There's a lot of big, bold type in this chapter because we were sculptors taking the first big wax off of a chunk of extremely tough granite. The subtleties can come later. The creation of Mac the Knife was, above all, an act of will by my colleagues and me to survive. And what they're surviving from is this rapid deregulation of his industry. And he says deregulation is always a good thing, but the reverberations,

Starting point is 00:53:28 these quick changes in business can actually put you out of business. So they were worried they were actually going to go under. He says, I'm just going to give you a little bit of background and then I'm really going to focus on his ideas more than the deregulation part. The retail grocery industry went through the same kind of bends that the airlines suffered in 1981

Starting point is 00:53:41 when they were deregulated or that electric utilities had suffered. Freedom can be an unwelcome thing. We were, quote unquote, protected by price controls on almost 50 percent of what we sold. So those price controls are going to be removed. He's talking about that's the before almost 50 percent of what we sold actually had price controls. And so that's when he's like, OK, we have the most important strategic decision we made was to become a genuine retailer. And this is fascinating. So this is he says retail comes from a medieval French verb retailer, which means to cut into pieces. Taylor comes from the same verb.

Starting point is 00:54:16 And so he's saying, how can we actually can we define what we're doing and how and how we're going to do it? So he says the fundamental job of a retailer is to buy goods whole, cut them into pieces and sell the pieces to the ultimate consumers. This is the most important mental construct I can impart to those of you who want to enter retailing. Most retailers have no idea of the formal meaning of the word. Time and again, I have to remind myself just what my role in society was supposed to be. Many of the policy decisions for a retailer boils down to this. How closely should we stick to the fundamental retailing job? And don't worry if it's a little confusing, he's going to explain it.

Starting point is 00:54:58 And it's pretty clear in our cheese. This is funny. I was from a cheese department in our cheese department. We were literally taking whole wheels of cheese and cutting them into pieces. I took this as an analogy for what we should do with everything we sold. Getting rid of all outside salespeople was corollary to the programs that were to unfold during the next five years. Remember, what is a normal grocery stores do do they're just selling other people's products yeah they're gonna have private label as well and they'll copy what sells you know every other i

Starting point is 00:55:29 think every grocery store in the world does that but his point was like okay i don't want i only he's making a transition for only selling his own products right so he's talking about get out get these outside people no no outside people in mac the, no outsiders of any sort were going to be permitted in the store. All the work was done by employees. The closest thing to it that I see these days is Costco, which shares many features with Trader Joe's. And so what does he mean about Costco? He's talking about reducing the SKUs, right? So a typical convenience store will have like 5,000 SKUs, so individual products, right?

Starting point is 00:56:11 Like these big supermarkets that exist today, they have, I think, like 25,000 to 30,000. Trader Joe's is going to have no more than 1,500. So he's just getting into the thought process behind creating what would be a fundamentally different experience for a grocery store. So it talks about before and after. Each store probably had access to 10,000 stock keeping units, which is a SKU, of which about 3,000 were actually stocked in any given week. But by the time I left in 1989, we were down between 1,100 and 1,500 SKUs, all of which were delivered through a central distribution system. The managers no longer had any buying discretion.

Starting point is 00:56:48 And along the way, not only did we drop a lot of products that our customers would have liked us to sell, even at non-outstanding prices, we stopped all full case discounts and we persistently shortened the hours. And so the reason this may seem like some random things I'm including in here, but this is why I just read that part to you, because what he says here, we violated every received wisdom of retailing except one. We delivered great value, which is where most retailers fail. If you go back to the meeting that Jim Sinegal, the founder of Costco, had with a young Jeff Bezos, I think they met at a Starbucks inside of a Barnes & Noble, and that changed Jeff's approach to running Amazon at the time. The only thing they sold, if I remember correctly, were books, DVDs, and music maybe. But anyways, Jim just lays out how different Costco is. They reduce the amount of SKUs.

Starting point is 00:57:38 They have these big, weird warehouses. They make most of their money on – they mark everything up across the board. It's something like 14%. They make almost all their profits on just the membership fees. And his point that he told Jeff was that value trumps everything. People will drive out to these far locations in my weird store with no customer uniforms. And you have to bag your own stuff and put it up in boxes that the stuff was shipped in. It's just a bizarre thing because you'll come in, you'll see a TV that's $400 or

Starting point is 00:58:05 $200 cheaper than anywhere else you can get. And so Jim's point is value trumps everything. And then when that happens, when a customer comes and realizes, oh my God, the value I'm getting compared to the price I pay is outrageous. What does that do? Human nature is you're going to tell other people about it. That's why Costco doesn't, that's why Costco doesn't advertise. Okay, so let's go back to this. We're not done with this section though. There's many pages. He's essentially, everything I'm reading to you is he's just explaining how to be different. He did not just mindlessly open a grocery store, look around and just copy what everybody else was doing. He realized that's a dead end. Let me think things through for myself and let me trust my instincts and the fact that I have more product knowledge than my competitors. The good ones know more. Instead of national brands, focus on either

Starting point is 00:58:48 Trader Joe's label products or no label products like nuts and dried fruit. This was intended to enable Trader Joe's label to pick up momentum in the stores and it worked. Carry individual, again, all he's describing to us here is the different, Trader Joe's is saying, I don't care how grocery stores are doing it. This is what I'm going to do it. So we're going to carry individual items as opposed to whole lines. I didn't know this. We wouldn't try to carry a whole line of spices or bad candy or vitamins.

Starting point is 00:59:13 Each SKU had to justify itself. So normally the salespeople come in and be like, hey, you know, buy six of this brand. These products are very similar to each other. It's like, no, we're going to buy one. And in that case, it's their own brand uh depth this is the punchline depth of assortment now is of no interest that's extremely different go to a normal grocery store you'll see 17 different ketchups 15 different brands of of uh paper towels he's like no and costco does the same thing he's like no you don't need i don't want to choose between 15 things just tell me

Starting point is 00:59:44 the best one and i'll buy it uh no fixtures this is getting into furniture the store would have most of its merchandise displayed in stacks with very little shelving this implied a lower skew count high skew stores need lots of shelves the average supermarket carries almost uh 27 000 skews and 30 000 square feet of sale area, or roughly one SKU per square foot. Trader Joe's carried one SKU per five square feet. Costco, one of my heroes, carried about one SKU per 20 square feet. As much as possible,

Starting point is 01:00:16 I wanted products displayed in the same cartons in which they were shipped by the manufacturers. Another difference, there would be no loss leaders. They have to make a profit on every sale. He was talking about a lot of the grocery stores would make so much money on milk. And I forgot the other product he mentioned was that they would advertise, bring you in the door, sell you coffee, lose maybe 10% on that and make it all up on milk is one example. Above all, we would not carry an item unless we could be outstanding in terms of price and make a profit at that price. So actually, he says we'd have to be outstanding on price and uniqueness, excuse me, price or uniqueness.

Starting point is 01:00:51 And we'd have to make a profit at that price. And again, a lot of this came out of the idea that you have to survive deregulation. You're a completely new environment. Essentially, the rules of the game he was playing was changed overnight. Another thing that he talked about is this concept of discontinuity. And he's like, listen, grocery stores will try to sell you, you know, they'll sell you Folgers coffee. They've been selling it for 10 years. They'll sell it to you for the next 10 years.

Starting point is 01:01:18 We're going to offer things if they're a good value to the customer, even if they're temporary. No effort was made to always be in stock. The buying from Trader Joe's was as opportunistic as in wine. Some of our great values, and this is just clever, some of our great values in fruit juice were generated by getting the glass containers for cheap. Odd lots of glass containers show up from time to time. Let's say that a prune juice tries an odd shaped container and then drops it. The leftover inventory gets closed out at a bargain price. So we would buy up these odd lots and ship them, say to our apple juice supplier. Since so much of the cost of fruit juice is in the glass container, we were able to reflect big

Starting point is 01:01:57 savings in the retail price. So in other words, he's willing to seize temporary opportunities if it delivers value to the customer. And then he summarizes the section on private label products, which is what they're known for today. I wound up wishing we sold nothing else. So it took him a long time. This is the why behind unique products. Products needed to be differentiated in order to avoid direct price comparison. So the direct price comparison is the game that his competitors, the large grocery stores are playing. He's like, I'm not going to play that game. I'm just going

Starting point is 01:02:30 to have products that are so different that you can't compare prices. And so he expands on this idea. He says, my years at Pronto Markets convinced me that where there is no competition today, there will be tomorrow. The answer was to design a store that has no competition. That's why Mack the Knife should not carry any skew in which it was not outstanding. That reminded me of Yvon Chouinard, founder of Patagonia, that rebel. He said something in his autobiography, Let My People Go Surfing, and he's echoing exactly what Joe was saying here. He says, remember, I'm the kid who couldn't play competitive games. I'd much rather design and sell products so good and unique they have no competition. Yvonne applied that idea to clothing, and Joe's applying that idea to groceries.

Starting point is 01:03:21 It's the same idea. This is what I mentioned earlier. If you study the history of your industry, you can avoid just by avoiding being stupid. In this case, don't have too many stores that leads to bankruptcy. My preference is to have as few stores as far apart as possible and make them as high volume as possible. Trader Joe's sales were $1,000 per square foot, with supermarket was just averaging $570 per square foot. Too many stores, too many irreversible leases, too much geographical saturation was a recurrent theme in the failure of American retail chains in the 20th century. So all he did was,

Starting point is 01:03:57 why are all these guys going bankrupt? What are they doing? And let me just avoid that. I want to brag about something here. In 30 years, we never had a layoff of full time employees. The stability of full time employment at Trader Joe's was due in part to caution and opening new stores and insisting on high volume stores. And I would say that's another main theme of the book applied to different different ways. The idea is just make like you can, if you limit the amount of details and then make every detail perfect, like,

Starting point is 01:04:27 you have something that's more manageable. This, this, this fetishization of just being bigger and bigger and creating this

Starting point is 01:04:33 unwieldy thing that nobody has control over, eventually those things will collapse or they'll collapse a lot faster. It's something that's small and within your control

Starting point is 01:04:39 and I think now, what, Trader Joe's has been around for almost 60 years or something like that and I think they only have 500 stores. I mean,

Starting point is 01:04:44 not a small company by any means but they could have grown a lot faster than that um more more comparing contrasting here uh between Trader Joe's and other um other groceries no closeout sales no coupons and no senior discounts giving discounts and I'll just expand on the no senior discount thing because I thought it was funny and he quotes Munger one of my heroes giving discounts to people over 60 is to borrow a phrase from Charlie Munger a type of dementia I can't even classify here you have the fastest growing most affluent part of the population and you give them a discount another main theme of the book and something we've seen over and over again down with committees businesses successful businesses are run by formidable individuals.

Starting point is 01:05:26 I want to make it quite clear that I called the shots. I rejected management by committee. I think however that my regime was somewhat short of despotic. I like the quote about Pierre Montau, the great conductor of the San Francisco Symphony, Montau never tried to get a performance out of an orchestra. He was always giving one with them. Okay, so then something surprising happens. He sells Trader Joe's. And I was really shocked. He sold it, I think, in 1989. And as I'm reading it, there's this giant, like a German company that owns a bunch of grocery stores all over the world. And I was reading this section. I was like, why does this sound so familiar to me?

Starting point is 01:06:10 And then I got to the last page. And he says, Sol Price had sold FedMart the previous year to another German capitalist, a sale that ended in an explosive exit by Sol and the subsequent collapse of FedMart. So I was like, okay. I knew. I was like, I knew i was like i swear

Starting point is 01:06:25 some other german company came over and bought an american company american retailer i couldn't remember why he reminded me it was in soul prices book and so i'm going to go over many pages here this is going to be one long close and this part is so so important because he had another career. I think it was like 50 something, 58 when he sold. He sold his life's work and he regretted it. So I'm not going to bury the punchline. I think this is a very important lesson to learn. And this is something that's come up and, you know, we're almost 200 books into this project. I can't think of a single example where somebody sells their life's work and thought that was a good idea, but I can give you several examples where they sell their life's work and they regret it. So take whatever meaning you want out of that. I'm going to let Joe speak

Starting point is 01:07:13 for himself here. And he says, frequently people who see the enormous success of Trader Joe's ask me why I sold. Let's put it this way. I ran, There's this guy named Bernie McDonald who had a risk calculation, a definition of like risk management. And let me actually read the whole thing to you. It says risk management. You say risk management is asking, what am I risking if I say yes? And what am I risking if I say no? So wait, just ask yourself questions. And I guess before I go back into the addendum in this book, which I'm not going to talk about at all, is like his second career. He was a consultant, took control of some other retail companies, sat on board of directors. He did not write about that period of his life with the love and enthusiasm and passion and intensity that he did about Trader Joe's. And so when you get to the point where he says, yes, I fucked up. I regret this.

Starting point is 01:08:05 It's extremely important because he started the book saying, I'm writing this for future entrepreneurs and would be entrepreneurs. That's how it starts. And at the end, the very last end is I shouldn't have done this. OK, so let's go through how that could have possibly happened. Frequently, people see the enormous success of Trader Joe's. Ask me why I sold. Let me put it this way. I ran Bernie McDonald's risk calculus. What do I risk if I sell? What do I risk if I don't? That calculus of what do I risk if I don't included interspatial death taxes.

Starting point is 01:08:39 So this is, I guess this tax was repealed under Reagan in the 80s. So he defines it the hateful tax that my widow would have had to pay if I died. A tax that could bankrupt a now leaderless company if he died. That calculus included President Carter's threat to end capital gains tax preferences in 1980. A threat that would have increased capital gain taxes for me from 33% to 73%. So he sells the business in the 70s. It was a very rough economic time in American history. And he's going through the, I'm going to list all these other, a lot of it's just like,

Starting point is 01:09:16 I have a lot of uncertainty and I'm worried about the future, somewhat pessimistic about the future, right? And his point later on is like, I wish I had the courage to just go with it. I knew I loved what I did, but I was scared. And that's normal. Like, I'm not like, I think it's important to learn these lessons because humans make irrational decisions even when we're not afraid. We are much more prone to make irrational decisions when we're afraid. And that's his point. That calculus included the fact that our after-tax proceeds from the sale would be large enough to permit us, meaning his family, to be free of economic worry for the rest of our lives, assuming I didn't do something stupid with the money. Makes sense.

Starting point is 01:09:54 That calculus of what do I risk if I sell? So that's if I don't sell, right? Now he's talking about what do I risk if I sell? Included the fact that Trader Joe's was my zen window on the world I experienced the world mostly through Trader Joe's that's an advantage of being self-employed that window can never be as open when you're an employee because he's going to work for the company for almost 10 years after he sold which is also very surprising tells you he didn't want to leave. Come on, man.

Starting point is 01:10:31 But Joe, didn't you think about the risk of not making an even greater fortune if you said yes? So were you worried about the fact that you could have made more money in the future if you just kept it? And his point was, no. I had studied Aristotle's concept of the golden mean, the Hellenistic ideal of sophrosign. I don't know how to pronounce that, which translates to nothing too much. The amount that that was offered to me was enough by the nothing too much standard. Essentially saying I'm not like I don't I'm not optimizing just to be the richest person in the cemetery.

Starting point is 01:11:03 Right. We have led a very comfortable life ever since. One of the really nice things about my career is that I was never an absentee dad. Workaholic? Yes, but not absentee. What price glory? When is enough enough? So there's a lot of knowledge in what he's saying, right?

Starting point is 01:11:25 That's what makes it so difficult the fact that this is such a it's such an easy decision to make a mistake on and that's why i think you see so many smart and accomplished people make the mistake so he's continuing to give us this inner monologue over the spread over to what i'm reading to you spread over two chapters well joe the first graduate business student, the first year graduate business school student might ask, what was your exit strategy if it wasn't to sell? Because he initially turned down that he'd never planned to sell. He said no multiple times and then he had all this fear, right? So then what was your exit strategy if it wasn't to sell or let your kids take over the business?

Starting point is 01:12:04 This is Joe's answer. I detest the term exit strategy when I hear young entrepreneurs bragging about theirs, as if a business is something one builds and casts off. There is an emotional part to business. It's not just financial. He loved Trader Joe's. It was a part of him. It was his soul. I had never planned to exit by the way of sale to outsiders. My personal exit strategy pre-sale was to work in the business as long as I was able to. And this didn't change with the sale because I thought I'd spend the rest of my career reporting to Dieter. Dieter is the guy, his liaison between the German owners, between himself and the German owners, right? And so he's

Starting point is 01:12:43 like, even after I sold, I plan on working trade address for the rest of my life. Things are going to happen. Remember, when you don't own the company, you have no control. And that's so you don't actually have control of your destiny, which he learned. Because I thought I'd spend the rest of my life reporting to Dieter.

Starting point is 01:12:57 So I sold. Do I regret it? I'll answer that in the next chapter. And you can see as he sets up the question, you're going to know the answer is yes, or he would have just answered it, right? Or if the answer is no, he would just say it. Six years after selling Trader Joe's,

Starting point is 01:13:11 there were bumps in the road. I got shocking news. Dieter quit. This isn't supposed to happen in Europe. My forecast of spending the rest of my career working with him blew up. And so then you have all this, remember, he's used to being in up. And so then you have all this. Remember,

Starting point is 01:13:25 he's used to being in charge. And now you have somebody coming in trying to overcheck his decisions. And eventually he's going to get fed up. And that's when he leaves the company entirely. I sensed that my prerogative of complete control, the prerogative of an entrepreneur posing as an employee was being progressively eroded. And this is when he learned, when he realizes that he's going to have to leave the company that he loves. And the reason I'm closing on this, and the reason I think this is the most important part of the entire book, is you don't want this. You do not want a regret this large, especially towards the end of your life. He cannot create another Trader Joe's. That will never happen. And he still lived for like another close to 40 years after he left

Starting point is 01:14:09 Trader Joe's. So he had to live with this regret for a huge part. So I'll just end on this. But do I regret having sold? Yes, I admit it. To my own self, I was not true when I sold. I regret not having the guts to ride out the loss of the tax exemptions, the employee ownership problem, the threat of death taxes, Carter's threat to eliminate capital gains preferences, and all of the other fears real or phantom in late 1978. I have to admit the truth that I regret having sold Trader Joe's and I've had to pay something for this beyond the loss of my shadow. Thanks for listening. Joe Colombe. That was the ending of the book. That is a powerful, powerful ending. Right to the point, and then it ends. I can't recommend this book enough.

Starting point is 01:15:10 I think it's fantastic. Every entrepreneur should read it. If you want the full story, and you want to support the podcast at the same time, you can buy the book using the link that's in the show notes of your podcast player. That is 188 books down, 1,000 to go, and I'll talk to you again soon.

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Founders - #188 Joe Coulombe (Founder of Trader Joes)

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