Book Review: Becoming Trader Joe
While I love the Trader Joe’s stores (and wish they’d come to Puerto Rico), and I fill some suitcases and coolers with Trader Joe’s products a couple times a year in Florida, I never thought I’d be so impressed by someone working in “boring” retail as I was with the founder of Trader Joe’s, Joe Coulombe.
The essential lesson of this book, at least for me, is that even “boring” lines of business have high returns to intelligence and competence. Grocery retailing is low margin, but at lot of that is due to weird structural issues in the industry, and with slotting fees, distribution direct to store, consumer packaged goods juggernauts, union and FLRA rules, and everything else keeping paper profits down. Trader Joe’s always paid employees well, with successful store managers making more than executive leadership, and line employees at markedly more (2-3x it seemed like) of minimum wage. In addition, employees were treated well — rotated through jobs in the store, tasks optimized for being easier for staff, etc. A lot of this is stuff a product manager or designer might do with a green field business, but wasn’t generally done in retail. Trader Joe’s was innovative to the same degree Costco and ALDI were in their respective markets.
Trader Joe’s probably benefitted from, and certainly look advantage of, some Depression-era California protectionist laws which were in place from the 1930s to the 1970s ‘‘Fair Trade Laws”. In alcohol specifically, which was overturned by a court case in 1976, it prevented competition on price (generally), and let the early Trader Joe’s make huge amounts of money as a liquor and wine retailer, competing primarily on product knowledge and selection. Trader Joe’s also used some loopholes in importing (running their own winery, working with a great importing/distribution partner, etc.) to get wines at incredible prices — combined with recession and lack of demand, there were some amazing bottles of French wine sold for $3-8 at retail which would easily go for $500+ today. This cash cow helped subsidize the rest of the business as it went through multiple reincarnations.
Once these protectionist laws were obviously going away, Trader Joe’s shifted to a much more aggressive strategy. Joe calls it the “Mac the Knife” strategy. The store shifted to limited SKUs, and focused on selling only products where it had a deep competitive advantage, without any obligation to sell an entire product line (so, no bulk sugar or other pantry fillers, consumer packaged goods from the big vendors, sodas, etc. — you wouldn’t be able to do 100% of your grocery shopping at Trader Joe’s). Lots of arbitrage opportunities were capitalized on, and Trader Joe’s remained successful.
Two other parts of the book were striking to me. First, just how fucked up the tax and other regulations of the 20th century were. Pre-Reagan, Joe was in a 73% tax bracket, and many decisions were made (such as keeping the business split into 8 separate corporations, with less than 80% ownership by major shareholders) as a tax optimization strategy. The sale of Trader Joe’s to the German founders of ALDI was partially due to Carter threatening to end the privileged treatment of capital gains. Trader Joe’s remained a California-only business for a long time due to interstate commerce rules. Joe avoided debt except for real estate largely due to his experiences in the 50s-60s. He also pointed out that many of the individual regulators were themselves children of the Depression, and in the 1960s-70s were just trying to mark time until they could retire, so didn’t want to rock the boat.
Second, just how intellectual Joe Coulombe was. He cited Fred Brook’s Mythical Man-Month, excellent historical references, and extensive literary references. This isn’t what I’d expect of a grocery retailer, and might have influenced the target market of Trader Joe’s — “overeducated and underpaid” people like graduate students, adjunct professors, etc.