Trader Joe’s

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 two buck chuck. Nice. Got so many nuts. So many nuts. Some chocolate, some cheese. A 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.

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. 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 slash email. After you listen, come talk about this with the entire Slack community, acquired.fm slash Slack.

If you want more Acquired, check out our interview show, ACQ2. Search ACQ2 in any podcast player to listen. 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. Ben, 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 Cologne. Because you can't separate Trader Joes from Trader Joe. Joe Cologne was born in 1930 in San Diego, California. The same hotbed of American retailing innovation that produced Salt Price, Price Club, and everything that would become Costco. Yep. 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 schoolteacher, 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 Cologne 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 drugstores throughout America. And this is a struggling company.

Owl 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 Fisher, 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. Ah. 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 parrot 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? Yeah, go for it. All right, so listeners, this comes from Benjamin Lohr, 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 stock 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 from 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, I 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 to 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 Al 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 Al. Let's just copy paste this 7-Eleven thing. Now, remember, Al 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. 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 percent. Shockley 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 traitorous aid or something.

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 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 slash 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 companies. 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. Yes. Yes. Interesting. 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. Okay. 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, great, great, great autobiography called Becoming Trader Joe that came out a couple of 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, 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 get paid between 40 and 150 percent over what average compensation is for their roles in retail. I saw 60 percent 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.

Oh, 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 Ador Milk Farms, A-D-H-O-R, which is ROTA spelled backwards. Come back to that in a minute. He goes to the owner and president of Ador, 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 Ador 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.

Yeah. So over the first couple years, it does go great. Pronto becomes Ador'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. And 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.

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 Ador 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 icebox 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 Ador 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 L.A., is Ador's largest seller of their products. That is not a good sign for Ador. 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, Ador had mostly Guernsey cows. And Ador, 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, that Ador 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. 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 a 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 Ador 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 credit worthy. And the operating history. Yeah, you're a landlord. Would you rather have 7-Eleven be your tenant or start up pronto markets?

You're going to bet on 7-Eleven. Yes. And that not only takes away his milk supply, it'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. Bart's 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. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there.

Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

Lagora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Lagora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test.

Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time. Or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com slash acquired and just tell them that Ben and David sent you. 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 macro economist who, once he realized where all 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, 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 goods set.

Yes. Once all this stuff gets thrown out and rolled down constitutional, 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 regulatorily 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 out of state corporations. 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 of years, Pronto Markets basically transforms into a liquor store. And it buys Joe a couple of 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 this strategy linearly instead of completely changing tracks and going in this other direction. Yeah. 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've got one counter. There's a bunch of goods that you can see, but it's not self-serve. 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. Mm, yeah. 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 cardstock. This enables real consumer packaged 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 U.S. 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 packaged 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. It's 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 packaged good. What role does that play in the development of the grocery store? Procter & Gamble. Unilever. Kellogg's. Gillette. Coca-Cola. Nestle. Note, 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, homogenous 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- The mother load.

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 stopped 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, A, 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, 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. Americans are about to be well-traveled. And well-educated. Yes. 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 Colom 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, 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 Coulomb to, like, figure out is how is it that well-traveled, well-educated people are going to let you take a nontraditional 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. It started with the South Pacific movie, and it bled into cocktails, into drinks. So, 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, what's the bird?

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 Colom 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-ian 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 and cities across America. Oh, Trader Vic's. 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 in 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've got professors. You've got graduates coming out. And was this one of the Pronto markets before?

Was he in the same real estate? No, this is a new store. 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. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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That's V-A-N-T-A dot com slash acquired for $1,000 off. 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.

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 slash 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. 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 this 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? Yes. Is that chemistry? I think so. Or they used to have the Sir Isaac Newtons. 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. Yeah. The first location on Arroyo in Pasadena, even though it's small today, was actually about twice that size.

It was like 7,000 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? No, no, no. Long gone. Too hard to handle. 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, while we're thinking meats here, he used to have the shop next to one of their other pronto markets here in L.A.

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. Yeah. Oh, yeah. We're going to do it. So this manager, this captain is like, well, Joe, alcohol is, you know, our sort of core product here.

What if we try expanding into wine? Joe's like, all right, great. Let's try it. Meanwhile, Joe doesn't drink wine. Yeah. Yet. Yet. Yet. He would become a huge anophile, unophile? 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, unophile. Learn something new every day. Yeah. So Joe's 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 that 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 and 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 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. 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, the everything, all the famous, all the old world greats against Napa Valley wines.

And the Napa wines trounced the top Bordeaux's 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 winemakers who are essentially guys in the garage at this point in time. They bring it back to Pasadena. They get Heights, Fremark Abbey, like some of the best wines and winemakers 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.

Hmm. And it's this whole newsletter. 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. 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. And they still have, what, single-digit stores at this point? Yeah. Pretty quickly, they add imported wine, too. So not just domestic Californian wine. They go to Europe. They go to France. They go to Spain. They go to Portugal. All the great winemaking 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 was just 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. Because in other fair trade categories, you'd have to go to the entire distributed group of producers and say, Hey, all milk producers or all 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? Yes. This is awesome. 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. Yes. Brilliant, right? 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. Brutal. 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 pours 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 this 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 in 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 era's tour of Trader Joe's. That'd be amazing. Bring out the products from the different eras. That'd be 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 Lohr'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 Lohr, the guy 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 C-suite 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 cage 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's 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 Waz, and that becomes Apple and everything.

The Haight-Ashbury. 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 in Create Whole Foods, and he saw them five plus years before. Yep. It's about aligning your trade-offs. 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. Yeah. 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. Because it kind of blossoms into this big list of, you can just trust the foods that we are giving to you is 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 to 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. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow.

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So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out ServiceNow.com slash acquired and 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 one. And some other things here and there. There's RX bars, I noticed. They used to have Spindriffs 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. 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 because 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? Not this package. 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. 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? 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 hippy 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, and 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. There you go. Compelling convenience value for our customers. You don't have to turn on your whole big 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. 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 Saul 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 discount and 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's and...

They're all much bigger businesses. Exactly. So, while we're on branded products, this is a great little tidbit. Eater, the website, submitted a FOIA request to the U.S. 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 Dan 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.

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 becomes a 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, et cetera, et cetera, et cetera. 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, and 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. So it's bad because your 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 undersell. 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. This is really obscure. It's Mack the Knife, like the song Mack the Knife from Three Penny 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 pay 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 shit 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 Mac 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 priceless, 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. Yes. Almond processing leaves lots of leftover little almond bits that are almonds but are just little bits of almonds. And there's actually a different technological process that you need to then turn that into butter versus what you need to use for bits of peanuts to turn into peanut butter.

So none of the big brands did this even though peanut butter was this staple CPG good in America. Peanuts are also way cheaper to source than almonds. So you have to be willing to mark up your almond butter or maybe use exclusively waste products like all the bits to make it. Exactly. But the big CPG companies almonds aren't a big part of what they're doing back in these days. Right. At this point. So Trader Joe's goes and learns the process and the technology of how to do this finds suppliers that are willing to do it and brings packaged almond butter to store shelves in grocery stores for the first time.

And the secret weapon to really making all this work was the fearless flyer. And back to the wine merchandising strategy. Yeah. They had the direct channel to their customers to tell long form stories and merchandise these products and make them N of one. It's a physical newsletter and it's all about the product stories of these products that they're bringing to market. It only comes I don't know if it's four times a year or six times a year but there's some scarcity to it so you actually kind of pay attention when you get it.

There's also a funny thing where at first Joe was resistant to doing it for two reasons. One, it was really expensive to publish your own newspaper. You have to work with a real publisher printer sort of thing a typesetter. And two, you don't want to be in the business of asking all these customers for their address and then maintaining PII on them and tracking them when they move. And so that one is great because Joe just realized well actually if I'm so good at targeting neighborhoods that have disposable income and are highly educated like I have a very particular sense of who my customer is if they move the person that moves into their house is probably also going to be my customer.

So I can just do zip code targeting. And so he's like this is great we'll just mail them out to everybody in the area around the store that I want to serve. And then for the first one this is amazing the timing of this is right around the time that the original Mac is released. And so he was doing the Fearless Flyer himself using desktop publishing software on the original Macintosh. And I will say when you pull up the Fearless Flyer you can kind of tell it looks like one of these amateurishly laid out desktop publishing software publications.

Which today is part of the charm but yeah was done by Joe himself back in the day. As is the goofy tagline that is very Trader Joe's in their sense of humor of terrible dad jokes and puns. Trader Joe's Fearless Flyer as always free and worth every penny. Yes. So this leads into as far as I know the one only other marketing advertising activity that Trader Joe's does. Oh on the radio? Yeah radio and I believe yeah the only paid one which also starts as an organic free thing.

Yes. Radio advertising. So the classical music radio station in LA which again target customer educated and underpaid asks Joe to come on once a week this is especially during the wine era of Trader Joe's and do a one minute segment on a wine that they're bringing to town and of course Trader Joe's like amazing I'm going to do that and then it broadens out to food and it works so well that they eventually decide hey we should actually do this as paid radio advertising but unlike everybody else who advertises on the radio these aren't going to be generic ads it's going to be Joe written himself speaking himself telling the product story of one singular product in every ad and we're always

going to end with thank you for listening. I love it. It's a non-advertisement advertisement. Joe basically discovered the power of podcasts to reach your audience back in the 1970s. They realized they should actually go pretty hard into this and in order to justify all the radio ad spend they needed a density of stores in a certain area and so when they were going to launch a new city they would have to make sure they had sufficient number of stores to amortize buying radio ads for all the different areas it was going to reach.

Right. Because it's going to reach the whole city. Right. They wouldn't just launch one store they would go into a city and launch several at a time so you can get the economies of scale of that. There is one other place that they did paid marketing. Do you know what it is? I don't know that I found this. Donations to the arts. Ah yes yes. Again on this theme of the highly educated and trying to reach them where they are they would do things like go to plays or go to the ballet make donations appear in the playbill in the pamphlet in the magazine.

Yeah. My wife Jenny who's an executive at the ballet here in San Francisco will be very mad at me if I don't underscore for everyone listening that supporting the arts is a great effective form of marketing for your company. Because it is also tax deductible. Also tax deductible and for Trader Joe's reaching exactly your target audience. Yep. So coming out of that mid-70s whole earth hairy health food era of Trader Joe's it really was these two huge strategic things for the company.

One was diversifying them out of just wine and liquor into another new product category that they could be really differentiated in and then the bigger one of just getting them into this private label strategy as a whole that they could then blow out with Mac the Knife and eventually transform the whole store basically except wine and liquor into private label. There was one other thing though that Joe did as a sort of strategic hedge against all the chaos that the repeal of fair trade unleashed in the California retail sector.

Yeah he sold the company. Yeah. Yeah he sold the company. Just a little hedge. So what's the story? In 1979 Joe and all the other employee shareholders completely sold out 100% of the company's equity and they sold it to Tao Albrecht the owner of Aldi Nord which is one half of the Aldi global megastore super chain headquartered in Germany. The even crazier twist though is that Joe remained as the CEO of Trader Joe's for another 10 years after selling the company until he retired in 1988.

This is not the brother that owns the store called Aldi in the United States. Yes. To be super clear Aldi does not own Trader Joe's. One the Aldi that exists in the United States is Aldi sued the other half of the Aldi empire that split in the like late 60s early 70s. The relationship that owns Trader Joe's is the founder of Aldi Nord the other half. And the entity Aldi Nord never actually bought Trader Joe's. Tao bought it himself personally and yes Trader Joe's is now owned by the three German foundations that he set up for after his passing.

And if you look lots of places on the internet it will tell you that Aldi owns Trader Joe's and that is not true. Okay. How did this happen? So as we said when Joe did the management buyout of Pronto Markets the predecessor entity to Trader Joe's from Rexall Drugs Joe was the founder and the largest shareholder but about like a quarter to a third of the company was owned by the other early employees and so by the time you get to the mid to late 70s here a bunch of those folks had either retired or passed away and they started having estate planning needs because Trader Joe's starts becoming valuable and they had bought in for like 100 bucks yes

a valuation of $15,000 right so yes this stock is worth a lot they've got some giant capital gain so Joe and the company know this is a problem coming and during the mid 70s they spent a couple years setting up a whole ownership structure to transfer ownership of the company into an official employee stock option plan or ESOP as it's known in corporate finance this is the exact same kind of structure by the way that Domenico DeSole and Tom Ford used to protect !

Gucci as the mechanism by which they rebuffed Bernard and LVMH in the handbag wars between Gucci and LVMH amazing yeah so the thing though about setting up this ESOP ownership plan and transferring ownership of the company into it is it was predicated on there being a valuation for the company and right as it's about to happen is when fair trade gets repealed and interestingly there had not been any primary capital infusions to look at the only valuation that ever happened was the $25,000 transaction when Joe bought pronto right it's a big deal for whoever is coming in to create the valuation for this because that'll be the basis for which this entire corporate structure reorg employees owning it in an

ESOP is going to be predicated on yep and the value that the original shareholders can cash out et cetera et cetera so then the end of fair trade hits the whole industry is in disarray and nobody can agree on a valuation because you don't know if the company is going to survive you don't know if it's actually way more valuable now the confidence that you have in the valuation is shot so it doesn't get issued yep so the ESOP plan goes out the window meanwhile at the same time Aldi had been the other brother's company was the one doing this not Aldi Nord Teo Albrecht's company who has no exposure to the US market at this point right but he's

a little jealous of his brother and he really would like some US market exposure Aldi by the way I didn't know this till doing research is an acronym for Albrecht discount so there you go that's where Aldi comes from so Teo and Aldi Nord they start looking at the US market too they actually hire investment bankers to go over from Germany and start scouring the US looking for other grocers or retailers in the US that they could acquire and have Aldi Nord also enter America and that's how they find Trader Joe's because at this point it's still 20 stores all in California yep but clearly they've got some he spends years trying to convince Joe to sell and Joe's like

no way you're very nice I respect you I appreciate what Aldi's done but one I'm not selling like why on earth would I sell two no way in hell am I going to sell to Aldi Trader Joe's is special like this will never be turned into Aldi and then the ESOP blows up a couple years later so Joe re-engages with Teo and he is the current situation is that so much of the income flows through me personally and I have a marginal tax rate of 73 percent right the highest marginal tax bracket in the US at this point in time is 73 percent yeah imagine for every dollar you make 73 cents is getting paid in taxes he's like this

is the worst structure imaginable whatever it is it has to be different than this yeah so he says to Teo all right I will sell to you but here are my conditions number one Trader Joe's will not become part of Aldi we will share nothing these are totally different businesses you won't use Trader Joe's as a vehicle for Aldi Nord to come to America to Ben like you're saying we will have complete management autonomy and the strategic operating plan that we are going not the Aldi massive discount operating plan you either believe that and are in or there's no deal three I can stay on as CEO for as long or as short as I like no management contract it is

100% up to me four the price you're going to pay for the company is three times what you offered me a couple years ago and then number five the real kicker we're going to put all this in contract it is going to be a one page deal we're going to put these deal points in here one page contract no diligence no definitive merger agreement BS that's it one page with these points I will draft it sign the paper if you like it pay me and my employees the money or no deal and Tao says great I'm in awesome so they do the I was reading this in becoming Trader Joe and Joe's autobiography this is why Warren Buffett wins this

is why Berkshire is Berkshire so Tao Albrecht owns Trader Joe's and now his three separate foundations just like the Ikea structure own Trader Joe's and neither Tao nor certainly Aldi ever invest a single incremental dollar beyond the price they bought it for it is very profitable cash flow positive throwing off cash for the foundations ever since yeah as of 1976 so three years before the sale Trader Joe's carried no fixed interest bearing debt never recorded a loss and became more profitable every year incredible it's crazy I'm actually not sure we've covered a business on acquired like this that starts with a giant amount of leverage where the founder just mortgages his life sells his house yeah and then manages to

what within 13 years of founding get out from under it and then just incrementally pile up every year maybe Nike yeah maybe Nike the Japanese trading company is a little bit of a twist but yeah I mean Teo Albrecht is a bit of a twist here too but again that didn't impact the business at all he just became the shareholder so meanwhile there's a whole other parallel story which is not for this episode which is Aldi sued !

in the US since COVID and they plan to open 800 more stores in the next couple years but it has absolutely nothing to do with Trader Tess or even this branch of the family yeah crazy okay so this feels like it's some sort of climax like it's like the end of the story the show is called acquired this used to be where we would end the story there's ! today yeah where Trader Joe's winds up I mean we're only even at this point in time in the beginning of the transition to private label the Trader Joe's as we know it today has barely been started at the time of the sale to Teo's family it's the craziest thing it really

is just a change in ownership and nothing else that does not interrupt the compounding of the business itself yeah there's some kind of great lesson in there for investors yes all right listeners now is a great time to talk about one of our favorite companies Statsig yes long time acquired partner there is a reason why the best product teams at companies like open AI and Notion Atlassian Figma Rippling Brex and more rely on Statsig whether they are iterating on their core product features or shipping AI powered experiences at scale yep in the crazy speed of today's AI world shipping fast is just table stakes now it's basically trivial to build and deploy your app constantly the real advantage is how

quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next whether it's a feature tweak a pricing change a performance improvement or an AI update like a model change or prompt adjustment they're not relying on instinct they're measuring what actually moved engagement retention and ultimately revenue and as more teams build with AI that learning loop becomes even more important building with LLMs introduces non-determinism into your product experience the same input doesn't always produce the same output and behavior can shift in subtle ways in real world use so doing offline evals will give you part of the picture but you can really only understand the impact once your

product is live with real users and then you can measure how their behavior actually changes it's very different than the way you would ship features in a pre-AI world where you knew exactly what the software was going to do in production so this is where stat sig comes in it brings experimentation feature flags and product analytics into one unified system so teams can ship safely test rigorously and directly link what they changed to how users actually behaved the result is a tighter feedback loop and learning that compounds over time so you go to statsig dot com slash acquired to get started all right David the big expansion so what happens after the sale well the immediate answer of course as we

said is nothing Joe sticks around as CEO for the next 10 years running the private label strategy and it works great in Southern California as you were saying so here's the thing about Joe he really is like sole price he was this incredible entrepreneur absolute genius came up with all of this truly innovative orthogonal genius strategies that nobody else in the industry was pursuing Saul Price did the same thing at Costco but Saul Price isn't the one who really built Costco Jim Senegal built Costco the scale Costco we know today it's the same thing for Joe he built Trader Joe's but he really didn't have any interest in scaling it and taking it outside of Southern California I kind of

think reading between the lines of some of the things some of his successors said about him and some of the stuff in his obituary is in press I think he just really didn't want to travel I think he wanted to be close to his family I think he wanted all the stores within a day's drive to and from from his house so when he retires in 1988 again 10 years after he sold the company they're only just shy of 30 total stores they had just expanded to Northern California the first Northern California store was in San Rafael my wife's hometown in Marin great little town I think for Joe that's sort of what his ambition was was to build one

of the greatest retailers of all time regional chain but he was indifferent whether it was regional or national it's so interesting how some of the entrepreneurs we study have this empire builder strain to them where they're never satisfied they have to build the biggest thing in the world and build something of consequence to the world and if there's an opportunity to do that they must go seize it it's impossible to not spend their time effort life doing that and Joe just wasn't one of those people the Mark Zuckerbergs I think he kind of looked at it and thought well to what end what is the point of building something giant I'm the shareholder I like this business I have this

great life I've very positively impacted all the people who this is a thing I can obsessively polish I do like constantly making it better and making it more resilient and all these things but bigger wasn't necessarily the goal yeah I can totally relate to it but national expansion clearly is what should happen next year with the business yes so in 1987 as Joe's getting ready to retire he hires an old friend from Stanford from his GSB days guy named John Shields to come in as president and COO under him for a year and then be the anointed successor to take over John after GSB had gone and worked at Macy's and then at Mervin's the huge retailer that got acquired

by Target so John new retail new national expansion and operations and most importantly Joe had known him for a long time going all the way back to Stanford and trusted him so on January 1st 1989 John takes over as CEO from Joe second CEO in Trader Joe's history it's crazy this is 36 years ago the modern Trader Joe's is all formed after the sale after this Joe lays down the strategy yes and all the execution happens after with some tweaks along the way as we'll talk about John does as expected you know what he was hired to do basically he does national expansion so he takes Trader Joe's from I think as best as I can tell I think it was

27 stores to 175 over the next 12 13 years that he's CEO and importantly he made the jump across the country yes let's hop all the way to the east coast so they decided to start in Boston and build out a set of stores in the 500 mile corridor from Boston to D.C. At this point you should be able to go I know why they did it is the most dense population of universities in America all along that corridor and it's kind of crazy Dan Bain who would take over as the third CEO of Trader Joe's in 2001 he did a podcast just recently he actually talked about he's like yeah I probably wouldn't have made that decision if I

were CEO at the really you taking a regional Southern California company where all the culture the Northeast seems like a good place yeah yeah so that's really the strategy for the 90s and the John Shields era it's all about taking the strategy the retail concept that Joe built and just scaling it up across the country that and fully realizing the private label plan that took a decade decades to shift everything that they were selling to Trader Joe's branded !

So the third Trader Joe's CEO Dan Bain comes into the company in 1990 first as president of the West Coast operations and he previously had been the CFO of a grocery wholesale business and like John Shields knew Joe and Trader Joe's intimately over a long period of time because his wife was the company's auditor for like 20 years like tax auditor and accountant so what Dan really does is create the Trader Joes that we all know today and it's the same core strategy that Joe had developed especially with the focus on private label the value to customers the same target audience but Dan expands it to all categories of grocery so here's the thing when Dan started at the company

in the late 90s we've alluded to this a little bit throughout the episode Trader Joe's was actually a pretty different store than it is the average Trader Joe's customer came in once per month and Dan says in a podcast interview about when he started at the time we weren't really a grocery store we were that store that sold wine cheese and nuts we were sort of a party store and this is about the late 90s yeah party as in like when you are throwing a party you go to Trader Joe's so Dan comes in and he says hey there's actually a pretty obvious opportunity for us here to really grow same store sales and that's people love us we're such

a great fit for our target customer base we just need to give them the right product assortment to keep coming back more often we need to be more of a grocery ! effort to have a complete assortment no sugar no salt no flour etc unless we could be outstanding in it and make a sufficient number of dollars from it obviously that is very different than Trader Joe's today it's funny I still think about them as they're not a grocery store like I kind of have to go to Trader Joe's in addition to my grocery store run but they're a lot closer now you can buy sugar you can buy flour you can buy salt exactly yeah Joe had no interest

in being in those categories he was really all about that n of one every product must be differentiated Dan came in and said we can still have that ethos and most of our products can be that way but we can also serve our customers in their weekly grocery ! or you could look at it as that is the first little chipping away at the foundation of what makes Trader Joe special and we might see great revenue growth and all the numbers taking up in the near term but does it take a bite out of their soul in a way that will catch up to them eventually when they become just like !

everyone else yep and we don't know so before Dan took over Trader Joe's stores carried about 1500 SKUs wow that's really few really few he takes that up to about 4000 so that's what this is you know it's the sugar the flour the salt it's more than doubling the number of SKUs but importantly he says we are not going to become a supermarket so A 4000 SKUs is still way way way less than the average supermarket again has 50,000 SKUs the average Walmart has like 150,000 right he says the way we're going to do this is we are not going to change the footprint of the stores same square footage same concept we need to re-merchandize the stores to serve

our customers and give them what they need on a weekly basis without changing the nature of what the store is so we're going to fit two and a half times the amount of stuff in the same square footage yes and we're going to do it such that every product on every shelf in every aisle passes the five foot test for every customer who is at least five feet tall they should be able to reach every aisle so we can't !

just stack to the ceiling like Costco fascinating and so when you go into Trader Joe's it really is very dense oh it's unbelievably dense I mean that's my complaint too is that whenever I'm reaching for something there's like a guy behind me trying to get it there's a woman in front of me trying to back out of that area it's funny I've stopped thinking about Trader Joe's as the wine and cheese shop and more as it's defined to me by that one diagonal aisle down the middle with the open freezer chest that has an amazing assortment of glorified TV dinners yes but also on top of the glorified TV dinners there's like the shelves with all the amazing nuts and

chocolate snacks and then there's like the thin ribbon in between the shelves and the open freezers where they have one more inventory area for all the little things there's so much in that aisle and there's always like 40 people in it also how genius is it the freezers are open so I'm sure it's very costly wasting the cold air but think about how much more likely you are to just reach in and grab some Indian food or some mandarin orange chicken or whatever also they gotta be when you've got 50 or 100 people in that same aisle all reaching in you can't have people opening and closing doors all the time right so I'm sure the psychological thing of oh

just go grab that little box of food plus how many more people they can jam in that aisle makes the open freezer chest totally worth it so you are absolutely hitting on the other part of the Trader Joe's tapestry Trader Joe's is a social experience whether you like it or not but for their target customers this is what they want so if you think about the grocery retail landscape it's predicated on basically two things efficiency and convenience which means lots of SKUs real efficient to get in and out of the stores you want e-commerce we got e-commerce omni-channel baby you want to drive we got a big parking lot for you all these things and then the other side of

that coin is our target customer is families we want the American family to shop here because you got a big whole hunk of buying power and you're buying a lot of stuff yep that's not Trader Joe's no it's not Trader Joe's is the opposite of our parking lots are a mess you're going to be packed into these much smaller stores with a whole lot of other people it's going to be unpleasant if you have a toddler with you oh yeah you don't want to bring your kids here I mean sure yeah they've got the treasure hunt thing and people do bring their kids to Trader Joe's but I really had this emotional and struggle to shop at Trader Joe's all

the time I was a Trader Joe's customer and then something happened in the last couple years and I never shopped there anymore what could have happened I'm racking my brain is it like acquired has been too successful is that the problem am I now like one of those people and then I read this other book for research called build a brand like Trader Joe's so Mark was an advertising executive and he always wondered how Trader Joe's had built this incredible brand and so he was like what the hell I'll just go work at Trader Joe's I'm going to find out I'm going to be an employee I'll be a man on the inside and see what it's like so he

did it and he wrote a book about it and I'm reading this book and I'm like oh my god this is why I stopped being a Trader Joe's customer it's not for families I had kids that's what happened so everything about the Trader Joe's experience naturally lends itself to young professionals and retirees in the Dan Bain era they go all in on this so intentionally the experience there is to socialize with other people and the crew members of the store they hire specifically for extroversion in the people that they hire part of the reason why all the employees in Trader Joe's work every part of the store and everybody does the cash register and everybody does bagging is to maximize

interaction with customers wow there's a bunch of Reddit comments around hey was this Trader Joe's employee hitting on me it's like no they're just that friendly they are screening for this in the hiring process they're looking for former theater kids basically yeah I would argue on this not for families thing I was actually talking to my friend who's a mom of two and she pointed out that it is so tiring making food for kids every night and Trader Joe's while the shopping experience is not optimized to bring your family in it's actually amazing to just go and get pretty healthy totally ready to eat grab it out of the freezer throw it the microwave meals and there's a pretty big

variety of it and you can mix and match and get different ideas so it's like even though that's not the target it can work really well they're not intentionally trying to alienate but this extends to the product strategy to the frozen meals which are such a ! They're individually packaged individual serving I guess that's all there is you're not finding family size at Trader Joe's once I realized this I was like oh my god this is genius they're doing what Joe's always done they're differentiating versus other retailers every other grocer out there it's all about the families right bring your big car bring your whole family bring your kids we'll get you in and out not Trader Joe's we should

move talk to people when I go there most people that are in there don't seem to want to talk to anyone we're all just in close quarters but the stuff that we want is there so we're all there I think most people don't care that much about the other shoppers there they do actually care about the employees though you have a store that you're going to every week with a very low turnover employee base Trader Joe's employee turnover I think is 5 or 6% annually so super low unbelievably low the average tenure of a crew member is like 10 to 12 years you're really going to get to know those people like I mean imagine especially if you're a retiree

which is a core part of the demographic here you really want the social experience yep anyway Dan really puts all this into there's one more big chapter that you've been holding back from telling the story ready to uncork here so the crowning product achievement of the Dan Bain era of Trader Joe's starts pretty early in his tenure in 2002 I'm sure you have all been waiting for it two buck Chuck baby not a private label product interestingly enough so interesting for the volume that they do it's unbelievable but is an exclusive product so the story is wild but first I'm going to open my bottle Charles Shaw here that I've been saving the whole episode so I got a Sauvignon

Blanc I assumed the red blend would be the cheapest amazingly all the Charles Shaw are the same price and at Seattle Trader Joe's it was $399 which come on it's supposed to be two buck chuck but inflation kills ya been a lot of inflation since 2002 Ben I'm curious what you are opening I am opening a California cab 2023 nice beautiful label with a beautiful looking gazebo here in the image established 1979 really gosh there must be a story behind all this why is there a gazebo this whole thing looks very generic to me amazingly it is not really that is part of what founded a winery in Napa in 1974 right

at the very beginning of the bottle shock era the come up of Napa changing wine in America and Charles and the eponymous Charles Shaw winery and label was a high-end winemaker right there with heights and free market all the others he was like a real player in the Napa ecosystem this is wild and that was all through the 70s and the 80s well I mean he's still the biggest player in the Napa ecosystem by volume well unfortunately for Charles he's not I see his name is so then in the 90s he has a series of missteps and the winery Charles Shaw ends up going bankrupt now this is not a uncommon story in wine the list of bankrupt wineries in

Napa and Sonoma is long have you ever heard that aphorism how do you become a millionaire winemaker start as a billionaire yes exactly so he's part of the first wave of wealthy people that get into the wine business have success and have some missteps and lose it all so he goes bankrupt in 1995 and the label the brand name and the trade name Charles Shaw and literally the label with the gazebo and the font and the design and everything gets bought out of bankruptcy in 1995 not the winery separate not the real estate not the grapes not the nothing just the label by an entity called Bronco Wines for $27,000 Ben have you ever heard of Bronco Wines no I've

never heard of Bronco Wines at least there's like something in the back of my head that makes me feel like it's the parent company of something I have heard of though well let let me tell you about Bronco Wines it is short for brothers and cousin and it was founded in 1973 same era as all of this stuff by one Fred Franzia and his brother Joe and his cousin John all named Franzia the name Franzia might mean something to people to anyone who's ever been a college student so the Franzia this is the story goes deeper not what you would expect have you ever done a tour de Franzia yeah yeah yeah we used to do that at Princeton that was

an Ohio State thing too yes must be just a general American college experience thing I'm glad we opened the wine for this section of the story so like I said it goes deeper the Franzias it turns out were nephews of Ernest Gallo that name might also mean something to you the Franzias are part of the Gallo family it's almost more like the Gallos are part of the Franzia family but you could argue either way wow so the Franzias completely separate from the Gallos had their own big time California wine business in the era before Bottle Shock and Napa and after the Franzia business the older generation so the generation above Fred and John and Joe sold out in 1973 right

as wines are starting to have their moment in America to none other than Coca-Cola ! So Franzias were making real wine at this point Franzia as you know at the boxed wine does not exist yet Coca-Cola operates it for a few years and then decides you know what we don't actually want to be in the wine business they sell Franzia to an entity called the wine group and the wine group is then what makes the boxed wine Franzia here in the US so the Franzia that you know is the same family but two business owners later okay there's a theme here though of taking a brand name and repurposing it for a more mass market shall we say so when

the older generation of the Franzias sell the business to coke fred and his generation his brother and his cousin like they're pissed they're like screw you guys like we wanted to run the business we want to be in the wine business why didn't you sell the company we were going to take this thing over so they're like F it we're just going to go out and start our own wine company and recreate the family business and that's Bronco Wines but it's going to be informed by everything that's happened since so this first generation of the rich people that come to Napa and Snoma start these wineries lose their shirts go bankrupt of which Charles Shaw is part fred and the new

Bronco Wines develop a business plan they are essentially going to become a distressed winery buyout shop they are just going to vacuum up this is what Bronco Wines is this is what Bronco Wines is okay and that's how they end up buying Charles Shaw among hundreds of other wineries and brands sometimes they buy the grapes sometimes they buy the wineries sometimes they buy the vineyards sometimes they just buy the labels and the brands which is what they do with Charles Shaw in 1995 for $27,000 listeners just so you know there have been a billion bottles sold of Charles Shaw well over a billion yeah there were a billion sold like probably 10-ish years ago so probably at least two if not

three billion by now $27,000 $27,000 so as you would imagine this doesn't make the younger Franzia's popular characters in Napa shall we say I bet a lot of resentment from the rich snotty folks that were building these wineries and then going out of business and Fred and his brother and cousin are vacuuming them up for pennies and trading on their brands but this actually is the other part of the story of wine becoming big in America you've got all the great wineries and the great awards that they're winning and Napa and Sonoma becoming real players and it is crazy I don't think most people know this that Trader Joe's gets a lot of the credit for bringing California wines to people

to the masses in the U.S. And here's where these two parts of the market intersect so what Fred and Franzia and Bronco are doing is they're bringing it to the beer drinking population they saw what happened to the family name with the box wine with Franzia they saw what their cousins over at Gallo were doing and they're like well shoot we can do this too like why should wine just be for snobs F that amazing Fred's perspective on this is like hey look there's a huge opportunity to make wine the new beer and you people in Napa are completely missing the boat on this he was once asked in an interview how he could sell wine for less than the

price of bottled water and his reply was don't you get it they're overcharging for the water so a couple years into two buck chuck here the new yorker interviews him and runs this big profile like what is Charles Shaw who is Fred Franzia where did this come from what is this phenomenon Fred starts off the interview by saying take that and shove it Napa when asked about the success of Charles Shaw he's a real maverick 10% of Trader Joe's 40 million bottles of wine that they sell every year is Charles Shaw it's amazing I mean we didn't tee up this section enough for how meaningful this is we both just kind of like opened our Charles Shaw bottles and cheers

but 10% of the time when someone walks in to get some wine from Trader Joe's they walk out with this yes often a giant case or two of this yes okay so it was 1995 when Bronco buys the Charles Shaw label for $27,000 out of bankruptcy two buck Chuck doesn't actually launch until 2002 what happens well they gotta somehow go grow a ton of grapes right and have a giant processing facility and you are not thinking like Fred Francia so he's vacuuming up this whole portfolio of assets that he figures he will find a use for eventually so fast forward to 2001 there is a huge overproduction surplus of wine in California I think both it was a bumper year

for grapes and then demand was way down in 2001 a major misjudgment so there's lots of surplus wine out there and a lot of paper rich people in San Francisco are not rich just 50 miles south exactly so Fred sees the opportunity of a lifetime really he and Bronco come in and they buy up basically all of this surplus finished already made produced wine at dirt cheap below the cost of production what do they just like mix it all together I think they kept it separate but he's got this huge huge amount of unbranded surplus wine on his hands that is good wine from a lot of different wineries and he needs an outlet and a vehicle a vessel you might

say wait but aren't they all going to taste different sure who cares and this is when he hooks up with Dan Bain in Trader Joe's wow it is the perfect wine for Trader Joe's it is the perfect marriage here so they take this glut of mostly genuinely good wine they bottle it up they use the Charles Shaw label they pull it out of the portfolio dust it off the bin and they throw it up in Trader Joe's for a buck ninety nine I'm going to read a few quotes here from this amazing oral history of two buck chuck that ran in Thrillist a couple years ago and was the main source for all this Franzia used the exact same name

and the exact same label on the bottle as the old Charles Shaw back when it was a real winery even the same original artwork a picture of a little pagoda it's funny that the Thrillist article calls it a pagoda listeners we reached out to Elizabeth Shaw the daughter of Charles Shaw to fact check this section and she informed us it was not a pagoda but a gazebo yes thank you Elizabeth the Thrillist quote continues that used to sit by the tennis court on Charles Shaw's Napa property he being Fred Franzia shocked the world by slapping a 199 label on it everybody in the industry thought it was impossible he had the testicles that nobody else had to sell wine at

that price he'd shoot over to Portugal or France and knock on the door of a cork or glass producer and say if I write you a check for two million dollars today will you fill up this boat with cork I don't care about quality it gets better people went apeshit this was around 2002 articles were saying this wine is amazing and actually drinkable it was a fad the macarena of wine I would always hear about it from college students and it was this blue collar pride thing people thought this bottle is just as good as the one that's twenty dollars screw those snobs together Fred Franzia and Bronco and Trader Joe's unlock replacing beer not replacing but you know right

wrestling in on beer as the alcoholic drink of the masses ! Amazing! Okay so what grapes go into it now because there's not this glut anymore can't find that information yeah classic Trader Joe's yeah Bronco isn't saying and Trader Joe's isn't saying either but at least for those first few years and this really helps establish the brand and the product it's genuinely really good wine that was surplus on the market that was going into two buck check so obviously this becomes a grand slam home run success for everybody as you noted Ben prices have increased with inflation two buck check is now generally somewhere between $299 and $399 but yeah completely revolutionizes mass consumption of wine you know before that

yes Franzia and boxed wine existed but this is real wine right in a bottle priced at two bucks yeah in the secret life of groceries he calls it essentially unquenchable demand so here are the stats that I could find 2009 so seven years after the launch they passed 400 million bottles sold three years after that they passed 800 million bottles sold Bronco slash Trader Joe's have confirmed out there that over a billion bottles have been sold I'm sure that is grossly underestimating how many have been sold several billions I'm sure so if they're selling 150 million a year which might be a little low on the estimate that's 250,000 bottles per store that's nuts which would put it at 600

bottles per day per store what did you say a minute ago unquenchable demand for this unquenchable demand I mean but where else are you going to go and get a legitimate bottle of wine for three bucks four bucks nowhere nowhere so Fred Franzia dies in 2022 and the New York Times runs a big obituary about him in which they quote Zach Gabel who's a sommelier and host of the Vine Pair podcast and has been in the industry for a long time he says I looked at stuff like Charles Shaw with a lot of condescension but it really helped create in this country what had long existed in Europe this very affordable very accessible widely available wine that people who wanted

to drink wine essentially daily could afford to do so no matter what their income it's incredible and you gotta wonder how often are people walking into Trader Joe's to get a bottle of two buck chuck and walking out with 50 bucks of other stuff yes of high dollar density items that are sprinkled all over the store would love to have some nuts to go with my two buck check yes all right David should I catch us up to the business today 600 stores 600 stores well it's worth saying Trader Joe's has become a little less differentiated today as you said the stores are bigger and actually some of this is a quote from Joe before he passed away to Benjamin

Lohr as he's writing this book he says the stores are bigger the skew count is higher than in the old days you really can't do the limited batches of amazing deals anymore because you know they really are at scale it's not like they're just going to be like oh great you got this one pile of obscure nuts that we just need to unload in the next couple weeks great no problem we'll take that they really do need to be able to distribute at scale they try to keep that ethos with the sort of seasonal stuff like right now I'm enjoying the mini hold the cones that are the holiday themed but this is very planned and seasonal it's harder to find

suppliers that can manufacture at this scale so they're constrained to a certain set of suppliers they can work with but clearly it's still working and it's working better than ever so perhaps the lesson is you can't be too precious once you establish your differentiation there are ways to take advantage of your scale but still keep the soul of what made you different even though you're not living it to the extreme the way that you had to when you were younger so by revenue David you found this there are lots of incorrect sources around the internet estimating their revenue you found a podcast with Dan Bain where he throws out a significantly higher revenue figure than the rest of the internet thinks

yes so he says on this podcast that when he retired in 2023 they were doing north of 20 billion a year in revenue and they had just hit 1 billion when he joined the company in the late 90s the estimates that had been going around the internet and are still out there if you search are what more like 16 17 we know in 2023 it was over 20 yes how did you find that podcast a lot of googly we'll link to it in our sources it's a really obscure leadership podcast that Dan randomly went on in January of this year in 2025 so north of 20 billion in revenue two years ago so we can kind of extrapolate when we

get to growth rate where that is today earnings we truly have no idea other than knowing that every year they've generated more absolute dollars of profit than the previous year on growth since selling to the Albrecht family they've grown stores at about 10% each year and over the last 20 years or so they've grown revenue at a little over 11% per year so that puts us in the 24 25 billion of revenue this year ballpark Yep!

Again way higher than I saw anywhere reported on the rest of the internet! Yep! the really interesting stat though is sales per square foot So the sales per square foot is estimated to be over $2,000 today That is the single highest sales per foot of any grocery store and twice its nearest competitor in Whole Foods Yeah It's over 4x the industry average Even Costco who we extolled on the Costco episode is 1200 a foot Yeah Costco's have really big stores Trader Joe's has really small stores that are densely densely packed with high revenue items I mean this is really incredible They are twice as good by this metric which is really like the key metric in the retail industry It's

efficiency I mean it doesn't include everything in your overhead but you know rent is a giant part of your costs so your efficiency on your rent is effectively the sales per foot If you look at margins people estimate their gross margins are in the low to mid 20% which again we should underscore all this brilliant business strategy customers are getting a great deal their gross margins are only low to mid 20% most of the grocery industry is in the kind of 27 28 29 30% but Trader Joe's just doesn't need as much margin since in terms of geography where they are they're in 43 states they now have 608 stores they have 70,000 employees and 100% of their captains this is

the store manager were promoted from the first mate role which is effectively the number two and 80% of those came from crew members so it is a 70,000 person organization most of which is promoted internally which is amazing and as best as I could I think headquarters staff like corporate staff is still pretty tiny I think that at least is a goal I think it's a value of theirs is to do that you know they get all kinds of great benefits and stuff for grocery store workers they get 15% put into a retirement plan they have health care benefits dental all that stuff but the real kicker they get a 20% discount at Trader Joe's which no one gets because

they never have any sort of discounts the one way to get a sale at Trader Joe's is to work at Trader Joe's yes but it is crazy like this whole thing about the employees is a belief that if you pay more you can get better people who will retain longer that lower your new employee training costs that lower your overhead each employee be more productive be able to do higher quality work and most importantly they'll be happy employees that are there to delight customers yes and as I was talking about earlier this plays into the social aspect and the extroversion and that's really important for the customer base I do really genuinely believe that's true the biggest thing here though

is turnover so grocery store employee turnover it's got to be like 50 plus percent per year is some of the highest in the entire labor market I think it might be like 65 maybe even 70 percent Trader Joe's is one tenth of that compared to industry average yep I mean that means that for your average grocery store you are turning over your entire store workforce every year and a half the answer of how you run a business like that is you don't actually run to on our shelves that people actually want now the

real question before we sort of wind this home is if they were publicly traded what would they be worth and this is an exercise I always like to do every time we do private companies this is a fascinating one because grocery industry revenue multiples of publicly traded companies are extremely low they're like 1x maybe 1.5x it's much worse than that so first let's look at Costco the most similar business in some ways Costco is growing about 8% per year so probably a little slower than Trader Joe's by most estimates and has a 3% net income margin Costco !

trades at 1.6x revenue ! Sky high! And that is the jewel of the industry Yes For a second comp Walmart which isn't all grocery but a lot of it is grocery has similar net income margins similar growth maybe it grows a little slower than Costco Walmart trades at 1.3x revenue Okay What does Kroger trade at Kroger trades at 0.3x revenue and Albertsons at 0.1x revenue Those are much slower growth businesses and Kroger is actually shrinking with razor thin net income margins between 1 and 2% but the question then is where do you put Trader Joe's in this Trader Joe's probably trades at north of 1x but probably not all the way at Costco !

that 23 24 billion in revenue that we estimated call it a 32 to 34 billion dollar company maybe a 35 billion dollar company which delightfully puts them worth slightly more than 7-11 That's good So here's what I think is really interesting about that We don't cover many 30 billion dollar 40 billion companies unacquired these days I literally have in my notes this might be the smallest company we've covered in recent memory by value So if the takeaway from that is wow this is really an outlier and it's a much smaller business than they usually cover unacquired I think that's actually the wrong takeaway Trader Joe's first Joe and now under the ownership of the Albrecht Foundations is willing to play

such a long game in the fullness of time I bet Trader Joe's will be worth at least 10x that Ooh what a stock pick Well okay simply because they have nearly infinite expansion potential ahead of them internationally they are only in the US and maybe management has decided we will only ever be in the US is Kroger international is Safeway international Aldi works internationally Costco works internationally Walmart works internationally 7-Eleven works internationally there is no reason why Trader Joe's wouldn't work in other geographies around the world and work just as well they can sell American food as exotic like cheeseburgers okay so just to prove my point on this I have a whole list of miscellaneous fun stuff about Trader Joe's

that didn't make it into the rest of the episode my number one thing is Pirate Joe's which is a native Canadian who was living in the US decided there would be an opportunity to bring Trader Joe's products to Canada he went all up and down the west coast buying Trader Joe's products out of stores set up a warehouse in Vancouver and sold Trader Joe's products and there was like infinite demand it created this whole international legal incident there is demand in other countries for Trader Joe's I think on that alone in the fullness of time can be worth at least 10x interesting and the question is does the concept work let's say they're even just scoped to America where they

haven't fully saturated yet does the concept work to address a larger audience than the current audience we've talked about all episode interesting I'm not sure if it does but I also don't think it matters San Francisco is a perfect case study for this there were already several Trader Joe's in San Francisco and recently one opened in Hayes Valley it's nuts the lines are ridiculous right that's the Costco thing where they keep actually being able to open way more Costco's anywhere than they thought they could they could probably open three or four more Trader Joe's in San Francisco with the same target audience and still not be value is grocery as a category is so much more important than it is

valuable it's almost like the Lockheed Martin episode that we did it's not a super valuable company by the standards of what we typically cover on acquired it is one of the most important companies in the world and grocery is sort of the same way in any given community you're in a food desert ! it's essential for life we need oxygen water and grocery stores and Trader Joe's happens to have built one of the most culturally relevant brand in an essential category even if it ends up financially not being as valuable as these other companies we cover yep I totally agree with that the cultural relevance really is crazy though have you seen the prices of these limited edition tote bags

on the resale markets ! You can start a Pirate Joe's for us amazing all right well you were pitching me before we started on when we wind down the story we should lay out the entire ballet with what is the way that all these puzzle pieces fit together and what sort of drives the fly wheel great let's do it so I would throw out it all starts with this insight that we don't need to stock everything people just need to trust us that they'll find great stuff when they come here and if you have that then you can flip all the assumptions of the grocery business on its head yep I totally agree you should always remember that Trader Joe's

started as a wine merchant and they merchandise everything like wines and that's exactly how you behave as a wine merchant there's no way you you need high dollar density items avoid taking up large amounts of space for things like paper towels and a corollary to that they aren't focused on the margin percentage of each item we didn't talk about this yet but they don't apply a consistent markup they focus on the absolute dollars of margin in each item so if something is $20 and you only make a couple bucks of margin that's actually not bad as long as it doesn't take up too much shelf space you'd much rather have that than sell something for four dollars where you're only

making like a dollar of margin even though on a percentage basis it sounds better Trader Joe's is like no no no the scarce thing is the square inches on the shelf you then get very quickly into okay so they've got this low skew count not as low as the old days but still only like 4,000 skews and if you keep this constraint really aggressively it means that you're not wasting money on your less productive square feet every square foot is sort of being used to its highest capacity everybody of course wishes they could do this why doesn't everybody else just do this Trader Joe's has spent decades making every customer comfortable with the idea that you won't find everything there

it works with their brand promise in a way that Walmart mini would totally fail a Walmart with less stuff cool I'm not going there the whole premise of Walmart is all the stuff yep and of course the way that works is if you're only buying relatively very few skews then you can consolidate your buying power buying a lot of that skew that's exactly right and so when you're buying a lot of any given skew from your supplier it means you can lower your unit prices with economies of scale because you're a bulk buyer which you can then pass on to your customers so they get additional savings and value it also means you can usually avoid a middleman or distributor

and you can go directly to the manufacturer again cutting out random margin that gets made that ends up costing more to your customer and if you're going directly to the manufacturer I feel like this is if you give a mouse a cookie for business yes I read that all the time same then you can say well hey we need you to drop this off at our distribution center we'll take care of the distribution to our stores but please do not arrive at our store which is great because then a it's not clogging up your very limited parking lot space but b then you actually can stock stuff in your stores with your own employees you don't have representatives of brands

wandering around working in your stores without aligned interests kind of like steering the direction of your business without you realizing it and we didn't talk that much about all this but theft is a get great stuff yep and this also plays into the social experience trader joe's intentionally mostly does the shelf stocking during opening hours this is very different than other grocers that do almost all of their stocking at night when the store is either closed or if it's a 24 hour store where very few customers are there trader joe's wants their employees doing the shelf stocking with the customers as you have to because of the rapid inventory turnover if you're only stocking 4,000 SKUs and you're

doing a ton of sales in that store it means you're selling through that whole inventory really fast I saw one stat that they turn over their inventory 60 times per year which is more than once a week they sell through everything in the store you found one in that podcast with Dan where he said that there are some stores that actually sell through twice a week yeah and that's on an average across the whole product assortment twice a week that's like a hundred times a year on a product level this is what you were saying a minute ago about why you need to be stocking while customers are shopping for the most popular products in the most popular stores you're

turning multiple ! times a day every three to six days which means products will probably get emptied out every few hours think about two buck chuck that display has to be replenished multiple times a day in most stores such a good point it's funny that I've been thinking about all the ways this is similar and different to Costco because a lot of this will rhyme on that episode we pointed out that the rapid inventory turns the net 30 payment was due and the benefit there is that your suppliers are effectively financing your entire inventory and you don't have to tie up your own working capital in the inventory this is amazing I know where you're going complete opposite with Trader

Joe's Trader Joe's does the opposite yes they pay up front and they pay on delivery yes they pay cash ! You just have cash as vendors that those companies never have any cash flow issue or waiting issue as soon as they drop it off Trader Joe's makes good on the payment I have never heard of any other retailer that does this cash on delivery of inventory everybody else Costco Amazon Walmart yeah oh pay in 60 days 90 days yeah a critical part of the business model is the cash flow that they are selling the items !

We would rather have the benefit that we get from paying suppliers quickly than the benefit we get from the vendors financing our inventory we're not worried that we're going to sell the inventory yes that is true they actually take risk to a lot of traditional grocery stores are kind of like a consignment basis where you still own the inventory even though it's sitting on the retailer shelves the brands are actually still taking risk even though it's in the store that's not the trader joe's philosophy that's right which of course gets to private label which dramatically simplifies your business model if you can get customers to be game for it well I think there are a couple things you got to

keep in mind about private label at trader joe's and the most important is that the job private label is same but cheaper right it's generic it's unbranded at trader joe's private label is code for this is a differentiated product the other critical thing I think about private label for trader joe's that fits into the next puzzle piece is the marketing strategy trader joe's is built on story based product marketing just like a wine merchant ! brand based marketing where most of if not all of the marketing is being done by the brands on a mass market often price and deal driven basis whereas trader joe's marketing strategy is all about long form storytelling and that only works because they have

differentiated unique products yep totally does all of this really leads to low overhead when you need to do fewer things in your business you just need fewer fixed costs and so when you have fewer SKUs and smaller stores and more narrowly scoped operations and fewer suppliers you have to work with fewer media channels and marketing initiatives yes higher employee pay or deeper product knowledge or just less overhead overall which means you can charge your customers less for items that to me is the puzzle I no sales or coupons that just drives your customers to wait for sales no loyalty programs because again overhead costs to administer they have a funny quote on this we're loyal to all of our customers

rather than trying to buy loyalty through rewards or discounts there's also this amazing thing about Trader Joe's that's so different than the rest of the retail industry as best as I or anybody else can tell they don't collect any data I know I was trying to figure that out too every other retailer basically are like data operations yes how much can we personalize a circular for you Trader Joe's doesn't care about any of it it's so true there's no account when I'm checking out they have no individual shopper data like I'm sure they have store data and product data but nothing about you and on the whole like we don't do technology thing so they have no PA system in

the store they use a bell which is cute and actually feels much nicer than the sort of oppressive PA system of a grocery store there's no screens in a store there's no computers on the floor they didn't even have price scanners until Dan Bain became CEO in 2001 and I think they're not like anti technology but I think anytime they're considering a technology they're not looking around and saying oh we got to do digital transformation because everyone else is doing it I think they're saying wait why would we do that and how does it well that's it for my ballet of how all of this reinforces each other for why Trader Joe's works and what a beautiful ballet it is

all right with that let's move into analysis I actually did basically my whole playbook throughout the story there let's do power though and analyze seven powers framework so for anyone who's new power is what enables a business to achieve persistent differential returns or to be more profitable than their closest competitor and do so sustainably so David at various points in Trader Joe's which of these do you think they had you got to remember about power it's all relative to the other players in the industry yeah so scale economies the first one that exists in so many of the companies we cover sure of course Trader Joe's has economies of scale but relative to their competitors in the grocery industry they

definitely don't they're much lower scale oh I disagree on a per skew basis I think Trader Joe's sells more nuts than okay that's fair I mean think about if it's against Safeway and Safeway has 30,000 skews and they have four I bet it's actually pretty competitive on who moves more volume yeah okay or yeah look at two buck yes great example okay I mean it's gotta be the best selling wine in the world interesting so maybe they do have scale economies then on a skew basis I buy that they don't on like a real estate basis or a labor basis or anything like that right that's exactly right but on a buying power per skew yeah they probably do they

are still counter positioned it's rare for a large company to be counter positioned it's very easy to see the examples of counter positioning in the early days like stocking liquor when that was too difficult or off strategy for 7-11 to do but things like we're not going to collect your data Safeway can't not collect your data or we're not going to participate in the whole shadow economy of the CPG supermarket industrial complex we're not going to do stocking fees slotting fees we're not going to do co-op marketing right I think technically no one does slotting fees anymore everyone's hiding the ball and found a new way to charge their suppliers yeah that money went somewhere else for sure Kroger can't

not do that it's part of the business model at this point you can't ! shake out of it so I think Trader Joe's is still counter positioned in that way I do really think they also have a counter positioning in their target customer focused on non families again not that Trader Joe's can't be good for families but everybody else is 100% catering to families and Trader Joe's is saying crowded stores great small parking lots great individual servings great we're here for you !

network economies I think this is non existent just because somebody else shops at Trader Joe's doesn't make it better or worse for me to go there switching costs at first I was going to say there's no switching costs but I don't know you get used to liking some of those foods you don't want to shop somewhere else that doesn't have them in fact this is funny my wife rags COVID hit we ran out of our snacks and I was sitting there thinking I really wish I had a dark chocolate peanut butter cup from Trader Joe's I love those and I eat one a night after dinner of it being completely empty that little plastic tub and at some point I

was like how am I going to get these because I can't go to the ! store and I look $3 product and someone is selling it for $19 and it arrived and it to buy it and repackaged it and my wife is like you got to be kidding me you bought this for $19 you paid a 7x markup or whatever on so they have switching costs apparently my willingness to pay is actually 7x what they're charging amazing perhaps somewhat related they have huge huge brand power especially today they really do have differentiated products and a lot of the products are differentiated on something other than what the actual product is today differentiated on packaging yeah and that's where I think

brand is really playing a part here take the peanut butter cups you can get peanut butter cups elsewhere look if I felt it was the same peanut butter cup that I had grown accustomed to I would have bought it from elsewhere yes okay fair enough but yeah I like these peanut butter pretzel nuggets more because they're the Trader Joe's one and I'm confident ! there are grocery stores that sell something almost identical and to me it's just not the same thing even though it's probably the same thing process power this one's always a hard one to nail down I'm sure they have some of it but I don't think it's the thing that sets them apart and cornered resource I

guess at this point the supplier relationships are because some of these supplier relationships make a huge amount of their only product or largest ! product just for Trader Joe's so having those contracts locked up is cornered yep sounds right to me the scale economies is surprising you're right they do have it it's just on a SKU level it's the same thing with Costco when Costco buys a SKU they really buy a SKU it can be the largest source of revenue for that supplier yep by the way we should say for anyone who's wondering Costco is but Costco's revenue is 10x maybe more last year it was 275 billion dollars now margins are a different story they famously only mark up

11 to 14 percent and Trader Joe's is probably I don't know it seems like about twice that but Costco is much much more skilled business yep and my point about international Costco is an international business totally fair point all right David so you've now thought about Trader Joe's specifically for a month but we've known we were doing this for a while what is your quintessence as you think about this business yes I've thought about this a lot my quintessence for Trader Joe's is that there are no broken promises in the chain so every aspect of how Trader Joe's works is genuinely a promise ultimately to their customers that they are keeping the real estate strategy we're in your neighborhoods the

product strategy we have differentiated products that are truly differentiated on some dimension product nature price packaging story etc the labor strategy they genuinely pay their workers way more than the industry and their labor force stays with them way longer than the rest of the industry meaning you will develop actual relationships with the it all boils down to independence and control trader joe's has built a system where they are just not that dependent on others in the ecosystem in a way that supermarkets traditionally are supermarkets are effectively one half of a

partnership with CPG companies content is on there too because content is where all the ads are placed on TV that then drive the people to buy the CPG products at the grocery store I feel like Ben Thompson used to write about this that it was the American holy trinity of General Motors and the NFL and Procter and Gamble yes it's a partnership but it's not a great partnership because as soon as the CPG product becomes so wildly differentiated they're going to start commanding somehow squeezing more in the value chain or let's say the grocery store got differentiated they're going to start squeezing more in the value chain Trader Joe's has been a 50 year exercise to ensure their independence where

no one has leverage over them individual little things like a landlord has leverage over them in a store negotiation or a supplier does for a given skew but at scale overall Trader Joe's is really external things that could dramatically shake their business they've built I think we talk about this a lot stored potential energy in their business that just make them more resilient and it's crazy that the internet happened and it hasn't been bad for them they've grown just as fast in the internet era as the non internet era it's hard to imagine things that could shock them more there is the perfect existence proof other grocers could deal with COVID was Instacart or doing their own delivery which actually

Instacart powers a lot of that now as a white label service which is fascinating but anyway Trader Joe's said nope we're just not gonna do that we're gonna find a way to operate our stores during COVID and they didn't miss a beat yep so my question for you to close this out is how important do you think private ownership is to making all this work because on our Rolex episode we said it's really important that they're owned by a foundation and our Ikea episode it said really important that it's family and foundation controlled and on our Mars episode we said it's really important is this really important that they're not a publicly traded company there's the fascinating other example of

Costco right which again of course is very different on a lot of dimensions but spiritually aligned Joe actually says in his autobiography he looks up to them yeah the one store that's out there that is cut from the same cloth as us is Costco yep and they're obviously doing great as a successful public company I think in this case though yeah probably the fact that Theo Albrecht bought it when Joe needed to sell made a huge huge huge difference okay so play it forward what do you think it would have affected like in the Rolex scenario I think they wouldn't have been able to buy the many years of probably bad financial returns that they had amidst the courts crisis

if they were publicly treated what do you think management would face pressure on because as best we could tell in recent years they've grown 11% per year they've gotten more profitable every year shareholders should love that the biggest thing to me is just steadfastly not participating in the CPG supermarket industrial complex there would be so much pressure I think from public markets to be like well can't you just take like a little bit of co-op marketing dollars perfect example the demos in the store Trader Joe's has lots of samples and lots of demos oh if you walk up to someone and say what does that taste like they rip open a bag and just let you try it for a

while they had the vendors do that that's like standard practice in the industry is the vendors even in private label whoever makes the stuff they come to your store they do the sampling and the demos because they in theory should be more knowledgeable at the product and then they also finance it so the free items that are given out paid for that cost is eaten by the vendors and Trader Joe's actually did this for a while and then they started running into problems like you might expect of customers would come up to the people that were doing the sample demos and they'd have to say sorry I don't work here and this happened enough that Trader Joe's is like you

know what it's not worth it we're going to do this in house we're going to have our crew members we're like you guys are crazy what are you doing why are you paying for this nobody else does this they said yeah we know but we're going to do it anyway yeah so my take on this is it was really important for a long time but I all meant until doing research one bell means

come to the register yep open a new checkout line two bells is I need a manager nope that's three bells two bells is a customer needs help carrying their bags to their car or whatever and then three bells is we need the captain or the first mate we need a manager but basically everything can be expressed ! after Joe retired from Trader Joe's he had a whole second career dabbling in doing a few retail turnaround jobs as you might expect lots of retailers valued Joe's advice and he started eventually just sitting on corporate boards during which he joined the board of a company that a young entry level employee would work at concurrently during the same time they overlapped and that

young entry level employee would go on to become a central character in the acquired cinematic universe and in modern business history can you guess what company that was oof give me some hint what industry I'll give you a hint I figured you might need a hint this might give it away it is a restaurant group Starbucks mmm ! was on the board of Denny's while a young high school aged Jensen Huang was a busboy and waiter slinging sausages at Denny's amazing I am confident they never cross paths yes me too but there is a direct connection between Trader Joe's and Nvidia co-workers you heard it here first Trader Joe and Jensen !

Huang were co-workers at one point in time I was really wondering if you were going to pick up on that in the research I'm glad I got you that's amazing all right should we do our personal carve-outs let's do it I because I can't help myself ordering every Apple product and most new tech gadgets that come out and then just having a giant pile of them I ordered AirPods 3 on launch day with my new phone and they're awesome it just is crazy how Apple gets better and better and better and better iteratively each time with these things and I think the sound quality is better there's days I listen to so many audiobooks and podcasts that I actually don't

notice it as much because I feel like anytime I'm listening to something it's words not music but the fit's amazing it's much more granular now it's much better the noise cancellation is insane I think a lot of it's physical cancellation maybe the algorithms are better too and they're more comfortable over a long period of time like on long runs I notice they just stay in my ears and are more comfortable so I think they're great I can second that I got them too by far the best AirPods yet I still prefer the Metaglasses though like I just have realized I really don't like having things in my ears !

summer and fall oh did you buy another video game console we got a switch or I should say more accurately my older daughter had her fourth birthday last weekend and I got her a switch we did an original switch I got her an OLED switch part of my thought process she doesn't need the switch too but Mario Kart ! perfect and get an OLED switch for her we'll be able to play together in tabletop mode it has been amazing so if I thought about it maybe I could have predicted this you know she's four and she's obsessed with princesses and being a princess she doesn't actually care at all about winning she cares about being all the different princesses and so

every race she chooses a different princess and then this is so fun what she has decided she really loves about the game is when you fall off the track and the little cloud guy comes and picks you up with the fishing pole and tows you back onto the track she thinks it's a fairy and so she loves when the fairy comes and picks up her princess and puts her back on the track after every race she says I want to pick a new princess and then I want to pick a new course and I want a course where we fall off and she goes rainbow road every time is this one where we fall off is this one where we fall

off is this one where we fall off so funny and then I race as fast as I can and then another like 10 minutes go by where she just spends the whole time driving off the road and the little cloud guy tows her incrementally forward each time and she has a blast it's wonderful that's awesome parenting so unexpected so fun congratulations all right well listeners we have some thank yous I have a huge thank you to Benjamin Lohr for writing the fantastic book The Secret Life of Groceries and as always to Arvin Navaratnam at Worldly Partners for his amazing write-up on Trader Joe's linked in the show notes for anyone who wants his awesome analytical take on why the business

succeeded David I know you've got some too yeah and then continuing on the book front Mark Gardner's really fun book build a brand like Trader Joe's about his experience going and working as a crew member at Trader Joe's for a year so helpful in the research a very entertaining read too by the way and then Joe Calome yes writing his autobiography becoming Trader Joe it's a great book and obviously the main source for this episode and then just two specific research thank yous for this one both to Instacart first to Ravi Gupta of Sequoia Capital formerly CFO of Instacart when we finalized that we were going to do this Trader Joe's episode Ravi was of course our first call because we

were like help us with grocery please yo we don't know anybody in the grocery industry help us out Ravi was incredibly helpful including connecting me with Chris Rogers the current CEO of Instacart and Chris was also incredibly helpful giving me perspective on the industry and e-commerce within it thank you Ravi and Chris and all the other grocery folks and resources who you connected us with and pointed us to yep well if you like this episode check out our episodes obviously on Costco I also think you'll probably like Ikea any others to point folks toward David Walmart of course for sure absolutely Walmart perhaps Amazon part one also may be of interest since this is effectively the anti-Amazon it's the everything store

and the very few things store oh and Ben how could we forget we made an episode on Whole Foods back in the day we did the day that Amazon bought the company a little bit embarrassing what was that 2016 2017 it was a little bit amateur hour I didn't re-listen to it for this episode so I don't know if it holds up or not but yes we do have an episode on Whole Foods I feel good about anything basically 2020 onward yeah after you finish this episode come talk about it with us at acquired.fm slash slack get all the goodies including the pictures and graphics and stuff that we talked about and corrections and help us pick the next episodes by

joining our email list that's acquired.fm slash email and with that listeners we'll see you next time we'll see you next time and as Joe would say in his radio slots thank you for listening thank you for listening who got the truth is it you is it you is it you who got the truth now huh