What’s in a Name?
The Winning Performance by Clifford and Cavanaugh: Money is a useful yardstick for measuring quantitative performance and profit and an obligation to investors. But . . . making money as an end in itself ranks low.
A Trader Joe’s Sampler: Before we get into the details, here are some Trader Joe’s products that have especially interesting stories.
“What are some of the best deals you ever made?”
In 1981, Newsweek ran a story about a fish called pilchard, which was a lot like tuna but much cheaper, which was being promoted in New England.
We took the pilchard, relabeled it, and blew it out at a price two-thirds that of green-labeled tuna and half the price of albacore.
One of the first products of the Mac the Knife program was whey butter from the famous Tillamook cheese company in Oregon.
When I got into the grocery business, I couldn’t understand the scant attention paid to this greatest of all syrups. All the major brands like Aunt Jemima were mostly cane syrup with a little maple thrown in.
Putting our Intensive Buying and Virtual Distribution to work, we made a deal with the leading cooperative in Quebec to buy syrup in fifty-gallon drums. We brought it to Los Angeles, had it bottled (Pilgrim Joe’s label), and we didn’t just break the price — we destroyed the price!
As far as I know, Trader Joe’s is the largest retailer of maple syrup in the United States. If only Grandma Blanche had lived to see it!
No strong brand demand, nobody interested in helping the public buy it right. Putting Intensive Buying and Virtual Distribution to work, we became the largest retailer of wild rice in the United States.
I was very proud of what we did to popularize wheat bran, and ten years later, to be the first to promote oat bran, which may help control cholesterol.
For years we were almost the only retailer with almond butter.
HOW WE GOT THERE
The Milk Train Doesn’t Stop Here Anymore: In 1965, I was forced by competitive pressures to convert a convenience store chain, Pronto Markets, into Trader Joe’s
Trader Joe’s got its start in a bar on La Cienega Boulevard, where a crisis broke over my head on a Friday afternoon in October 1965.
Merritt Adamson Jr., owner of Adohr. I was thirty-five years old, President and controlling stockholder of Pronto Markets, a sixteen-store chain of “convenience” markets in Los Angeles. Just three years earlier, we had hovered on the edge of bankruptcy. After I bought Pronto using extreme leverage (I had no money), Merritt had provided much of the capital, which had helped fuel our expansion to sixteen stores and a recovery to lots of black ink. In 1962, Merritt and I got together on common ground. He’d get our milk business we’d get capital; but whatever we did would be squeaky clean with the state.
“Joe, I’ve sold Adohr. And I’ve sold it to Southland Corporation.” Southland, for the uninitiated, is the owner of 7-Eleven Markets. As a partner of Rexall, I had started Pronto in 1958 as a copy of 7-Eleven, because there were no 7-Elevens in California. What Merritt was telling me was (a) my source of financing was cut off and (b) a competitor a thousand times greater in wealth was coming to town, and (c) they had found some way to avoid California’s high labor costs.
The convenience store business is 90 percent real estate, 10 percent all other.
The God of Fair Beginnings: How I got started with Pronto Markets as a subsidiary of the giant Rexall Drug Co. in the 1950s
Bud Fisher, the handsome scion of one of the founding families of Southern California was then Executive Vice President of the Owl Rexall Drug Co., a moribund chain of three hundred stores on the West Coast.
Sav-on drugstores, a brilliant new concept in self-service retailing created by two Latter Day Saints, Messrs. Bud hired me to find out why. All of those men who had experienced both the Great Depression and World War II are dead and gone from management now, but they were powerful forces in shaping postwar America. In the course of our research on alternatives for Owl, we discovered 7-Eleven stores in Texas. I then quit. I told Bud that I had learned all I could at Owl.
Eighteen months after I quit, he called me: he had persuaded Rexall to hire me back to clone 7-Eleven. And that’s how at age twenty-seven I became President of Pronto Markets.
Justin Dart, the famous President of Rexall, bought Tupperware. Within a year, Tupperware was generating a third of Rexall’s profits. What was vertical integration for Tupperware was going to be horizontal disintegration for The Owl Drug Co., and Pronto.
But Dart had a problem: nobody wanted to buy the molting Owl Drug.
I suggested that to pull it out of its nosedive, we would do a public offering of just the best Owls, about one out of five stores. Bud and I would wind up running the public company, in which Pronto would be a minor but profitable part. The two dyslexics agreed.
It took six months to assemble figures that Pricewaterhouse would certify, partly because Owl had never been audited separately from Rexall.
I either had to buy Pronto or find a new job. The decline of the stock market accelerated. “I will buy Pronto Markets for book value.” I needed to raise the money within ninety days. We did find the money, somehow.
Seventeen years later, when I finally sold the company, the cost basis of my total investment was only $ 25,000.
The Guns of August, the Wages of Success: I bought Pronto Markets in September 1962 and made the most important decision of my career: pay high wages
If all the facts could be known, idiots could make the decisions. — Tex Thornton, cofounder of Litton Industries, quoted in the Los Angeles Times in the mid-1960s.
In 1962, Barbara Tuchman published The Guns of August, an account of the first ninety days of World War I. It’s the best book on management — and, especially, mismanagement — I’ve ever read. The most basic conclusion I drew from her book was that, if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance.
Trying to find an optimum solution in business is a waste of time: the factors in the equation are changing all the time.
This is the most important single business decision I ever made: to pay people well. Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract — and keep — the quality of people who work at Trader Joe’s.
Equally important was our practice of giving every full-time employee an interview every six months.
Productivity in part is the product of tenure. That’s why I believe that turnover is the most expensive form of labor expense. Good people pay by their extra productivity.
The problem with a convenience store (a small store with a small inventory and few fixtures) is that it is hard to invest enough money to let the people be productive enough to justify high wages and benefits. I had put the cart — the high wages — before the horse — the convenience market.
We upped the investment ante by taking only prime locations, which could generate the most sales, even though the rents were higher.
I was never a fan of franchising.
As a second way to pump investment into the Pronto stores, to support our high wage costs, we began to add hard liquor, instead of just beer and wine, to the stores. Owning a liquor license meant owning a guaranteed income stream. That’s why the licenses cost so much.
For the first time, we had begun to get a little product knowledge after buying out Rexall.
The buyers at the supermarket chains knew nothing about what they sold, and they don’t want to know.
Our first product knowledge breakthrough was Extra Large Eggs. So, into my tiny office came the egg man. He had a problem: too many Extra-Large AA eggs. He offered them to me at the same cost as Large AA, the size that all the supermarkets advertised. The supermarkets couldn’t follow. The supply of Extra Large simply wasn’t great enough to cover a Safeway ad.
The Pronto Market chain, at the time of 7-Eleven’s arrival, had the highest sales per store of any convenience store chain in America by a factor of three, thanks to the high wage policy, the strong locations, a few liquor licenses, and the beginnings of differentiation through product knowledge.
On the Road to Trader Joe’s: Those high wages force me into merchandising moves, which led to Trader Joe’s
The basic problem is that convenience store retailing is a commodity business that is hard to differentiate.
Trader Joe’s was conceived from those two demographic news stories. What I saw here was a small but growing demographic opportunity in people who were well educated.
I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream people.
How I Love Lucy Homogenized America: I smelled a chance to be different
In response to Napoleon’s problems with feeding his huge army, Nicolas Appert invented canning in 1809. This was the first step away from bulk retailing.
The Kraft brown paper bag was invented about 1870, making it possible to put all your store-bought purchases in a paper bag, a phenomenon that even today is unusual in Europe.
The supermarket rose to prominence because it recognized the automobile, something that department stores did not recognize until after World War II.
The supermarket was then perfected by yet another set of wheels, when the shopping cart was invented in 1937.
As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.
Good Time Charley: Aloha! The first version of Trader Joe’s, 1967, was the fun-leisure-party store
There were three major versions of Trader Joe’s between 1966 and 1977: Good Time Charley of 1967, Whole Earth Harry of 1971, and Mac the Knife of 1977, which retained few vestiges of Good Time Charley.
Good Time Charley represented the coming together of these ideas: We were going to track the small but emerging group of well-educated, well-traveled people. The correlation between alcohol consumption and levels of education is about as perfect as one can find in marketing. As reported earlier, in order to support the high wages we paid, I kept trying to invest more per job: the easiest way was to add distilled spirits.
The advantage of hard liquor merchandise was that it met three tests: A high value per cubic inch, essential to a small store format. A high rate of consumption. It had to be easily handled.
Most of my ideas about how to act as an entrepreneur are derived from The Revolt of the Masses by Jose Ortega y Gasset.
People like secrets, because secrets bring power. There’s a place for secrets, and it’s usually in the office of the head of Human Resources.
In 1966, the United States was at a peak of prosperity. So, Trader Joe’s was conceived in an atmosphere of fun-leisure-party-prosperity.
The first Trader Joe’s, which opened in August 1967 on Arroyo Parkway in Pasadena, had a quasi-tori gate sign, the sheltered sign motif, and a Polynesian roof.
The fundamental “chunk” of Trader Joe’s is the individual store with its highly paid Captain and staff: people who are capable of exercising discretion. I admire Nordstrom’s fundamental instruction to its employees: use your best judgment. Trader Joe’s finally settled down at an average of about eight thousand square feet in the 1980s, but the concept of a relatively small store with a relatively small staff remains in force.
The primary market for wine in 1967 was zilch; the secondary market for California wine was even worse. By great good fortune we became the first retailer to offer plenty of shelf space to tiny wineries that later became famous, like Heitz, Schramsberg, Mayacamas, Souverain, Freemark Abbey, and the controversial Martin Ray, probably the greatest winemaker I have ever known, and the most devious.
Trader Joe’s was off to a good start. We began converting the demographically suitable Prontos in West LA, Culver City, Fullerton, etc., and selling off the less suitable Prontos, ones that we had leased in our rush to sell more Adohr milk. At the beginning of 1970, it looked like we were on a roll, leasing more locations. Then the economy went to hell. The era of fun-vacation-leisure party was no longer operative.
Uncorked!: How we managed to break price on wine despite the Fair Trade Laws
To date, 1970 was the most important single year in the history of Trader Joe’s. The sharp recession of 1970 was followed by a sudden inflation caused by Vietnam spending. This was followed in 1973 by the end of fixed currency exchange rates. The dollar plummeted.
Against all this, Trader Joe’s mounted three initiatives. In chronological order: We launched the Fearless Flyer early in 1970. We broke the price of imported wines in late 1970 thanks to a loophole in the Fair-Trade law. Most importantly, in 1971, we married the health food store to the Good Time Charley party store, which had been the 1967 – 70 version of Trader Joe’s. Together these three elements comprised the second version of Trader Joe’s, Whole Earth Harry.
I learned time and again, success in business often rests on a minute reading of the regulations that impact your business. We had found a loophole in the law, and by God we drove a truck through it! Within three years, we were the leading retailer of imported wines in California! This was the real beginning of the Legend of Trader Joe’s.
I don’t want you to think, however, that all we were interested in were great wines. What’s described above was an anomaly, an opportunity we seized, but the wines were not what I had in mind for the core competency of Trader Joe’s: I wanted to make sure that every family could afford a bottle of decent wine on the table every night. One of my obsessions is the association of wine with food.
We created two Wine Banks at stores twenty miles apart, and wound up storing thousands of cases for customers. The day that Fair Trade on alcohol ended in 1978, however, I would have happily blown up both Wine Banks. They were a pain in the ass. About five years after I left, my successors closed the Wine Banks.
Another form of unregulated competition was credit. We did, however, install Visa and Master Charge, becoming one of the first grocers in the U.S. to do so.
New Master Wine Grower licenses didn’t have the same grandfathered privileges of that 1933 license. With that license, we could legally hold wine tastings of any wine, even if it didn’t have our label on it. We could also legally act as a wholesaler of any wine, and this led to the sales of thousands of cases to some of the best private clubs and restaurants of Los Angeles. There was a little catch, however: we had to operate a winery!
A little-noted aspect of winemaking is the presence of bees.
By 1976, Trader Joe’s had become a powerhouse retailer of wines, especially low-priced values both from Europe and, under our label, from California.
In the mid-1980s, the dollar soared against all other currencies because of high interest rates here. The big importers of branded French wines, especially champagnes, however, didn’t lower their wholesale prices to reflect the new reality. Bob Berning began buying with both arms. At times 10 percent or even 20 percent of our total sales were in the world’s greatest champagnes. Also, we had cash. In late 1985, the Group of Seven met and talked the dollar down. So, we went back to offering wines for the overeducated and underpaid.
Being king of the low-price, high-value wine trade in California was one of the greatest satisfactions of my career.
Whole Earth Harry: A serious recession forces me to marry the health food store to the party store, and I got Whole Earth religion in the process
Bob Hanson, the manager of the new Trader Joe’s in Santa Ana, which was off to a slow start, was a health food nut. He kept bugging me to try “health foods.” After I’d read Scientific American, I was on board!
Let’s define health foods as foods grown with as few chemicals as possible, processed with as few chemicals as possible, and packaged as “ecologically” as possible.
We prepared to marry the health food store to the liquor store.
We began running experiments in Santa Ana. Trader Joe’s first private label food product was granola. We installed fresh orange juice squeezers in the stores, and sold fresh juice at the lowest price in town. By late in 1971, we were moving into vitamins.
The United States is one of the most protectionist countries in the world when it comes to cheese, thanks to restrictive laws bought and paid for in the 1950s by the Wisconsin cheese lobby. Our big breakthrough was Brie. Because Wisconsin had no native Brie industry in the 1950s, it had neglected to shut off imports of Brie: there were no restrictions.
By 1976, Trader Joe’s, the Whole Earth Harry version, had evolved into a rather effective, very profitable retailer, but still small.
In what was called the Green Movement, growth for the sake of growth was defined as a form of cancer. Growth for the sake of growth still troubles me. It seems unnatural, even perverted.
To keep sales increasing during the mid-1970s, we relied on new ideas implemented in existing stores. This was my favorite form of growth. I don’t think that any given store ever fully realizes its potential.
Promise, Large Promise: Fearlessly advertising Trader Joe’s
Having sold the Insider’s name, I renamed our magazine the Fearless Flyer.
In the Insider’s Wine Report we gave the results of the wine tastings that we were holding with increasing frequency. To report these results, I designed the Insider’s Food Report, which began publication in 1970. Other elements of design are owed to David Ogilvy’s Confessions of an Advertising Man.
At all times I wrote the Fearless Flyer for overeducated, underpaid people. This required two mindsets: There are no such things as consumers — dolts who are driven by drivel to buy stuff they don’t need or even want. There are only customers, people who are reasonably well informed, and very well focused in their buying habits. We always looked up to the customers in the text of the Fearless Flyer. We assumed they knew more than they did; we never talked down to them. Given the first two assumptions, we assumed that our readers had a thirst for knowledge, 180 degrees opposite from supermarket ads.
Originally, we distributed the Fearless Flyer only in the stores and to a small but growing subscriber list.
I don’t believe, however, in advertising budgets that are based on a percentage of sales. You figure out the dollars needed to do the job right, and go ahead and spend them.
One of the fundamental tenets of Trader Joe’s is that its retail prices don’t change unless its costs change.
One should never use a mandatory sentence in addressing a customer; should never give orders. The subliminal message of a Trader Joe’s commercial is, “We’re going to be around for a long time. If you miss out on this bargain, there’ll be another. If you have the time and inclination . . .”
Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our clientele.
Hairballs
All businesses have problems. It’s the problems that create the opportunities. If a business is easy, every simple bastard would enter it.
Only a few managements, those of Nordstrom’s and Dillard’s come to mind, were able to negotiate well the treacherous waters of retailing in the period 1986 – 1995.
Here’s an example of a hairball we choked on: a U.S. Department of Labor audit of our pay practices.
After that I became somewhat of a connoisseur of the Fair Labor Standards Act, and of California’s Labor Department’s own interpretations of it. This knowledge has served me in good stead in all the companies I ran post – Trader Joe’s and in all my consulting work.
In late autumn 1976, the entire legal foundation on which all California grocers had built their businesses blew up. And that blowup resulted in the next version of Trader Joe’s, Mac the Knife.
MAC THE KNIFE
Mac the Knife: End of Fair Trade on milk and alcohol in 1977 leads to the third and final version, which I called “Mac the Knife”
The economist, Joseph Schumpeter, was absolutely right: Innovation is less an act of intellect than an act of will. — Michael Schrage, former technology editor for the Los Angeles Times, June 15, 1995.
And so, we come to the third version of Trader Joe’s, the one that operated for at least the next twenty-one years.
The creation of Mac the Knife was, above all, an “act of will” by my colleagues and me to survive. Late in 1976, we suddenly got two unsubtle surprises from the California bureaucracies: The state would no longer mandate minimum retail prices on milk, starting January 1, 1977. The state would drop the whole Fair Trade on alcohol program.
The fundamental job of a retailer is to buy goods whole, cut them into pieces, and sell the pieces to the ultimate consumers. Many of the policy decisions for a retailer boil down to this: How closely should we stick to the fundamental retailing job?
“Retail” comes from a medieval French verb, retailer, which means “to cut into pieces.” “Tailor” comes from the same verb.
In Mac the Knife, no outsiders of any sort were permitted in the store. All the work was done by employees. The closest thing to it that I see these days is Costco, which shares many features with Trader Joe’s.
From 1958 through 1976, each store probably had access to ten thousand stock keeping units (SKUs), of which about three thousand were actually stocked in any given week. By the time I left in 1989, we were down to a band of 1,100 to 1,500 SKUs, all of which were delivered through a central distribution system. The managers no longer had any buying discretion and there were no “DSDs,” or direct store deliveries.
What follows did not happen overnight. The guidelines set in February 1977:
- Emphasize edibles vs. non-edibles. Within edibles, drop all ordinary branded products like Best Foods, Folgers, or Weber’s bread.
- Focus on discontinuity of supplies.
- Instead of national brands, focus on either Trader Joe’s label products or “no label” products like nuts and dried fruits.
- Carry individual items as opposed to whole lines.
- No fixtures.
- Each SKU would stand on its own two feet as a profit center.
- Above all we would not carry any item unless we could be outstanding in terms of price (and make a profit at that price per # 7) or uniqueness.
The average supermarket carries about 27,000 SKUs in 30,000 square feet of sales area, or roughly one SKU per square foot. Trader Joe’s, by 1988, carried one SKU per five square feet! Price-Costco, one of my heroes, carried about one SKU per twenty square feet.
Intensive Buying: Honest, we love middlemen
Here’s how Intensive Buying works:
- Honor Thy Vendors After all, these are the guys you’re buying from.
- Vendors should have prompt interviews.
- Buyers should be product-knowledgeable.
- Complementary to no “layering,” the number of real buyers should be minimized.
- Buyers should be well paid. Trader Joe’s had the highest-paid buying staff in grocery retailing.
- Rigid departmental splits between buyers should be avoided.
- Vendors should get prompt decisions.
- Vendors should be regarded as extensions of the retailer, a Marks & Spencer concept.
- Treasure entrepreneurial vendors and maintain entrepreneurial buying hours: on holidays, or very early or very late.
- Vendors’ manufacturing plants should be visited frequently, especially by your quality control people.
- Trust the vendor: This is part of the genius of Marks & Spencer, which accepts deliveries from its long-established vendors without counting the cases.
I adopted a rule: Screw me once, shame on you. Screw me twice, shame on me.
We decided to sell only whole coffee beans, a field that the supermarkets had almost abandoned in the 1970s. Then Doug Rauch came across a new process for canning coffee, which, instead of drawing a vacuum, flushed the can with the inert gas nitrogen, driving out the oxygen. This is still the way that Trader Joe’s coffee beans are sold, and it’s been a great success. There is a drawback: the cans come in only one size, but different kinds of beans expand differently when they’re roasted. We simply packed different weights, and explained it in the Fearless Flyer. It worked!
You must master the USDA, FDA, and BATF rules that impact labels such as vitamins, imported wines, imported meats, etc., and you may want to make your labels more informative than laws or trade practice require.
I believe that products should move in only one direction, never back up the supply chain.
Another element of our Intensive Buying was our willingness to pay cash on delivery.
What Intensive Buying Is Not:
- Eliminating the middleman.
- Buying power. What most people mean by “buying power” is actually selling power: the ability to move large quantities of goods.
- Monopolism.
- Limited to branded closeouts and private label.
During my tenure, Mac the Knife happened to run on a gross profit of about 23 percent after all distribution costs and what is euphemistically called “shrinkage.”
When I left Trader Joe’s, our average sale was around $ 30.
Virtual Distribution: Outsourcing? So that’s what you call it!
Intensive Buying can’t work unless you have a way to receive container loads and truckloads in one location and distribute the goods to the stores, a process of which we were quite ignorant.
During the next twelve years under Mac the Knife, we not only radically changed the composition of what we sold; we totally centralized the distribution into our own system, ending all direct store deliveries by vendors!
By 1981, we had made so much progress in logistics that we were willing to consider going into our own bakery program. Our concept was to line up several small “health food” bakers, have them deliver to a central dock, and hire a trucker to distribute the bakery products from there. The bread program, and the other distribution programs, however, would never have been adequate for our requirements had the third challenge not been met.
In 1980, my son, Joseph Steere Coulombe (Young Joe), after having worked on computers for two years at one of the Grandes Ecoles in Paris, got his BA in communication theory at UC San Diego. Young Joe was a certified Macintosh programmer. The Apples were the first computers in the office.
In 1982, we employed an Apple II to do most of the number crunching. That was a big help, but it didn’t solve the problem of the nightly communication to the bakers. Young Joe rigged up one of the first voice-activated computer systems in the U.S. to take the orders from the stores. Young Joe created a payroll system that could be run on the Mac.
As I slowly learned some of the ramifications of computers, I suddenly realized that a given SKU, regardless of its physical size, occupies the same electronic space. This was one more justification for the radical down-SKUing of the number of SKUs in the system: it helped the computers work better.
There comes a time in the evolution of any company when the people who built it need reinforcement, not necessarily replacement, with broader-scope managers.
The next year I made the biggest organizational change I ever undertook: I hired a new President, John Shields.
For people who didn’t know anything about distribution, we created one of the most remarkable systems in America. We owned no trucks, no warehouses, and no mainframe computers. I used to call it Leroy’s Lighter Than Air Distribution System. One of the most important decisions we made back in 1977 was to ship to the stores only in whole-case quantities.
Private Label Products: Academic jokes for the overeducated and underpaid
A Guideline: No private label product was introduced for the sake of having private label.
Instead of having a one-size-fits-all private label like the supermarkets, we tried to individualize each label to each product. Wherever I could, therefore, I used artistic, or musical, or literary, or historical, or scientific allusions in the product names. We had the Brandenberg Brownies, the Sir Isaac Newtons, The Bagel Spinoza, The Peanut Pascal, Disraeli & Gladstone’s British Muffins, etc. My favorite of all the private labels was Heisenberg’s Uncertain Blend of coffee beans.
I believe in the wisdom that you gain customers one by one, but you lose them in droves.
From Discrete to Indiscretions: Standards are okay, up to a point
Every major conglomerate that tried to capitalize on the boutique wine boom lost its shirt, including Coca-Cola, Hunt-Wesson, and Pillsbury, each of which made mistaken bets on California wineries in the 1970s. Discontinuity is not their game. That’s one reason why (as I write this) 88 percent of the wines are consumed by only 11 percent of Americans (and you can bet that most of them are Trader Joe’s customers or would be except for geography).
Because of our wine background, we liked and embraced discontinuous lots of foods.
Too, Too Solid Stores: “Nymph, in thy orisons be all my sins remember’d!”
My preference is to have a few stores, as far apart as possible, and to make them as high volume as possible.
Too many stores, too many irreversible leases, too much geographical saturation was a recurrent theme in the failure of American retail chains in the twentieth century.
The “normal distribution” of most chains is 20 percent dogs, 60 percent okay stores, and 20 percent winners.
I believe that the sine qua non for successful retailing is demographic coherence. We wanted excellent boulevard access to large numbers of “our” people. Preferably, we wanted freestanding locations. I was willing to pay extra for a loading dock.
The question of number of stores? You need to have enough stores in a trading area to economically amortize the radio advertising. You need enough stores in an area to have a large enough pool of employees.
My rule was that distance between stores should not be measured in miles but in driving time. I wanted no less than twenty minutes between stores.
Never, never, never sign a lease with a “continuous operation” clause. That clause means you must stay open — you can’t “go dark” and just pay the rent.
In 1967, Dave Yoda, our Controller, and I innovated what has since become fairly common in the industry under the name “The Leave Bank”: no distinction is made between sick leave and vacation time.
One of the most important employee benefits that I installed back there in 1963 was Income Continuation Insurance. It’s one of the smartest things I ever did. It took the monkey off our back if an employee got sick for a protracted period of time.
Skunks in the Office: Tom Peters runs amok in the organization chart
Here’s how the office was organized: I was inspired by Tom Peters’s story of Lockheed’s Skunkworks. A skunkworks is a group of people brought together to work on a project. When the project is completed, you dissolve the group and transfer the individuals to other projects.
Central Management was divided into three parts: Skunkworks I, Buying (why use “purchasing” — it has an extra syllable); Skunkworks II, Sales, which included the stores and what is now called Human Resources; and Skunkworks III, Accounting.
Six months after I left Trader Joe’s, Peter Drucker wrote a seminal piece in the July 25, 1989, Wall Street Journal called “Sell the Mail Room.”
It described what we had been doing since we shifted to the Mac the Knife mode in 1977: getting rid of all functions except those of buying and selling.
Double Entry Retailing: 3-D tennis in the check stand
From my view, the Demand Side of Retailers can be analyzed in terms of five variables:
- The assortment of merchandise offered for sale.
- Pricing: stability (weekend ads?), and relative to competition.
- Convenience: geographical, in- store, and time.
- Credit: the accepted methods of payment.
- Showmanship: the sum of all activities that result in making contact with the customer, from advertising to store architecture to employee cleanliness.
Here are factors on the Supply Side:
- Merchandise
- Vendors Employees
- The way you do things: “habits” and “culture”
- Systems
- Non-merchandise vendors
- Landlords
- Governments
- Bankers and investment bankers
- Stockholders
- Crime
Demand Side Retailing: Geometry. Advantageous, but not necessarily true
Indeed, one of the biggest operational issues for limited-SKU retailers like Trader Joe’s is: What SKUs do you drop to make room for new ones? Mostly we did it on the basis of dollar value of sales.
The real limit on what range of products we could carry was our product knowledge.
In Good Time Charley we strove to be the exclusive retailers of certain (fair-traded) California boutique items. This proved to be a fool’s errand, since the exclusives were honored in the breach, and I was glad to get out of that rat race as soon as Fair Trade ended.
We repeatedly promoted the first-of-season pistachios, dried fruits, etc. But what really drove sales on these products was our prices.
We couldn’t make any legitimate claims except one: our high sales of cheeses, vitamins, nuts, and dried fruits automatically made our products fresher than our low-turnover competitors.
Retailers seem to be falling into two distinct SKU modes: those with under 4,000 – 5,000 SKUs and those with over 25,000 SKUs.
Pricing Stability of price levels within the store. Price levels vs. competition. Coupons. As we moved away from branded products, coupons had no relevance to Trader Joe’s.
Senior discounts. Giving discounts to people over sixty is, to borrow a phrase from Charlie Munger, “a type of dementia I can’t even classify.”
Food stamps were an important alternative method of payment in markets; I dropped them early in Mac the Knife, partly because so many customers objected to seeing food stamps cashed in at Trader Joe’s for “luxury” products.
Lighting, I think, is one of the key elements in successful retailing. Paint goes along with lighting. The same is true of floor covering.
Clean parking lots are also part of showmanship.
Supply Side Retailing: Government Intrusion, a supply-side opportunity?
Peter Drucker has said, in the context of troubled companies, that it’s impossible to change a company’s “culture” but you can change its “habits.”
The Leave Bank, which had the radical feature of combining vacation leave and sick leave, and in accruing it in dollars instead of hours.
“Systems” and “Non-Merchandise Vendors” often cross paths, especially in the current trend toward outsourcing.
The funny thing is that grocers seem to spend more effort squeezing payroll than squeezing Cost of Goods Sold, though there is at least five times more opportunity to save money in the latter.
The combination of internal theft, vendor theft, bad checks, armed robbery, and burglaries can be overwhelming at times.
This is one reason why the management function of Control is so critically important to retailing. Retailers like Aldi and Costco may commit many sins on the Demand Side, but their bulldog tenacity on Supply Side Control makes them profitable in spite of it. Ask not what you can do for your customers, but what your employees, vendors, customers, and druggies can do to you.
One of the most important Supply Side constraints is the stamina of the Chief Executive Officer.
The Last Five Year Plans: Russia and Coulombe give up Five Year Plans in the same year, 1988
Five Year Plan’ 77 had been a great success.
By the Five Year Plan’ 82 (written in July 1982), we were ready to flex our muscles.
Frederick P. Brooks Jr., architect of the IBM 360 system, in his insightful 1982 book, The Mythical Man Month:
- “To get a good design, therefore, the Number One consideration is to have integrity of design, and you can’t get integrity from a committee.”
- “Because ease of use is the purpose, this ratio of function to conceptual complexity is the ultimate test of system design. Neither function alone nor simplicity alone defines a good design.”
Bottom line: FYP’ 82 recommitted us to the Discrete vs. the Continuous, because we had proven it was our key to differentiating ourselves from all the other grocers.
FIRST I SELL, THEN I LEAVE
Employee Ownership: Founders yah, too bad. And that it led to . . .
We, the employees and I, sold Trader Joe’s to the Theodore Albrecht family of Essen, Germany, in 1979.
From the beginning of Pronto Markets, one of my basic principles, one of my basic goals, was employee ownership of the business. Getting there, however, was complicated.
To unify the eight corporations so the employees could invest in the entire enterprise, the Pronto Market Investment Club was created.
Avoiding the surtax on the first $ 25,000 meant a savings of $ 12,500. This meant nothing to General Motors but it meant, potentially, a total tax saving of $ 100,000 per year if we could get all eight corporations sufficiently profitable.
Employees were eager to have the chance to invest in the business, a touching faith that was not always justified. The system worked well until 1975, when a sea change occurred in the economic background. From 1974 to 1977, the price of houses at least doubled! In 1975, a family had to choose between buying a house (or a bigger house) and investing in the Pronto Market Investment Club. The club lost.
In 1975, in fact, we paid off the last of the bank loans from Bank of America: Trader Joe’s has never had any fixed debt since 1975.
Clearly a crisis would arrive within a couple of years. So, Ed Weissman, our attorney since Froehlich was on the Superior Court, and I began an exhaustive study of Employee Stock Option Plans (ESOPs), a rather new concept in 1975. The idea: we would establish an additional retirement plan for the employees, with Trader Joe’s contributions equal to about 10 percent of each employee’s income per year. This Employee Stock Ownership Plan required our giving up the $ 100,000 per year tax saving, and merging the corporations, but the tax savings on the Trader Joe’s contributions would more than offset this. On the eve of getting their appraisal, the startling announcements about Fair Trader and milk pricing came from the state government.
Thus, the stage was set for the abandonment of my twenty-year-old goal of employee ownership. And for the sale of Trader Joe’s to the Albrechts.
The Sale of Trader Joe’s: Money talks
In 1919, the parents of Karl and Theodore Albrecht, who were infants at the time, bought three tiny grocery stores in Essen, Germany , and they bought them on credit. The Albrecht brothers designed the “box” store. Their concept of the box store has about six thousand square feet and carries six hundred SKUs. The box stores, called Aldi (an acronym for Albrecht Discount), were one of the major factors in the postwar German “miracle,” growth without inflation.
Sometime around 1970, although still living fifteen minutes apart in Essen, the brothers split their empire, I was told. Karl, the eldest, took Germany south of Essen, Austria, Spain, and the United Kingdom. Theodore (or Theo, pronounced TAY-o, as I came to know him), took northern Germany and West Berlin.
In 1975, Karl came to the United States and bought a moribund supermarket chain in Iowa, the Benner Tea Co. Using this as a logistical base, he began more or less replicating Aldi in the Midwest.
Perhaps with a little sibling rivalry going on, Theo hired the investment bankers Dominick & Dominick to search for an American chain to buy, and to launch his own Aldi’s here.
Dieter Brandes. He held the special responsibility for non-German operations: the low countries, and now America.
In Essen, Alice and I met Theo, his charming and intelligent wife, Cilly, and their two sons, Theo Jr. and Bertholdt, who were then in their twenties.
Aldi can be described as an architectural operation in the spare, austere Bauhaus mode. I was really impressed. I wound up working for him for ten years. But not then. After getting a second look at Aldi, I hit the wall. The deal was washed up, as far as I was concerned.
In 1978, Fair Trade ended and Dominick was immediately on the phone. I told them that we were not in distress, that by God we were going to solve this problem. In October 1978, Dominick called me with a radically revised offer: They were sold on Trader Joe’s post-deregulation future. No changes would be made in the way Trader Joe’s was run. I would not have to sign a management contract. The price was about three times what had been offered a year earlier. On the other hand, we were already making a lot more money under Mac the Knife.
I responded that the sales contract could be no more than one page long. My insistence on that simple agreement led to my being retained as a consultant for Thrifty Corporation ten years later, in 1989.
The deal closed in 1979.
- We did not “sell to a German company.”
- The Albrechts never invested a pfennig directly in Trader Joe’s. There were no debt guarantees, no nothing. Nor did they take dividends.
- The Albrechts and Dieter Brandes never took an active part in the management of Trader Joe’s.
- I never took any part in their European operations. The year after they bought us, however, Dieter, who was charged to find more American investments for them, caused them to buy a 10 percent interest in Albertson’s.
Two years after the sale of Trader Joe’s, the IRS audited our 1978 results and came after us for $ 100,000 of additional taxes because the corporations’ ownership hadn’t been diluted enough to enjoy the eight surtax exemptions. The Albrechts never said a word of complaint about the “one-pager” having no holdbacks.
I have always felt sorry for people who inherit the family business. No matter how successful they prove to be, they always have the nagging doubt about whether they could have done it on their own.
Goodbye to All That: Auf Wiedersehen
Six years after selling Trader Joe’s, in 1985, we had an excellent year for Mac the Knife, but there were a couple of bumps in the road.
At Christmastime, I got shocking news: Dieter Brandes had quit Aldi. This isn’t supposed to happen in Europe. My forecast of spending the rest of my career working with him blew up. Dieter was the only member of top management in Essen who spoke fluent or even semi-fluent English.
Commencing in 1986, a series of small frictions arose that had not existed before. Only one was major: a change in top management, which I wanted to make and which Theo blocked.
I faxed my resignation to Essen, effective January 1, 1989. The time for leaving a company is when it is running well and is well staffed. After thirty years at the same job, I felt I had better leave if I ever was going to leave. I could see still other disagreements in the future.
Do I regret having quit? No.
But do I regret having sold? Yes. I admit it. To mine own self, I was not true when I sold. I regret not having had the guts to ride out the loss of the surtax exemptions, the employee ownership problem, the threat of death taxes, Carter’s threat to eliminate capital gains preference, and all the other fears, real or phantom, of late 1978.
Post De-Partum: Or my ten years as a consultant
I began to explore other businesses; also, I had a couple of leads to run other companies. Eventually that did happen, and I did wind up in charge of eleven companies during 1992 – 95 after wandering into and through consulting work during 1989 – 91.
My post de-partum life can be broken into three categories: running companies in terrible trouble; consulting for companies in terrible trouble; and serving on boards of directors, some troubled, some not, which is my current occupation.
For three years, 1989 through 1991, I consulted on the six divisions for Jim Ukropina, the former O’Melveny attorney, who was now CEO of Pacific Enterprises, on Thrifty Corp. Jim resigned as CEO of Pacific Enterprises in December 1991 and was succeeded by Bill Wood. I’d met him only once before, but he asked me to come to work as Executive Vice President of Pacific Enterprises in charge of Thrifty Corp. After five days of meeting with lawyers, CPAs, and investment bankers, we decided to liquidate Thrifty Corp. In May 1992, we made a deal with Leonard Green, a prominent Los Angeles venture capitalist. Pacific Enterprises, whose stock had fallen from $ 57 to $ 17, had lost $ 1.6 billion in six years of retailing. But once we unloaded Thrifty, its stock did recover to $ 25.
At about the same time as Pacific Enterprises’ mistaken purchase of Thrifty, a giant Canadian supermarket chain made a similar bad move. It bought a moribund wholesale grocery company in Northern California called Market Wholesale. And then to pump up its volume, the Canadians bought three terrible supermarket chains, the gourmet-level Petrini’s, a bottomless black hole named Cost Less, and a bagged-out chain in Modesto called New Deal.
The parent company in Montreal itself had been in trouble in 1993, leading to the ouster of its jet-set management, who were replaced by some really sharp guys who had created Price Club-Canada, which had the highest volume Price Clubs in the world. Pierre Mignault, the new CEO, after a downer visit to California, called his old boss, Sol Price, who put him in touch with me.
Pierre Mignault and Bernie McDonell are probably the two best retail executives I’ve ever worked with. Intelligent, experienced, tough yet visionary, they had a real mess to clean up in Canada. They gave me three years to clean up California.
We had a hard time finding anyone who would buy the California operations. Fortunately, I had gotten to know Jim and Jerry Kohlberg back in 1992 when I was finishing Thrifty. I did some consulting for them in 1992 – 93. After months of tough negotiations in which Bernie McDonell proved his mettle (and taught me about “risk management”), we sold to the Kohlbergs in early January 1995.
Sport Chalet was a chain of forty-seven big, upscale stores in Southern California. Just as I returned home to Pasadena, the board parted company with its CEO and asked me to fill in and recruit a new CEO. Sport Chalet, curiously, was the most satisfying because it was an operational success. It was a good way to end a career as a CEO that had begun in 1958.
This is one of the most important things I can impart: in any troubled company the people at lower levels know what ought to be done in terms of day-to-day operations. If you just ask them, you can find answers.
Since 1989, I have served on the boards of directors of some really interesting companies.
