Trader Joe’s Co.

views updated

Trader Joe’s Co.

P.O. Box 3270
Pasadena, California 91031
U.S.A.
(514) 861-9481
Fax: (514) 861-7053

Public Company
Incorporated: 1967
Employees: 2,200
Sales: $600 million
SICs: 5499 Miscellaneous Food Stores

Trader Joe’s operates a chain of unique grocery stores that have been described as a cross between a discount warehouse club and a gourmet deli. The company has grown steadily since its inception through innovation and sharp management techniques. In 1994 there were about 75 Trader Joe’s stores operating in the western United States from San Francisco to Phoenix. The company, distinguished by its practice of carrying zero debt, was purchased in 1979 by the Albrechts, a wealthy and secretive German family, making financial information difficult to obtain.

Although Trader Joe’s was not officially founded until 1967, its origins can be traced back to the Pronto Markets chain of food stores that were started in the late 1950s. Pronto Markets was initiated by the Rexall Drug Co. in 1957. The venture reflected the intent of Rexall, an operator of a chain of drug stores, to get in on the burgeoning convenience and corner foodstand market. Rexall appointed Joe Coulombe to head up the new division. Coulombe was only 26 years old at the time and had been with Rexall for only three years. Nevertheless, his managers were impressed with his performance and believed that he could handle the job. During the late 1950s and early 1960s Coulombe managed to build Pronto into a chain with a considerable presence in Orange County, California.

Despite its expansion, Pronto was experiencing growing profit pressures by the mid-1960s as a result of increased competition. Southland Corp.’s successful 7-Eleven chain, in particular, was bearing down on smaller competitors like Pronto and was even planning an aggressive expansion in Pronto’s region. Rexall elected in 1966 to jettison its Pronto Markets division and escape the convenience store industry. Coulombe, still at the helm, was faced with a choice—attempt a buyout of the chain that he had built and remain as chief executive, or bail out and look for a new niche in the retail industry. Coulombe took an extended Caribbean vacation before deciding to stick with Pronto. With the financial backing of Bank of America, he purchased Pronto from Rexall and went to work.

Coulombe knew when he bought Pronto that the strategy he had used to grow the business in the past would be ineffective in the face of growing competition. 7-Eleven was targeting his customers, and his organization lacked the resources to compete with the national chain. The ever-innovative Coulombe considered two prevalent social trends as he devised a new marketing scheme. First of all, consumers were becoming increasingly educated and sophisticated, and were expecting more from their shopping experiences. Secondly, the surge in global travel, made possible by plummeting jumbo jet airfares, was exposing Americans to new foods. Coulombe decided to develop a food store at which well-educated, well-traveled, but not necessarily wealthy people could buy foods that would impress themselves and their friends. “I wanted to appeal to the well-educated and people who were traveling more,” he explained in the October 2, 1989 Forbes, “like teachers, engineers and public administrators. Nobody was taking care of them.”

Coulombe’s initial concept was to reposition Pronto as an upscale food market/convenience store located near educational centers. That decision was influenced by the health of the liquor business at the time, which, for Pronto, was still very profitable. That scheme was scrapped in 1971, however, when the aerospace industry collapsed and the local Orange County economy plunged. The recession squarely hit Coulombe’s targeted customers, who weren’t throwing many parties. To overcome the slowdown, Coulombe drew on his own travel experiences and fashioned a sort of combination health food shop and liquor store during the early 1970s. He ordered unique food items from different parts of the world to attract customers, and he labeled the foods with sprightly, entertaining labels like “Kiwi From Paradise juice,” and “Look Ma! No Refined Sugar!” Coulombe’s new Trader Joe’s stores experimented with all types of health foods and beverages, and generally avoided marketing mammoths like Coca-Cola and Budweiser.

Among Coulombe’s most successful tactics in the early 1970s was his biting journal Fearless Flyer (originally called Trader Joe’s Insider Report), which aroused environmental awareness through stinging commentary on conservation issues. Distributed to the general public, the Flyer brought hordes of environmentally conscious customers into Trader Joe’s, which began stocking increasing amounts of vitamins, biodegradable products, and health foods. Focused on that key market, Trader Joe’s boosted sales and profits steadily until 1976. In that year, California legislators deregulated the supermarket industry. The change boded poorly for Trader Joe’s liquor segment. Indeed, since the Great Depression the state had effectively subsidized the sale of milk and liquor by markets. Many smaller convenience stores, in fact, had come to rely on milk and liquor sales, even to the point of advertising other items below cost just to get customers in their shops. Deregulation quashed that practice, and many mom-and-pop stores failed.

As the giant supermarkets flexed their muscles in the newly deregulated grocery industry, Trader Joe’s quickly adapted to the new environment. Coulombe rejected traditional convenience store inventory and began to market Trader Joe’s as an upscale, but value-oriented, seller of trendy, hard-to-find beers and wines. The strategy was a success and Trader Joe’s maintained its profitability. Trader Joe’s continued to selling its inexpensive, unique wines and imported cheeses and coffees as it had since the early 1970s. But Coulombe gradually began expanding the chain’s inventory to include a wide array of singular nuts, pastas, fish, vegetables, and prepared snacks and meals. In 1979 Trader Joe’s was purchased by the Karl and Theo Albrecht, members of the secretive, billionaire Albrecht family in Germany. The Albrechts retained Coulombe as CEO.

During the early and mid-1980s Coulombe continued to perfect Trader Joe’s inventory and market position and to slowly grow the California chain. He gradually moved away from the intense environmental rhetoric in the Fearless Flyer, for example, and evolved with his core market. That meant positioning the Trader Joe’s stores to appeal the emerging upwardly mobile, or “Yuppie,” crowd which was exhibiting increasingly sophisticated shopping patterns. Unique beers and wines remained a major attraction, but Coulombe also began bringing in more perishables and unique dry food items. The Fearless Flyer continued to be a primary marketing tool, but it was toned down and used to provide entertaining and useful information such as health tips and new store items; “I wanted it to be a marriage of Consumer Reports and Mad Magazine,” Coulombe said in a June 5, 1995 Business Week article.

Importantly, Coulombe bolstered the attraction of his inventory by keeping a sharp focus on value and targeting the well-educated but less-than-affluent consumer. Wines and other alcoholic beverages were often displayed in cases and most stores had only a few rows of shelving. And while the average store size increased during the 1970s and 1980s, the average Trader Joe’s store was still only about 6,000 square feet by the late 1980s—about half the size of the typical Los Angeles supermarket. Although his strategy of maintaining a continually changing inventory may have seemed like an expensive and daunting proposition to larger markets and superstores, Coulombe managed to keep prices low. Trader Joe’s efficiency was partly the result of its cash policy; the company paid cash for all purchases and funded growth internally as well as through the deep-pocketed Albrecht family. Innovative, low-cost advertising was a major money saver as well.

Also minimizing expenses was the company’s unusual purchasing program. The store’s own branded items—fresh salsa and unique pastas, for example—were supplied by a constantly changing set of small, independent contractors. The foods they supplied were often discontinued items that Trader Joe’s bought at a discount. Those contractors and other suppliers were found by Trader Joe’s own buying team, which traveled throughout America and Europe in search of interesting items and bargains. The result of Coulombe’s innovative inventory and pricing strategy was huge profit margins. In 1989, Trader Joe’s chalked up an estimated $150 million in sales. That figure reflected gross sales of more than $800 per square foot—extremely high compared to grocery industry norms. Furthermore, because its stores were usually located on non-prime real estate, the company’s fixed overhead was relatively low.

By the late 1980s the nearly 60-year-old Coulombe had built Trader Joe’s into a chain of 30 outlets, most of which were in the Los Angeles and San Diego regions. Besides his efforts at Trader Joe’s, moreover, Coulombe became involved with Denny’s Restaurants Inc. as a board member in the early 1980s and had been instrumental in taking the company private in a $700 million buyout. “I was approaching coronary age and I wanted to retire,” Coulombe recalled in the February 26, 1990, Los Angeles Business Journal. “But I wanted to leave the company in good hands,” he added In 1988 Coulombe selected 55-year-old John V. Shields to succeed him at the helm. Following a short transition period, Coulombe stepped aside and the Albrecht family welcomed Shields as the new chief.

Shields had known Coulombe for about 40 years when he joined Trader Joe’s. The two had met in 1950 as fraternity brothers at Stanford University and had kept in touch over the years; Coulombe had always been impressed by Shield’s retail sense. Shield’s first exposure to retailing occurred at Stanford, where he worked as a salesman at a men’s clothing store. After college he accepted a job with R.H. Macy in New York and set a goal of becoming senior vice-president by the age of 40. He began by turning around the women’s department, converting it from a money loser into one of the store’s most profitable departments. Following similar feats, he was promoted to senior vice-president before he was 40. In 1978 he took a job at Mervyn’s and helped that retail chain grow from 38 stores to 180 within nine years. He next move was to Trader Joe’s.

Shield’s maintained much of Trader Joe’s unique product mix and marketing strategy, as evidenced by a transaction conducted shortly after he took control of the chain. In a rapid-fire deal, Trader Joe’s wrote a check for $1 million worth of wine from the Napa Valley Mihaly winery. The winery had just been purchased by a group of Japanese investors who planned to make sake, or rice wine, at the winery. They didn’t need the inventory of wines that were popular in the United States, so Trader Joe’s moved quickly in a deal that brought it 240,000 bottles of wine at a bargain price. “We never buy anything unless we’ve tasted it, and we turn down more than 90 percent of the wine that is offered to us,” Shields said in the Los Angeles Business Journal article, “but we knew we wanted the Mihaly inventory ... if we didn’t move fast, someone else might have.” A similar deal about the same time brought 3,000 cases of a mid-level chardonnay to Trader Joe’s; Trader Joe’s was selling the bottles for $2.99 while nearby liquor stores were charging $8.50.

Deals like these kept Trader Joe’s cash registers ringing into the early 1990s. Indeed, despite an economic downturn and another depression in the California defense industry, the Trader Joe’s units continued to perform. Inventory was broadened to include a variety of wines, nuts, cheeses, dairy products, frozen foods, candies, bakery items, juices, and even dog food. Moreover, Trader Joe’s became the largest retailer of pistachio nuts, whole bean coffee, and brie in California, and was among the largest retailers of maple syrup and wild rice, among other distinctions. Meanwhile, Shields was working to expand the enterprise. By late 1991 there were 43 Trader Joe’s operating in California, including several new units in the San Francisco Bay area. Total sales for the company were topping $250 million annually, and the average size of the outlets had grown to about 7,500 square feet.

Shield’s stepped up Trader Joe’s expansion activity in 1992 and 1993, moving outside of California into Phoenix and growing the chain to 59 stores by late 1993. By that time, the chain was generating revenues of about $500 million annually (about 40 percent of which came from imported goods) and was eyeing expansion possibilities in Seattle and Portland. Trader Joe’s inventory had swelled to include about 1,500 items in each store, including many goods from former Soviet-bloc countries like Hungary and Czechoslovakia. The company was also boosting purchases from Caribbean nations as a result of new trade agreements signed by the United States in that region. Its major advertising tool continued to be its Fearless Flyer and word-of-mouth, but it was also promoting through radio spots and ads in local media by the mid-1990s.

Trader Joe’s grew to about 65 outlets in 1994 and grossed about $600 million, representing average annual per-store sales growth of about ten percent over the past five years. The company began establishing stores in Seattle late in 1994 and planned to open 15 to 20 outlets in Oregon and Washington within a few years. By mid-1995, in fact, Trader Joe’s was operating 72 outlets and was generating an estimated $1,000 per square foot. Evidencing the rising popularity of Trader Joe’s was the circulation of the Fearless Flyer, which had grown to 800,000 before rising delivery costs forced the company to begin distributing it in the stores rather than through the mails. By 1996, moreover, Shields was expecting to expand in the Northeast, with plans to build at least 50 new Trader Joe’s stores in that region within five years.