Trader Joe’s is one of the most successful grocery chains in the US.
In 2008, BusinessWeek reported that the company had the highest sales per square foot of any grocer in the United States.
In 2016, Fortune magazine estimated the sales to be $1750 per sq. ft. More than 2x Whole Foods, with a much larger footprint.
And to top it off, Trader Joe’s was one of the fastest retailers to recover from the COVID-19 lockdowns in 2020. As of Oct 2020, Whole Foods traffic was down 20%-30%, but Trader Joe’s had almost fully recovered.
I work in retail too, so I was quite impressed. And intrigued. What creates such sustained leadership?
So, when I heard that Joe Coulombe’s memoir had just been published (from this tweet by Sajith Pai), I immediately got the book and dug in.
Becoming Trader Joe is about the first 30 years of the business – 1958-1987.
As I looked at all the strategic decisions that made Trader Joe’s (TJ) a retail powerhouse, one thing struck me.
There weren’t that many decisions!
Peter Thiel loves to ask, “What’s your secret?”
And boy, Trader Joe’s has a secret. And it’s hidden in plain sight.
Whether a decision is big or small, there is some overhead to making good decisions. You have to debate the choices, reflect on them, make the decision, and then follow-through to execution. Making decisions takes something out of you.
As a self-interested manager, it’s clear where you want to go – make fewer decisions, but get the same output. i.e., managerial leverage.
How do you make fewer decisions? By focusing not on tactics, but on strategy. Not on the chaos, but on the concept.
By not deciding on each specific choice you’re asked to make, but by laying out a principle for all such choices. So that your teams can make these choices on their own – you don’t need to decide on that topic again.
Now, Drucker said this about team management, not business strategy. But it applies here too.
Joe made one decision back in 1958. One simple decision. 64 years ago. And it still has ramifications today.
“I will have the highest paid employees in retail.”
This simple decision has reverberated through the years, making TJ what it is today. This one statement is the secret of Trader Joe’s success.
We think of business strategy as a series of interlocking decisions. Like the 4Ps we learned about in Marketing Strategy 101. Product, Price, Place, Promotion (sometimes there’s a fifth – People).
But far more often, it’s not that many decisions.
It’s only 1 or 2 key decisions. The rest is an iterative search through option space, to find the one configuration that fits.
Strategy is not drawing mind-maps in an ivory tower.
Instead, it’s a furious search for the magic pattern where everything just clicks.
But Minority Report is not the perfect analogy. In fact, strategy is a lot like the game of Wordle.
Unless you’ve been living under a rock, you know what Wordle is.
The aim of Wordle is to guess a five-letter word. But you don’t have to guess all five letters individually. If you’re lucky and you get one letter at the right place (i.e., it turns green), sometimes the whole word becomes easy to guess.
That’s how it was with Trader Joe’s.
One simple decision. Which drove everything that Trader Joe’s did. And created a lasting, successful retailer.
I will have the highest paid employees in retail.
But before we get into that, let’s appreciate how radical this decision was (and still is).
Grocery retailers win by keeping costs down.
The assortment across retailers is largely the same – they all carry the same mass consumer brands. They win by becoming the place for customers to shop.
wider assortments (which mean larger / more stores = high real estate costs)
better deals (= lower prices)
Ergo, you need to keep employee costs down.
But Joe went in the opposite direction!
He said he wanted to keep employee costs up. And if they weren’t high enough, well then raise them some more!
Which made all the downstream choices radically different too.
#1: It drove the choice of consumer.
If you’re going to have the highest paid employees, you need to have the highest gross profit. Which means:
You need high-margin products.
You also need high productivity on these products.
Therefore, you still need to offer great deals
Joe hit upon a target segment that ticked all the boxes: “overeducated but underpaid consumers”.
These consumers will make highly discretionary purchases, that would be more expensive. In 2022, these are the folks who buy alternative milks instead of full-fat dairy.
But because they’re underpaid, they’ll also be looking for bargains on these products.
So, if you can give them a great bargain on high margin products…
#2: It drove the choice of product assortment.
If you need to make higher margins than other retailers, you need to carry different products.
Every other supermarket in the 1960s carried the same popular brands from Procter & Gamble and other consumer majors. So, TJ went the other way – only private labels and unbranded products.
But not just any product. Only those where Trader Joe’s could offer a better quality at a lower price. While making a great margin.
Sounds hard? Well, lucky that TJ had the best employees in retail…
This was the most interesting part of the book.
Every retailer has a buying / procurement function. But Trader Joe’s made that its core differentiator. It focused on it so sharply that it cut through the noise.
In fact, TJ didn’t have a fixed assortment. It kept evolving, to ensure that this remained its core differentiator.
TJ changed its positioning 3 times in 3 decades, with focus on its core customer all through.
A. In the 60s, Trader Joe’s positioning was “Good time Charlie”.
In the 60s, California (where TJ started) had very protectionist laws around sale of alcohol. But Joe and his team read the laws with a magnifying glass, and found loopholes that others didn’t.
They hunted around to buy an old alcohol license, so they could get grand-fathered into new regulations with lower import tariffs.
And so, while other neighborhood grocery retailers couldn’t carry any alcohol, Trader Joe had the widest assortment of the best wines, at the lowest prices.
Wines for the sophisticated palate, at affordable prices (remember: overeducated but underpaid?).
B. In the 70s, “Whole Earth Harry”.
California relaxed its regulations on alcohol in the early ’70s. TJ no longer had any differentiation there. So it shifted – following its consumers – to focus on sustainability and safety.
The assortment changed:
Albacore fished on long lines instead of nets, to be cruelty-free
Cold pressed peanut oils
Phosphate free detergents
The company also introduced creative ways to nod to its consumers’ sophistication.
→ Produce with vintage printed on the box – like wine. “This corn was harvested in Spring 1975”.
→ Private labels with literary allusions – Sir Isaac Newtons, Bagels Spinoza, etc.
All to cater to this overeducated consumer target segment.
C. In the 80s, “Mac the Knife”
As other retailers caught on to the sustainability fad, it was time for TJ to change – yet again.
It went back to the roots of what it means to be a retailer.
The company outsourced everything else (I wrote about this in “Sell the Mailroom!”), and focused on its core value proposition. Buying and selling.
“All the best products, at the best prices”.
No fixed assortment. What you see today in store might not be there tomorrow. This created FOMO among all its loyal consumers.
And the P&L didn’t lie.
In those 10 years (1977-1987), the company quadrupled revenues and grew profit nearly 9 times!
#3: It drove the choice of location.
Trader Joe’s was a neighborhood grocery store, but it couldn’t be in just any neighborhood.
To have the highest paid employees in retail, you need the highest sales throughput. So only the best locations, where productivity could be high enough.
And all stores were near major institutes of learning, corporate offices, or retirement villages. Where the target segment was likely to be.
All these downstream decisions, chosen almost by default after that first decision.
But the most powerful part – the secret – was how it made Trader Joe’s unmatchable.
Without making the same choice – “I will have the highest paid employees in retail” – no other retailer could compete with Trader Joe’s.
That’s the real secret of Trader Joe’s success. That the entire strategy turns on this simple decision – you cannot beat Trader Joe’s without making this decision.
In a sense, this decision became TJ’s moat.
“Highest Paid Employees” as Trader Joe’s moat.
Whether Joe Coulombe predicted it or not, this mantra gave TJ immense defensibility. So much so that even now, 60+ years later, it’s one of the US’s most profitable retailers.
It reduced attrition. And improved customer service.
The retail industry is notorious for staff attrition. You hire someone and train them well, and then they leave.
Not at Trader Joe’s.
Folks in stores were paid as much as, or more, than people in desk jobs at HQ. So, not only did they not leave for greener pastures (there weren’t any!), they also didn’t clamor for a promotion to HQ!
And when you have low attrition:
You have low training costs
You have better customer service
It created durable consumer trust and loyalty.
By honing its buying capability, TJ created consumer trust. People who shop there know that they’re getting bargain prices, on the best products. They will not get these prices anywhere else, or at any other time.
This creates two emotions in consumers, which seem opposite to each other:
Loyalty: “I know Trader Joe’s will have the products I want, at the best prices.”
Impulse: “This product is at a great price! I better buy it now, they might not have it tomorrow!”
Now, these two advantages are great. But you can lose them over time.
If not for the most important driver of defensibility…
You get what you pay for.
By having the highest-paid employees in retail, Trader Joe’s also got the best employees in retail.
Not rule-followers, but maximizers. Not processors, but improvisors.
The first COVID lockdown in 2020 was a great illustration of this. Remember when consumers were panic buying everything? Remember the toilet paper shortage?
From the company’s podcast in May 2020 (Episode 25):
Tara (Marketing Director): Let’s go back a little bit because I want to talk about some of the things that the folks on our buying teams, very specifically, were doing during that phase of this that was really the huge impulse. Almost like a panic buy.
Matt (VP Marketing): The buying team was calm and methodical and really looking at ‘what do we need’ and ‘how can we best fill that need’. And it turns out by looking in places other than the usual places. You might see a five pound bag of rice where we previously only sold a one pound bag of rice.
Tara: I’m going to share the toilet paper story. (laughs)
I opened up my email one morning and there was an email from someone I didn’t know who was an executive at an international hotel chain saying, “Our business is down. We’re not using a lot of the things that we’ve contracted for. We have some of this, we have some of that.”
So I forwarded that email to the folks who manage our buying teams and I instantly got a message back from one of the folks on our buying teams who just said, “Toilet paper!!” with big exclamation marks at the end. Within a week and a half, we had made a deal to buy toilet paper from this large international hotel chain that suddenly didn’t have guests staying in their hotel rooms. You get to a Trader Joe’s when they have it in, because it comes and it goes and it’s, you know, it’s there and then people buy it and it’s gone. And it comes back. But we’re selling individual rolls of toilet paper that were originally intended for use in hotel rooms.
Matt: Those weren’t retail ready packages and specifically they didn’t have what’s known as a universal product code, the barcode, the UPC, so these didn’t scan at the register. And for a lot of retail businesses, that would be a make or break deal. But we figured out that, you know what, our crew is smart, they’re capable, we can figure out how to do this. We can ring it up manually. And that’s what we’ve been doing. I just love how it’s summarized in this store sign that I saw…I’ll just read the sign to you. “April break getaway canceled? Don’t worry. Now you can enjoy a hotel toilet paper experience in your own bathroom.”
When you pay top salaries, you get top people.
Sometimes, moats (and secrets) endure.
When Joe Coulombe quit TJ in 1987, he told the team that the true test of his leadership would be in the years after he left.
Coulombe was succeeded as CEO by John Shields, who was at the helm from 1987-2001.
In that time, the company expanded out of California – to Arizona, the Pacific Northwest, and the East Coast as well.
Between 1990 and 2001, Trader Joe’s quintupled its number of stores. And grew profits ten-fold!
I’d say Trader Joe Coulombe passed that test with flying colors.
[Note: I shared this mental model with my email subscribers on Nov 20, 2016. If you want to receive a new mental model every week, join the club.]
What it is:
We use maps, principles, mental models, learnings from experience, etc. to help us navigate the world around us. But it’s important to remind ourselves – the map is not the territory.
The map doesn’t include every feature of the territory. Even a very detailed map of London won’t include every thin street.
The territory is different: Sounds banal, but a map of London won’t help at all, if you’re in Mumbai.
The territory may have changed. An 1850 map of London won’t help you in 2016 London.
This sounds trite, but we often forget this, as we see in the following examples.
Examples in business:
Just because there’s a formula for something doesn’t mean the formula is perfect. The Black-Scholes option pricing equation bankrupted Scholes’ hedge fund. And, as Taleb says, the misplaced concreteness of Value-at-Risk has caused a lot of financial crashes.
When you hear someone say, “This is how we did it in my previous company.”, tread carefully.
Rules to follow:
Start from first principles. Always begin with, “What do we know to be absolutely true?”
Beware of false rigor. Just because something is described concretely doesn’t mean it is concrete.
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From a quick dipstick I did last week, I’d guess a good chunk of my readers use a Macbook, and even more use an iPhone. I think it’s fair to say: Most of us are Apple fans.
So, it’s concerning to see the company meandering over the last few years. Lackluster product launches, even more lackluster products. Even Siri seems dumb now.
Apple’s slow slide illustrates four key principles of business strategy:
1. The S-Curve of Company Growth: Any successful company inevitably goes through a life-cycle of stuttering beginnings, rapid growth, and then gentle maturation – an S-curve. This has been true both in the Internet era and before, as Ben Evans illustrates in The best is the last. Apple is no different. Apple may be the next Microsoft.
2. Limited Window of Optionality: There is a way to prolong your growth arc, though. Keep transforming your business, when your previous product is succeeding, and the wind is at your back. Jobs leveraged this limited window of optionality successfully, with the iPod, then the iPhone, and then the iPad. Larry Ellison did it at Oracle too.
But Tim Cook hasn’t been able to lead such pivots at all.
Why?
3. The Visionary Leader – Executor Follower Conundrum: Steve Jobs was a visionary (duh). And he built a strong team of executors around him, to implement his vision. So, guess who succeeded him? A superb executor, but short on vision. Tim Cook is great at delivering on an existing strategy, but he just hasn’t kept pace with a fast-changing world.
4. The Jobs-to-be-done Framework: There’s another interpretation of Tim Cook’s non-success. And it comes from Clayton Christensen’s second big theory – jobs-to-be-done. As he says, consumers buy products that complete specific jobs for them.
“People don’t buy quarter-inch drills, they buy quarter-inch holes.”
[Note: I shared this mental model with my email subscribers on Oct 23, 2016. If you want to receive a new mental model every week, join the club.]
Who do you think will win the war between Google and Apple?
That was a trick question. There really doesn’t need to be a war between the two companies.
Apple makes money when people buy its products, while Google makes money when people use its services. Apple is a vertical company, while Google is a horizontal player.
But don’t feel bad for missing the trick. Google missed it too, when they framed the fight as Google vs. iPhone. When it was really Samsung vs. iPhone.
Why did they make this mistake? Why did they, for example, release turn-by-turn navigation on Maps only for Android, and give Apple a reason to launch its own Maps?
Didn’t think from first principles
As Ben Thompson explains in Google and the Limits of Strategy, they got too caught up in the Android-iPhone us-them framing, without realizing that they’re fundamentally different companies, with no need to compete!
Mike McCue (CEO, Flipboard) highlights the importance of such first-principles thinking from his own experience, in The Most Powerful Lesson in Business.
When making an important decision, examine your beliefs first. Start with a simple question: “What do we know to be absolutely true?”
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Strategy consultants are a much maligned lot in the startup and business world. Over the five years I spent at the Monitor Group (a strategy consulting firm started by Michael Porter), I heard various complaints:
How can a young consultant say anything useful to an industry veteran?
What’s the use of a plan that’ll take five years to execute?
Consultants don’t do anything except make slides.
You don’t know how to make decisions. Sure, you can advise people…
You never put your money where your mouth is. (I think Paul Graham meant this, when he called management consulting a version of ‘gaming the system’).
I heard many such comments during my tenure, from friends, relatives, and chatty fellow travelers on long flights. And seeing how we addressed these complaints at Monitor – while advising large conglomerates in established industries, paradoxically enough – prepared me for starting up.
1. It doesn’t matter who you are or what you know. You need to have a hypothesis, and be ready to learn.
When I started in strategy consulting, the first thing that struck me was the novel, hypothesis-based approach.
Hypothesis-Based Approach
Coming from an engineering background, I was used to the deductive approach – start from what you know, and proceed towards conclusions. But a hypothesis-based, inductive approach starts from the other end – you make some predictions, and then proceed to test them (and modify them as needed). This data-driven learning approach is a great complement to industry understanding. That’s why companies hire strategy consultants – to hold up a mirror to their beliefs, test them, and help company executives understand how the industry’s evolving.
Performing this process – of making predictions, being proved wrong, and correcting them – repeatedly over multiple projects gives you a healthy appreciation of your own ignorance. I’ve found this invaluable when starting up – I may not know the right answer, but I know how to test my beliefs and work my way there.
[Tweet “I may not know the right answer, but I know how to test my beliefs and work my way there.”]
2. You need to be OK with uncertainty.
One of the differences between strategy and operational consulting is the timeframe – strategy is more long-term. The industry trends you bank on may play out over 3-4 years – some may not have even started yet. So there will be ambiguity. But you still need to make some bets, and find creative ways to validate (or invalidate) them – talk to industry experts, observe trends in related industries and evolution of similar economies, etc. But none of these will give you the perfect answer – you need to ‘satisfice’. Thus, not only do you not know the answer starting out, but you also may never know the answer with certainty.
And it’s the same at my startup – I don’t know if my product is going to be loved, hated, or worst of all, ignored – first by early adopters, then by followers, and then the rest (if I get that far). But I’ll keep plugging away, and figure out ways to run small tests often to ensure I’m on the right track.
3. Serving your clients’ needs is your foremost objective.
Ignoring the double entendre for a bit, client service is the priority in consulting – I heard this all the time from Partners at Monitor. Whether it’s sudden weekend work or an ill-timed field visit, you do it if it benefits the client.
Today, I have a consumer-facing Android app. Every once in a while I get a caustic review, or a needlessly harsh 1-star rating. But it’s not my place to rail against unreasonable users – if I focus on serving them well, then I hopefully won’t have to worry about these ratings in the future.
4. Brevity is the soul of communication.
Naysayers are true when they say consultants make a lot of PowerPoint slides. Boy, did I make a LOT! But the thing about slides is that, unlike a Word document, there’s limited space. So you need to make your point succinctly. And you need to say first up why that message is important(or as they say at Monitor, you need to bring out the ‘so whats’).
I’ve done my 10,000 hours of slide-making. I’m still far from a genius at it (Gladwell was wrong), but knowing how to deliver the key message upfront and in as few words as possible is a very useful skill at a startup. Whether it’s in crisp emails to potential clients, high-impact copy for Facebook ads, or elevator pitches to investors with short attention spans, brevity is invaluable to startups.
5. Ideas are worthless. Execution is key.
I know this sounds very ‘global’ (and it is – I won’t lie), but project after project has taught me that the best-articulated strategy can stop making sense once you start implementing. There was one case where we designed the strategy and left, and the client came to us after a few months saying everything is shot to hell and can we please come back and help them. We could definitely have done better – it was our responsibility to devise a plan that the client could implement, and explain it to the client’s team.
But the larger learning for me was that your plan doesn’t matter so much; it probably wasn’t rocket science to begin with. But you need to be able to execute on it effectively. It needs to be ‘actionable’.
[Tweet “Your plan doesn’t matter – it probably isn’t rocket science. You need to be able to execute on it.”]
In the same article where Paul Graham says that management consulting is gaming the system, he also mentions the similarity to college. And while I may not fully agree with his first comment, his second is spot on. A strategy consulting firm is one of the best finishing schools you can go to, if you want to build a business of your own someday.
What do you think? Did these learnings resonate with you? And did I miss anything? I’d love to hear what you think – mail me at [email protected], tweet at @jithamithra, or just comment here.
