Trader Joe's Sails Through Shifting Fortunes

ELLIOT ZWIEBACH

The 50-year history of Trader Joe's Market is a tale of shifting fortunes and a lot of serendipity.

It started with Joe Coulombe, who was a 24-year-old MBA graduate from Stanford University when he was hired in 1954 by Owl Drug Stores to figure out how it could be more competitive in Southern California.

While doing research, he came across a chain in Texas called 7-Eleven, Coulombe told SN. He approached Owl about investing in a similar group of stores to help move more health and beauty care items from its warehouse and ice cream from its ice-cream plant.

Owl agreed to finance the project, but it put the company — called Pronto Markets — in Coulombe's name, “because of issues with the labor unions, although I actually owned only a pittance,” the 78-year-old Coulombe told SN.

The first Pronto Market opened during Memorial Day weekend in 1958 in a 2,500-square-foot space in Pacific Palisades, an upscale section of Los Angeles along the California coast. It was so successful, he recalled, that Pronto expanded to six stores over the next four years.

But in 1962, Justin Dart, the chief executive officer of Rexall, Owl's parent company, decided to liquidate the entire Owl drug chain so he could invest in a new product called Tupperware, Coulombe told SN, “which meant I was going to lose my financial backer.”

Coulombe said he was able to scrape together enough money to buy Pronto — in part by selling a portion of the ownership to his employees. Then he found another investor — Adohr Milk Farms, a Southern California-based milk distributor. “We became Adohr's biggest customer, and they helped us with money to expand to 18 stores,” he said.

“Then in late 1965, I was having lunch with Adohr's owner when he told me he was selling his company to 7-Eleven. So not only was 7-Eleven coming to town but it was also buying out my source of capital.”

By that time Coulombe was becoming disenchanted with the convenience-store format, he said — in part because it was losing some of the advantages it had enjoyed over supermarkets as they “began lengthening their hours, as well as opening on Sundays and holidays, and started selling alcohol. Plus, I realized c-stores were a commodity business. So I began thinking of other ideas to do something different.”

Part of his thinking was influenced by an article he read in Scientific American magazine that said more people were attending college than ever before. “Where much of the previous generation had been unable to attend college because of the Depression, college graduates in the late 1960s represented the mass market, and their children were even better educated, and that's who I decided to go after,” Coulombe said.

He decided to call the new format Trader Joe's because of the anticipated increase in overseas travel, he said. “Once the 747 [airliner] came into use, it dropped the cost of foreign travel, and I knew travel would broaden people's education. And the South Seas, which had once seemed too far away for people to visit, was now much more accessible, so we adopted a South Seas theme for the stores, with nautical decor and employees in tropical shirts.”

GETTING BIGGER

The first Trader Joe's opened in August 1967 in a 7,500-square-foot former water plant in Pasadena, Calif. — a space three times the size of a unit of Pronto Markets.

“As I've said for years,” Coulombe told SN earlier this month, “Trader Joe's is a store for well-educated people — people who are overeducated and underpaid.

“We knew from research that the more educated people were, the more they drank, so that first store had the world's largest assortment of alcohol in addition to conventional groceries,” Coulombe said. “We had 100 brands of Scotch, 70 brands of bourbon and 17 types of California wines — which was all that were available and which proved to be the best sellers.”

Based on the success of the first store, Coulombe opened several more Trader Joe's locations over the next three years — often by converting existing Prontos “if they were located near large clusters of educated people, and selling them off if they were not,” he explained.

“But we moved slowly because those Prontos were cash cows,” he added.

In January 1971, Coulombe grafted a health-food store onto the grocery-liquor store format after he read a cover story in Scientific American about biospheres, “and it proved to be a sensational success. Then we began adding nuts, dried fruits and cheese — in fact, at one time we were the largest importer of brie into the U.S.”

In late 1976, circumstances changed again, as fair trade on alcohol was lifted “and as the milk bureaucrats in California stopped enforcing minimum pricing laws on milk,” Coulombe recalled. “Within two weeks, our gross profit went from 22% to 2%, so we had to start all over again.

“That's when I took a look at Stew Leonard's, whose single store in Norwalk, Conn., was doing $100 million with 850 SKUs.

“His secret was buying well, so we dropped our grocery supplier, slashed our SKU count and established our own system of logistics that involved out-sourcing distribution and trucking. All we did was buy and sell.

“We had been learning so much over the previous seven years about buying health foods and merchandising private-label wine, so we already had a good logistics system in place, and within 90 days after fair trade was lifted, we were making more money than ever before,” Coulombe said.

During the late 1970s, Coulombe was contacted by the Albrecht family of Germany about selling the company. “I said no, but they kept raising the price, and in 1979 the employees, who owned 45%, and I sold the company.”

Under the deal, Trader Joe's was acquired by an Albrecht family trust under which Theo Albrecht owned properties, in northern Germany, France, Benelux (Belgium, the Netherlands and Luxembourg) and the U.S., including Trader Joe's, Aldi and, for several years, a stake in Albertsons; his brother, Karl Albrecht, owned businesses in southern Germany, Austria, Italy, the United Kingdom and Australia.

“In 30 years, of ownership the Albrechts never interfered with the Trader Joe's operation,” Coulombe said — with one notable exception.

“They believe in cannibalization, and I don't,” he said. “I wanted to operate as few stores as possible doing as much volume per store as possible, whereas they have no problem with in-filling, and that's been their only input to the Trader Joe's operation.”

NEW LEADERSHIP

When Coulombe decided to retire in 1989, he hired John Shields as his successor. Shields, a fraternity brother at Stanford, had held executive positions with Macy's and Mervyn's.

Shields had helped Coulombe write the original business plan for Pronto Markets, and over the years Coulombe had sent him reports on the company's progress, so Shields was already familiar with the business when he joined it.

Shields oversaw a major expansion effort, growing Trader Joe's to 175 units from 36 and boosting sales to $2 billion from $132 million. All funds for expansion, up to the present, come exclusively from cash flow, observers told SN.

Asked in a 2002 interview with the Pepperdine University business school what had been his most challenging task as CEO, Shields said it was the decision to expand Trader Joe's beyond the West Coast.

Shields said he became concerned in 1991 about the company's long-term growth. “We were a West Coast company, and I thought the West Coast could probably support 100 Trader Joe's stores, and I didn't want to attempt international expansion.

“Realistically there are not any population centers to the east [of California] until you get to the Midwest, [which] meant we had to make a geographical leap to the east. Very few retailers have successfully done this, [and] most who have tried have stumbled, and stumbled badly.

“After a serious study, we became convinced the 500-mile corridor from Boston to Washington, D.C., was truly Trader Joe's country,” he said. “It has more colleges and universities than any other area of the U.S.”

Trader Joe's estimated it would lose money for the first three years, but could break even at the end of the third year. With its cash cow on the West Coast, it could make the expansion without any outside funding, Shields said.

“I still had real reservations whether we could transfer the company culture 2,500 miles away,” he said. “We finally decided if we could move a cadre of about 25 existing employees to the East Coast, we could do it. So in September of 1996 we opened our first two stores in Boston. Three years later we had 27 stores, and we broke even, right on schedule.”

By the end of 2001, Trader Joe's had 48 stores outside the West, from Chicago to Boston to Washington.

“Those stores are very profitable, so in retrospect it was the right decision,” Shields said.

In 1998, Trader Joe's hired Dan Bane and groomed him as Shields' successor.

Bane had spent 13 years as a public accountant and four years as senior vice president of finance and administration for Unified Grocers, Los Angeles. He was initially hired as president of the chain's western operations and named chairman and CEO in July 2001 when Shields retired.

Bane declined comment when contacted by SN.

During his seven years at the helm, Trader Joe's has added 135 more stores for a total of 310 units in 23 states and the District of Columbia, with sales exceeding $6.6 billion.

“Bane established targets for growth that, for many in this industry, would not seem achievable but which the company has been able to reach or exceed because of his strong leadership and commitment to the company's business philosophy,” one observer told SN.

Bane is a very visible part of the business, visiting each store in the chain three or four times a year and spending two to three days each week actually working at the checkstands with employees and customers.

“He's helped Trader Joe's hold onto its great brand equity while maintaining the important part of the company's old culture — making everyone an important part of the organization and staying close to customers,” one observer said.