Trader Joe’s

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: I decided today needed to be an all Trader Joe's day. Actually, I've got to show you. Check out my haul.

David: Oh, ho. Tote bag! You are styling. Take that to Europe.

Ben: I've got some two-buck chuck.

David: Nice.

Ben: Got so many nuts.

David: So many nuts.

Ben: Some chocolate, some cheese. A little picnic we're gonna have here in the recording studio. All right, here I am popping this bottle of Charles Shaw, and we are ready to go.

David: All right. That might be the nicest wine opener that has ever been used for a two-buck chuck.

Ben: All right, let's do it.

Ben: Welcome to the Fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts. Peanut butter-filled pretzel nuggets, some "Hold the Cone" Mini Ice Cream Cones, plantain chips, and mandarin orange chicken. These are a few of the items I picked up this week on my trip to Trader Joe's. You know, David, I had to do a research trip. It was mandatory.

David: Had to do the research trip.

Ben: I don't think I've ever spent more money at Trader Joe's because I just said yes to everything. It felt like I needed to have it all.

David: But you couldn't have spent that much money. That's part of the point, listeners.

Ben: America seems to have an obsession with this grocery store, Trader Joe's. It's a strange mashup of a health food store that carries interesting and quirky products inspired by traveling the South Seas, but it's for value-conscious shoppers. And they break every rule in grocery retailing.

It's not that convenient. They don't stock all the things you need to buy each week. You can't buy online. You can't get it delivered in any way. Even as the whole world turns to grocery e-commerce, parking is reliably horrible. I mean, every Trader Joe's I've ever been to.

David: Part of the strategy, Ben. It's part of the strategy.

Ben: Apparently the stores are small, and I'm always bumping into other shoppers. There are never any sales or discounts, and they don't offer any coupons. They sell almost none of your favorite known brand names. And their produce leaves a lot to be desired.

And yet people love it. I mean, in an era where most grocery chains are being disrupted, Trader Joe's cult following has driven it to be more successful than ever, at least as far as we can tell from the outside, because it is an intensely private company.

David: Yes, it is.

Ben: But this is the perfect example of something that we talk a lot about on Acquired: aligning all the trade-offs you make in your business to all work together in a beautiful, self-reinforcing puzzle. Trader Joe's is not the best grocery store, but it might be your favorite store. And today we dive into how this travel-themed, pseudo-healthy, national neighborhood grocery chain came to exist from the unlikeliest of places as a clone trying to rip off 7-Eleven in the 1960s.

David: I mean, I wrote this whole script, and everything you just said is accurate, but it sounds ridiculous.

Ben: Should we just stop the episode there? Do you feel that's sufficient? All right, well, listeners, if you want to know every time an episode drops, join our email list. You will also get to vote on future episode topics, get corrections from past episodes, and see all the images that we are talking about in episodes. That's Acquired.FM/Email.

After you listen, come talk about this with the entire Slack community. Acquired.FM/Slack. If you want more Acquired, check out our interview show, Acq2. Search "Acq2" in any podcast player to listen. And before we dive in, we want to briefly thank our presenting partner, JPMorgan Payments.

David: Yes, just like how we say every company has a story, every company's story is powered by payments, and JPMorgan Payments is a part of so many of their journeys from seed to IPO and beyond.

Ben: So with that, David, happy 10-year anniversary.

David: Happy 10-year anniversary. Toast my two...

Ben: Two-buck chuck to you right now.

David: You've got the two-buck chuck open, Ben. I've got mine sitting right here. I'm waiting to open it until the end of the episode when I tell the amazing story of how it came to be. Cheers.

Ben: Well, cheers, listeners. We are recording this on the 10-year anniversary of posting our very first episode. It has been an amazing 10 years with all of you. Thank you so much for listening.

David: What a journey together. With that, listeners.

Ben: This show is not investment advice. Dave and I may have investments in the companies we discuss. And this show is for informational entertainment purposes only. David Rosenthal, where are we starting our story?

David: Oh man. Well, I wish that you and I had investments in this company, but unfortunately, only one person in the world does, and he's deceased, as we will see at the end of the episode. Yes, we start with Trader Joe himself, Joe Coulombe. Because you can't separate Trader Joe's from Trader Joe.

Joe Coulombe was born in 1930 in San Diego, California, the same hotbed of American retailing innovation that produced Sol Price, Price Club, and everything that would become Costco, which we so lovingly talked about on that episode a few years ago. Joe's father was an engineer at Convair, an aircraft manufacturer in Southern California in the defense industry there. And his mother was a schoolteacher. And perhaps inspired by his mother, Joe was a very good student.

He ends up going to Stanford for his undergrad. He gets his undergrad degree in economics in 1952. And then, somewhat unusually for the time, he stays on at Stanford for an extra two years. And he gets an MBA at the Stanford Graduate School of Business in 1954.

Ben: You know, there are a lot of famous Stanford alumni. This is not one that people are walking around quoting. You know, Joe Coulombe was a GSB alum. Like, he's not the... the Phil Knights come to mind.

David: Back then, not that many people were going to business school or at least not Stanford Business School. And, reflecting that, Joe went to get a job after GSB. And the only job he could get was back in Southern California at the lowly Owl Drug Company, which was a subsidiary of the larger Rexall Drug Company, a line of regional drugstores throughout America. And this was a struggling company. How times have changed for new GSB grads these days in the job market.

So what was Owl? Owl was a chain of 300 drugstores up and down the West Coast. So Joe was hired by an executive named Bud Fisher, who specifically wanted to bring in a recent MBA grad to research alternatives for turning around Owl. The company was struggling. So Joe went off and he scoured the country and came across a relatively new concept coming out of Texas, launched by a company called the Southland Corporation: the convenience store. And Southland had just recently rebranded their stores that they were operating very successfully in Texas in this convenience store model to something called 7-Elevens.

Ben: Ah, yes.

David: The history of 7-Eleven and the Southland Corporation is fascinating and probably merits an Acquired episode of its own someday. Here is a list of crazy things about 7-Eleven. One, today in 2025, they have more stores than any other retailer in the entire world. They are the largest retailer in the world by number of stores, which is...

Ben: Not the way that you should be impressed by a retail company, but it is impressive.

David: No. Their market cap is about $30 billion. So, like, a small fraction of Walmart, Costco, and Amazon, et cetera. Two, they invented the to-go coffee cup. That's wild. And also the self-serve soda fountain. And then this is my favorite. In the '70s, the Southland Corporation franchised the 7-Eleven concept to a company in Japan, a supermarket chain there. It became so successful in Japan, and 7-Elevens in Japan became so deeply a part of the Japanese culture that in the '90s, 7-Eleven Japan bought out the 7-Eleven parent and now owns the company. 7-Eleven today is a publicly traded Japanese company on the Tokyo Stock Exchange, founded in Dallas, Texas, that operates the largest global retail chain in the world. Of course.

Ben: Of course.

David: Incredible. But for our purposes today, back to its original instantiation as part of the Southland Corporation. How did this come to be? So Southland was founded in the 1920s as an ice company.

Ben: Oh, yes.

David: This was before home refrigerators were a thing. People had iceboxes in their houses, and they had to get their ice somewhere.

Ben: I've actually got the whole history on this. Can I take it?

David: Yeah, go for it.

Ben: All right. So listeners, this comes from Benjamin Lorr, who wrote the exceptional book *The Secret Life of Groceries*, which we're going to reference a bunch in this episode. So Southland had a chain, David, of what you're talking about, these ice docks where people would bring their mule-drawn wagons and pick up ice in the Texas heat. Pre-cars, pre-refrigerators, pre-freezers, pre-anything.

So this innovation happened where in 1927, a guy named John Jefferson Green figured out, "Hey, I don't think people want to leave their house in the middle of the Texas heat in the summer to bring their mule and wagon over to get the ice. I think we should do it when it's a little bit cooler outside. What if we open at like 7 AM and we stay open late, till like..."

David: 11 PM, so our customers can come get their ice for their iceboxes when it's not going to melt on the way home.

Ben: That is exactly right. This meant, of course, that his hours were now even longer than the general stores where people were going and getting their goods. So as legend has it, a woman came up to his ice dock and said, "You know, you're the only thing open right now. I really wish you stocked milk in addition to your ice."

David: Makes sense. I buy my ice for my icebox from you. Why can't I buy the things that I put in my icebox?

Ben: Exactly. And so John Jefferson Green immediately called the folks he knew at the Southland Corporation—kind of the parent—and said, "If you give me the money, I'll source milk and eggs and bread, and I'll split the profits with you." This way, you can kind of be in another line of business. We've got this stand. We may as well do this too. And the convenience store was born, or more effectively, the first 7-Eleven, even though it wouldn't be fully rebranded yet. This became 7-Eleven.

David: And this, of course, seems obvious today. Like, oh, why didn't anybody try this before? This was the heyday of the milkman, the produce man, and the poultry man. These things got delivered, or you picked them up in a market in town. The modern supermarket, let alone convenience store, didn't exist yet.

Ben: We're so far from that. Yeah.

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David: So this was a truly wild idea. Over the next few years, they started adding other daily items you might want: bread, beer, cigarettes, magazines, et cetera. People loved it.

Then, fast forward to after World War II, when the American economy is booming. People have cars, people are moving to suburbs. People get refrigerators; they no longer need ice anymore. The company just completely sheds the ice business and becomes the 7-Eleven business. In 1946, they officially changed the name of the stores to their operating hours: 7-Eleven.

Ben: And David, you're talking about the rise of the automobile and refrigerators. That technology change and the Post-World War II shift means this thing has perfect product market fit. By 1951, it becomes Texas's largest retailer of beverages, milk, and bread. They've got a little under a hundred stores. This is like a movement. They found the formula, and they just expanded incredibly fast to meet the desire of customers.

So, if you fast forward then 14 more years, in 1965, what does this look like in that year? They opened 398 stores in a single year, I think all in Texas.

David: Yeah. For context, Trader Joe's today, in 2025, has 600 stores. So, 7-Eleven is blowing the doors off.

Ben: This is true blitzscaling that's happening to fully seize this opportunity that people are clearly going crazy for.

David: Like we said, they are the largest retailer in the world by number of stores today. Great.

Ben: There's this delicious thing in the history of retail and the history of grocery. When we're sitting here today, you sort of look at these models and you're like, "There's nothing innovative about that." This is completely obvious. And at the time, this was a breakthrough. This was completely innovative.

David: Yeah. Yes. Well, speaking of completely obvious, back to Joe and the Trader Joe's story. He's working at Al for Bud.

Ben: This is like the mid-50s. So, this is right as 7-Eleven is starting to really scale up, but before it's hitting those sort of crazy hundreds of stores per year. Yep.

David: They get wind of what's happening. Joe travels to Texas, and they're like, "There is absolutely no reason that this won't work in California. We've got to turn Al around. Let's just copy-paste this 7-Eleven thing."

Now, remember, Al is part of this bigger conglomerate of Rexall, this slow-moving ship. So he comes back, they're like, "Oh, we're going to do this!" And Rexall's like, "I don't know." It's corporate bureaucracy; it gets slowed down. Bud can't push it through with the powers that be.

Ben: And I guess a drugstore was actually pretty different than a convenience store at this point.

David: So then this is like the path almost taken for Joe. He gets a call from another Southern California company one day that is also looking to recruit recent MBA grads. This time, to help them with the management of their new, successful startup business line that they've started. This is the semiconductor division, the new startup division of the Hughes Aircraft Company. And Joe actually jumps ship for 18 months and goes and works at Hughes, and he's basically the CFO of their semiconductor division.

Ben: Joe works in semiconductors?

David: Yes. During which time it grows 700%. Shockley Semiconductor had just gotten started. We're about to hit Fairchild and Intel. Silicon Valley's about to boom. There was this whole alternative path that Trader Joe might have actually been like a traitorous eight or something like that. Wow. Totally wild.

Ben: So he's on this path, but then he leaves Hughes.

David: So then Bud calls him back up after 18 months that he's been at Hughes, and he's like, "All right, I've finally persuaded Rexall to go ahead with the cloning 7-Eleven concept. We've got the go-ahead. You did all the research. You've been there on the ground. You are the guy to run this. I want to hire you back. I'm going to make you president of our new division within Al that is going to copy 7-Eleven and bring convenience stores to Southern California."

Ben: Just a few years out of business school, and I get to be the president of something that's corporate-approved. Let's go!

David: So, at age 27, he comes back to Al Rexall as the new president of the newly christened Pronto Markets, Pronto Convenience Store. You're in, you're out. Pronto.

Ben: Giddy up.

David: They build six Pronto Convenience Stores in the LA metro area as a pilot, and they're off to the races. As you would expect, it works great: instant product market fit, tons of demand. They're blowing the doors off.

Ben: And I should say I looked up some of the stuff they were selling.

David: This is awesome.

Ben: Of course, it's like cheese and eggs and bread and stuff.

David: It's also ammo, ammunition for guns.

Ben: Yes, a very successful high-volume business. Tobacco, selling what Joe calls "girly magazines"—pornographic magazines.

David: This is not the Trader Joe's that you know today.

Ben: That's exactly right.

David: And that might have been the story. Joe might have built the 7-Eleven of the West Coast. Except that the parent company Rexall had a couple of different irons in the fire for turnarounds here. And one of the other irons was they had bought another little startup company called Tupperware. Oh yes, the multi-level marketing maker of food containers.

Ben: Right. Come over, we'll have a little party at my house, and I'll sell you some Tupperware.

David: Because you're my neighbor, you can't make this stuff up. As they bought Tupperware, it became so successful that the management team that's running Rexall is like, "Screw this crappy retail business! We're going all in on products and multi-level marketing." They decide that they're going to sell off the entire retail division piece by piece and buy a bunch of other products. They end up buying Duracell, the battery company.

Ben: Company, which would eventually be owned by Berkshire Hathaway.

David: Crazy.

Ben: And isn't there something with oil here, where the owners of Rexall wanted to fully invest in the supplier of Tupperware? So, they bought into an oil business.

David: Yes.

Ben: And they needed to free up the capital to do that.

David: They were super all-in on Tupperware.

Ben: Yes. Interesting.

David: So, this leaves Joe. He's 27, 28, he just quit his job in semiconductors. Right. He's got a wife, he's got a young family, and he's got a successful early business here that he's running. So, he goes to Rexall and he says, "Hey, rather than just selling off Pronto as part of all the drugstore operations, what if I buy just these six Pronto markets from you, do like a management buyout?"

Ben: But of course, Joe has no money.

David: Yes, he has no money.

Ben: He doesn't come from a wealthy family. He hasn't really earned money yet. Yes.

David: So, the Rexall CFO says, "All right, I'll tell you what: I will sell these things to you for $10,000 over the book value that we essentially have these leases on our books."

Ben: And what's book value on this?

David: Book value is $15,000.

Ben: Okay.

David: So, if you can scrape together $25,000, I will sell you Pronto Markets. And, inflation-adjusted, this is now the early '60s. This would have been about $250,000 today. Joe and his wife, Alice, sell their house to raise money for this. Wow. They borrow money from their parents.

Ben: This is like full-on Savannah Bananas.

David: Full-on Savannah Bananas. Jesse Cole may as well...

Ben: ...be on an air mattress in a...

David: ...garage instead of a yellow tuxedo. Joe is wearing a Hawaiian shirt here.

Ben: Yes.

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David: That only gets them to $14,000. He needs another $11,000.

Ben: So it's his whole net worth now, because he doesn't own a home, and he's borrowed money from his parents.

David: He decides to do a combination of two things for the remaining $11,000. One, he goes to Bank of America, takes out a loan. Still, they won't loan him enough money to get all the way to $25,000.

David: He goes to the current employees of the six Pronto stores, and he says, "Look, I believe in this. I have sold my house. I have borrowed money. You guys obviously believe in this with me. We see how it's working. I will offer to you to also invest in this buyout at book value. So I will give you the valuation that it is on the books at Rexall, even though I'm buying it at $10,000 above book."

Ben: So he's giving them, what, a 40% discount on the price that he's paying for his shares?

David: Yes. And collectively, with equity dollars invested by the employees, his partners, they get to the $25,000. Summer of 1962, they close the deal, and Joe and the employees become the owners of the newly incorporated Pronto Markets.

David: Joe writes in his great, great, great, great autobiography called "Becoming Trader Joe," that came out a couple years ago, that employees owned about half the company. I don't think it's quite half. That doesn't pencil out, but it was a significant chunk. At least a quarter, if not a third, of the company is owned by these early employees.

Ben: It's interesting that their entry price is actually lower than his. I was doing the research, and I tried to figure out the total return since Joe bought in. His employees actually got a better multiple. So anybody who held from that original date all the way through till—spoiler alert—he sells the business later, would have beat Joe by almost 2x.

David: Yeah. But even more importantly, though, almost nothing from Pronto Markets survives to Trader Joe's today. Not the ammo, not the cigarettes, not the girly magazines. But this does.

Ben: But the sort of respect for employees.

David: The spirit of treating your employees as partners.

Ben: Yes. And I think right after he takes it over is when he sets his really aggressive employee comp plan. A thing you commonly hear about Trader Joe's today that he did right away is that they would have some of the highest-paid employees in the industry, and they would attract the best talent by just effectively overpaying for everyone.

David: Basically, every employee at Trader Joe's gets paid between 40 and 150% over what average compensation is for their roles in retail.

Ben: I saw 60% over, so it kind of falls in that range. I say overpaid, but Joe's philosophy on this is it's not overpaying because we're attracting the best people, and because we're setting up all the right incentives, they're just going to make the product that much better for customers.

Ben: We're going to do clever things like rotate the employees around. No one's just a cashier. They're working in all the different jobs, so they get to know the business really well, they get to be really knowledgeable about the products. And then if anybody asks us anything about them, literally anybody on staff could have the right answer.

David: This also carries through right to this day. Every Trader Joe's you go to, there's a captain who's essentially the manager of the store, there's a first mate who's an assistant manager, and then everybody else does the same job.

Ben: The nautical naming.

David: There's no dedicated cashiers, there's no dedicated baggers, there's no dedicated stockers. Everybody does everything.

Ben: All right, so everything's going to go great, right? He pulled together this capital. He's leveraged to the gills. He owes money all over town. All these employees have bet their life savings on him, too.

David: So he's leveraged to the gills just to do the buyout. You're not going to get far just with the buyout. You also need a balance sheet to have working capital to get product, to expand. He also doesn't want to have just six convenience stores here. He wants to expand, open new stores.

David: So shortly after doing the buyout, he goes to one of his biggest suppliers, a dairy company called Adhor Milk Farms (A-D-H-O-R), which is Rota spelled backwards. Come back to that in a minute. He goes to the owner and president of Adhor, a guy named Merritt Adamson Jr., and says, "Hey, let's do a deal here. I need financing for working capital, expansion, all these things. You need distribution; you give me debt financing. And Pronto will exclusively carry Adhor dairy products—milk, ice cream."

Ben: Nothing like borrowing money from your most important supplier.

David: Yeah, right, right, right.

Ben: It's good because they know your business really well and you're working together anyway, but it can work.

David: Great. But you're really leveraged now on this one supplier. Yes.

Ben: I really need your goods, and I also really need your money, and I really need you to stay happy with me so that nothing bad happens to any of these covenants or whatever in the debt.

David: Yep. So over the first couple years, it does go great. Pronto becomes Adhor's largest retailer.

David: And then in October of 1965, Joe goes to meet Merritt for his monthly lunch meeting with him. They have monthly lunch meetings to check in about the business, the relationship. Then Merritt starts drinking. He orders one gin and vermouth, two gin and vermouth, three. He orders his fourth gin cocktail. And Joe's like, "All right, he's got something he needs to tell me, and it's not going to be good news."

Ben: Yes. And listeners, before David breaks the news to us of what is going to happen, there are three pieces of background that are worth knowing about Adhor and about the dairy industry at this moment in time that sets up this meeting. One: refrigeration has gone mainstream at this point.

David: Yes. 1965. We're well past the icebox era.

Ben: People's buying patterns have changed. Convenience stores have now popped up everywhere. So this sort of dampened demand for milkmen since people are now picking up their own milk. And so the Adhor Company has had to do this crazy rejiggering of who is actually selling their product.

David: And I said it a minute ago, that Pronto Markets, still a relatively little chain in L.A., is now Adhor's largest seller of their products. That is not a good sign for Adhor. They are not doing well here.

Ben: All right, so why are they not doing well? Well, the American preference was shifting from whole milk to skim milk. You might just say, "Oh, well, I'm sure they just skim the fat off. That's part of the process." I assume that's what happens.

Ben: There are different cows that produce milk that is well suited to be whole milk versus well suited to be skim milk. There are Holstein cows which produce white, chalky milk that you sort of expect to become skim milk. There are these Guernsey cows. Their milk has this yellowish hue. It produces this really rich, creamy milk. Unfortunately, Adhor had mostly Guernsey cows. And Adhor, it's not like they have just a few of these. They are the nation's largest dairy farm, and they have the wrong kind of cow for where the future is going.

David: In one minute, it will all become clear to you why they are the nation's largest dairy farm by real estate, at least, and why their cows are real fat and real happy. But continue for the moment.

Ben: And then third: there's another thing happening, which is it's not just Joe who realizes that 7-Eleven is a good idea in California.

David: It's also 7-Eleven and other competitors that pop up, too.

Ben: Yes. So what is the news?

David: Well, after the fourth drink, the news that Merritt finally shares with Joe is that he has made the difficult decision to sell his Adhor dairy operation. That's troubling enough to Joe. This is his biggest financing partner, biggest supplier. It's like, "All right, well, who's the buyer?" And Merritt's like, "The buyer is the Southland Corporation. 7-Eleven is coming to California, and they needed a dairy supplier. And yeah, I sold our operations to them." Brutal. Not good. Not good.

Ben: Not great, Bob.

David: All right, so what's really going on here? So at the same time as Merritt is having these problems with the family operations of running a dairy farm, he also has an incredible opportunity that is the flip side of the coin. Why are the cattle so fat, so happy, and distributed across so much land?

Ben: And what has Merritt inherited that's been passed down through generations of his family?

David: Why is it called Adhor? And what is Rhoda? His mother, Rhoda, was the descendant of an inheritor of the original California Spanish land grant. It was the area that is now the entire city of Malibu, the most expensive, attractive real estate today in perhaps the entire country. They own the entire city. This is the dairy farm. The cows are grazing in Malibu.

Ben: Yes.

David: You can't make this up. And so they have finally made the rational decision here to sell off the dairy operations and develop this as real estate, which they had already been doing little by little. So Pronto Markets is toast.

Ben: 7-Eleven is at least a thousand times bigger. And any landlord is going to want to sign 7-Eleven over little Pronto Markets. In real estate, having the bigger balance sheet is the way to be the preferred tenant, especially if you can promise, hey, longer leases and/or a more credit-worthy operating history.

David: Yeah, you're a landlord. Would you rather have 7-Eleven be your tenant or a start-up Pronto Markets? You can bet on 7-Eleven.

Ben: Yes. And that not only takes away his milk supply, it's also his current debt holder who he owes money to. And he's in this business that has no structural or strategic barriers at all. He is doing the exact same thing as 7-Eleven at a smaller scale. And so the core insight is that Pronto Markets is effectively just an empty vessel to sell the same products. In a situation like that, it is a race to the bottom on your margins, and scale will determine the winner.

David: So in other words, Pronto Markets is toast.

Ben: Yes.

David: So Joe has some soul searching to do.

Ben: He needs a retreat.

David: He goes on vacation. He takes his wife and children first.

Ben: To a little cabin in California with his family. Then he goes to St. Barts in the Caribbean. He somehow gets in touch with a friend who offers this insane beach house, and he's like, "Well, I've never flown internationally before, and I don't really have the money, but I really do need a reset. We are royally screwed."

David: He needs to come up with a plan.

Ben: Yes.

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David: And that plan would become Trader Joe's. But before we tell that story, now is a great time to thank our presenting partner, JPMorgan Payments.

Ben: Yes, and listeners, this episode, with Trader Joe's supply chain, is much more important than your typical Acquired episode. We're sort of touching on it here, but the whole rest of the episode is going to be about supply chain. When you are talking about supply chain, payments are a huge part of keeping shelves stocked and products moving. So, let's consider a typical manufacturer. They're trying to balance paying their suppliers quickly to keep good relationships while also optimizing their own working capital. And meanwhile, their suppliers, especially the smaller ones, often struggle with cash flow while they wait 30, 60, or 90 days to get paid.

David: This is where JPMorgan Payments' technology and global expertise come in. They've transformed supply chain financing into a dynamic, tech-driven solution. Their platform, which supports multiple languages and currencies, links buyers to more than 18,000 suppliers, streamlining payables and giving suppliers the option for early payment at favorable rates based on the buyer's credit rating. Businesses can easily switch between supply chain finance and dynamic discounting as their needs change. It's all real-time with full visibility, so you can track invoices and optimize payment timing in one place.

Ben: While supply chains like Trader Joe's prioritize simplicity — which, spoiler alert, is a huge thing we're going to talk about later in the episode — the reality for most grocery retailers is different. They have massive numbers of suppliers stocking shelves with a diverse mix of products. But managing these relationships is complex, especially when it comes to negotiating payment terms and maintaining a steady flow of goods. And this is not unique to grocery; many other industries like restaurants, automotive, hardware, technology, and more depend on a large network of suppliers. And in all likelihood, your industry can benefit from optimizing payment cycles and strengthening supplier relationships.

David: That's why over 2 million suppliers worldwide use these solutions. It's a win-win, making supply chains more resilient and efficient. JPMorgan Payments is at the forefront, providing trusted, innovative financial and operational infrastructure. So whether you want to unlock more flexibility in your finances or build a supply chain that's ready for anything, visit jpmorgan.com/acquired to learn how JPMorgan Payments can help you build your business.

Ben: For anyone going to AWS re:Invent, we will be there with the JPMorgan Payments team. Yes, doing a big interview on stage with AWS CEO Matt Garman and more. You can find all of the details on that, plus a re:Invent discount for Acquired listeners, in the show notes. Alright, so David, the origin of Trader Joe's: Joe is there in St. Barts, in his beach house, cocktail in hand, looking out over the ocean, thinking about how absolutely screwed he is.

David: He effectively... and the plan is cocktails, effectively.

Ben: The plan is tiki. The crazy thing that he does on this vacation and, henceforth, his management style: he is a genius. He premeditates the entire shifting landscape over the next 30 years ahead of him. And he does it five years at a time in what he calls white papers, or at other times, theory papers, that he publishes internally. He carefully thinks through things like social change, cultural shifts, geopolitics, currency fluctuations, shifts in how people will be educated, consumer buying preferences, and travel patterns. As I really dug into this, Joe's somewhat of a macroeconomist who, once he realized where all the world was going, placed his bet in the form of a highly opinionated grocery store. And then he would execute much of that vision himself — I mean, like physically moving pallets and typesetting newsletters for customers. He is a complete unicorn.

David: Okay, so Joe comes back from this vacation, and what does he do? Yes, he's a genius, but he also... he's got a real back-against-the-wall problem, right?

Ben: He's thought through all these implications. He's forecasted the future, and he's going to go out of business.

David: He needs to make his rent this month, so he needs to find something that he can start selling that is basically the Venn diagram intersection of high enough value that he can get real gross margin dollars out the bottom from his small handful number of stores to meet his obligations.

Ben: Quickly become a good business, quickly provide...

David: returns and is protected from the 7-Eleven juggernaut that's coming.

Ben: Because you never want to compete with someone bigger, more established, better capitalized than you, on the exact same footing that they're on. You need to do something different that they can't or won't do.

David: Yep. And he lands on hard alcohol. This is the hilarious thing about Trader Joe's. It actually starts as a hard liquor company.

Ben: It's an ammo and tobacco company that gets into hard liquor.

David: Right, right, right. So, hard liquor is actually very, very, very attractive here. It's very high value. There are a set of laws called fair trade laws that impact everything retailers sell in this era. It's actually kind of crazy. It's a holdover from the Depression. We talked about it on the Costco episode, where it was illegal for retailers to sell goods below the minimum price set by manufacturers.

Ben: Right. It's not just MSRP. It's not just a suggested retail price. It's: you will go to jail if we catch you selling below the price that the cabal of producers of any given good set.

David: Yes. Once all this stuff gets thrown out and ruled unconstitutional, et cetera. Now it's suggested; back then, it was mandated. But the net of that is: if you can find a way to sell hard alcohol, because they're high dollar value, you know you're going to get a certain amount of profit out of it.

Ben: And the way this works is you need to make sure you get liquor licenses, which are hard; but if you have a liquor license, then it's like an annuity. People are definitely going to come to your store, they're definitely going to buy liquor, and you have a regulatorily protected profit on that liquor.

David: Yes. And that's the moat against 7-Eleven. 7-Eleven, giant Southland Corporation. They're not going to come to California and get liquor licenses for all these stores that they're going to open. They're out-of-state. A corporation like Joe's can be much more nimble. He can invest the time and the money. These things cost a lot of money back in the day because they're basically, like you said, a guaranteed annuity profit stream. And he can invest at a small scale, raise more debt to do this. And this is his way out.

Ben: And that was basically his bet: 7-Eleven. Because this is a small little arm of their operation, they're not going to change their national business model to, in this little pocket, have liquor.

David: I think that's right. And I think they did not sell hard liquor, period, at that point in time. It just wasn't part of their strategy.

Ben: Okay, I see.

David: And there's one other, perhaps unforeseen at the time but ultimately incredibly strategic, benefit to this decision to go all-in on hard liquor, which is that it's also a moat against supermarkets and the grocery industry. They're not going to do hard liquor.

Ben: either, at least at this point in time.

David: So he goes, raises more capital, and gets the licenses.

Ben: This is the third tranche of debt that he's taken on now.

David: Yeah, yeah, yeah, yeah. So, it works for a couple years. Pronto Markets basically transforms into a liquor store, and it buys Joe a couple years to figure out the bigger business plan and stave off the invasion from 7-Eleven. They're still selling other stuff in the stores, but they start devoting more and more space to liquor because it's highest value per square foot. They have a regulated, protected right to sell it that their competitors don't have. I mean, there's an alternative world where Trader Joe's basically becomes Total Wine or BevMo or something like that.

Ben: Yeah. If they had just kept scaling this strategy linearly instead of completely changing tracks and going in this other direction.

David: Yep. Alright, so let's talk about supermarkets, listeners.

Ben: I did a brief history of supermarkets in America to come up to speed on what Trader Joe's does differently and how we got here. So, you go way back, all the way to pre-Civil War America, and you've got general stores. We all have this loose idea of what this looks like. You've got one counter; there's a bunch of goods that you can see, but it's not self-served. You don't get to go pick up any goods yourself. The employee of the general store, or more than likely the owner, is just going to be the person who fetches it for you and then checks you out. That is kind of the retail experience in America, pre-Civil War. Then there's this series of innovations that advanced from this to the grocery store. So the first is the box, the cardboard box. And specifically, pre-cut corrugated cardboard boxes happened in the 1890s. It's rigid, it's cheap, and it enables shipping at scale. So suddenly, you can have regular shipments in predictable quantities inexpensively between producer and retailer. That's puzzle piece number one. Then you've got the flat-bottomed paper bag. That had happened a little bit before in the Civil War. They used to use cotton bags. But it's in short supply because you need cotton for the soldiers. And so, necessity is the mother of invention. We get the brown paper bag. You have canning. Before this, you only had glass; it would break, it was fragile, it was expensive. Suddenly, you can use tin, and you can manufacture this at scale. You can keep goods fresh for a long period of time. It's durable. And again, it's in this easy-to-manufacture, fixed-quantity size. You then get cardstock. This enables real consumer packaged goods like cereal, cracker boxes. That's still most food today.

David: Or most food sold in supermarkets.

Ben: Yes, all containers really move from bespoke, one-off containers to mass-manufactured, quantifiable, fixed sizes. By 1900, one-fifth of all U.S. manufacturing is packaged food. That is how significant the shift is.

David: This is the rise of the great CPG companies on the product supplier side of the supermarket market.

Ben: Yeah, consumer packaged goods. That's exactly right. And in 1916, the real break from the general store of old happens. A guy named Clarence Saunders launches a store where, thanks to packaged and branded products, you no longer need an associate for help. So, consumers can actually go and touch the products for themselves instead of asking the man behind the counter to get it for you. Which was complete heresy at the time. And it is the way all stores work now.

David: Just like the convenience store innovation. Yes. Equally obvious today, and equally wild back then.

Ben: Yes. And that store that Clarence Saunders started was Piggly Wiggly.

David: That's right.

Ben: With 500 stores today. So David, you mentioned CPG, the cousin of the supermarket. These two entangled characters in our story: the rise of the supermarket and the rise of the consumer packaged good. What role does that play in the development of the grocery store?

David: Procter & Gamble, Unilever, Kellogg's, Gillette, Coca-Cola, Nestlé. Note: all companies and products that you're not going to find in Trader Joe's today.

Ben: Not today. Yeah. So once you get this scale of packaging and consistency of products, you've basically paved the way for food brands to emerge. You can start to promise quality to customers in a way that was previously reserved for the merchant. You used to trust the store owner, not the granola maker. And now the maker of granola can take on this new job to be done, which is taking a heterogeneous amount of natural products. Remember, like we were talking about with milk or grains or any of these fruits and vegetables that turn into a CPG thing. They are at one point natural products and then are put through some sort of manufacturing process to come out the other side as one predictable, promised, homogenous product.

David: Standardized, nationally available product. Yep.

Ben: Yes. That lives up to a brand promise of whatever it is. It's probably quality, but it's probably other things too. You start to get companies like the National Biscuit Company realizing, "We should lean into this."

David: Oh boy, that sounds like Nabisco, doesn't it? It is.

Ben: So you get them for the very first time, slapping Nabisco on a cardboard box. So this is a profound change for the entire value chain, where the trust is now with the brand, not with the retailer. And retailers basically are shifting to serve as a vessel just to sell these trusted, branded products. Once brands — these producers of products — realize this power and realize, "Oh my God, it's all shifted to us now!" — they press this advantage. So they start advertising: first you get newspaper and magazine, and then radio, and then the most perfect instantiation, the mother lode you could ever ask for a brand: television. The idea that you could build trust with consumers through sight, sound, and motion, beamed over the air into everyone's homes in the 1950s and '60s — it's nirvana for this whole ecosystem to come together.

David: And the net of all this for Joe and Trader Joe's, being about to get into this market, is that supermarkets basically become real estate companies.

Ben: Yes.

David: This is something I had no idea about until doing this research. They essentially stop having their core competency be the taste and opinion of a merchant.

Ben: They used to be in this great business where they would choose what to stock, and then they would be the source of trust. And now consumers are just saying, "Hey, you need to have these things."

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David: Hey, I'm here for the Cheerios.

Ben: Right? You say you need Cheerios, I'll go try and get Cheerios. We're just getting whiplashed around as a commodity.

David: That makes it sound bad, but actually they do become real estate companies. They become scaled real estate companies, and they offload a lot of the merchandising operations to the brands for a lot of items. The grocery store employees don't stock the shelves; the brands, the CPG companies, come in with their employees and stock the shelves.

Ben: It's crazy. If you walk into a large-scale traditional supermarket today, how many quote unquote employees of the store are actually representatives of the producer, the brand, or more likely the distributor? Because the brands aren't going to directly show up to those stores.

David: Yep.

Ben: It's funny, when I finished reading Joe's book, one of the takeaways was, it seems like if you can master one, negotiating real estate leases; two, regulatory stuff, like if you can figure out regulatory arbitrage; and three, if you can figure out how to not have your employees and customers steal from you, then you're going to run a good grocery store.

That's actually the core of this industry: those three things. Now, of course, there's much more to it, and those much more things are the things you kind of want the business to be. But it's shocking how much of the bedrock of just not losing money comes down to your real estate leases, not having things stolen from you, and understanding the regulatory environment you exist in and not running afoul of it.

David: Yep. So back to Joe and his Pronto dilemma and what's going to become Trader Joe's here.

The hard liquor thing was a competitive response to 7-Eleven. Turns out it's also a great competitive response to supermarkets.

So after a year or two of stabilizing the ship, Joe is ambitious. He wants to do more than just hard liquor. He realizes that this state of play in the supermarket industry, between the big brands and the supermarkets who have essentially become real estate companies, has actually created a wide-open vacuum for a new, different kind of grocer to come in and actually return to merchandising and product knowledge.

Ben: Yes.

David: So as the legend goes, in the late '60s, he is hit by two simultaneous bolts of inspiration.

The first is an article that he reads in *Scientific American* that states that, starting with the GI Bill after World War II, the rate of college education in America went from 2% of high school graduates to 60% of high school graduates by 1964, thanks to the GI Bill. Basically, in America, it went from nobody went to college after high school except the very privileged elite to 60% of high school graduates now go to college. It was a massive demographic change in America.

Ben: And it's not just that everyone gets educated when they're in college. They sort of become more aware of the world.

David: Yes. So that leads into the second bolt of inspiration that he has from another article he reads, this time in *The Wall Street Journal*, which is that Boeing, the aircraft company, was going to be launching the 747 commercially, and that it would dramatically reduce the cost of international overseas travel and make it accessible to the average American.

Ben: So the stat on this is insane. The 747 immediately cut the cost of international travel to Europe by 50%; and within 10 years, the real cost of traveling to Europe was cut by a factor of 15.

David: Wow.

Ben: So you go from this insane thing where 80% of Americans in 1965 had not ever set foot on a plane, to suddenly the cost going down by 15x to get to Europe. Americans are about to be well-traveled and well-educated.

David: And in Joe's mind, these two pieces of information from these two articles coalesce into this massive epiphany that he has about the future of the American public.

He writes in the book: "7-Eleven and the whole convenience store genre served only the most basic needs of the most mindless demographics. With cigarettes, Coca-Cola, milk, Budweiser, candy, bread, and eggs, dimly I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream people."

Ben: I mean, this is it. This is the core insight. You hit me with a quote, I'm hitting you with a quote.

This is from *The Secret Life of Groceries*: "Back in 1970, Trader Joe Colomb looked at the grocery industry and saw two paths. The first required becoming an active retailer, which for him meant rejecting a passive role as a supermarket landlord and applying an intensive effort to seek out or create 'discontinuous products' that could not be imitated by competitors. The second was to grow big, sell goods that are available in infinite supply" – remind you of the Everything Store?

David: Yep.

Ben: "And compete ruthlessly on price." This latter path was essentially what every single one of his competitors was attempting. They would spend the next decades scaling up to carry bigger and bigger inventories, gobbling up larger and larger warehouse spaces, forever looking over their shoulders at competitors and trying to shave down costs.

He saw his own ruin there. The biggest chain in the world would always win; and however many competed, there would only be one or two that survived to the end. That's it. It's this realization that, look, I don't think I'm going to eventually be Walmart if I'm not going to be Walmart or Kroger or Albertsons or one of the big giant "winners."

David: Let's go in the extreme other, right? And, oh by the way, there are these two intertwined massive demographic trends that are starting with the young people coming out of college and are soon going to become the whole country that are in my favor.

Ben: But the thing that's not obvious, that takes a Joe Colomb to figure out, is how is it that well-traveled, well-educated people are going to let you take a non-traditional path in grocery? This is the genius insight of the thing that he delivered that we didn't know that we needed.

It's like Steve Jobs giving us the iPod, and we didn't all know that we needed that thing. Why is it that well-traveled, well-educated people needed a divergent grocery store?

David: Yes. And this is also where it's so crazy path-dependent at this time in the late '60s, early '70s: the best way to target these types of consumers that differentiates them from other mass-market consumers. The best way to do so is their alcohol consumption preferences. Like, it couldn't be more perfect; he is already a liquor store.

Ben: It's so true. I didn't realize how important basically being a liquor store was to the Trader Joe's story. The rest of Trader Joe's kind of falls out of selling liquor.

David: Yes. So at the time in the late '60s, early '70s, there was a sharp divide along these lines in the country. Blue-collar Americans drank beer. Educated Americans drank cocktails and spirits and soon-to-be wine, thanks to Trader Joe's.

Ben: Fascinating.

David: It was the mark of sophistication back then. So Joe decides that his store, the newly revived Pronto Markets, should create a new tagline designed for this new target customer base.

"The world's largest assortment of alcoholic beverages," which becomes 100 different brands of Scotch, 70 different brands of bourbon, 50 different brands of rum, and so on.

Ben: You weren't kidding when you said it could have easily become a BevMo or Total Wine.

David: Absolutely. So he knows this is a wholly different, unique retail concept versus Pronto. He needs a new name because this is a new store.

So, in another almost completely foreign thing to today, the culture back then, especially Joe's target market of educated, soon-to-be-traveled folks, was completely obsessed in America with a fad known as tiki culture.

Ben: Yes.

David: And it was inspired by what people—Americans who were about to be able to travel but heretofore had not actually traveled around the world—thought that Polynesia and South Pacific culture was like.

Ben: And, you know, there are movies, like the James Bond movies.

David: Yeah, yeah. It started with *South Pacific* the movie. And it bled into cocktails, into drinks.

So, drinks like the Mai Tai, and South Pacific/Caribbean versions of them, were super popular among this educated class of people. If you go to Disney World, you can still see some vestiges of this.

Ben: There's the Polynesian Resort, the Dole Whip, and the... what's the bird? Remember, Nolan Bushnell told us on the Atari episode that he was inspired by all the animatronic birds, which is right next to the Dole Whip stand, and not too far over is the Jungle Cruise.

And Joe Colomb says the Jungle Cruise was one of his two inspirations for embracing this "Trader" idea, this tiki Trader thing. The other of which is a book that he was reading called *White Shadows in the South Seas*. And when you look at it, the cover is evocative of this. We'll put it in the email newsletter. It's very Trader Joe's-ian looking.

David: And then the final piece of this sort of branding stew in Joe's mind is that one of the cornerstone cultural elements of tiki culture were these two competing restaurant chains that scaled across America.

Oh, Don the Beachcomber was the first one, and then their competitor, Trader Vic's. They were these tiki-themed restaurants. So borrowing from Trader Vic's, along with all this other influence in Disney World, Hollywood, movies, and books, Joe gets the idea.

Ben: It should feel like Traders on the high seas. It should have a maritime element and a tiki Trader element.

David: And we're going to call it Trader Joe's, too.

Ben: Perfect.

David: So in August 1967, Joe opens the first Trader Joe's on Arroyo Parkway in Pasadena, California.

Joe decides that Pasadena is the perfect first target market because Caltech and a whole bunch of universities are there. You've got professors, you've got graduates coming out.

Ben: And was this one of the Pronto Markets before? Was he in the same real estate?

David: No, this is a new store. And when it opens in August 1967, it has a lot of the elements of Trader Joe's today.

Employees are called crew members. The store manager is a captain. The assistant manager is first mate. The employees all wear Hawaiian shirts. It has a new strategy, but before we talk about what that...

Ben: new strategy is... Yes, we want to thank one of our favorite companies: Shopify. Okay, David, I had an idea for this one. I want to take listeners on a tour of my house and point out some of the products that I own from businesses built on Shopify. Are you game?

David: This is awesome. You referenced this on our last read. This is great. Let's go.

Ben: All right, so upstairs I'm sleeping on Brooklinen sheets and Parachute pillows, all from founders that built amazing businesses on Shopify.

My wife's jewelry collection includes pieces from At Present, that's the company that our friend Mark Bridge started.

David: Of course. Shout out Mark.

Ben: Yep. Thanks. (On the Rolex episode.) And in my closet, Marine Layer, I've got some Rothy's and, of course, Warby Parker, all built on Shopify.

David: That is quite the entrepreneurial set of items.

Ben: In my house, it keeps going downstairs. And in the kitchen, there's of course Dandelion Chocolate, Athletic Brewing, and a few Phony Negronis in the fridge.

David: Delicious.

Ben: My coffee mug right here is from MiiR. I love how light these stainless steel mugs are. And I've got a Cotopaxi bag by the door over there, another amazing founder story built on Shopify.

And then here's one that surprised me. In my toddler's playroom, we've got Hot Wheels and Fisher-Price, because Mattel runs their online stores on Shopify.

David: That might be my favorite big Shopify customer because I guess that means Barbie runs on Shopify too, since it's part of Mattel, which means a huge part of my house with my four-year-old girl also runs on Shopify.

Ben: Yes, I was wondering. And listeners, it's not just creator brands or small startups. David, those books on the shelf behind you from Penguin Publishing, they sell through Shopify. The New York Times store? Shopify.

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David: Yeah.

Ben: And get this, my old house had an air conditioner from Carrier, a 110-year-old public company that also sells on Shopify.

David: Yeah, basically invented air conditioning. Amazing story. Sells on Shopify. It is breakout founders and the biggest enterprises that are powered by Shopify today.

Ben: Yes. And for these smaller niche brands, Shopify, obviously, is everywhere. That purple Shop Pay button at checkout has become so trustworthy and so insanely easy to buy things you want. And for the bigger enterprise brands, it's proof that Shopify isn't just for startups. They power some of the largest and most established retailers in the world.

David: So if you run a business, whether you're just starting out or operating at global scale, Shopify is the platform built for you. Head to shopify.com/acquired. That's S-H-O-P-I-F-Y.com/acquired. And just tell them that Ben and David sent you.

Ben: All right. So, David, what is strategically different? What are the choices that Joe made when he opened that first Trader Joe's in Pasadena, other than, of course, putting everyone in Hawaiian shirts?

David: So, the first, obviously, is the target market, like we just talked about: these newly educated college grads who are about to travel the world. Joe has his sort of folksy shorthand for this in the book, "the overeducated and underpaid."

Ben: Yes, it's interesting. At this point, it's not really branded products the way that Trader Joe's is today. It's just a convenience grocery store that happens to target people who value authenticity, quality, sophistication, but also want affordability. It's sort of this early-career, post-grad type of person. So it's near college campuses. It's near large hospitals. Interestingly, it's also near retirees.

David: Yes.

Ben: Because retirees sort of behave similarly to younger, pre-family folks.

David: This is the dual pillars of Trader Joe's target customers. It's young professionals starting out and retirees.

Ben: Yes. It's funny, the retirees are also very value-focused and large consumers of liquor, candy, high-fiber foods, vitamins. It's a big profit center. A thing that they do here to sort of play into the "overeducated," or I would say, "highly educated, underpaid" is the Victorian art with the sort of cheesy, humorous captions. They adopt this as their visual identity. It's a double win: it plays off this educated customer base where they can make jokes, like if you go buy the... is it the guacamole that they call Avocado's number as a play on Avogadro's number?

David: Yes.

Ben: Is that chemistry?

David: I think so. Or they used to have the Sir Isaac Newtons, of course.

Ben: But two, Victorian imagery is royalty-free. Anything before 1906 is public domain. So this is just Joe being cheap. All the packaging is just ripping off these old, royalty-free images.

David: That's Trader Joe's right there.

Ben: That's amazing. And so he really comes up with this thing he calls the Four Tests, which is: one, we want to stock goods that are high value per cubic inch.

David: Yes, and it starts, of course, with liquor, as we talked about.

Ben: Yes, and then, of course, vitamins. And you walk into a Trader Joe's today, you can almost feel that it's stocked with things that are high value density, even though the goods aren't expensive. The way it's all jammed into the store, it feels dense.

David: Yes. And Trader Joe's today average about, call it, 15,000-ish, maybe a little less, square feet per store. The average supermarket is like 50,000 square feet, and the average Walmart is like 150,000 square feet.

Ben: And back then, Trader Joe's was like 4,000 square feet. I mean, these were tiny stores, so they needed high value density in them.

David: Or, I'm going to come back to that in a minute. He wanted them to be 4,000 square feet.

Ben: Two: high rate of consumption. You want customers coming back over and over again.

David: Vitamins.

Ben: Three: goods that are easily handled. So much of Trader Joe's business stems out of this that they are unwilling to start doing things that are hard to handle, that are logistically difficult. And they kind of have this ethos of, if we can make it so people are willing to overlook the fact that we don't have some stuff that's hard to handle, then great. All the better business for us if we can keep customers coming back and we only have to deal with easily handleable goods. And then the fourth is probably the most important: something that Trader Joe's can be outstanding in terms of price or assortment.

David: Yes.

Ben: This is the counter-positioning. This is how can we be different than what every other player in the market is doing.

David: So this last strategic tenet is, I think, most perfectly, perhaps in Trader Joe's entire history, exemplified in the first new product category that they add beyond liquor to this official new first Trader Joe's store. You mentioned a minute ago that Joe's target square footage size for the new Trader Joe's store concept was like 4,000, 4,500 square feet. The first location on Arroyo in Pasadena, even though it's small today, was actually about twice that size. It was like 7 or 8,000 square feet. Not by design. "We want to be in Pasadena. That's the perfect first market. I'm willing to trade off having a bigger store than I would actually like."

Ben: And he was meticulous about location picking. It wasn't just, "let's look at some census data and figure out incomes." I mean, it was the soft factors of, "is there a university close?" But he would just go drive up and down all the neighborhoods around it and try to figure out, "hey, are these my customers? How easy is it to access my store if I put it on this block versus that block? Oh, if I'm on the wrong side of a divided highway, then I actually can't access all the people who have to make a left turn into traffic." It was really this sixth sense for developing what is my actual easy, addressable customer base from this store: who is going to make this store their home spot.

David: Yep. So they move in, they've got the Trader Joe's concept, with hard liquor being the cornerstone, sort of, first.

Ben: Yeah. What was the second?

David: Well, they've got to figure out what to do with all this extra space. And at first, they try bringing in a meat department—a meat butcher—as a concession, as a subtenant.

Ben: Which they don't have now, right?

David: No, no, no. Long gone.

Ben: Too hard to handle.

David: Too hard to handle and not differentiated. I mean, that's what the supermarkets do. He's building the anti-supermarket.

Ben: Right.

David: And then one of the store managers in the portfolio says, 'Hey, I know this other meat guy. We were thinking meat's here.' He used to have the shop next to one of their other Pronto Markets here in LA. He moved up to Northern California to Napa County. He's gotten to know some of the wine guys up in Napa. Now, this is like late '60s, early '70s. This is before California wine and Napa...

Ben: ...is a thing, which I didn't know until starting this episode, that the whole concept of Napa is like 60 years old.

David: Yeah. Oh, yeah, we're going to do it. So this manager, this "captain," is like, 'Well, Joe, alcohol's our sort of core product here. What if we try expanding into wine?' Joe's like, 'All right, great, let's try it.'

Ben: Meanwhile, Joe doesn't drink wine.

David: Yeah. Yet. Yet.

Ben: Yet.

David: He would become a huge anophile—oenophile. How do you pronounce it?

Ben: I have no idea.

David: I think it's like O-E-N-O-P-H-I-L-E. The wine lover. Oenophile.

Ben: Learn something new every day.

David: Yeah. So, just like, 'Great, let's try it.' They use a whole bunch of that extra space that they have in the Arroyo Boulevard store. And they install the 'world's greatest variety of California wine' right there in the Trader Joe's store. And the world's greatest variety was 17 different kinds of wine from different wineries in Napa.

Ben: 17.

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David: Now, the crazy thing that's so funny, I actually think there's a pretty good chance that this was the world's greatest variety of California wine in one retailer because it wasn't a market yet. Americans were not yet drinking wine, let alone Napa wine or Sonoma wine. It's Trader Joe's that makes it a thing.

Ben: Wow.

David: Because, by God, it becomes a huge hit, as you could imagine, with the Trader Joe's target demographic. I mean, what more sophisticated, worldly thing could you offer them? It makes so much sense in retrospect. Wine is the ultimate non-commodity commodity.

Ben: Oh, yeah. There's this great line that you can't sell wine, you have to sell wines.

David: Yes.

Ben: The consumer psyche around wine is that we are trained to believe that it's this heterogeneous product, whereas milk, vitamin D whole milk, is vitamin D whole milk; milk is milk. It's all interchangeable. Wines aren't that way at all.

David: They're the complete opposite side of the spectrum.

Ben: Amazing thing, if you're trying to be this merchant who is selecting goods on behalf of your customers, and your brand promise as the merchant is, "Just come to my store and be delighted." You don't need to just say, "Hey, I'll always have milk for you." You say, "Come to my store and I will pick out interesting wines." And when the wines are gone, they're gone.

So they're small batch, they're boutique. I'm buying however much supply I can get of a thing that I think is great. You can build a much better business on being known for, "I will be surprised and delighted when I come to the store, and you have selected interesting items for me," than you can on, "You are an empty vessel through which to provide me milk."

David: Yeah. Or Nabisco or, whatever large CPG brand. It's so perfect. And wine comes with all of these other amazing aspects to it, too. Drinking it makes you seem sophisticated, European. It has this rich tradition going back for all of recorded human history. You can spend a whole lifetime studying it and still never come close to learning everything about wine.

Ben: High repeat purchase, high density. It really fits the four tests. Super easy to handle. And now a great way to be differentiated. And because no one else is doing the California wine thing, this is new. They can build a brand around being California wine purveyors.

David: So it happened by accident that they had this extra space that the old store manager knew the meat guy who moved to Napa who knew the wine guys. But I think this probably becomes the most important factor in Trader Joe's success. And they also timed it perfectly. This is the unlock for thinking about Trader Joe's: They are wine merchants, and they merchandise everything in the same way you would merchandise wine.

Ben: Yes. They really asked themselves this question of, "Could grocery be the same?" Could we actively seek out and purchase things in small, finite batches that we think would be interesting to provide to our customers? And would people buy into a store where you go and you don't always know exactly what you're going to get, but you can trust that the person who found it for you found a great treasure?

David: Yes, it's perfect. And like I said, they nailed the timing. So this is the late 60s, early 70s, where they're starting out becoming a California wine merchant. American, and specifically Californian, wine is about to have a rocket ship ascendancy.

If you've ever seen the movie *Bottle Shock*, which came out a couple years ago, it's about this thing that really happened: the 1976 Judgment of Paris, which is one of the most seminal events in the history of the wine industry. It was a blind taste test where Parisian wine critics did blind tasting of all the top French wines: the Bordeaux, the everything, all the famous, all the old world greats against Napa Valley wines. And the Napa wines trounced the top Bordeaux in every category. And it was this bomb that went off in the wine industry and started the whole culture of Napa and Sonoma and American wines and the tourism there and the romance.

Ben: And Trader Joe's is like a few years into being the number one seller of the widest variety of California wines.

David: Yes. And their target market is exactly who is going to consume this stuff and love it. It's so great. So the early days of the Trader Joe's wine program were unbelievable. Joe and all the employees, they start learning about wine, going up to Napa, conducting tastings, meeting all these winemakers who are, essentially, guys in the garage at this point in time.

They bring it back to Pasadena; they get Heitz, Freemark Abbey, like some of the best wines and winemakers in the entire world in history are being sold for 10 bucks a bottle in Trader Joe's in Southern California. So they start evangelizing it to their customer base. Like you said, "meets all the tests." We're all in. In 1970, they start publishing a free newsletter to all their customers to educate them about wine and update them about all the new shipments that are coming in.

Ben: Do they already have the Fearless Flyer? Is this like, in addition to that?

David: This, the Fearless Flyer, starts. Ah, they call it the Trader Joe's Wine Insiders Report. And it's this whole newsletter. Imagine you're a wine merchant. This eventually, once they get more into grocery, in 1985, this becomes the Fearless Flyer. But it's the same approach to it. It's merchandising. It's telling the stories of these products just like you would with a wine.

Ben: Fascinating.

David: It's incredible. No other grocer is doing anything like this.

Ben: No.

David: So by 1970, the year they launched the Insiders Report, and three years after this first Trader Joe's launches on Arroyo Boulevard, Trader Joe's becomes the largest wine retailer in California, which is, on the one hand, completely insane, but on the other hand, shows just how young and new the wine drinking market was in America, and that Trader Joe's was the one making it happen, starting in California.

Ben: And they still have, what, single-digit stores at this point?

David: Yeah. Pretty quickly, they add imported wine, too. So not just domestic Californian wine. They go to Europe, they go to France, they go to Spain, they go to Portugal, all the great winemaking countries. They go to Italy, and they start bringing imported wines back, too. That also sells like wildfire. They also do this really clever thing where fair trade laws applied to wines.

Ben: Oh, that's right.

David: And with imported wines, they didn't actually set the minimum prices based on the wine label. It was based on the distributor, the importer that brought it into the country.

Ben: Country, which makes it different than the way that domestic products worked.

David: And multiple importers would import the same labels and wines from Europe. And so Trader Joe's was like, "Oh, this is an arbitrage. We'll just go find importers that are willing to set the lowest minimum price for the wines that they're importing, and we can break the street price from the other importers."

Ben: That's interesting, because in other fair trade categories, you'd have to go to the entire distributed group of producers and say, "Hey, all milk producers or all whiskey producers, can you guys agree to lower the fair trade price?" And they'd all be like, "No."

David: It was uniform across the whole product.

Ben: Yeah, but in this scenario, you just have to go to one distributor and say, "Hey, you're importing the French wine. Can you set the price a little lower? I want to sell it lower."

David: Yeah. Then pretty quickly, wine collecting starts to become a thing, and Trader Joe's is just blowing out wine. They're the number one retailer in California. At one point, Joe decides he's going to set up a wine bank for his customers. Did you read about this?

Ben: Yes.

David: This is awesome. He's like, "Great. How am I going to sell more to my customers and give them something they want, meet their needs?"

Ben: To them, and then also sell them a place to put it?

David: Yes. Brilliant, right? Trader Joe's does not have wine banks today. It turns out it's a bad business idea, because when couples get divorced, the first thing is to raid the wine bank, pull out all the wine that is now worth a lot of money, and then the other spouse will sue the wine bank.

Ben: So they're just like in the middle of these divorces all the time.

David: They get dragged into all these divorce lawsuits.

Ben: Brutal. But what you're starting to see here, with the ability to find clever ways to do regulatory arbitrage or sell below the fair trade price. Joe is a master of reading all the regulations, not trusting what anybody tells him of, like, "Oh, this is the way you're supposed to do it." He's like, "Show me the regulation."

And he pores over the regulation, and he synthesizes it all from all the different bodies, whether it's the USDA or the FTC or the State of California or the Interstate Commerce Commission, or just understanding the full landscape, holding it all in his head, and saying, "I have it. I know a way that we can provide value to customers because this whole thing is like, how do we give people the best value possible: high-value items at low prices, and do it in a legal way." And then I can market the heck out of it. I can make it a thing that people know. It's just one more great thing you'll get from coming to Trader Joe's. It's one more thing that we only have here that you can't get anywhere else. And you're going to get a great value by doing it.

David: High value to customers in differentiated products. And wine is so perfect. So all that takes us through the early 70s in this sort of first era of Trader Joe's, on the back of liquor and then wines.

Ben: Yeah. This is what he calls "Good Time Charlie," building this party store.

David: Somebody needs to do the "Eras Tour" of Trader Joe's. That'd be amazing. Bring out the products from the different eras. Awesome. And that leads into the next era that Joe also sort of in goofy fashion calls "Whole Earth Harry," the health food era of Trader Joe's. So I think you could say about Joe that he was a genius at many, many things, just about every critical aspect of retailing. But I think maybe his greatest genius was identifying major demographic and cultural trends that were just starting in America, and then creating the products and the merchandising to capitalize on them.

Ben: It is astonishing how he had his finger on the pulse, and how he was willing to either change what Trader Joe's was or adapt it and add a new layer on top to turn Trader Joe's into the next version of what it needed to be. You mentioned some attributes on Joe himself. This is a beautiful excerpt from Benjamin Lohr's book that I think is just the best description of him.

Joe is a man frequently described as a genius by other very smart men. And I should say Benjamin Lohr, the guy writing this, very critical, very journalistic in his approach. The whole rest of the book is applying a lot of scrutiny to the grocery industry. The fact that he talks about Joe this way actually has a lot of credibility. When asking his employees and competitors and industry observers about him, I hear the word "visionary" so many times, it becomes worrisome. I hear "he is brilliant," "incredible." Wise grown men tell me they are awestruck, chilled, giddy in his presence.

Executives who worked for him — stuffed C-suite dullards of the grotesquely self-confident variety — will drop all pretense and describe wanting to wake up early in the morning to race to work because they can't wait to hear what Joe has to say. They tell me he has a photographic memory, that he can read up to 1,200 words per minute, that he adds, multiplies, or divides lists of figures in his brain quicker than they could ever scan them, that he knows the names of all his employees, their spouses' names, their dates of hire, their birthdays, and their wedding anniversaries.

But beyond all this awe — the steel cage memory, the gymnastic cognitive quickness — the genius of Joe that impresses me most is his ability to project this integrity and decency when he wants to. He keeps you guessing exactly where the line lies between calculating businessman and wholesome self-taught founder in a way that allows almost everyone who meets him to underestimate his abilities, yet simultaneously afford him huge amounts of respect. It is an awesome talent, especially in a business built on negotiation, trust, and quick, decisive deals.

David: That is so awesome.

Ben: I'm telling you, this whole book is just beautiful prose, but that's a great encapsulation. And when you layer on top that intelligence with that interpersonal ability, and then this thing you're talking about, David, this seeming ability to predict the cultural future of where America is heading, and then build Trader Joe's as the product for that future, it's unbelievable.

David: It is amazing.

Ben: So this "Whole Earth Harry" era, where we wrap ourselves in a blanket of granola and health food and almond butter.

David: And nuts and dried fruits. So at the end of the 60s and into the 70s, the California hippie counterculture Summer of Love movement kind of bifurcated and went off in a whole bunch of different directions. And one of those directions was Silicon Valley and tech and computers and Steve Jobs and Nolan Bushnell and Woz. And that becomes Apple and everything.

Ben: The Haight-Ashbury.

David: Yeah, yeah. Another one of those directions was the organic health food movement. And for Joe and the target audience of overeducated, underpaid consumers, this, just like wine, is right in the sweet spot. You can merchandise it just like wine. You can tell the stories about what these foods are, why they're better, why they're great for your body. It's high value per cubic inch. It's more expensive than regular food.

Joe has this amazing quote on this. He says, "We prepared to marry the health food store to the liquor store. This concept obviously was founded in schizophrenia, but it occurred to me that people who really thought about what they ingested, whether they were wine connoisseurs or health food nuts, were basically on the same radar beam. Both groups were fragmented from the masses who willingly consumed Folgers Coffee, Best Foods mayonnaise, Wonder Bread, Coca-Cola, et cetera. Both groups were the kind of people who I was hoping represented a breakup of mainstream consumption in America."

"And so by the spring of 1971, the caterpillar 'Good Time Charlie' had emerged from his chrysalis as 'Whole Earth Harry,' a party store cum health food store." It's amazing this is all happening. Call it five to eight years before John Mackey starts Whole Foods in Austin, Texas. So this is how on the pulse Joe was. And Whole Foods would obviously become the closest substitute competitor that Trader Joe's has out there. They're still pretty far apart, but yeah, it's wild. Joe sees all the things that John would then see and create Whole Foods. And he saw them five plus years before.

Ben: Yep. It's about aligning your trade-offs. The other amazing aligned thing about this customer base that he's trying to serve and the business that he's trying to create — of being this sort of anti-supermarket with health foods — you can buy batches of food from suppliers that the big chains won't or can't because they're just not set up to do it.

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David: The CPG companies are never going to touch this stuff. At least in the 70s, there's this.

Ben: Amazing story of someone coming to visit Trader Joe's saying, "Hey, I have a whole bunch of extra large eggs that I just can't sell to the supermarket chains. Can you help me out?"

David: They only want large eggs.

Ben: Yeah. And Joe says, "Sure, what's going on with them?" And he says, "Well, they only want large eggs. I'll sell you these extra large eggs that are at least 12% bigger but for a lower price because I can't seem to unload them."
And he's like, "Why the deal?" And the supplier says, "Well, the large supermarket chains only want continuous items. And I'm actually not sure I can regularly produce enough of these extra large eggs."
The kind of disturbing part about this is it's because it's at the end of the chicken's life that they produce these extra large eggs. So it's kind of the last eggs they'll lay. And unless I can promise a certain volume and certainty that I'll be able to supply, there's not a market for it.

David: The big supermarket industry just isn't interested.

Ben: Trader Joe's is like, "We've got the perfect consumer for you. They're value conscious. Our message to them is sometimes we'll have stuff, sometimes we won't."
And so if you just want to sell those to me, I'm sure I can unload them on our customers; they're going to love the deal. And then it's actually not a big deal for me when I run out, because that's not a part of our value proposition the way it is for the big supermarkets.
So this begins what Joe calls intensive buying. If we have line of sight on something that we can uniquely sell, that we're going to get a great deal on, that we know our customers are going to love, we should do all we can to go and suck up all the supply of that thing so we can get the lowest per unit price for our customers.

David: Yep. We'll tell the story, they'll get it.

Ben: It's this storytelling that's exactly right. It's just like selling wines. They really start to bring that into foods in this era.

David: So for this Whole Earth Harry era of Trader Joe's, these health foods are the perfect vessel for all this.

Ben: Yeah, they basically create a blacklist of things that over the years becomes: no GMOs, no high fructose corn syrup, no artificial flavors, no MSG, no bleached flour, no added hormones in their dairy products.
It kind of blossoms into this big list: you can just trust the foods that we are giving to you as healthy in some way. The funny thing is, today, most of what you're buying from them is processed packaged food. It's just a story told very well.
And when you go to grab stuff in the freezer, it's a lot of salt; there's a lot of deep-fried stuff. You can't make giant frozen meals at this scale without being very processed.
But they have this brand that they've built over 50 years of paying attention to the ingredients, of doing what they can, of looking a lot more granola during this 1970s era. So they are able to carry that brand with them. And they regularly update what they will and won't stock and what they let their suppliers put in. So there is sort of this funny dichotomy of it being a "health food store."

David: There have been other layers that have been added since then.

Ben: Yes.

David: So it's fitting you say granola. The really strategic, critical element of adding health foods to Trader Joe's isn't just that it also fits all the same criteria that wine does and that it's a perfect fit for the Trader Joe's target customer. All that is true.
It's different than wine in one critical aspect. Wine by nature is branded. It's not big brands, but it's the brand of the winery and the label, and that carries a huge amount of value.
Health foods: nuts, dried fruit, bran, granola. This stuff is unbranded at the time. And thus emerges the opportunity for Trader Joe's to start introducing their own product brands.
But first, before we tell the story of private label in Trader Joe's, this is a great time to thank good friend of the show, Sentry. That's S E N T R Y. Like someone standing guard.

Ben: Yes, Sentry helps developers debug everything from errors to performance issues and fix them before users get mad. Specifically, David, I've started describing it this way. When you open an app and it just kind of hangs or you click a button and then an error pops up? Yep, the people making those apps need to know about this, and Sentry tells them so you don't have to, listeners.

David: You have almost certainly used something today that relies on Sentry. 140,000 organizations. Basically all of your favorite apps use Sentry to run better.

Ben: So I asked the team for some examples. If you're tracking a workout with Tonal, Sentry is there; or checking your kid into preschool with Brightwheel, Sentry; or brushing up on your Spanish in Duolingo; or going for the win in Valorant—Sentry is even helping to keep satellites in space.

David: Or if I literally just read off Sentry's website: Disney, Cloudflare, GitHub, Anthropic, Vercel, Atlassian, all use Sentry.

Ben: And they do more than just tell you about the issues. It helps you figure out how to fix them, too. Sentry now has an AI debugging agent called Seer, which can find the cause of even the gnarliest issues.
With nearly 95% accuracy, Seer pulls from all the contexts that Sentry already has—your errors, logs, traces, code base, et cetera—to understand the root cause, offer a fix, and get you back to building. Their new AI code review feature can even help you look at pull requests and predict bugs before you ship them into production.

David: So awesome. So our thanks to Sentry for making sure that all of our favorite stuff just works. You can check out Sentry.io/Acquired (that's S E N T R Y.io/Acquired) and just tell them that Ben and David sent you.

Ben: All right, so, David, private label, let's go. What was the very first Trader Joe's private label product? Also, it's crazy to imagine Trader Joe's without private label, right? I mean, you walk in today, you look around, over 80% of the stuff is Trader Joe's except wine and some other things here and there. There's Rxbar, as I noticed.

David: They used to have Spindrifts for a while. I don't know if they still do.

Ben: Some of their cheeses.

David: Yep. But wine and spirits are the one big category left where it's mostly not private label, including Charles Shaw, as we will talk about at the end of the episode.

Ben: All right, so how did they start?

David: All right, the first private label product is naturally enough for Whole Earth Harry Granola.

Ben: Perfect.

David: You can still buy Trader Joe's granola today. I'm sure it's not the same recipe.

Ben: And it's kind of the easiest thing, right? You just take in a giant truckload of generic granola. It's not that hard to throw it into bags.

David: And it's literally the product that is used as the euphemism for this whole health food category.

Ben: Yes.

David: Granola, yes. So granola quickly leads them to private label honey, freshly squeezed orange juice (which they had in the stores for a long time). They eventually pulled it out because it was too operationally complex.

Ben: It's such a Trader Joe's thing, right? Totally not easy to handle. Doesn't pass one of the four tests. Get it out of there.

David: Vitamins, private label bran and bran flakes. And then the big one, the wine equivalent of health foods.
Their vendor there in Southern California that they were sourcing their bran and bran flakes from turns out also does nuts and dried fruits.
And so Joe and Trader Joe's, on a whim (because their vendor of bran also offered it), decided, "Hey, let's get some nuts and dried fruit in here, too."

Ben: All right, now is a great time to eat some roasted and salted fancy mixed nuts branded by Trader Joe's.

David: Got any dried fruit in there, too?

Ben: Not this package. I will say now, when you go and grab, they're not just commodity nuts. They have stuff that you can't get anywhere else, like weird chili lime blends or sesame crusted cashews or interesting trail mixes that are not the generic thing.

David: Yep. So nuts and dried fruits become the next rocket ship product category for Trader Joe's. And just like wine in the alcohol era, customers love it. Still do. This has got to be one of the biggest product categories for Trader Joe's to this day.

Ben: Yep.

David: Certainly in terms of space that I see in the stores, the nut and dried fruit section is huge. Just like with wine, Trader Joe's quickly becomes the largest nut and dried fruit retailer in the whole state of California. And it's all either unbranded or Trader Joe's private label products that they're selling. Incredible. Also very high value per cubic inch, even higher than wine.

Ben: And just everything about it is great. For Trader Joe's business model, it's yet another thing where they're not carving off a piece of themselves and giving it to a brand.
They're saying, "Nope, this is a Trader Joe's thing." And when people come in here, they have a relationship with us that we're not just a vessel for other people.
We're now slowly getting to make 100% of the brand promise and the experience of Trader Joe's: our stores, with our items in it, and all of our operations.

David: There is no greater example of the difference between the supermarket CPG brand industrial unholy alliance versus the Trader Joe's approach than nuts. What is the #1 CPG brand at this time that sells nuts?

Ben: Planters.

David: Planters. Compare that. It's the same nuts. A nut is a nut. But what is the brand promise, product experience, and job to be done by Planters versus the nuts and dried fruit that you're buying at Whole Earth Harry? Trader Joe's polar universe. Opposites.

Ben: It's funny: if I'm eating the same mixed nuts that are salted from Planters, it feels like I should be drinking them with a beer and...

David: Watching football, and it's like, "bad for you."

Ben: And it feels like if I'm eating them out of this bag (that I just ate the exact same nuts out of) with this hippy-dippy little basket that shows some roots and a sunshine on the bag. And this makes me feel good. This is health food.

David: You're being discerning about what you're putting in your body.

Ben: So funny.

David: It's the same nuts.

Ben: So once they realize this, they really just start moving product category by product category. Obviously, Trader Joe's is not getting into the business of making these products themselves, but what they are doing is finding people that currently make something and working with them to make something slightly different.
Almost always slightly different. Putting it in Trader Joe's packaging that is in some way unique. It's like what Costco does. They want a unique SKU for Costco, so you're never price comparing it against something else.
I remember my classic example at Costco was when I went and bought a Sonicare at Costco. But it turns out the way it was packaged, it came with different accessories. So there were no apples to apples with the Sonicare that I was buying elsewhere.
This takes it one step further. They're saying: for most of these items, there is no equivalent somewhere else. Yeah, there's a few, like the pretzel thins, but a lot of these things have a different set of spices, one or two more or less ingredients in the pre-made meal.
Or maybe Trader Joe's merchandisers are collaborating with a supplier to create a meal from scratch based on their market intelligence and insights about what consumers want. Trader Joe's is actually making almost none of this, but they are integrating up the supply chain in a way where they can say, "Hey, we need a Trader Joe's unique product that you are making just for us." And by the way, you will never tell a damn soul that you are the one who makes it.

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David: My favorite example of this, obviously not from the health food era of Trader Joe's, was that there was a period of time—it may still be the case—that Wolfgang Puck made the frozen pizzas for Trader Joe's. This illustrates the concept of, "We've got to deliver unique and compelling value for our customers." It's a Wolfgang Puck frozen pizza you can go buy in a supermarket. But the Trader Joe's version is smaller in diameter so that it fits in a toaster oven. Ah, there you go! Compelling convenience value for our customers. You don't have to turn on your whole big oven to make this pizza.

Ben: And I would also bet that it's just cheaper. By getting rid of the brand, and thus getting rid of the brand's need to market and have overhead costs in marketing, they just eliminate some of the waste in the system and pass that along to their customers. So you're always getting a little bit of a better value in addition to a little bit of a unique product.

David: Oh, totally. One thing we didn't talk about in the description of the brand-supermarket industrial complex is how much of the totality of marketing is falling on the brands in this world. It's not just the national advertising on television; it's the couponing. What is the definitive experience, at least until the recent past, of the modern American supermarket? You go in with your wad of coupons that you got from the circular. Who's paying for those coupons? It's not the supermarket; it's the manufacturers.

Ben: And then you get into all the dirty stuff around slotting fees. Did you read at all about this?

David: Oh yeah, totally.

Ben: It's so extractive.

David: The brands have to pay money to the supermarkets just for the right to put their products on the shelves.

Ben: And then even in modern days it's, "Hey, we've got in-store signage, we've got in-store TV screens. They call it retail media. You should pay us to advertise in the store at the point of sale."
Trader Joe's is like, "Let's just eliminate all of that. The brand is just our brand. If you make the food for us, we will pay you for that. But it's our brand. You don't have to pay marketing costs. You don't have to pay the slotting fees to get on our shelves. We don't have retail media in our stores."
The whole thing is about just compressing all of the margin out of all the activities that need to happen in the traditional system for this streamlined system.

David: And in Joe's mind, and I think even through the next generations of Trader Joe's CEOs and all the way up through the company today, that practice of the supermarket CPG industrial complex is just gross. It's just disgusting. It's morally repugnant to them. I genuinely think they feel that way.

And it's another take on the same thing that Costco and Sol Price and Jim Sinegal had about why they don't do sales. Trader Joe's also doesn't do sales and doesn't have coupons. It's like you're insulting your customers. You're pitching to them as if this is a discount and great thing and benefit for them, but actually it's the result of this highly pernicious system that inflates costs across the board for them.

Ben: Right. It's a privileged position to be in, though, where you're lobbing bombs. Somebody probably has to have a 50,000 SKU store. I mean, Trader Joe's and Costco both only stock about 4,000 items at a time. It's a better business to be in. It's a more pleasant business to get to run. It's a better business to work in. And at the end of the day, there probably also is going to be a much larger market for a system that exists the other way to sell all these branded products.

David: There's a reason that Walmart and Kroger's...

Ben: And they're all much bigger businesses.

David: Exactly.

Ben: So while we're on branded products, this is a great little tidbit. The website Eater submitted a FOIA request to the U.S. government, to the USDA and the FDA.

David: Oh, I remember this. This is awesome.

Ben: To figure out, via food recalls, who makes Trader Joe's items. And by the Freedom of Information Act, they have to provide that information. So there's a whole bunch of these on the internet where you can actually see the Trader Joe's pita chips are made by Stacy's, which is Frito-Lay/Pepsi. The yogurt is Dan and Stonyfield Farm.

Tasty Bite makes a lot of Trader Joe's Indian food. The Tasty Bite Punjab Eggplant ran $3.39 at Whole Foods, and the seemingly identical or very similar is a whole dollar cheaper. So even for these ones that are extremely similar, by cutting out the brand, by buying a mass quantity of it, and by eliminating all these slotting fees and retail media, you really knock a huge amount. I mean, a dollar off of a $3.39 price is a huge percentage.
Trader Joe's smoothies are very likely the same or very similar as Naked Juice, plus or minus one or two ingredients. The hummus is very likely Tribe hummus. The whole thing is great.

David: So the health food era really has two huge strategic impacts on Trader Joe's. It's getting them into private label, which becomes a cornerstone of the company all the way to this day.

The other equally important thing is it diversifies them out of wine and liquor as their sole core differentiated offering for their target customers. This is hugely important because right as health food is really ramping up and hitting its stride, in 1977, California repeals the fair trade laws on alcohol and nearly everything else. This means that any retailer can now price wine and alcohol at any price they want, and this leads to all the alcohol discounters coming in: Total Wine and BevMo, et cetera. Now, of course, Trader Joe's is still in a great position and still does great, but all of a sudden they had this category basically all to themselves.

Ben: With a regulatory pseudo-monopoly on it, or at least a scarce number of...

David: Yeah, right, price-regulated monopoly, set profit margins. But now you've got BevMo showing up. Now you've got Total Wine. You've got discounters, dedicated big-box liquor stores that can just blow it out on prices, and it becomes a big competitive vector for Trader Joe's. This plays out most viscerally in wine and liquor, but it's everything across the board—every product they sell. Now that fair trade is gone, profit margins just start getting eroded in basically every category. So this is a big, big strategic challenge, not just for Trader Joe's, but for every retailer in the industry.

Ben: And with deregulation like this, it's good for consumers because prices are going to drop. In some ways, it's good to be a retailer, because now you have more control. You can move prices up and down when before you were prohibited from doing so. It's bad because your guaranteed profit margin is going away, but what it does do is it shifts the entire competitive playing field to: how good are you at your operations? How tight are you at running your business, controlling your costs, accounting for everything, and understanding all the impacts—now that your profit margins are shrinking—of things that ripple through your business?

David: Yes. And Trader Joe's certainly does do all of those things coming out of this. However, what you just said is true for the majority of retailers out there. But if you could somehow find a way to make the majority of what you sell, or maybe even eventually everything you sell, truly differentiated one-of-one products, well, then you would be insulated from this price competition, have no direct competitors, and, man, it's really nice that Trader Joe's has just built up this private label expertise in the health food market.

Ben: Yep.

David: So Joe decides, all right, "end of fair trade and deregulation." I don't want to undersell this: it's a massive tidal wave that hits the industry. Retailers go out of business left and right, and Trader Joe's is not immune from this either. People think the company is going to go under; employees think the company is going to go under, just like everyone else.
Joe says our way out is, of course, operational excellence. But really, in the long run, it's, "We've got to differentiate and be one-of-one in everything." So he calls this phase of the company "Mack the Knife." This is really obscure. Is "Mack the Knife" like the song "Mack the Knife" from *Threepenny Opera*?

Ben: That's funny. I had no idea where that came from.

David: Joe writes in the book *Friends*, "'Mack the Knife' has no competition. That's why I called it 'Mack the Knife.'" My years at Pronto Markets convinced me that where there is no competition today, there will be tomorrow. You must assume that competitors will open all around you. The answer is to design a store that has no competition. After 1978, after the end of fair trade, I paid no heed to nearby supermarkets, liquor stores, health food stores, or anything else. The whole strategy becomes double down on private label, double down on differentiation, become...

Ben: One-of-one, become one-of-one. I love it. Obviously, I love it because this is how you and I think about Acquired. Trader Joe's is very much a reflection of the type of business we hope to build, and so I think all of this is preaching to the choir. How can you be more niche, but serve the shit out of your niche? How can you provide an incredible amount of value to your core customer base and not care about anybody outside your customer target? How can you be N of 1? How can you provide only the most unique thing? I can't decide if these are just the best principles to run a business, or if these are just the ones that happen to appeal to us almost as an act of vanity. It's probably not the best way to run a scale business, but it's an amazing way to dominate a niche.

David: Well, yes, I think that's true. And if you can somehow find a scale business that you can run with these properties, it's amazing. That's when you get the Apples, the Costcos, the Trader Joe's.

Ben: Right. Having no competition is a nice...

David: It's a nice thing. So heading into this "Mack the Knife" era, Joe institutes a rule that I assume is still in effect at Trader Joe's to this day, which is that, "Okay, everybody, obviously private label, that's the strategy, that's for the future here." But Trader Joe's will never introduce any private label product just for the sake of having a private label product in...

Ben: ...that category, which is the opposite of most of these generics. Like you go to Walmart, the Great Value brand is a crappier version of the exact same branded product, but it's priced less, so...

David: Exactly.

Ben: Are Amazon Basics batteries differentiated? No, they're just cheaper.

David: Yes.

Ben: Also, it's kind of interesting that Walmart has Great Value, Target has Good & Gather, Amazon has Basics, Costco has Kirkland Signature, Trader Joe's has Trader Joe's. How come nobody else's house brand is just the name of the retailer? I think actually it exposes that Trader Joe's is all-in.

David: Yeah.

Ben: Whereas these other brands sort of want to play both sides. "We've got a house brand, but we also work great with third parties." Trader Joe's is like, "The Trader Joe's experience is walking into our store that is called Trader Joe's and buying our products that are called Trader Joe's, and everything around it is just wrapped in a big Trader Joe's blanket." And you couldn't possibly decouple the two. I don't think other retailers feel that way.

David: Yes. This is all to the point of it's doing a totally different job at the other retailers. The other retailers want to use the house brand name to signal to customers: this is the same product at a cheaper price.

Ben: Yes.

David: Trader Joe's wants to signal to customers with all of their products: "This is an N of 1 product."

Ben: Yep. And it's almost always true. These pretzels I'm eating with the peanut butter inside... I'm pretty sure there's a Costco equivalent of these, but a lot of the things are truly unique.

David: Yeah. Well, we'll get into after Joe's era, how Trader Joe's changes a bit as it scales.

Ben: Yes.

David: But for now, this is core, core tenets here. A great one that started during the health food era, but then becomes so emblematic of this: Trader Joe's basically invented packaged almond butter.

Ben: Yes.

David: Almond butter wasn't a thing.

Ben: I couldn't believe this. Almond butter is one of my favorite foods in the world. I eat it every day, just like I eat a spinach feta wrap. It is like a part of my identity: almond butter. And reading this book and realizing that Trader Joe's invented it is the coolest thing.

David: Yes. Almond processing leaves lots of leftover little almond bits that are almonds, just little bits of almonds. And there's actually a different technological process that you need to then turn that into butter versus what you need to use for bits of peanuts to turn into peanut butter. So none of the big brands did this, even though peanut butter was a staple CPG good in America.

Ben: Peanuts are also way cheaper to source than almonds. So you have to be willing to mark up your almond butter or maybe use exclusively waste products, like all the bits, to make it.

David: Exactly. But for the big CPG companies, almonds aren't a big part of what they're doing.

Ben: Back in these days, right at this point.

---

David: So Trader Joe's goes and learns the process and the technology of how to do this, finds suppliers that are willing to do it, and brings packaged almond butter to store shelves in grocery stores for the first time.

Ben: Yep.

David: And the secret weapon to really making all this work was the Fearless Flyer. Back to the wine merchandising strategy, they had the direct channel to their customers to tell long-form stories and merchandise these products and make them 'n of one.' One gets a physical newsletter, and it's all about the product stories of these products that they're bringing to market.

Ben: It only comes—I don't know if it's four times a year or six times a year—but there's some scarcity to it. So you actually pay attention when you get it. There's also a funny thing where at first Joe was resistant to doing it for two reasons. One, it was really expensive to publish your own newspaper. You'd have to work with a real publisher/printer sort of thing, a typesetter. And two, you don't want to be in the business of asking all these customers for their address and then maintaining PII on them and tracking them when they move. And so that one is great because Joe just realized, "Well, actually, if I'm so good at targeting neighborhoods that have disposable income and are highly educated, I have a very particular sense of who my customer is." If they move, the person who moves into their house is probably also going to be my customer.

David: Yes. So I can just do zip code targeting.

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

David: Publications, which today is part of the charm. But yes, it was done by Joe himself.

Ben: Back in the day, as is the goofy tagline that is very Trader Joe's in its sense of humor—of terrible dad jokes and puns. "'Trader Joe's Fearless Flyer, as always, free and worth every penny.'"

David: Yes. So this leads into, as far as I know, the only other marketing advertising activity that Trader Joe's does.

Ben: Oh, on the radio.

David: Yes, radio. And I believe, yes, the only paid one, which also starts as an organic, free thing. Yes, radio advertising. So, the classical music radio station in...

Ben: LA, which again, target customer: educated and...

David: Underpaid, asks Joe to come on once a week—this is especially during the wine era of Trader Joe's—and do a one-minute segment on a wine they're bringing to town. And of course, Trader Joe's was like, "Amazing, I'm going to do that!" And then it broadens out to food. And it works so well that they eventually decide, "Hey, we should actually do this as paid radio advertising!" But unlike everybody else who advertises on the radio, these aren't going to be generic ads. It's going to be Joe himself, writing and speaking, telling the product story of one singular product in every ad. And we're always going to end with, "Thank you for listening."

Ben: I love it. It's a non-advertisement advertisement.

David: Joe basically discovered the power of podcasts to reach your audience back in the 1970s.

Ben: They realized they should actually go pretty hard into this. And in order to justify all the radio ad spend, they needed a density of stores in a certain area. And so when they were going to launch a new city, they would have to make sure they had sufficient number of stores to amortize buying radio ads for all the different areas it was going to reach.

David: Right. Because it's going to reach the whole city.

Ben: Right. They wouldn't just launch one store; they would go into a city and launch several at a time. So you can get the economies of scale from that. There is one other place that they did paid marketing. Do you know what it is?

David: I don't know that I found this.

Ben: Donations to the arts.

David: Ah, yes, yes.

Ben: Again, on this theme of the highly educated and trying to reach them where they are, they would do things like go to plays or go to the ballet. They would make donations appear in the playbill, pamphlet, and magazine.

David: Yes. My wife, Jenny, who's an executive at the ballet here in San Francisco, will be very mad at me if I don't underscore for everyone listening that supporting the arts is a great, effective form of marketing for your company because it...

Ben: Is also tax deductible.

David: Also tax deductible, and for Trader Joe's, reaching exactly their target audience.

Ben: Yep.

David: So coming out of that mid-70s, Whole Earth, 'hairy health food' era of Trader Joe's, it really was these two huge strategic things for the company. One was diversifying them out of just wine and liquor into another new product category that they could be really differentiated in. And then the bigger one: getting them into this private label strategy as a whole, which they could then blow out with Mac the Knife and eventually transform the whole store—basically, except wine and liquor—into private label. There was one other thing, though, that Joe did as a strategic hedge against all the chaos that the repeal of Fair Trade unleashed in the California retail sector.

Ben: Yes, he sold the company.

David: Yes, yes, he sold the company.

Ben: Just a little hedge.

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

Ben: This is not the brother of the one who owns the store called Aldi in the United States.

David: Yes, to be super clear, Aldi does not own Trader Joe's. The Aldi that exists in the United States is Aldi Süd, the other half of the Aldi empire that split in the late '60s, early '70s. The relationship that owns Trader Joe's is the founder of Aldi Nord, the other...

Ben: Half, and the entity Aldi Nord never actually bought Trader Joe's.

David: Teo bought it himself, personally. And yes, Trader Joe's is now owned by the three German foundations that he set up after his passing.

Ben: And if you look in lots of places on the internet, it will tell you that Aldi owns Trader Joe's, and that is not true.

David: Okay, how did this happen? So, as we said, when Joe did the management buyout of Pronto Markets, the predecessor entity to Trader Joe's from Rexall Drugs, Joe was the founder and the largest shareholder. But about a quarter to a third of the company was owned by the other early employees. And so by the time you get to the mid- to late '70s here, a bunch of those folks had either retired or passed away, and they started having estate planning needs because Trader Joe's starts becoming valuable.

Ben: And they had bought in for 100 bucks.

David: Yes. A valuation of $15,000.

Ben: Right.

David: So, yes, this stock is worth a lot.

Ben: They've got some giant capital gain.

David: So Joe and the company knew this was a problem coming. And during the mid-70s, they spent a couple of years setting up a whole ownership structure to transfer ownership of the company into an official Employee Stock Option Plan, or ESOP, as it's known in corporate finance. This is the exact same kind of structure, by the way, that Domenico De Sole and Tom Ford used to protect Gucci as the mechanism by which they rebuffed Bernard Arnault and LVMH in the handbag wars between Gucci and LVMH. Amazing.

Ben: Yes.

David: So the thing, though, about setting up this ESOP ownership plan and transferring ownership of the company into it was that it was predicated on there being a valuation for the company. And right as it's about to happen is when Fair Trade gets repealed.

Ben: And interestingly, there had not been any primary capital infusions to look at.

David: The only valuation that ever happened was the $25,000 transaction when Joe bought Pronto Markets.

Ben: Right. It's a big deal for whoever is coming in to create the valuation for this, because that'll be the basis for which this entire corporate structure reorg—employees owning it in an ESOP—is going to be predicated on.

David: Yep. And the value that the original shareholder is going to cash out, etcetera, etcetera. So then the end of Fair Trade hits, the whole industry is in disarray, and nobody can agree on a valuation.

Ben: Because you don't know if the company's going to survive. You don't know if it's actually way more valuable. Now, the confidence that you have in the valuation is shot, so it doesn't get issued.

---

David: Yep. So the ESOP plan goes out the window. Meanwhile, at the same time, Aldi had been expanding into America out of Germany. And again, Aldi Süd was the one doing this, the other brother's company, not Aldi Nord.

Ben: Teo Albrecht's company, who has no exposure to the U.S. market at this point.

David: Right. But he's a little jealous of his brother, and he really would like some U.S. market exposure. Aldi, by the way, I didn't know this until doing research, is an acronym for Albrecht Discount. So there you go. That's where Aldi comes from.

So Teo and Aldi Nord, they start looking at the U.S. market, too. They actually hire investment bankers to go over from Germany and start scouring the U.S., looking for other grocers or retailers in the U.S. that they could acquire and have Aldi Nord also enter America. And that's how they find Trader Joe's.

Ben: Because at this point, it's still 20 stores, all in California.

David: Yep. But clearly they've got some magic here.

Ben: Yeah.

David: Teo is enraptured. He meets Joe. They hit it off. He's like, "This is incredible!" He spends years trying to convince Joe to sell. And Joe's like, "No way! You're very nice. I respect you. I appreciate what Aldi's done. But one, I'm not selling. Why on earth would I sell? Two, no way in hell am I going to sell to Aldi. Trader Joe's is special. This will never be turned into Aldi."

And then the ESOP blows up a couple years later. So Joe reengages with Teo, and he basically says, "I will sell to you."

Ben: Part of the reason I'm going to sell to you is the current situation is that so much of the income flows through me personally, and I have a marginal tax rate of 73%.

David: Right. The highest marginal tax bracket in the U.S. at this point in time is 73%. Yeah.

Ben: Imagine for every dollar you make, 73 cents is getting paid in taxes. He's like, "This is the worst structure imaginable! Whatever it is, it has to be different than this."

David: Yep. So he says to Teo, "All right, I will sell to you, but here are my conditions:

Number one, Trader Joe's will not become part of Aldi. We will share nothing. These are totally different businesses. You won't use Trader Joe's as a vehicle for Aldi Nord to come to America.

Two, Ben, like you're saying, we will have complete management autonomy. And the strategic operating plan that we are going with now and for the future is private label, not the Aldi massive discount operating plan. You either believe that and are in, or there's no deal.

Three, I can stay on as CEO for as long or as short as I like. No management contract. It is 100% up to me.

Four, the price you're going to pay for the company is three times what you offered me a couple years ago.

And then number five, the real kicker: 'We're going to put all this in a contract. It is going to be a one-page deal. We're going to put these deal points in here: one-page contract, no diligence, no definitive merger agreement BS. That's it. One page with these points. I will draft it. Sign the paper if you like it. Pay me and my employees the money, or no deal.' And Teo says, 'Great, I'm in.'"

Ben: Awesome.

David: So they do the deal. That's it.

Ben: God! The value of a "we trust each other" one-page contract thing is just... you just see it over and over again in the best businesses and the best partnerships of all time.

David: I mean, I was reading this in *Becoming Trader Joe* and Joe's autobiography. Just like, "Hold on. This is why Warren Buffett wins!"

Ben: Yeah.

David: This is why Berkshire is Berkshire. So Teo Albrecht owns Trader Joe's, and then now his three separate foundations, kind of just like the IKEA structure from that episode, own Trader Joe's. And neither Teo nor certainly Aldi ever invested a single incremental dollar beyond the price that they bought it for. It is very profitable, cash-flow positive, throwing off cash for the foundations ever since.

Ben: Yeah. As of 1976, so three years before the sale, Trader Joe's carried no fixed interest-bearing debt, never recorded a loss, and became more profitable every year.

David: Incredible.

Ben: It's crazy. I'm actually not sure we've covered a business on Acquired like this, that starts with a giant amount of leverage where the founder just mortgages his...

David: Life, sells his house.

Ben: Yeah. And then manages to, what, within 13 years of founding, get out from under it, and then just incrementally pile up more cash in the business every year. Maybe Nike. Yeah, maybe Nike, the Japanese trading company is a little bit of a twist, but...

David: Yeah, I mean, Teo Albrecht is a bit of a twist here, too, but again, that didn't impact the business at all. He just became the shareholder. So meanwhile, there's a whole other parallel story, which is not for this episode, which is Aldi sued. Aldi is one of the biggest grocers in America now.

Ben: Yes.

David: There are 2,500 Aldis in the U.S. It is the fastest-growing grocer in the U.S. since COVID, and they plan to open 800 more stores in the next couple years. But it has absolutely nothing to do...

Ben: With Trader Joe's or even this branch of the family.

David: Yeah, crazy!

Ben: Okay, so this feels like it's some sort of climax, like it's the end of the story. The show is called Acquired. This used to be where we would end the story. There are like 20-something stores when this transaction happens. They're still in Southern California. The company is now 600 stores.

David: We are so far from today, yeah.

Ben: Where Trader Joe's winds up. I mean, we're only even, at this point in time, in the beginning of the transition to private label. The Trader Joe's, as we know it today, has barely been started at the time of the sale to Teo's family.

David: It's the craziest thing. It really is just a change in ownership and nothing else that does not...

Ben: Interrupt the compounding of the business itself.

David: Yeah, there's some kind of great lesson in there for investors.

Ben: Yes. All right, but before we tell you that story, listeners, we have to tell you about another friend of the show that we are very excited about here at Acquired HQ. That's WorkOS.

David: Yes. If you are building software that's used in enterprises, you've probably felt the pain of integrating things like SSO or SCIM (that's SCIM for people in the know), various permissions, audit logs, and all the other features that your big enterprise customers demand that you have. And if you haven't felt this pain yet, you absolutely will as soon as you get that first big enterprise customer.

Ben: WorkOS turns these potential deal blockers into simple drop-in APIs, letting you scale revenue earlier in the life of your company or simplify your internal codebase if you're already a larger company.

David: Ben and I were actually just talking with WorkOS's founder Michael Grinich, and he pointed out that especially in this AI era, it's not just about scaling revenue, it's about landing a customer so your competitors don't. Enterprise readiness has just become table stakes for companies, no matter what their stage, and WorkOS is the go-to choice for the best software companies to shortcut this process and get back to focusing on what makes their beer taste better — building the product itself.

Ben: Interestingly, this has accelerated in this AI era. OpenAI, Anthropic, Cursor, Perplexity, Sierra, Replit, Vercel, and hundreds of other AI startups rely on WorkOS as their auth solution. So why have all of them jumped on the WorkOS train?

David: Yep, Michael is telling us it's basically two things. One, AI companies are just scaling so much faster that they need things like authorization, authentication, and SSO to quickly become enterprise-ready in the early days. And two, unlike the old world of bring-your-own-SaaS product for your little team, these AI products reach pretty deep into your customers' systems and data to be the most effective. So IT departments are scrutinizing software vendors more than ever to make sure new products are compliant before they can adopt them.

Ben: So if you are ready to get started with just a few lines of code for SAML, SCIM, RBAC, SSO, authorization, authentication, and everything else to please IT admins and their checklists. So, check out WorkOS. It's the modern software platform to make all this happen. That's WorkOS.com, and just tell them that Ben and David sent you. All right, David, the big expansion.

David: So what happens after the sale? Well, the immediate answer, of course, as we said, is nothing. Joe sticks around as CEO for the next 10 years, running the private label strategy, and it works great in Southern California. As you were saying, Ben. So here's the thing about Joe. He really is like Sol Price. He was this incredible entrepreneur, absolute genius. Came up with all of these truly innovative, orthogonal, genius strategies that nobody else in the industry was pursuing. Sol Price did the same thing at Costco. But Sol Price isn't the one who really built Costco. Jim Sinegal built Costco. The Costco we know today, it's the same thing for Joe. He built Trader Joe's, but he really didn't have any interest in scaling it and taking it outside of Southern California.

I kind of think, reading between the lines of some of the things some of his successors said about him and some of the stuff in his obituaries and press, I think he just really didn't want to travel. I think he wanted to be close to his family. I think he wanted all the stores within a day's drive to and from his house. So when he retires in 1988, again, 10 years after he sold the company, they're only just shy of 32 total stores. They had just expanded to Northern California. The first Northern California store was in San Rafael, my wife's hometown in Marin. Great little town. I think for Joe, that's sort of what his ambition was: to build one of the greatest retailers of all time, a regional chain. But he was indifferent whether it was regional or national.

Ben: It's so interesting how some of the entrepreneurs we study have this empire-builder strain to them where they're never satisfied. They have to build the biggest thing in the world and build something of consequence to the world. And if there's an opportunity to do that, they must go seize it. It's impossible to not spend their time, effort, life doing that. And Joe just wasn't one of those...

David: People—the Mark Zuckerbergs, I think. He...

Ben: Kind of looked at it and thought, "Well, to what end? What is the point of building something giant?" I'm the shareholder. "I like this business."

David: I have this great life. I've very positively impacted all the people who work for me, all of our customers who shop for us. I've helped birth the wine industry in California and America.

Ben: This is a thing I can obsessively polish. I do, constantly making it better and making it more resilient and all these things. But bigger wasn't necessarily the goal.

David: Yeah, I can totally relate to it. But national expansion clearly is what should happen next for the business.

Ben: Yes.

David: So in 1987, as Joe's getting ready to retire, he hires an old friend from Stanford, from his GSB days, a guy named John Shields, to come in as president and COO under him for a year and then be the anointed successor to take over. John, after GSB, had gone and worked at Macy's and then at Mervyn's, the huge retailer that got acquired by Target. So John knew retail, knew national expansion, and operations. And most importantly, Joe had known him for a long time, going all the way back to Stanford, and trusted him. So on January 1, 1989, John takes over as CEO from Joe, second CEO in Trader Joe's history.

Ben: It's crazy! This is 36 years ago. The modern Trader Joe's is all formed after the sale.

---

David: After this, Joe lays down the strategy.

Ben: Yes.

David: And all the execution happens after with some tweaks along the way. As we'll talk about, John does, as expected, what he was hired to do. Basically, he does national expansion, so he takes Trader Joe's from, as best as I can tell, 27 stores to 175 over the next 12 or 13 years that he's CEO.

Ben: And importantly, he made the jump across the country.

David: Yes.

Ben: Let's hop all the way to the East Coast. They decided to start in Boston and build out a set of stores in the 500-mile corridor from Boston to D.C. At this point, you should be able to say, "I know why they did that." It is the most dense population of universities in America all along that corridor.

David: And it's kind of crazy. Dan Bain, who would take over as the third CEO of Trader Joe's in 2001, did a podcast just recently, and he actually talked about it. He said, "Yeah, I probably wouldn't have made that decision if I were CEO at the time."

Ben: Really?

David: You're taking a regional Southern California company where all the culture, all the DNA, all the learning, it's all there.

Ben: And you're saying the Northeast seems like a good place?

David: Yeah, yeah. That's really the strategy for the '90s and the John Shields era. It's all about taking the strategy, the retail concept that Joe built, and just scaling it up across the country.

Ben: That, and fully realizing the private label plan that took decades to shift everything that they were selling to Trader Joe's-branded products.

David: So the third Trader Joe's CEO, Dan Bain, comes into the company in 1998, first as President of West Coast operations. He previously had been the CFO of a grocery wholesale business, and like John Shields, knew Joe and Trader Joe's intimately over a long period because his wife was the company's auditor for like 20 years—both tax auditor and accountant.

So what Dan really does is create the Trader Joe's that we all know today. It's the same core strategy that Joe had developed, especially with the focus on private label, value to customers, and the same target audience, but Dan expands it to all categories of grocery.

Here's the thing: when Dan started at the company in the late '90s, we've alluded to this a little bit throughout the episode: Trader Joe's was actually a pretty different store than it is today. The average Trader Joe's customer came in once per month. Dan says in a podcast interview about when he started, "At the time, we weren't really a grocery store. We were that store that sold wine, cheese, and nuts. We were sort of a party store."

Ben: And this is about the late '90s.

David: Yeah, party as in when you're throwing a party, you go to Trader Joe's. Dan comes in and he says, "Hey, there's actually a pretty obvious opportunity for us here to really grow same-store sales." And that's: people love us. We're such a great fit for our target customer base. We just need to give them the right product assortment to keep coming back more often. We need to be more of a grocery store and less of a party store.

This is quite different from Joe's strategy. Joe actually writes in his autobiography, "We made no effort to have a complete assortment. No sugar, no salt, no flour, et cetera, unless we could be outstanding in it and make a sufficient number of dollars from it." Obviously, that's very different from Trader Joe's today.

Ben: It's funny, I still think about them as—they're not a complete grocery store. I kind of have to go to Trader Joe's in addition to my normal grocery store run, but they're a lot closer now.

David: You can buy sugar, you can buy flour, you can buy salt. Exactly. Yeah. Joe had no interest in being in those categories. He was really all about that "N of 1"—every product must be differentiated. Dan came in and said, "We can still have that ethos, and most of our products can be that way, but we can also serve our customers in their weekly grocery needs."

Ben: Now, you can look at this as a great insight, and he was right because he massively increased the frequency that people come to the store. Or you could look at it as the first little chipping away at the foundation of what makes Trader Joe's special. We might see great revenue growth and all the numbers ticking up in the near term, but does it take a bite out of their soul in a way that will catch up to them eventually when they become just like everyone else?

David: Yep.

Ben: And we don't know, but that is the continuum that choice exists on.

David: Yes. Given that he started down this path 24 years ago and people still really love Trader Joe's, I think they're doing pretty good.

Ben: Yes.

David: Before Dan took over, Trader Joe's stores carried about 1,500 SKUs.

Ben: Wow, that's really few!

David: Really few! He takes that up to about 4,000. So that's what this is: the sugar, the flour, the salt. It's more than doubling the number of SKUs. But importantly, he says, "We are not going to become a supermarket." So 4,000 SKUs is still way, way, way less than the average supermarket, which has 50,000 SKUs. The average Walmart has about 150,000. He says the way we're going to do this is, "We are not going to change the footprint of the stores. Same square footage, same concept. We need to re-merchandise the stores to serve our customers and give them what they need on a weekly basis without changing the nature of what the store is."

Ben: So we're going to fit two and a half times the amount of stuff in the same square footage?

David: Yes, and we're going to do it such that every product on every shelf in every aisle passes the five-foot test. For every customer who is at least five feet tall, they should be able to reach every aisle, so we can't just stack to the ceiling like Costco.

Ben: Fascinating!

David: So when you go into Trader Joe's, it really is very dense.

Ben: Oh, it's unbelievably dense! I mean, that's my complaint too: whenever I'm reaching for something, there's a guy behind me trying to get it. There's a woman in front of me trying to back out of that area. It's funny, I've stopped thinking about Trader Joe's as the wine and cheese shop and more as—it's defined to me by that one diagonal aisle down the middle with the open freezer chest that has an amazing assortment of glorified TV dinners. Yes, but also, on top of the glorified TV dinners, there are the shelves with all the amazing nuts and chocolate snacks. And then there's the thin ribbon in between the shelves and the open freezers where they have one more inventory area for all the little things. There are so many things in that aisle, and there are always 40 people in it. Also, how genius is it that the freezers are open? I'm sure it's very costly, wasting the cold air, but think about how much more likely you are to just reach in and grab some Indian food or some mandarin orange chicken or whatever.

David: Well, also, they've got to be. When you've got 50 or 100 people in that same aisle all reaching in, you can't have people opening and closing doors all the time.

Ben: Right. I'm sure the psychological thing of, "Oh, just go grab that little box of food," plus how many more people they can jam in that aisle, makes the open freezer chest totally worth it.

David: You are absolutely hitting on the other part of the Trader Joe's tapestry: Trader Joe's is a social experience, whether...

Ben: you like it or not.

David: But for their target customers, this is what they want. If you think about the grocery retail landscape, it's predicated on basically two things: efficiency and convenience, which means lots of SKUs. It's really efficient to get in and out of the stores. You want e-commerce? We've got e-commerce. Omnichannel, baby!

Ben: You want to drive? We've got a big parking lot for you.

David: All these things. And then the other side of that coin is that our target customer is families. We want the American family to shop here because you've got a big hunk of buying power, and you're buying a lot of stuff.

Ben: Yep.

David: That's not Trader Joe's.

Ben: No, it's not.

David: Trader Joe's is the opposite of that on every dimension. It's not efficient to shop here. Our parking lots are a mess. You're going to be packed into these much smaller stores with a whole lot of other people.

Ben: It's going to be unpleasant if you have a toddler with you.

David: Oh, yeah. You don't want to bring your kids here. I mean, sure, yeah, they've got the treasure hunt thing, and people do bring their kids to Trader Joe's. But I really had this emotional and mental struggle throughout this whole episode research process, because I'm reading all about how great Trader Joe's is. I have so much admiration for this company. Of course, I love it. And I'm just thinking about my own life, and I'm like, "I used to shop at Trader Joe's all the time. I was a Trader Joe's customer." And then something happened in the last couple of years, and I never shopped there anymore.

Ben: What could have happened?

David: I'm racking my brain. Is it that Acquired has been too successful? Is that the problem? Am I now one of those people? And then I read this other book for research called *Build a Brand Like Trader Joe's* by this guy, Mark Gardner.

Ben: Oh, is he the guy that got the job at Trader Joe's?

David: Mark was an advertising executive, and he always wondered how Trader Joe's had built this incredible brand. So he was like, "Eh, what the hell? I'll just go work at Trader Joe's. I'm going to find out. I'm going to be an employee. I'll be a man on the inside and see what it's like." So he did it, and he wrote a book about it. And I'm reading this book, and I'm like, "Oh, my God. This is why I stopped being a Trader Joe's customer. It's not for families. I had kids. That's what happened."

Ben: Wow, there are a bunch of Reddit comments around, like, "Hey, was this Trader Joe's employee hitting on me?" It's like, "No, they're just that friendly."

David: They are screening for this in the hiring process. They're looking for former theater kids, basically.

Ben: Yeah. I would argue on this "not for families" thing. I was actually talking to my friend who's a mom of two, and she pointed out that it is so tiring making food for kids every night. While the shopping experience at Trader Joe's is not optimized to bring your family in, it's actually amazing to just go and get pretty healthy, totally ready-to-eat meals you can grab out of the freezer and throw in the microwave. There's a pretty big variety, and you can mix and match and get different ideas. So, even though that's not the target, it can work really well.

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David: They're not intentionally trying to alienate, but this extends to the product strategy, too. The frozen meals, which are such a part of Trader Joe's today, are individually packaged, individual serving sizes.

Ben: Oh, yeah.

David: This is the exact opposite of the supermarkets' family sizes.

Ben: We ran out of beef bulgogi last night, made it, and it was like, well, I guess that's all there is.

David: You're not finding family size at Trader Joe's.

Ben: Right?

David: Once I realized this, I was like, Oh my God, this is genius. They're doing what Joe's always done. They're differentiating versus other retailers. Every other grocer out there, it's all about the families, right?

Ben: Bring your big car, bring your whole family, bring your kids.

David: We'll get you in and out. Not Trader Joe's.

Ben: We should move on. I am a skeptic on the whole social thing. I don't talk to people when I go there. I don't want to talk to people when I go there. Most people that are in there don't seem to want to talk to anyone. We're all just in close quarters, but the stuff that we want is there, so we're all there.

David: I think most people don't care that much about the other shoppers there. They do actually care about the employees, though. You have a store that you're going to every week with a very low turnover employee base. Trader Joe's employee turnover, I think, is 5 or 6% annually.

Ben: Super low. Unbelievably low.

David: The average tenure of a crew member is like 10 to 12 years. You're really going to get to know those people. Imagine, especially if you're a retiree, which is a core part of the demographic here. You really want the social experience.

Ben: Yep.

David: Anyway, Dan really puts all this into strategy at the company.

Ben: Makes sense. Well, David, I know there's one more big chapter that you've been holding back from telling the story.

David: Ready to uncork here. The crowning product achievement of the Dan Bain era of Trader Joe's starts pretty early in his tenure in 2002. I'm sure you have all been waiting for it. Two Buck Chuck, baby! Not a private label product, interestingly enough.

Ben: So interesting for the volume that they do!

David: It's unbelievable, but it is an exclusive product. The story is wild, but first I'm going to open my bottle of Charles Shaw here that I've been saving the whole episode.

Ben: So I got a Sauvignon Blanc. I assumed the red blend would be the cheapest. Amazingly, all the Charles Shaw are the same price. And at Seattle Trader Joe's it was $3.99, which... come on! It's supposed to be Two Buck Chuck, but inflation kills ya.

David: There's been a lot of inflation since 2002.

Ben: David, I'm curious what you are opening.

David: I am opening a California Cab, 2023. Nice, beautiful label with a beautiful looking gazebo here in the image. Established 1979. Really? Gosh, there must be a story behind all this!

Ben: Why is there a gazebo? This whole thing looks very generic to me.

David: Amazingly, it is not, really. That is part of what makes the story so incredible.

Ben: Who is Charles Shaw?

David: As I pour my cab here, cheers, by the way. To 10 years of Acquired.

Ben: To 10 years of Acquired.

David: What better way to celebrate 10 years of Acquired than with a glass of Two Buck Chuck, as we are recording the episode on Trader Joe's? There is a real Charles Shaw. Charles Shaw founded a winery in Napa in 1974, right at the very beginning of the Bottle Shock era—the come-up of Napa. Changing wine in America. Charles and the eponymous Charles Shaw winery and label was a high-end winemaker, right there with Heitz and Freemark Abbey and all the others. He was like a real player in the Napa ecosystem. This is wild! That was all through the '70s and the '80s.

Ben: Well, I mean, he's still the biggest player in the Napa ecosystem by volume.

David: Well, unfortunately for Charles, he's not.

Ben: I see.

David: His name is. Then in the '90s, he has a series of missteps, and the winery, Charles Shaw, ends up going bankrupt. Now, this is not an uncommon story in wine. The list of bankrupt wineries in Napa and Sonoma is long.

Ben: Have you ever heard that aphorism? How do you become a millionaire winemaker?

David: Start as a billionaire? Yes, exactly. He's part of the first wave of wealthy people that get into the wine business, have success, and then have some missteps and lose it all. Yep. He goes bankrupt in 1995. And the label—the brand name and the trade name Charles Shaw, and literally the label with the gazebo, the font, and the design, and everything—gets bought out of bankruptcy in 1995. Not the winery. Separate. Not the real estate. Not the grapes. Not the nothing—just the label. By an entity called Bronco Wines for $27,000. Ben, have you ever heard of Bronco Wines?

Ben: No, I've never heard of Bronco Wines. At least there's something in the back of my head that makes me feel like it's the parent company of something I have heard of, though.

David: Well, let me tell you about Bronco Wines. It is short for Brothers and Cousin. It was founded in 1973, same era as all of this stuff, by one Fred Franzia and his brother Joe and his cousin John, all named Franzia. The name Franzia might mean something to people. Ben, I see you lighting up.

Ben: To anyone who's ever been a college student.

David: The Franzias—the story goes deeper—not what you would expect.

Ben: Have you ever done a Tour de Franzia?

David: Yeah, yeah, yeah. We used to do that at Princeton. That was an Ohio State thing, too. Yes. Must be just a general American college experience thing. I'm glad we opened the wine for this section of the story. Like I said, it goes deeper. The Franzias, it turns out, were nephews of Ernest Gallo. That name might also mean something to you.

Ben: The Franzias are part of the Gallo family.

David: It's almost more like the Gallos are part of the Franzia family. But you could argue either way.

Ben: Wow.

David: The Franzias, completely separate from the Gallos, had their own big-time California wine business in the era before Bottle Shock and Napa and Sonoma coming up. And then, during and after the Franzia business, the older generation—the generation above Fred, John, and Joe—sold out in 1973, right as wines were starting to have their moment in America, to none other than Coca-Cola. Wow. The Franzias were making real wine at this point. Franzia, as you know it—the boxed wine—does not exist yet. Coca-Cola operates it for a few years and then decides, "You know what? We don't actually want to be in the wine business." They sell Franzia to an entity called the Wine Group. And the Wine Group is then what makes the boxed wine Franzia here in the US. The Franzia that you know is the same family, but two business owners later.

Ben: Okay.

David: There's a theme here, though, of taking a brand name and repurposing it for a more mass market, shall we say? When the older generation of the Franzias sell the business to Coke, Fred and his generation—his brother and his cousin—they're pissed. They're like, "Screw you guys! We wanted to run the business. We want to be in the wine business. Why didn't you sell the company? We were going to take this thing over!" They're like, "Eff it! We're just going to go out and start our own wine company and recreate the family business." And that's Bronco Wines. But it's going to be informed by everything that's happened since. This first generation of the rich people who come to Napa and Sonoma, start these wineries, lose their shirts, go bankrupt—of which Charles Shaw is part. Fred and the new Bronco Wines develop a business plan. They are essentially going to become a distressed winery buyout shop. They are just going to vacuum up.

Ben: This is what Bronco Wines is.

David: This is what Bronco Wines is.

Ben: Okay. And that's how they end up buying Charles Shaw.

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David: That's how they end up buying Charles Shaw among hundreds of other wineries and brands. Sometimes they buy the grapes, sometimes they buy the wineries, sometimes they buy the vineyards, sometimes they just buy the labels and the brands, which is what they do with Charles Shaw in 1995 for $27,000.

Ben: Listeners, just so you know, there have been a billion bottles of Charles Shaw sold.

David: Well over a billion. There were a billion sold probably 10-ish years ago, so probably at least two, if not three billion by now.

Ben: $27,000!

David: $27,000. So, as you would imagine, this doesn't make the younger Franzias popular characters in Napa, shall we say?

Ben: I bet.

David: A lot of resentment from the rich, snotty folks that were building these wineries and then going out of business.

David: Fred and his brother and cousin are vacuuming them up for pennies and trading on their brands.

David: But this actually is the other part of the story of wine becoming big in America. You've got all the great wineries and the great awards that they're winning, and Napa and Sonoma becoming real players.

Ben: And it is crazy. I don't think most people know this: Trader Joe's gets a lot of the credit for bringing California wines to people, to the masses in the U.S.

David: And here's where these two parts of the market intersect. So, what Fred and Bronco are doing is they're bringing it to the beer-drinking population. They saw what happened to the family name with the box wine, with Franzia. They saw what their cousins over at Gallo were doing, and they're like, "Well, shoot, we can do this too. Why should wine just be for snobs?"

Ben: "F that." Amazing.

David: Fred's perspective on this is, "Hey, look, there's a huge opportunity to make wine the new beer. And you people in Napa are completely missing the boat on this." He was once asked in an interview how he could sell wine for less than the price of bottled water. And his reply was, "Don't you get it? They're overcharging for the water."

David: A couple of years into Two Buck Chuck, *The New Yorker* interviews him and runs this big profile. It's like, "What is Charles Shaw? Who is Fred Franzia? Where did it come from? What is this phenomenon?"

David: Fred starts off the interview by saying, "Take that and shove it, Napa." When asked about the success of Charles Shaw, he's a real maverick.

Ben: Ten percent of the 40 million bottles of wine that Trader Joe's sells every year is Charles Shaw.

David: It's amazing.

Ben: I mean, we didn't tee up this section enough for how meaningful this is. We both just kind of opened our Charles Shaw bottles and cheered. But 10% of the time, when someone walks in to get some wine from Trader Joe's, they walk out with this.

David: Yes. Often a giant case or two of this.

Ben: Yes.

David: Okay, so it was 1995 when Bronco buys the Charles Shaw label for $27,000 out of bankruptcy. Two Buck Chuck doesn't actually launch until 2002. What happens?

Ben: Well, they've got to somehow grow a ton of grapes, right? And have a giant processing facility and...

David: You are not thinking like Fred Franzia.

David: So he's vacuuming up this whole portfolio of assets that he figures he will find a use for eventually.

David: So, fast-forward to 2001. There is a huge overproduction surplus of wine in California. I think it was both a bumper year for grapes, and then demand was way down in 2001—a major misjudgment. So there's lots of surplus wine out there.

Ben: And a lot of paper-rich people in San Francisco are not rich just 50 miles south.

David: Exactly. So Fred sees the opportunity of a lifetime, really. He and Bronco come in, and they buy up basically all of this surplus, finished, already made, produced wine at dirt-cheap, below the cost of production.

Ben: Do they just mix it all together?

David: I think they kept it separate. But he's got this huge, huge amount of unbranded, surplus wine on his hands that is good wine from a lot of different wineries. And he needs an outlet and a vehicle—a vessel, you might say.

Ben: All going to taste different?

David: Sure, who cares? And this is when he hooks up with Dan Bane and Trader Joe's. Wow.

Ben: It is the perfect wine for Trader Joe's.

David: It is the perfect marriage here. So they take this glut of mostly genuinely good wine. They bottle it up, use the Charles Shaw label, pull it out of the portfolio, dust it off the bin, and throw it up in Trader Joe's for a buck 99.

David: I'm going to read a few quotes here from this amazing oral history of Two Buck Chuck that ran in Thrillist a couple of years ago and was the main source for all this.

David: "Franzia used the exact same name and the exact same label on the bottle as the old Charles Shaw back when it was a real winery. Even the same original artwork, a picture of a little pagoda."

Ben: It's funny that the Thrillist article calls it a pagoda. Listeners, we reached out to Elizabeth Shaw, the daughter of Charles Shaw, to fact-check this section, and she informed us it was not a pagoda, but a gazebo.

David: Yes. Thank you, Elizabeth. The Thrillist quote continues: "That used to sit by the tennis court on Charles Shaw's Napa property."

David: He, being Fred Franzia, shocked the world by slapping a $1.99 label on it. Everybody in the industry thought it was impossible. He had the testicles that nobody else had to sell wine at that price.

David: "He'd shoot over to Portugal or France and knock on the door of a cork or glass producer and say, 'If I write you a check for $2 million today, will you fill up this boat with corks? I don't care about quality.'"

David: It gets better. People went apeshit. This was around 2002; articles were saying this wine is amazing and actually drinkable. It was a fad, the Macarena of wine. I would always hear about it from college students, and it was this blue-collar pride thing. People thought this bottle is just as good as the one that's $20. "Screw those snobs!"

David: Together, Fred Franzia, Bronco, and Trader Joe's unlocked replacing beer—not replacing, but wrestling in on beer—as the alcoholic drink of the masses.

Ben: Amazing. Okay, so what grapes go into it now, because there's not this glut anymore?

David: Can't find that information.

Ben: Yeah, classic Trader Joe's.

David: Yeah, Bronco isn't saying, and Trader Joe's isn't saying either, but at least for those first few years... And this really helped establish the brand and the product. It's genuinely really good wine that just was surplus on the market, that was going into Two Buck Chuck. So obviously, this becomes a grand-slam home run success for everybody.

David: As you noted, Ben, prices have increased with inflation. Two Buck Chuck is now generally somewhere between $2.99 and $3.99. But yeah, it completely revolutionizes mass consumption of wine. You know, before that, yes, Franzia and boxed wine existed, but this is real wine, right? In a bottle priced at two bucks.

Ben: Yeah. In *The Secret Life of Groceries*, he calls it essentially unquenchable demand.

David: So here are the stats that I could find. In 2009, seven years after the launch, they passed 400 million bottles sold. Three years after that, they passed 800 million bottles sold. Bronco and Trader Joe's have confirmed that over a billion bottles have been sold. I'm sure that is grossly underestimating how many have been sold—several billions, I'm sure.

Ben: So if they're selling 150 million a year, which might be a little low on the estimate, that's 250,000 bottles per store.

David: That's nuts.

Ben: Which would put it at 600 bottles per day per store.

David: What did you say a minute ago? Unquenchable demand for this?

Ben: Unquenchable demand. I mean, but where else are you going to go and get a legitimate bottle of wine for three bucks, four bucks? Nowhere.

David: Nowhere. So Fred Franzia dies in 2022, and *The New York Times* runs a big obituary about him in which they quote Zach Geballe, who's a sommelier and host of the VinePair podcast and has been in the industry for a long time. He says, "I looked at stuff like Charles Shaw with a lot of condescension, but it really helped create in this country what had long existed in Europe—this very affordable, very accessible, widely available wine that people who wanted to drink wine essentially daily could afford to do so, no matter what their income." It's incredible.

Ben: And you've got to wonder how often are people walking into Trader Joe's to get a bottle of Two Buck Chuck and walking out with 50 bucks of other stuff?

David: Yes.

Ben: Of high-dollar-density items that are sprinkled all over the store.

David: Would love to have some nuts to go with my Two Buck Chuck.

Ben: Yes. All right, David, should I catch us up to the business today?

David: 600 stores.

Ben: 600 stores. Well, it's worth saying Trader Joe's has become a little less differentiated today. As you said, the stores are bigger.

Ben: And actually, some of this is a quote from Joe before he passed away to Benjamin Lorr as he's writing this book. He says, "The stores are bigger. The SKU count is higher than in the old days. You really can't do the limited batches of amazing deals anymore because they really are at scale. It's not like they're just going to be like, 'Oh, great, you got this one pile of obscure nuts that we just need to unload in the next couple of weeks. Great, no problem, we'll take that.'"

Ben: They really do need to be able to distribute at scale. They try to keep that ethos with the sort of seasonal stuff. Like right now, I'm enjoying the Mini Hold the Cones that are holiday-themed. But this is very planned and seasonal. It's harder to find suppliers that can manufacture at this scale, so they're constrained to a certain set of suppliers they can work with.

Ben: But clearly, it's still working, and it's working better than ever. So perhaps the lesson is you can't be too precious once you establish your differentiation. There are ways to take advantage of your scale, but still keep the soul of what made you different, even though you're not living it to the extreme the way that you had to when you were younger.

Ben: So by revenue, David, you found this. There are lots of incorrect sources around the Internet estimating their revenue. You found a podcast with Dan Bane where he throws out a significantly higher revenue figure than the rest of the Internet thinks.

David: Yes. So he says on this podcast that when he retired in 2023, they were doing north of $20 billion a year in revenue. When he joined the company in the late 90s, they had just hit $1 billion. The estimates that had been going around the Internet and are still out there, if you search, are what, more like $16 or $17 billion. We know in 2023 it was over $20 billion.

Ben: Yes. How did you find that podcast?

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David: A lot of googling. We'll link to it in our sources. It's a really obscure leadership podcast that Dan randomly went on in January of this year, in 2025.

Ben: So, north of 20 billion in revenue two years ago. So we can kind of extrapolate, when we get to growth rate, where that is today. Earnings, we truly have no idea, other than knowing that every year they've generated more absolute dollars of profit than the previous year. Since selling to the Albrecht family, they've grown stores at about 10% each year. And over the last 20 years or so, they've grown revenue at a little over 11% per year. So that puts us in the 24, 25 billion of revenue this year ballpark.

David: Yep.

Ben: Again, way higher than I saw anywhere reported on the rest of the Internet.

David: Yep. The really interesting stat, though, is sales per square foot.

Ben: So the sales per square foot is estimated to be over $2,000 today. That is the single highest sales per foot of any grocery store and twice its nearest competitor, Whole Foods. Yeah, it's over 4x the industry average. Even Costco, who we extolled on the Costco episode, is $1,200 a foot.

David: Yeah, Costco has really big stores.

Ben: Trader Joe's has really small stores that are densely, densely packed with high-revenue items.

David: I mean, this is really incredible. They are twice as good by this metric, which is really the key metric in the retail industry.

Ben: It's efficiency. I mean, it doesn't include everything in your overhead. But, you know, rent is a giant part of your costs. So your efficiency on your rent is effectively the sales per foot. If you look at margins, people estimate their gross margins are in the low to mid-20%, which, again, we should underscore: All this brilliant business strategy means customers are getting a great deal. Their gross margins are only low to mid-20%. Most of the grocery industry is in the kind of 27, 28, 29, 30%. But Trader Joe's just doesn't need as much margin since they have lower overhead and lower operating costs compared to those bigger stores.

In terms of geography, they're in 43 states. They now have 608 stores. They have 70,000 employees, and 100% of their captains (this is the store manager) were promoted from the "first mate" role or the "mate" role, which is effectively the number two. Eighty percent of those came from crew members. So it is a 70,000-person organization, most of which is promoted internally, which is amazing.

David: And as best as I could tell — I don't know about you — I think headquarters staff, like corporate staff, is still pretty tiny.

Ben: I think that at least is a goal. I think that's a value of theirs, to do that. You know, they get all kinds of great benefits and stuff for grocery store workers. They get 15% put into a retirement plan. They have healthcare benefits, dental, all that stuff. But the real kicker: they get a 20% discount at Trader Joe's, which no one gets because they never have any sort of discounts.

David: The one way to get a sale at Trader Joe's is to work at Trader Joe's.

Ben: Yes, but it is crazy. This whole thing about the employees is a belief that if you pay more, you can get better people who will retain longer, which lowers your new employee training costs and your overhead. Each employee will be more productive, be able to do higher quality work, and most importantly, they'll be happy employees that are there to delight customers.

David: Yes. And as I was talking about earlier, this plays into the social aspect and the extroversion. And that's really important for the customer base. I do really genuinely believe that's true. The biggest thing here, though, is turnover. So grocery store employee turnover, it's gotta...

Ben: Be like 50-plus percent per year.

David: Is some of the highest in the entire labor market. I think it might be like 65, maybe even 70%.

Trader Joe's is one-tenth of that compared to industry average.

Ben: Yep.

David: I mean, that means that for your average grocery store, you are turning over your entire store workforce every year and a half. The answer of how you run a business like that is you don't actually run the business.

You are a real estate company, and you hire the brands to go do everything.

Ben: Yep. And you make money from the brands. Trader Joe's has this philosophy: We only make money one way, and that's when someone checks out an item and pays money to us. We don't make money from our suppliers. Whereas those other grocery stores, they actually make a lot of money from the suppliers. They make a lot of money in slotting fees and in advertising, and it sets up a bad incentive where you are happy to put stuff on your shelves that doesn't sell, as long as they're going to pay you a lot in slotting fees and in advertising.

David: Because you're not really making your profits from selling the goods.

Ben: Right. And you might be making some, but you can also make money another way. And Trader Joe's is like, "No, this way. We're only putting stuff on our shelves that people actually want." Now, the real question before we sort of wind this home is, if they were publicly traded, what would they be worth? And this is an exercise I always like to do every time we do private companies.

David: This is a fascinating one because grocery industry revenue multiples of publicly traded companies are extremely low. They're like 1x, maybe 1.5x.

Ben: It's much worse than that. So first, let's look at Costco, the most similar business in some ways. Costco is growing about 8% per year, so probably a little slower than Trader Joe's by most estimates, and has a 3% net income margin. Costco trades at 1.6x revenue, sky high.

David: And that is the jewel of the industry.

Ben: Yes, for a second comp, Walmart, which isn't all grocery, but a lot of it is grocery, has similar net income margins, similar growth. Maybe it grows a little slower than Costco. Walmart trades at 1.3x revenue.

David: Okay, what does Kroger trade at?

Ben: Kroger trades at 0.3x revenue and Albertsons at 0.1x revenue. Those are much slower growth businesses. And Kroger is actually shrinking with razor-thin net income margins between 1 and 2%. But the question then is, where do you put Trader Joe's in this? Trader Joe's probably trades at north of 1x, but probably not all the way at Costco's 1.6x. I don't know. Maybe around there. So on that 23, 24 billion in revenue that we estimated, call it a 32 to $34 billion company, maybe a $35 billion company, which delightfully puts them worth slightly more than 7-Eleven.

David: That's great. So here's what I think is really interesting about that. We don't cover many $30 billion, $40 billion companies unacquired these days. I literally...

Ben: Have in my notes, this might be the smallest company we've covered in recent memory by value.

David: So if the takeaway from that is, "Wow, this is really an outlier, and it's a much smaller business than they usually cover," Unacquired. I think that's actually the wrong takeaway. Yeah, Trader Joe's, first Joe, and now under the ownership of the Albrecht Foundations, is willing to play such a long game. In the fullness of time, I bet Trader Joe's will be worth at least 10x that.

Ben: Ooh, what a stock pick.

David: Well, okay. Simply because they have nearly infinite expansion potential ahead of them internationally. They are only in the US, and maybe management has decided we will only ever be...

Ben: In the US. Is Kroger international? Is Safeway international?

David: Aldi works internationally. Costco works internationally. Walmart works internationally. 7-Eleven works internationally. There is no reason why Trader Joe's wouldn't work in other geographies around the world and work just as well.

Ben: They could sell American food as exotic, like cheeseburgers.

David: Okay, so just to prove my point on this, I have a whole list of miscellaneous fun stuff about Trader Joe's that didn't make it into the rest of the episode. My number one thing is Pirate Joe's, which is a Native Canadian who was living in the US, decided there would be an opportunity to bring Trader Joe's products to Canada. He went all up and down the West Coast buying Trader Joe's products out of stores, set up a warehouse in Vancouver, and sold Trader Joe's products. And there was like infinite demand. It created this whole international legal incident. There is demand in other countries for Trader Joe's. I think on that alone, in the fullness of time, can be worth at least 10x.

Ben: Interesting. And the question is, does the concept work? Let's say they're even just scoped to America where they haven't fully saturated yet. Does the concept work to address a larger audience than the current audience we've talked about all episode?

David: Interesting. I'm not sure if it does, but I also don't think it matters. San Francisco is a perfect case study for this. There were already several Trader Joe's in San Francisco, and recently one opened in Hayes Valley. It's nuts. The lines are ridiculous.

Ben: Right? That's the Costco thing where they keep actually being able to open way more Costcos anywhere than they thought they could.

David: They could probably open three or four more Trader Joe's in San Francisco with the same target audience and still not be able to serve all the demand.

Ben: Yeah, it's funny, my takeaway on the market cap on it being small in value is grocery as a category is so much more important than it is valuable. It's almost like the Lockheed Martin episode that we did. It's not a super valuable company by the standards of what we typically cover on Acquired. It is one of the most important companies in the world. And grocery is sort of the same way. In any given community, you're in a food desert without it. It's essential for life. We need oxygen, water, and grocery stores. And Trader Joe's happens to have built one of the most, or probably the most, culturally relevant brand in an essential category, even if it ends up financially not being as valuable as these other companies we cover.

David: Yep, I totally agree with that.

Ben: The cultural relevance really is crazy, though. Have you seen the prices of these limited edition tote bags on the resale markets?

David: Oh, yeah. They're like fashion items in Europe.

Ben: I almost was stocking up at the store yesterday when we were there.

David: You can start a Pirate Joe's for amazing...

Ben: All right, well, you were pitching me before we started on... When we wind down the story, we should lay out the entire ballet with how all these puzzle pieces fit together and what sort of drives the flywheel?

David: Great, let's do it.

Ben: So I would throw out: It all starts with this insight that we don't need to stock everything. People just need to trust us that they'll find great stuff when they come here. And if you have that, then you can flip all the assumptions of the grocery business on its head.

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David: Yep, I totally agree. You should always remember that Trader Joe's started as a wine merchant, and they merchandise everything like wines. And that's exactly how you would behave as a wine merchant. There's no way you could ever stock every wine in the world. You need to be a merchant and have an assortment.

Ben: Yes. So you need to be a merchant. You need high dollar density items. Avoid taking up large amounts of space for things like paper towels.
A corollary to that: they aren't focused on the margin percentage of each item. We didn't talk about this yet, but they actually don't apply a consistent markup. They focus on the absolute dollars of margin in each item. So if something is $20 and you only make a couple bucks of margin on it, that's actually not bad, as long as it doesn't take up too much shelf space. You'd much rather have that than sell something for $4 where you're only making, like, a dollar of margin, even though on a percentage basis it sounds better. Trader Joe's is like, no, no, no. The scarce thing is the square inches on the shelf.

You then get very quickly into this. Okay, so they've got this low SKU count. Not as low as the old days, but still only like 4,000 SKUs. And if you keep this constraint really aggressively, it means that you're not wasting money on your less productive square feet. Every square foot is sort of being used to its highest capacity.

Everybody, of course, wishes they could do this. Why doesn't everybody else just do this? Trader Joe's has spent decades making every customer comfortable with the idea that you won't find everything there. It works with their brand promise in a way that Walmart Mini would totally fail. A Walmart with less stuff? I'm not going there. The whole premise of Walmart is all the stuff.

David: Yep. And of course, the way that works is if you're only buying relatively very few SKUs, then you can consolidate your buying power, buying a lot of that SKU.

Ben: That's exactly right. And so when you're buying a lot of any given SKU from your supplier, it means you can lower your unit prices with economies of scale because you're a bulk buyer, which you can then pass on to your customers so they get additional savings in value.

It also means you can usually avoid a middleman or a distributor, and you can go directly to the manufacturer. Again, cutting out random margin that gets made that ends up costing more to your customer. And if you're going directly to the manufacturer, I feel like this is "if you give a mouse a cookie" for business.

David: Yes, I read that all the time.

Ben: Same. Then you can say, "Well, hey, we need you to drop this off at our distribution center. We'll take care of the distribution to our stores, but please do not arrive at our store." Which is great because then, a, it's not clogging up your very limited parking lot space, but B, then you actually can stock stuff in your stores with your own employees. You don't have representatives of brands wandering around working in your stores without aligned interests, kind of like steering the direction of your business without you realizing it.

And we didn't talk that much about all this, but theft is a huge problem. And being able to only have your own employees in your own stores is just much better security. So you've got all that combined with then better coordination of labor schedules because you're the one paying all the people who are showing up to your stores. So it's this better customer experience, and it lets you pass on the discounts to your customers. But again, it all stems from that one promise of when you show up to a Trader Joe's as a customer: "I may not get everything I need, but I will get great stuff."

David: Yep. And this also plays into the social experience. Trader Joe's intentionally mostly does the shelf stocking during opening hours. This is very different than other grocers that do almost all of their stocking at night when the store is either closed or if it's a 24-hour store where very few customers are there. Trader Joe's wants their employees doing the shelf stocking with the customers as they're shopping.

Ben: Well, you kind of have to because of the rapid inventory turnover. I mean, if you're only stocking 4,000 SKUs and you're doing a ton of sales in that store, it means you're selling through that whole inventory really fast.

I mean, I saw one stat that they turn over their inventory 60 times per year, which is more than once a week. They sell through everything in the store. You found one in that podcast with Dan Bain where he said that there are some stores that actually sell through twice a week.

David: Yeah. And that's on average across the whole product assortment: twice a week. That's like a hundred times a year on a product level. This is what you were saying a minute ago about why you need to be stocking while customers are shopping for the most popular products in the most popular stores. You're turning multiple times a day.

Ben: Yeah, that's true. The entire store would get emptied out every three to six days, which means products will probably get emptied out every few hours.

David: Think about Two Buck Chuck. That display has to be replenished multiple times a day in most stores.

Ben: Such a good point. It's funny that I've been thinking about all the ways this is similar and different to Costco, because a lot of this will rhyme. On that episode, we pointed out that the rapid inventory turns meant that you could sell through your inventory before the net 30 payment was due. And the benefit there is that your suppliers are effectively financing your entire inventory and you don't have to tie up your own working capital in the inventory.

David: This is amazing. I know where you're going. Complete opposite with Trader Joe's.

Ben: Trader Joe's does the opposite.

David: Yes, they pay upfront, and they pay on delivery. Yes, they pay cash on delivery.

Ben: You just have cash as soon as you drop something off at their loading dock. This gives them a huge edge of being a preferred customer for these vendors, meaning those companies never have any cash flow issue or a waiting issue. As soon as they drop it off, Trader Joe's makes good on the payment.

David: I have never heard of any other retailer that does this cash on delivery of inventory. Everybody else. Costco, Amazon, Walmart.

Ben: Yeah. Oh, pay in 60 days, 90 days.

David: Yeah. A critical part of the business model is the cash flow: that they are selling the items before they pay for them. Trader Joe's has said, "Nah, we don't care about that whole part of the industry."

Ben: We would rather have the benefit that we get from paying suppliers quickly than the benefit we get from the vendors financing our inventory.

David: We're not worried that we're going to sell the inventory. Yeah.

Ben: Yes, that is true. They actually take risk, too. A lot of traditional grocery stores are kind of like a consignment basis where you still own the inventory even though it's sitting on the retailer's shelves. The brands are actually still taking risk even though it's in the store.

David: That's not the Trader Joe's philosophy.

Ben: That's right. Which, of course, gets to private label, which dramatically simplifies your business model if you can get customers to be game for it.

David: Well, I think there are a couple things you've got to keep in mind about private label at Trader Joe's. And the most important is that the job private label is doing for Trader Joe's is completely different than the job private label does at every other retailer. Everywhere else, private label is code for "same but cheaper."

Ben: Right. It's generic, it's unbranded.

David: At Trader Joe's, private label is code for: this is a differentiated product.
The other critical thing I think about private label for Trader Joe's that fits into the next puzzle piece is the marketing strategy. Nobody else is built that way. Trader Joe's is built on story-based product marketing, just like a wine merchant. They're built on brand-based marketing where most of, if not all, the marketing is being done by the brands on a mass market, often price- and deal-driven basis. Whereas Trader Joe's marketing strategy is all about long-form storytelling. And that only works because they have differentiated, unique products.

Ben: Yep, totally does. All of this really leads to low overhead. When you need to do fewer things in your business, you just need fewer fixed costs.
And so when you have fewer SKUs and smaller stores and more narrowly scoped operations and fewer suppliers, you have to...

David: Work with fewer media channels and marketing initiatives.

Ben: Yes. Higher employee pay or deeper product knowledge or just less overhead overall, which means you can charge your customers less for items.
That, to me, is the puzzle. I have a bunch of things they don't do and why, but they're all kind of obvious at this point. No sales or coupons; that just drives your customers to wait for sales. No loyalty programs, because again, overhead costs to administer. They have a funny quote on this: "We're loyal to all of our customers rather than trying to buy loyalty through rewards or discounts."

David: There's also this amazing thing about Trader Joe's that's so different than the rest of the retail industry. As best as I or anybody else can tell, they don't collect any data. I know.

Ben: I was trying to figure that out, too.

David: Every other retailer, basically, is like a data operation.

Ben: Yes. How much can we personalize a circular for you?

David: Trader Joe's doesn't care about any of it.

Ben: It's so true. There's no account when I'm checking out.

David: They have no individual shopper data. Like, I'm sure they have store data and product data, but nothing about you.

Ben: And on the whole, like, we don't do technology thing, so they have no PA system in the store. They use a bell, which is cute and actually feels much nicer than the sort of oppressive PA system of a grocery store. There are no screens in a store. There are no computers on the floor.

David: They didn't even have price scanners until Dan Bain became CEO in 2001.

Ben: And I think they're not, like, anti-technology, but I think anytime they're considering a technology, they're not looking around and saying, "Oh, we've got to do digital transformation because everyone else is doing it." I think they're saying, "Wait, why would we do that? And how does it fit into our particular business model?" Because, like, they adopted desktop publishing to be able to accomplish the Fearless Flyer for a hundredth of the cost that they would have done it otherwise. But all of this other technology they've decided doesn't suit them and just adds overhead costs.

David: And they say, like, "Hey, we always evaluate this stuff, and we compare it against investing in opening the next store."
And opening the next store is always wildly more profitable. So we just do that.

Ben: Yep. So true. All right, well, that's it for my ballet of how all of this reinforces each other for why Trader Joe's works.

David: And what a beautiful ballet it is. All right, with that, let's move into analysis.

Ben: I actually did basically my whole playbook throughout the story there. Let's do power, though, and analyze the seven Powers framework.
So for anyone who's new, power is what enables a business to achieve persistent differential returns or to be more profitable than their closest competitor and do so sustainably. So, David, at various points in Trader Joe's, which of these do you think they had?

David: You've got to remember about power, it's all relative to the other players in the industry.

Ben: Yeah.

David: So, scale economies, the first one that exists in so many of the companies we cover. Sure. Of course, Trader Joe's has economies of scale, but relative to their competitors in the grocery industry, they definitely don't. They're much lower scale.

Ben: Oh, I disagree. On a per-SKU basis, I think Trader Joe's sells more nuts. Okay, that's fair. I mean, think about if it's against Safeway, and Safeway has 30,000 SKUs and they have four. I bet it's actually pretty competitive on who moves more volume.

David: I mean, it's got to be the best-selling wine in the world.

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David: Interesting. So maybe they do have scale economies then on a SKU basis. I buy that they don't on a real estate basis or a labor basis or anything like that.

Ben: Right. That's exactly right.

David: But on buying power per SKU? Yeah, they probably do.

Ben: They are still counter-positioned. It's rare for a large company to be counter-positioned. It's very easy to see the examples of counter-positioning in the early days, like stocking liquor when that was too difficult or off-strategy for 7-Eleven to do. But things like, "We're not going to collect your data," Safeway can't not collect...

David: ...your data. Or, "We're not going to participate in the whole shadow economy of the CPG supermarket industrial complex." "We're not going to do stocking fees, slotting fees, we're not going to do co-op marketing."

Ben: Right. I think technically no one does slotting fees anymore. Everyone's hiding the ball and found a new way to charge their suppliers for it.

David: Yeah, that money went somewhere else for sure.

Ben: Kroger can't not do that. It's part of the business model at this point. You can't shake out of it. So I think Trader Joe's is still counter-positioned in that way.

David: I do really think they also have a counter-positioning in their target customer, focused on non-families. Again, not that Trader Joe's can't be good for families, but everybody else is 100% catering to families. And Trader Joe's is saying: "Crowded stores? Great. Small parking lots? Great. Individual servings? Great. We're here for you."

Ben: Right. Network economies. I think this is non-existent.

David: Yep.

Ben: Just because somebody else shops at Trader Joe's doesn't make it better or worse for me to go there. Switching costs. At first I was going to say there are no switching costs, but I don't know, you get used to liking some of those foods. You don't want to shop somewhere else that doesn't have them. In fact, this is funny. My wife rags on me all the time for this. COVID hit. We ran out of all of our snacks, and I was sitting there thinking, "I really wish I had a dark chocolate peanut butter cup from Trader Joe's." I love those, and I eat like one a night after dinner. And it had been like a week...

David: You're so disciplined.

Ben: ...a night of it being completely empty. That little plastic tub. And at some point, I was like, "How am I going to get these, because I can't go to the grocery store?" And I looked on Amazon. Now, mind you, this is like a $3 product, and someone was selling it for $19.

David: And I was like, "I'm going to buy that."

Ben: "I'm going to buy that." And it arrived. And of course, it's in, like, real jank packaging because someone bought it and repackaged it. And my wife is just like, "You've got to be kidding me! You bought this for $19? You paid a 7x markup or whatever on it?" So they have switching costs.

David: There you go.

Ben: Apparently, my willingness to pay is actually 7x what they're charging.

David: Amazing. Perhaps somewhat related, they have huge, huge brand power. Especially today, they really do have differentiated products. A lot of the products are differentiated on something other than what the actual product is.

Ben: Differentiated on packaging.

David: Yeah, and that's where I think brand is really playing a part here.

Ben: Yeah.

David: Take the peanut butter cups. You can get peanut butter cups elsewhere.

Ben: Look, if I felt it was the same peanut butter cup that I had grown accustomed to, I would have bought it from elsewhere. Yes.

David: Okay, fair enough.

Ben: But, yeah, I like these peanut butter pretzel nuggets more because they're the Trader Joe's ones. I'm confident that there are grocery stores that sell something almost identical, and to me, it's just not the same thing, even though it's probably the same thing.

Process power. This one's always a hard one to nail down. I'm sure they have some of it, but I don't think it's the thing that sets them apart.

Cornered resource. I guess at this point, the supplier relationships are, because some of these supplier relationships make a huge amount of their only product or largest product just for Trader Joe's. So having those contracts locked up is cornered.

David: Yep. Sounds right to me. The scale economies are surprising. You're right, they do have it. It's just on a SKU level.

Ben: It's the same thing with Costco. When Costco buys a SKU, they really buy a SKU. It can be the largest source of revenue for that supplier.

David: Yep.

Ben: By the way, we should say for anyone who's wondering, Costco is a much, much, much bigger business than Trader Joe's. They're sort of cousins of each other in business model, different in all the ways we've talked about. But Costco's revenue is 10x—maybe more. Last year, it was $275 billion. Now, margins are a different story. They famously only mark up 11 to 14%, and Trader Joe's is probably, I don't know, it seems like about twice that. But Costco is a much, much more scaled business.

David: Yep. And to my point about international, Costco is an international business.

Ben: Totally fair point. All right, David, so you've now thought about Trader Joe's specifically for a month, but we've known we were doing this for a while. What is your quintessence as you think about this business?

David: Yes, I've thought about this a lot. My quintessence for Trader Joe's is that there are no broken promises in the chain. Every aspect of how Trader Joe's works is genuinely a promise, ultimately to their customers, that they are keeping.

The real estate strategy: "We're in your neighborhoods."

The product strategy: We have differentiated products that are truly differentiated on some dimension—product nature, price, packaging, story, et cetera.

The labor strategy: They genuinely pay their workers way more than the industry, and their labor force stays with them way longer than the rest of the industry, meaning you will develop actual relationships with the people who work at your Trader Joe's store.

Ben: Yep.

David: The marketing strategy, storytelling, and merchandising: it's the opposite of the CPG supermarket industrial complex. It's not the "hey, flashy deal, look at this fad of the week!" It's a merchandised product.

Ben: Yep.

David: There are no broken promises all the way through.

Ben: I like that. Mine is a zoomed-out framing of how we've talked about all these things on the episode. And that is, it all boils down to independence and control. Trader Joe's has built a system where they are just not that dependent on others in the ecosystem in a way that supermarkets traditionally are. Supermarkets are effectively one half of a partnership with CPG companies. Content is there too, because content is where all the ads are placed on TV that then drive people to buy the CPG products at the grocery store.

David: I feel like Ben Thompson used to write about this—that it was the American holy trinity of General Motors, the NFL, and Procter & Gamble.

Ben: Yes, it's a partnership, but it's not a great partnership because as soon as the CPG product becomes so wildly differentiated, they're going to start commanding—somehow squeezing more in the value chain. Or, let's say the grocery store got differentiated, they're going to start squeezing more in the value chain. Trader Joe's has been a 50-year exercise to ensure their independence, where no one has leverage over them. Individual little things, like a landlord, has leverage over them in a store negotiation, or a supplier does for a given SKU. But at scale overall, Trader Joe's is really, really resilient from external things that could dramatically shake their business. They've built—I think we talk about this a lot—stored potential energy in their business that just makes them more resilient. And it's crazy that the Internet happened, and it hasn't been bad for them. They've grown just as fast in the Internet era as the non-Internet era. It's hard to imagine things that could shock them more.

David: There is the perfect existence proof of this in COVID. Pretty much the only way that all other grocers could deal with COVID was Instacart or doing their own delivery, which Instacart actually powers a lot of now as a white-label service, which is fascinating. But anyway, Trader Joe's said, "Nope, we're just not going to do that. We're going to find a way to operate our stores during COVID," and they didn't miss a beat.

Ben: Yep. So my question for you to close this out is: how important do you think private ownership is to making all this work? Because on our Rolex episode, we said it's really important that they're owned by a foundation. And on our IKEA episode, it said it's really important that it's family and foundation-controlled. And on our Mars episode, we said it's really important—is it really important that they're not a publicly traded company?

David: There's the fascinating other example of Costco.

Ben: Right.

David: Which, again, of course, is very different on a lot of dimensions, but spiritually aligned. Joe actually says in his autobiography, he...

Ben: ...looks up to them.

David: Yeah, the one store that's out there that is cut from the same cloth as us, is Costco.

Ben: Yep.

David: And they're obviously doing great as a successful public company. I think in this case, though, yeah, probably the fact that Theo Albrecht bought it when Joe needed to sell made a huge, huge, huge difference.

Ben: Okay, so play it forward. What do you think it would have affected? Like in the Rolex scenario, I think they wouldn't have been able to buy the many years of probably bad financial returns that they had amidst the quartz crisis. If they were publicly traded, what do you think management would face pressure on? Because as best we could tell, in recent years, they've grown 11% per year. They've gotten more profitable every year. Shareholders should love that.

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David: The biggest thing to me is just steadfastly not participating in the CPG supermarket industrial complex. There would be so much pressure, I think, from public markets to be like, "Well, can't you just take a little bit of co-op marketing dollars?" Perfect example: The demos in the store. Trader Joe's has lots of samples and lots of demos.

Ben: Oh, if you walk up to someone and say, "What does that taste like?" they rip open a bag and just let you try it.

David: Oh, yeah. But there's also an organized program part of the store where they are showing samples. For a while, they had the vendors do that. That's standard practice in the industry: the vendors, even in private label—whoever makes the stuff—they come to your store and do the sampling and the demos. Because they, in theory, should be more knowledgeable about the product, and then they also finance it. So, the free items that are given out, paid for—that cost is eaten by the vendors.

And Trader Joe's actually did this for a while. And then they started running into problems, as you might expect: customers would come up to the people doing the sample demos and ask, "Oh, where do I find this?" or "What do you think about that?" And they'd have to say, "Sorry, I don't work here." And this happened enough that Trader Joe's was like, "You know what?"

Ben: It's not worth it.

David: We're going to do this in house. We're going to have our crew members do this. We're going to train our crew members more on the new products. We're going to have them rotate and do the sampling. And people in the industry were like, "You guys are crazy. What are you doing? Why are you paying for this? Nobody else does this." They said, "Yeah, we know, but we're going to do it anyway."

Ben: Yeah. So my take on this is, it was really important for a long time, but I think if they went public anytime in the last 10 or 15 years, it would have been totally fine, really.

David: Important for a while. I mean, now, yeah, totally. It could be public; it could be fine.

Ben: But in the good times, it's always fine to be public. It's about this: in catastrophic events, are you able to control your own destiny?

David: Yep.

Ben: All right. I know you've got some fun stuff up your sleeve.

David: Yeah. Okay, a couple fun little Trader Joe's carve-outs. Before we get to our personal carve-outs, my first one was Pirate Joe's, which I talked about earlier. Maybe my favorite thing about Pirate Joe's is that if you go to the Pirate Joe's website that used to exist, it now just redirects to the Wikipedia article all about Pirate Joe's and the international legal incident it caused. It's awesome.

Second, you mentioned this, but Trader Joe's doesn't use PA systems; it uses bells. I never knew what the bell rings meant until I did some research.

Ben: One bell means come to the register.

David: Yep. Open a new checkout line.

Ben: Two bells is I need a manager.

David: Nope, that's three bells. Two bells means a customer needs help carrying their bags to their car or whatever. And then three bells means we need the captain or the first mate—we need a manager.

Ben: But basically everything can be expressed through those things. So why do you need a PA system?

David: Totally. It's great. And then my last one: I've got a little quiz for you. So after Joe retired from Trader Joe's, he had a whole second career dabbling in a few retail turnaround jobs. As you might expect, lots of retailers valued Joe's advice, and he eventually started sitting on corporate boards. He joined the board of a company where a young, entry-level employee would concurrently work, and they overlapped during the same time. And that young, entry-level employee would go on to become a central character in the Acquired Cinematic Universe and in modern business history. Can you guess what company that was? Oof.

Ben: Give me a hint. What industry?

David: I'll give you a hint; I figured you might need one. This might give it away. It is a restaurant group.

Ben: Starbucks.

David: Mm, good guess. Nope. Denny's.

Ben: Denny's.

David: Oh. Joe was on the board of Denny's while a young, high-school-aged Jensen Huang—no way—was a busboy and waiter, slinging sausages at Denny's.

Ben: Amazing. I am confident they never crossed paths.

David: Yes, me too. But there is a direct connection between Trader Joe's and Nvidia via coworkers.

Ben: You heard it here first. Trader Joe and Jensen Huang were coworkers at one point in time.

David: I was really wondering if you were going to pick up on that in the research or not.

Ben: No, no.

David: I'm glad I got you.

Ben: That's amazing.

David: All right, should we do our personal carve-outs?

Ben: Let's do it, because I can't help myself: ordering every Apple product and most new tech gadgets that come out and then just having a giant pile of them. I ordered AirPods 3 on launch day with my new phone, and they're awesome. It's just crazy how Apple gets better and better iteratively each time with these things. And I think the sound quality is better. There are days I listen to so many audiobooks and podcasts that I don't notice it as much, because I feel like anytime I'm listening to something, it's words, not music. But the fit's amazing. It's much more granular now.

David: The fit is better now.

Ben: It's much better. The noise cancellation is insane. I think a lot of it's physical cancellation. Maybe the algorithms are better, too, and they're more comfortable over a long period of time—like on long runs. I notice they stay in my ears and are more comfortable. So I think they're great.

David: I can second that. I got them, too. By far the best AirPods yet. I still prefer the Meta glasses, though. I've just realized I really don't like having things in my ears.

Ben: Well, good thing there's a new one of those, too.

David: Yeah. All right. My carve-out is an update in my ongoing carve-out saga this summer and fall.

Ben: Oh, did you buy another video game console?

David: We got a Switch. Or, I should say more accurately, my older daughter had her fourth birthday last weekend, and I got her a Switch. We didn't get an original Switch; I got her an OLED Switch. It's part of my thought process. She doesn't need the Switch 2, but Mario Kart is going to be perfect. So Mario Kart 8—I've played a lot of Mario Karts over the last 25 years—I think is the best. It's just amazing. Perfect. I got an OLED Switch for her. We'll be able to play together in tabletop mode. It's been amazing. So, if I'd thought about it, maybe I could have predicted this. She's four and she's obsessed with princesses. And being a princess, she doesn't care at all about winning. She cares about being all the different princesses. And so every race she chooses a different princess. And then, this is so fun. What she's decided she really loves about the game is when you fall off the track and the little cloud guy comes and picks you up with the fishing pole and tows you back onto the track. She thinks it's a fairy, and so she loves when the fairy comes and picks up her princess and puts her back on the track after every race. She says, "I want to pick a new princess. And then I want to pick a new course, and I want a course where we fall off," and she asks,

Ben: Rainbow Road every time.

David: "Is this one where we fall off? Is this one where we fall off? Is this one where we fall off?"

Ben: So funny.

David: And then I race as fast as I can, and another 10 minutes go by where she spends the whole time driving off the road and the little cloud guy tows her incrementally forward each time, and she has a blast. It's wonderful.

Ben: That's awesome.

David: Ugh. Parenting. So unexpected. So fun.

Ben: Congratulations. All right, listeners, we have some thank-yous. First, thank you to our partners this season: JPMorgan Payments, trusted reliable payments infrastructure for your business, no matter the scale. JPMorgan.com/acquired. Sentry, the best way to monitor for issues in your software and fix them before users get mad. That's Sentry.io/acquired. Workos, the best way to make your app enterprise-ready, starting with single sign-on in just a few lines of code. That's Workos.com/acquired. And Shopify, the best place to sell online, whether you're a large enterprise or just a founder with a big idea. Shopify.com/acquired. You can click the links in the show notes to learn more about all of them. And as always, all of our sources for this episode are linked in the show notes.

I have a huge thank-you to Benjamin Lorr for writing the fantastic book *The Secret Life of Groceries*. And as always, to Arvind Navaratnam at Worldly Partners for his amazing write-up on Trader Joe's, linked in the show notes for anyone who wants his awesome analytical take on why the business succeeded. David, I know you've got some too.

David: Yeah. And then, continuing on the book front, Mark Gardner's really fun book *Build a Brand Like Trader Joe's* about his experience working as a crew member at Trader Joe's for a year. So helpful in the research, a very entertaining read, too, by the way. And then Joe Coulombe, writing his autobiography, *Becoming Trader Joe*. It's a great book and obviously the main source for this episode.

And then, just two specific research thank-yous for this one. Both to Instacart. First, to Ravi Gupta of Sequoia Capital, formerly CFO of Instacart. When we finalized that we were going to do this Trader Joe's episode, Ravi was, of course, our first call.

Ben: Because we were like, "Help us with grocery, please, yo."

David: We don't know anybody in the grocery industry. Help us out. Ravi was incredibly helpful, including connecting me with Chris Rogers, the current CEO of Instacart. And Chris was also incredibly helpful, giving me perspective on the industry and e-commerce within it. Thank you, Ravi and Chris, and all the other grocery folks and resources who you connected us with and pointed us to.

Ben: Yep. If you liked this episode, check out our episodes—obviously on Costco. I also think you'll probably like IKEA. Any others to point folks toward, David?

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David: Walmart, of course. For sure.

Ben: Absolutely. Walmart. Perhaps Amazon Part 1 also may be of interest, since this is effectively the anti-Amazon: it's the everything store and the very few things store.

David: Oh, and Ben, how could we forget? We made an episode on Whole Foods back in the day.

Ben: We did.

David: The day that Amazon bought the company.

Ben: A little bit embarrassing. What was that, 2016? 2017? It was a little bit amateur after.

David: I didn't re-listen to it for this episode, so I don't know if it holds up or not, but we do have an episode on Whole Foods.

Ben: I feel good about anything, basically, 2020 onward. Yeah, after you finish this episode, come talk about it with us at Acquired FM Slack. Get all the goodies, including the pictures and graphics and stuff that we talked about, and corrections.

And help us pick the next episodes by joining our email list. That's Acquired. And with that, listeners, we'll see you next time.

David: We'll see you next time. And as Joe would say in his radio slots, thank you for listening.

Ben: Thank you for listening.

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