#169 Lessons From Joe Coulombe (Trader Joe)
What I learned from “Becoming Trader Joe: How I Did Business My Way and Still Beat the Big Guys” by Joe Coulombe.
Today’s Chapter is based on the book “Becoming Trader Joe: How I Did Business My Way and Still Beat the Big Guys” by Joe Coulombe.
Joe Coulombe was the founder of Trader Joe’s in 1967 and led it as CEO until 1988. He built the chain around a specific customer niche (underpaid professionals), emphasizing unusual products, strong value, and a quirky brand identity that helped Trader Joe’s stand out in grocery retail.
Here’s what I learned:
Pay People Well
“Four Seasons is the sum of its people—many, many good people.”
— Isadore Sharp
A big reason for Joe Coulombe’s success at Trader Joe’s was his decision to pay employees far above industry norms. He refused to treat labor as an expense to be minimized. Instead, he viewed high wages as a necessity and an investment that delivered higher productivity and a lower turnover of employees. As he once said, “This is the most important single business decision I ever made: to pay people well. First Pronto Markets and then Trader Joe’s had the highest‑paid, highest benefited people in retailing.”
Coulombe explains that “Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract—and keep—the quality of people who work at Trader Joe’s. My standard was simple: the average full-time employee in the stores would make the median family income for California.”
As a matter of fact, Coulombe argues that turnover is the most expensive form of labor expense and that high wages would attract and retain the highest talent within the company. As such, this wasn’t a scheme based on generosity, but an economics decision. He understood that good people would repay his investment through higher output and loyalty. This commitment to compensation creates a virtuous cycle. While competitors struggled with high costs of employee turnover and training, Trader Joe’s enjoyed a stable and dedicated workforce. Coulombe argues that “You can’t afford to have cheap employees.”
“Productivity in part is the product of tenure. That’s why I believe that turnover is the most expensive form of labor expense. I am proud that, during my thirty years at Pronto and Trader Joe’s, we had virtually no turnover of full‑time employees, except for the ordinary human problems of too, too solid flesh.”
— Joe Coulombe
And equally as important, Coulombe understood that money alone wasn’t enough to retain talents. Majority of employees leave due to un-listened grievances. He mentions that “At Stanford I’d been taught that employees never organize because of money: they organize because of un-listened-to grievances. We set up a program under which each employee (including some part-timers) was interviewed, not by the immediate superior, the store manager, but by the manager’s superior. The principal purpose of this program was to vent grievances and address them where possible. And I think this program was as important as pay in keeping employees with us.”
Simply said, Coulombe understood that if you treat people as interchangeable parts, they will act like them. However, if you provide them with security and a sense of belonging, they become the differentiator that a larger, more faceless competitor cannot replicate. When asked how he could afford such highly paid employees, his response was always rooted in terms of productivity: a highly competent, well-paid person produces more value per hour than two underpaid, unmotivated ones.
“The answer, of course, is that good people pay by their extra productivity.”
— Joe Coulombe
This reminds me of the power of incentives that we have learned from Paul Orfalea at Kinko’s who also had a great incentive structure in place which lead to the success of his company. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company. As a matter of fact, being in the retail copy centers business, Orfalea had plenty of competitors considering it is an industry with no barriers to entry.
As such, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage. This starts by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”
First, he started calling his employees as coworkers to remind himself that he didn’t want to “use” people, but to work with “empowered entrepreneurs”. To instill this sense of entrepreneurship among Kinko’s workers, the company gave a share of the profits of the store to everyone — partners, managers, and even workers behind the counter.
Orfalea mentions that initially, Kinko’s “gave each manager 25 percent of his or her store’s profits. Later, we expanded the system of profit sharing when we started giving each manager 15 percent of the store’s profits and earmarking the remaining 10 percent to be split among that store’s coworkers.”
“At Kinko’s, we were building a family together at the same time we were building a business.”
— Paul Orfalea
Second, Orfalea mentions that “people want to know they are contributing to society.” As such, other than monetary incentives, Kinko’s had to give a sense of mission to keep their workers both happy and motivated.
To do so, Orfalea set a flat organization at Kinko’s. Without having any hierarchy, every single member of the company were treated equally in the company and were part of the decision process. In fact, Orfalea mentions that the head office’s main purpose is to serve the stores. He implemented the “80/20” policy where managers were encouraged to spend 80 percent of their time on the floor of the stores with coworkers and only 20 percent of their time in their offices.
As such, Kinko’s empowered coworkers behind the counter to become autonomous thinkers. They would not be required to ask for permission for implementing new ideas for taking care of customers. As Paul Orfalea once said, “our original store was a hothouse of experimentation.”
“As we grew, we designed a structure for our company that would be as democratic as the services we were providing. For me, this was the true brilliance of the Kinko’s we created.”
— Paul Orfalea
Find Undervalued Opportunities
“There are different ways to hunt, just like different places to fish. And that’s investing. And knowing that, of course, one of the tricks is knowing where to fish.”
— Charlie Munger
Being a successful retailer in America is extremely difficult. And this is especially true as a small player. Coulombe mentions that being a retailer in the grocery business, it is very difficult to differentiate yourself and to have a competitive advantage. This all changed once Joe Coulombe had the insight of hunting for discontinued products that he could purchase at large quantities for a discount. This was the core belief that made Trader Joe’s into what it is today.
He writes, “To this day, the promotion of Extra Large AA eggs is one of the foundations of Trader Joe’s merchandising, not just because of the program per se, but because it set me to wondering whether there weren’t other discontinuities out there in the supplies of merchandise. Eight years later, we built Trader Joe’s on the principle of discontinuity.”
As such, rather than to compete with other retailers that sold branded merchandise that customers already knew, Trader Joe’s turned into selling unique products that the customers may not be as familiar with such as discontinued products or private labels. This required, however, that the company cultivate its customers to these products. Hence why Coulombe believed that Trader Joe’s “fundamentally changed the point of view of the business from customer oriented to buyer-oriented. I put our buyers in charge of the company.”
“As we evolved Trader Joe’s, its greatest departure from the norm wasn’t its size or its decor. It was our commitment to product knowledge, something which was totally foreign to the mass-merchant culture, and our turning our backs to branded merchandise.”
— Joe Coulombe
Trader Joe’s developed a strict test for any new category of products: high value per cubic inch, high rates of consumption, ease of handling, and some way to be outstanding in either price or assortment. One example of this is hard liquor. Coulombe writes that “The advantage of hard liquor merchandise was that it met three tests: A high value per cubic inch, essential to a small store format. A high rate of consumption. It had to be easily handled. If we could have added a fourth test, it would be that we had to be outstanding in the field. That would be an ideal category.”
This relentless focus on finding products with differentiation was a core idea of Coulombe’s merchandising philosophy which became a true competitive advantage at Trader Joe’s. As Coulombe once said, “The fundamental job of a retailer is to buy goods whole, cut them into pieces, and sell the pieces to the ultimate consumers. This is the most important mental construct I can impart to those of you who want to enter retailing. Most ‘retailers’ have no idea of the formal meaning of the word. Time and again I had to remind myself just what my role in society was supposed to be.”
This concept of Joe Coulombe reminds me of what we have learned from Jim Weber’s journey at Brooks on the importance of focusing on a specific niche. When Weber took over as CEO in 2001, Brooks was struggling to compete with industry giants like Nike and Adidas. The company was spread too thin, trying to cater to too many categories. Weber made a bold decision: Brooks would focus solely on performance running. This pivot became the foundation of its success.
Weber’s philosophy was clear: you don’t have to be everything to everyone. Instead, you can dominate a smaller, more focused market. Brooks narrowed its focus to performance running, developing products that catered specifically to serious runners. This decision was a game-changer. As he explained, “Going forward, I told them, we would pivot to a running-only brand. Real performance for real runners. Our product would perform for the most discerning runners, earning their trust mile after mile, and our brand would embody the spirit and soul of all who run.”
“In footwear, many believe the conventional wisdom that says brands must play in all categories, across myriad price points. They believe that a company can’t survive by playing a narrow game. Our contrarian philosophy was to focus only on premium running, turning a narrow focus into a strength.”
— Jim Weber
Weber was inspired by Warren Buffett’s investment philosophy, particularly Buffett’s emphasis on building moats around businesses, as a matter of fact, the concept of a “moat” was central to his strategy. A moat, in business terms, refers to a company’s ability to maintain a competitive advantage over its rivals. Weber explains that “In business, a moat leverages the medieval castle metaphor, describing a business’s competitive advantages that allow it to successfully grow and defend its position with customers profitably against any would-be competitor.”
Weber believed that, “If you are entering a new business with serious competition, you need to prioritize solving for your moat.” For Brooks, the moat problem was solved once they focused on delivering premium products for performance running only. Weber’s decision to focus on a niche market also allowed Brooks to create a distinctive brand identity. Rather than trying to compete with larger, more diversified brands, Brooks leaned toward areas where competitors weren’t focusing on in order to create a brand that stood out in the croweded sportswear market.
“The goal for a brand is not to emulate the competition but to find unaddressed opportunity in between the strengths that your competitors already own.”
— Jim Weber
This focus on a niche not only helped Brooks survive but thrive. By 2010, Brooks had become the fastest-growing brand in running, surpassing Asics in market share in the specialty run channel. As Weber reflects, “I was convinced that Brooks’s opportunity in premium performance run was big. Plus, our Run Happy positioning was novel and unique. Given the size of the category, we had a billion-dollar idea.”
Build A Cult
“If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.”
— Jeff Bezos
Another key reasons for Trader Joe’s success was Coulombe’s ability to build a cult-like following among his customers. As a matter of fact, as education levels rose, a new group of demographic emerged in the United States, those who were well-traveled and well-educated but didn’t necessarily have the income to match their sophisticated taste. Coulombe identified them as his preferred customers as they would appreciate a store that would prioritize product knowledge over flashy advertising.
Coulombe understood that by leaning into the interests of this demographic, such as fine wines and healthy foods, he could create a level of loyalty and build a cult-like following. He writes, “Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our customers.”
“We became the best place in the world to buy a good bottle of wine for less than $ 2.00. That’s a position we held for the rest of my days at Trader Joe’s. It absolutely addressed our prime market, the overeducated and underpaid people of California.”
— Joe Coulombe
This focus on the overeducated and underpaid also drove the way Trader Joe’s expanded its locations. Coulombe looked for areas near major institutions of learning, hospitals and high-tech offices. He sought out the density of intelligence rather than just the density of wealth. He knew that a neighborhood with more PhDs than a typical college would be the perfect fertile ground for a store that sold obscure Bordeaux blanc and almond butter.
Coulombe explains that “We looked for our demographics: there are lots of overeducated and underpaid people in Southern California. That’s why most Trader Joe’s were located near a major institution of learning: Long Beach State, UC San Diego, UCLA, and hospitals like The Huntington in Pasadena or Long Beach Veterans’ and high tech corporate offices like TRW in Manhattan Beach, which probably has more PhDs than most colleges.”
Furthermore, this principle also differentiated Trader Joe’s approach to marketing compared to other retailers. The company treated marketing as a strategic weapon to educate its customers on the products rather than selling them. For example, Coulombe writes that “Most supermarket radio spots are paid for by cooperative advertising allowances from manufacturers. The supermarkets jam as many brands into sixty seconds as possible, because it maximizes their revenue. Information be damned! In sharp contrast, each Trader Joe’s spot was devoted to a single product, about which we tried to develop a story. And we refused to accept any advertising revenue from any manufacturer.”
Similarly, Trader Joe’s created the Fearless Flyer, which was an educational medium on products offered by the company. It quickly became a collectible educational tool for customers who often “ kept three-ring notebook collections of the issues so they could refer back to the articles.” And, Coulombe proved that when you educate customers, treat them as intelligent adults, and keep every promise, loyalty becomes almost religious.
“As everyone knows, word of mouth is the most effective advertising of all. Or, when in my cups, I have been known to say that there’s no better business to run than a cult. Trader Joe’s became a cult of the overeducated and underpaid, partly because we deliberately tried to make it a cult once we got a handle on what we were actually doing, and partly because we kept the implicit promises with our clientele.”
— Joe Coulombe
This reminds me of David Ogilvy’s principles of advertising. David Ogilvy once asked Sir Hugh Rigby, the surgeon to King George, what it takes to be a great surgeon. His response? “What distinguishes the great surgeon is that he knows more than other surgeons.” Similarly, Ogilvy believes this is true both in advertising and life in general. Those who succeed tend to have superior knowledge.
As Ogilvy, once said, “You don’t stand a tinker’s chance of producing successful advertising unless you start by doing your homework.” In terms of advertising, Ogilvy recommends a few steps one should take in order to succeed:
Learn everything about the product that is to be advertised. It is only by knowing all about it that one can find a great idea on how to sell it.
Find out how similar products are being advertised and how successful their advertising are.
Identify who the customers are and find out what they think about the product you are advertising (i.e: what attributes are important to them and what promise would be most likely to make them buy your brand again)
And finally, consider how you want to “position” your product. Ogilvy defines positioning as asking yourself “what the product does, and who is it for?”
As we have previously learned from Ogilvy, “every advertisement is part of the long-term in the personality of the brand.” He mentions that the company “who dedicates his advertising to building the most favourable image, the most sharply defined personality, is the one who will get the largest share of the market at the highest profit—in the long run.” For this reason, it is primordial to decide what “image” you want for the brand.
Furthermore, Ogilvy is a keen believer of using researches as a tool to improve his advertising. As he once said, “Advertising people who ignore research are as dangerous as generals who ignore decodes of enemy signals.” He mentions that while there aren’t any rules in advertising, it would be foolish to ignore the results of researches. Yet, it happens more often than you would think. Here’s a few advertising advices Ogilvy provides based on researches:
“Research suggests that if you set the copy in black type on a white background, more people will read it than if you set it in white type on a black background.”
On the average, five times as many people read the headlines as read the body copy. It follows that unless your headline sells your product, you have wasted 90 per cent of your money.
Advertisements in four colors cost 50 per cent more than black-and-white, but, on the average, they are 100 per cent more memorable. A good bargain.
Beyond the Book
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street
Read "Moats - Competitive Advantage" by Investment Masters Class
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