The Story of "Trader Joe's": The Small Grocery Store That Beats the Big Guys

And we continue with our American Stories. Our next story is about a grocery store founded in Los Angeles in 1967 and now has hundreds of locations covering 42 states.

Here's Greg Hengler with the story. Trader Joe's. The surfy, laid-back grocery store chain with a cult-like following known for its cheap prices and floral print-clad staff has been a household name for years. When you break it down to square footage, Trader Joe's is actually selling more than double its competitors like grocery store chain Whole Foods. And when it comes to the traditional, we have everything and more mega grocery store chains, the small Trader Joe's locations do more than simply offer competition. They outwork and outsell these Goliaths of grocery.

The question is, how? After all, Trader Joe's focuses on a unique selection of products under their private label rather than a large amount to them. They don't sell the same old things we normally see. No Lay's, no Heinz, no General Mills, etc. And whereas a traditional grocery store stocks upwards of 40,000 units, Trader Joe's runs around a mere 4,000. In order to make this clear, I went to my local Kroger and did some aisle counting and compared it with Trader Joe's scaled-down approach to shopping. Kroger 144 pasta sauces, TJ's 14. Kroger 75 iced teas, TJ's 9. Kroger stocks 275 cereals, TJ's 39. Kroger 44 olive oils, TJ's 14. And Kroger stocks 40 toothpastes, TJ's just 4.

So back to the question, how does the little guy, Trader Joe's, compete at such a high level? Psychologist and Trader Joe's enthusiast, Barry Schwartz, coined the term the paradox of choice and quite literally wrote the book on it, The Paradox of Choice, Why More is Less. Here he is to explain what he means. All of this choice has two effects, two negative effects on people. One effect, paradoxically, is that it produces paralysis rather than liberation. With so many options to choose from, people find it very difficult to choose at all. So that's one effect. The second effect is that even if we manage to overcome the paralysis and make a choice, we end up less satisfied with the result of the choice than we would be if we had fewer options to choose from. And there are several reasons for this. One of them is that with a lot of different salad dressings to choose from, if you buy one and it's not perfect and you know what salad dressing is, it's easy to imagine that you could have made a different choice that would have been better.

And what happens is this imagined alternative induces you to regret the decision you made and this regret subtracts from the satisfaction you get out of the decision you made even if it was a good decision. I had no particular expectations when they only came in one flavor. When they came in 100 flavors, one of them should have been perfect.

And what I got was good, but it wasn't perfect. Finally, one consequence of buying a bad fitting pair of jeans when there is only one kind to buy is that when you are dissatisfied and you ask why, who's responsible? The answer is clear. The world is responsible. What could you do? When there are hundreds of different styles of jeans available and you buy one that is disappointing and you ask why, who's responsible? It is equally clear that the answer to the question is you.

You could have done better with 100 different kinds of jeans on display. There is no excuse for failure. And so when people make decisions and even though the results of the decisions are good, they feel disappointed about them, they blame themselves. Clinical depression has exploded in the industrial world in the last generation. I believe a significant, not the only, but a significant contributor to this explosion of depression and also suicide is that people have experiences that are disappointing because their standards are so high.

And then when they have to explain these experiences to themselves, they think they are at fault. And so the net result is that we do better in general objectively and we feel worse. There's no question that some choice is better than none, but it doesn't follow from that that more choice is better than some choice. There's some magical amount.

I don't know what it is. I'm pretty confident that we have long since passed the point where options improve our welfare. Trader Joe's understands what Barry is saying. And as Barry has said himself regarding that magical number, I think Trader Joe's is the best example of how the world should be constructed. The man responsible for all of this is the original Joe, the guy behind the beloved grocery store chain who founded the company emphasizing quality over quantity.

And that quality starts with the more than 41,000 employees known as crew members. After all, the core of any business is customer service, which Trader Joe's more than excels at. Data science professionals have ranked Trader Joe's number one in customer preference for two years running, with Costco coming in at number two and Amazon in third.

The brand remains simple, with no online store, no loyalty programs, no special card to swipe, and no sales. Here's Trader Joe's vice president of marketing product, Matt Salone, marketing director Tara Miller, and Joe himself discussing the company's origins. So it's 1958 and Joe Colombe, Joe, he takes over a small chain of convenience stores around the LA area. These are called pronto markets.

The whole idea is fast, it's pronto, it's quick, right? And they're convenience stores before we really even know what convenience stores are. This is before 7-Eleven becomes the thing that it is. These are little tiny corner markets. The kind of place where you could get anything from, say, a pack of gum to some pantyhose to a box of ammunition. I spent ten years writing pronto markets.

Towards the end of that, I really did not like the convenience store formula. Joe is the classic entrepreneur. Joe's really good at looking for finding and developing opportunities. The demographics were changing in the United States because of the GI Bill of Rights, which was the largest experiment in mass higher education in the history of the human race. And I thought that these people would want something different.

The GI Bill of Rights, passed in 1944, provided benefits such as grants for school tuition, job training, and hiring privileges for World War II vets. So after realizing that competition from a burgeoning chain called 7-Eleven would likely drive it into the ground, Joe decided to introduce a new concept. The tiki trend was in full swing, so in 1967, Joe opened the first Trader Joe's in Pasadena, California, a play on the name of popular tiki restaurant chain, Trader Vic's. That first store is still there in the same spot, but the chain now has over 487 locations nationwide. And you've been listening to our own Greg Hengler and others involved in this story, including Trader Joe himself, telling the story of Trader Joe's. My goodness, the fact that it does more sales volume per square foot than its big grocery store competitors is something. And it's amazing because they also don't have an online presence, that is, they don't sell online, they don't have one of those fancy Costco cards you gotta pay and swipe.

No, it's just old school. Anyone who's ever been to a Trader Joe's knows it. And my goodness, that whole discussion of the choice paradox and the genius of Trader Joe's and understanding it before, well, psychologists even understood it.

That is, that less choice can be liberating. And how many of us haven't been in an aisle and been paralyzed trying to figure out which of the hundreds of brands of deodorant to buy? When we come back, the genius of Trader Joe's, the marketing and psychological genius behind this brand.

The story continues here on Our American Stories. It's milk. It's bread. It's the stuff on your list. It's the strange little snacks you end up buying instead.

It's the beautiful moms in their yoga clothes. It's our favorite place. It's that store, Trader Joe's. And we continue with Our American Stories and the story of Trader Joe's. Telling the story is our own Greg Hengler, but we begin with the vice president of marketing at Trader Joe's, Matt Sloan. And so Joe, the founder, is leading the company for the first 30 years, and he is central casting, dyed in the wool, entrepreneurial spirit. It's the quality of the people which sets Trader Joe's apart.

Forget the merchandise, forget all the other stuff. It's the quality of the people in the store. In 1973, a trip to Trader Joe's would have offered you many items that you won't find today, like pantyhose, which was sold until 1978. In 1977, they expanded their private label with fun names like Trader Ming's, Trader Giotto's, and Pilgrim Joe, and introduced the first reusable canvas grocery bag. In 1979, Joe sold Trader Joe's to Theo Albrecht. Albrecht's company, Aldi Nord, still operates Trader Joe's in the U.S. By the late 1980s, the chain had expanded into Northern California. In 1993, the first Arizona location opened. In 1995 brought expansion into the Pacific Northwest. In 1996, the first two East Coast locations opened outside Boston. Between 1990 and 2001, the number of store locations quintupled, and revenue shot through the roof as they rolled out an average of 10 new items per week.

During this time, they also introduced supermarket innovations like putting handles on paper bags. In 2002, they introduced one of their most notorious products, a $1.99 bottle of wine produced by a guy named Charles Shaw, a West Point graduate, and it came to be known as Two Buck Chuck. Here's wine expert and wine creator Charles Shaw himself being given a blind taste test of Two Buck Chuck.

So let's pour it out. So the first thing we're going to look for is aroma. The fine wine has actual qualities of the grape, and you can smell the fruitiness of the grape. And frankly, I can smell some fruit in this wine.

This is amazing. I'm going to taste it. First thing I'm going to do is put it under my tongue, and I picked up some decent acidity. It's not bad. It's a little dry. It's got some tannin.

And then I'm just going to put it in my mouth and see what I think. I think this is a very satisfying wine. Some consumers make the mistake of always equating quality with price. That was not the case at the 28th annual International Eastern Wine Competition. With 2,300 wines in the competition, judges awarded a prestigious double gold medal to a $1.99 bottle of California wine, the 2002 Charles Shaw Shiraz.

And it would happen again in 2005 at the Cal Expo competition, and then go on to win other awards in Orange County. Trader Joe's has sold one billion bottles of Charles Shaw since 2002. Here's Chris Condit, the category manager for wine at Trader Joe's.

I'm going to give you the secret to Trader Joe's here. So far they've all tasted like Tang, but not the good version, if there is one. One thing that we do that sets us apart is we have a tasting panel. There's a lot of wine out there. There really are hundreds of thousands of wines available on the market. We carry about 500 in our stores, so we're tasting every day, literally every day. It's got the color, the acid. It's a little more savory. It's pretty good, though.

You're going to tell me. It's Russian River. So it would be Trader Joe's 2016 Russian River Petit Syrah. Everybody had a chance to try it, think about it?

Who'd like to see that come in? Excellent. And lastly, and most... The source of the wine for our various private label and control label programs might change over time, but the wines are always going to be great, because we get to pick and choose. We don't have to carry every wine.

We don't have to always repeat that exact same thing every year. If it's not good, we don't think it's great value, we don't love the wine, we don't buy it. Trader Joe's frozen aisle is another innovative wonder of the grocery world compared to the frozen aisle in traditional grocery stores, which is flailing with only 6% of total store sales. Here's Warren Thayer, who runs the trade magazine Frozen and Refrigerated Buyer, explaining the poor numbers in traditional grocery stores. 46% of shoppers on the typical trip when they spend over $100 don't even set foot in the frozen food department. According to Phil Lempert, a food industry analyst, he says this is due to the predictable packaging of the once novelty frozen dinners introduced in the 50s and the frosty barrier of the frozen selection.

The red lean cuisine, the green healthy choice, it's sort of like boring. That glass door, it really creates a fence. You don't see those glass doors at Trader Joe's which has open freezers. The problem with opening that ice cold door at your traditional supermarket means you've already committed to purchasing something which doesn't lead to much product discovery. Compare that to Trader Joe's low level open freezers that bring shoppers physically closer to the products. This allows the freedom to check out new products with less effort, more leisurely, and without the blast of cold air and subsequent frosted glass door.

It's fun to go through that taste to see what you're going to find. Piggybacking on what Lempert said before about the unattractive appeal from the predictable packaging of traditional brands, Trader Joe's on the other hand has its own private label. They buy straight from the supplier which ultimately cuts cost and leads to cheaper products for the customer. The products themselves are colorful, quirky, and have a consistent branding. Here's brand building expert Denise Liang. It's usually kind of hand drawn or it's not looking like it's computer generated.

They're usually caricatures and then there's some descriptive copy. All of that I think helps the person, the shopper, see how this product fits into their needs. There's an element of discovery like finding a new product you didn't know existed. David Ziegler Voll, the former head of packaging design at Trader Joe's, said that the hand drawn images on the products evokes elements of trust and a human touch. Also a sense of being locally produced, handcrafted, and small batch. Trader Joe's has cultivated a level of trust that is really hard to manufacture. Trader Joe's found success by anticipating the needs of its customers, in many cases knowing what the customer would want even before they did, and selling it to them at a low price and in a fun atmosphere.

Joe, while still alive, is no longer involved with the company, but his legacy is set in stone. And a terrific job on the production, editing, and scripting by our own Greg Hengler. And what a story. Trader Joe's, the quintessential startup founded by the quintessential entrepreneur. That story about the West Point grad Charles Shaw creating the $1.99 bottle of wine, two buck Chuck, and it actually winning wine competitions.

And they've sold two billion Charles Shaw's. And then that story about the freezers, and how much fun it is to dig into those freezers and find new stuff, as opposed to that antiseptic glass door. It's just so true and so unusual. And my goodness, the anticipation of the needs of the customers is there. And every time I go to a Trader Joe's, I'm always surprised. I'm always trying new things. The story of Trader Joe's, the story of an iconic American brand, and the man who created it, here on Our American Stories.