Trader Joe's Atlantic Overtures

`Yippie aye oh--Trader Joe's is coming East," exclaims Sherie Winston. The last time the newsletter writer visited the quirky Southern California grocer, she packed an extra suitcase full of mocha-raspberry low-fat muffins, smoked bean dip, and six kinds of salsa to lug home to Washington, D.C.

Imagine a cross between a gourmet deli and a discount warehouse club, and you've got Trader Joe's Co. Like L.L. Bean Inc. or Ben & Jerry's Homemade in the early days, Trader Joe's has developed a cult following--for its bargain wines, upscale private-label foods, and manufacturers' close-outs. "They are the fashion leader in food in Southern California, and they are damn near without competition," says Norman H. McMillan, a partner in retail consultants McMillan-Doolittle in Chicago, which doesn't have Trader Joe's as a client.

Now, the 28-year-old chain, with outlets from San Francisco to Phoenix, is heading east, where it aims to open 50 stores in five years, from Boston to Washington. "It's our hope to be on the East Coast by the fall of '96, but we have no leases signed," was the sole comment from Chairman and CEO John Shields, a former R.H. Macy & Co. executive. Since 1979, Trader Joe's has been owned by Germany's secretive Albrecht family, which also owns an estimated 4,500 Aldi's deep-discount food markets in Europe and the U.S. Trader Joe's, which has almost no debt and always pays cash, gets its funding from the Albrechts, who have an estimated net worth of more than $7 billion.

Trader Joe's is tremendously profitable, industry experts say. And Shields has said publicly that sales more than doubled over the past five years, to last year's $605 million; same-store sales, meanwhile, have consistently grown by more than 10% a year. By locating its tiny stores--most measure fewer than 10,000 square feet--away from prime retail locations, it keeps real estate costs low. Competitors estimate that sales in its 72 stores average $1,000 per square foot per year, double that of conventional supermarkets and more than triple that of most specialty food stores.

RARITIES. Its formula is no secret. It develops or imports unusual foods for sale under the Trader Joe's label--or Trader Giotto's or Joe-san's, if apt. And it leverages its volume to insure it has the lowest price. For example, it's the largest retailer of brie in the U.S.--at $3.99 per pound, a dollar less than most supermarkets. It keys in on trends important to its young, educated customers: Ahi tuna is caught without nets, dried apricots are unsulfured--even peanut butter cups are all natural.

The store is full of bargains, wines especially. Buyers taste more than 8,000 samples a year. It also buys other food producers' mistakes. Just now, customers can pick up a pint of Ben & Jerry's discontinued Banana Walnut, Cherry Vanilla, or Coconut Almond ice cream for $1.49, half the normal price. Or Danish butter cookies packed in leftover Beatrix Potter centennial tins for $2.99.

All this according to the Fearless Flyer, Trader Joe's zany 24-page newsletter, packed with product trivia and cartoons. It had a mailing list of more than 800,000 until rising delivery costs forced the company to distribute it in stores. "I wanted it to be a marriage of Consumer Reports and Mad magazine," says founder Joe Coulombe, who retired in 1989. The current issue, for example, asks its readers: Why buy a certain $3.99 Cotes du Rhone from Trader Joe's, which managed to secure 4,000 cases? Because the obscure chateau's vineyards extend just seven acres beyond the demarcation line for the more famous Chteauneuf-du-Pape.

"There's very little unique merchandising, and this is unique," says David Nichol, chairman of beverage maker Cott Corp. While president of Canadian grocer Loblaw Cos., Nichol copied the newsletter when he created President's Choice, now a $1 billion private-label line. "I stole the name and concept of Trader Joe's Insider's Report [the original name of Fearless Flyer] for President's Choice," he says. Two years later, flush with success, Nichol bought the name from Coulombe, who renamed the Trader Joe's version. Adds Nichol: "It is safe to say that President's Choice owes the majority of its success to Trader Joe's."

Will the California concept transplant to the East Coast? Shields will have to grapple with a maze of differing state laws, particularly those governing alcohol. And while dry goods can be trucked east, the chain will have to line up suppliers for products such as baked goods--without the initial volume clout it enjoys back home. But if it can make the move, there's sure to be a contingent of California expats like Winston eager to load up on chic food bargains.

Before it's here, it's on the Bloomberg Terminal.