Trader Joe’s

Introduction

0:00I decided today needed to be an all Trader Joe's day. Actually, I got to show you. Check out my haul. Oh, tote bag. You are styling. Take that to Europe. I've got some two buck chuck. Nice. Got so many nuts. So many nuts. Some chocolate, some cheese. A little picnic we're going to have here in the recording studio. All right, here I am popping this bottle of Charles Shaw. And we are ready to go.

0:35That might be the nicest wine opener that has ever been used. Two buck chuck. All right, let's do it. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?

Welcome to Acquired

0:58Welcome to the fall 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. 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 had to do a research trip. It was mandatory. Had to do the research trip. I don't think I've ever spent more money at Trader Joe's because I just said yes to everything.

1:31It felt like I needed to have it all. But you couldn't have spent that much money.

Trader Joe's Obsession

1:37That's part of the point. Listeners, 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 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.

2:10Parking is reliably horrible. I mean, every Trader Joe's I've ever been to. Part of the strategy, Ben. It's part of the strategy. Apparently. The stores are small, and I'm always bumping into other shoppers. There's 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, as far as we can tell from the outside at least, because it is an intensely private company.

2:51Yes, it is. 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.

3:26I mean, I wrote this whole script, and everything you just said is accurate, but it sounds ridiculous. Should we just stop the episode there? Do you feel that's sufficient?

3:37All 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, see all the images that we are talking about in episodes. That's acquired.fm slash email. After you listen, come talk about this with the entire Slack community, acquired.fm slash Slack. If you want more Acquired, check out our interview show, ACQ2. Search ACQ2 in any podcast player to listen. So, with that, David, happy 10-year anniversary.

4:09Happy 10-year anniversary. Toast my two-buck Chuck to you right now. 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. 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. What a journey together. With that, listeners, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

Joe Colombe's Story

4:42David Rosenthal, where are we starting our story? 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 Colombe, because you can't separate Trader Joes from Trader Joe. Joe Colombe was born in 1930 in San Diego, California,

5:14the same hotbed of American retailing innovation that produced Salt Price, Price Club, and everything that would become Costco. 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 is a very good student. He ends up going to Stanford for his undergrad.

5:47He 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. You know, there's a lot of famous Stanford alumni. This is not one that people are walking around quoting. You know, Joe Colombe was a GSB alum. Like, he's not the, you know, the Phil Knights come to mind. Back then, not that many people were going to business school,

6:18or at least not Stanford Business School. And reflecting that, Joe goes to get a job after GSB, and the only job he can get is back in Southern California at the Lowly Owl Drug Company, which is a subsidiary of the larger Rexall Drug Company, a line of regional drugstores throughout America. And this is a struggling company. How times have changed for new GSB grads these days in the job market.

6:49So what was Owl? Owl was a chain of 300 drugstores up and down the West Coast. So Joe gets 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 is struggling. So Joe goes off, and he scours the country and comes across a relatively new concept coming out of Texas,

7:20launched by a company called the Southland Corporation, called the Convenience Store. And Southland has just recently rebranded their stores that they are operating very successfully in Texas in this convenience store model to something called 7-Elevens. Ah, yes. 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.

7:50One, today, 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 not the way that you should be impressed by a retail company, but it is impressive. No, their market cap is about $30 billion. So like a small fraction of Walmart and Costco and Amazon, etc. Two, they invented the to-go coffee cup. And also the self-serve soda fountain.

8:22And 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 are like so deeply part of the Japanese culture, that in the 90s, 7-Eleven Japan bought out the 7-Eleven parrot and now own 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.

8:56Of course, of course. Incredible. But for our purposes today, back to its original instantiation as part of the Southland Corporation, how did this come to be?

7-Eleven History

9:07So Southland was founded in the 1920s as an ice company. Oh, yes. This is before home refrigerators were a thing. People had ice boxes in their houses, and they had to get their ice somewhere. I've actually got the whole history on this. Can I take it? Yeah, go for it. All right. So listeners, this comes from Benjamin Lohr, 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

9:38and pick up ice in the Texas heat. Pre-cars, pre-refrigerators, pre-freezers, pre-anything. So this innovation happens where in 1927, a guy named John Jefferson Green figures 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 a.m. and we stay open late till like 11 p.m.?

10:11So our customers can come get their ice for their ice boxes when it's not going to melt on the way home. That is exactly right. This meant, of course, that his hours are now even longer than the general stores where people are going and getting their goods. So as legend has it, a woman comes up to his ice stock and says, you know, you're the only thing open right now. I really wish you stocked milk in addition to your ice. Makes sense. I buy my ice for my ice box from you. Why can't I buy the things that I put in my ice box? Exactly. And so John Jefferson Green immediately calls the folks he knows

10:44at the Southland Corporation, kind of the parent and says, 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 becomes 7-Eleven. And this, of course, seems obvious today. Like, oh, I didn't anybody try this before. This is the heyday of the milkman. Yeah. And the produce man and the poultry man.

11:17These things get delivered, or you pick them up in a market in town. Um, the modern supermarket, let alone convenience store, doesn't exist yet. Oh, we're so far from that. Yeah. So this was a truly kind of wild idea. And over the next few years, they start adding other daily items you might want. Bread, beer, cigarettes, magazines, et cetera. People love it. Then, fast forward to after World War II, when the American economy is booming, people have cars, people are moving to suburbs,

11:48people get refrigerators. They no longer need ice anymore. The company just completely sheds the ice business and becomes the 7-Eleven business. 1946, they officially changed the name of the stores to their operating hours, 7-Eleven. And, David, you're talking about the rise of the automobile and refrigerators happening. That technology change and the post-World War II shift means this thing has perfect product market fit. By 1951,

12:19it becomes Texas's largest retailer of beverages, milk, and bread. They've got a little under 100 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. Yeah. For context, Trader Joe's today in 2025 has 600 stores.

12:53So 7-Eleven is blowing the doors off. This is true blitzscaling that's happening to sort of fully seize this opportunity that people are clearly going crazy for. Like we said, they are the largest retailer in the world by number of stores today. Crazy. There's this sort of delicious thing in the history of retail and the history of grocery where 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 breakthrough. This was completely innovative. Yeah.

13:24Yes. Well, speaking of completely obvious, back to Joe and the Trader Joe's story, he's working at Al for Bud. And 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 number. Yep. They get wind of what's happening. Joe travels to Texas. They're like, there is absolutely no reason that this won't work in California. We got to turn around Al. Let's just copy paste this 7-Eleven thing.

13:56Now, 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. And I guess a drugstore was actually pretty different than a convenience store at this point. 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

14:26recent MBA grads, this time to help them with their 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 like the CFO of their semiconductor division. Joe works in semiconductors? Yes. During which time

14:57it 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 Traderous 8 or something. Wow. Totally wild. So he's on this path. But then he leaves Hughes? 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

15:27with 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. Just a few years out of business school and I get to be the president of something that's corporate approved. Let's go. So at age 27, he comes back to Owl slash Rexall as the new president

15:58of the newly christened Pronto Markets. Pronto. Convenience store. You're in, you're out. Pronto. Giddy up. They build six Pronto convenience stores in the LA metro area as a pilot and off to the races. As you would expect, it works great. Instant product market fit. Tons of demand. They're blowing the doors off. And I should say, I looked up some of the stuff they were selling. This is awesome. Of course it's like cheese

16:29and eggs and bread and stuff. It's also ammo. Ammunition for guns. Yes. Like very successful, high volume business. Tobacco. Selling what Joe calls girly magazines. Pornographic magazines. This is not the Trader Joe's that you know today. That's exactly right.

16:49And 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 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. Right. Come over. We'll have a little party at my house and I'll sell you some Tupperware because you're my neighbor. You can't make this stuff up.

17:20As they bought Tupperware, it becomes 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 product companies. They end up buying Duracell, the battery company. Which would eventually be owned by Berkshire. Crazy. And isn't there something with oil here where like the owners of Rexall wanted to fully invest

17:51in the supplier of Tupperware so they bought into like an oil business. Yes. And they needed to free up the capital to do that. They were super all in on Tupperware. Yes. Yes. Interesting. So this leaves Joe, you know, he's 27, 28. He just quit his job in semiconductors, right? Like he's got a wife, he's got like 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

18:23Pronto as part of all the drugstore operations, what if I buy just these six Pronto markets from you? Do like a management buyout. But of course, Joe has no money. Yes, he has no money. He doesn't come from a wealthy family. He hasn't really earned money yet. Yes. 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 on our books.

18:53And what's book value on this? Book value is $15,000. Okay. 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. They borrow money from their parents. This is like full-on Savannah Bananas. Full-on Savannah Bananas. You know, Jesse Cole. May as well be on an air mattress in a garage. Instead of a yellow tuxedo,

19:24you know, Joe is wearing a Hawaiian shirt here. Yes.

19:28That only gets them to like $14,000. He needs another $11,000. So it's like his whole net worth now because he doesn't own a home and he's borrowed money from his parents. 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 the $25,000. He goes to the current employees of the six Pronto stores. And he says,

19:58look, 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. So he's giving him, what, a 40% discount on the price that he's paying for his shares. And collectively,

20:29with 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. 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

20:59is owned by these early employees. 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, you know, almost 2x. Yeah. But even more importantly, though, almost nothing from Pronto Markets survives to Trader Joe's today. You know, not the ammo,

21:30not the cigarettes, not the girly magazines, but this does. But the sort of respect for employees. The spirit of treating your employees as partners. 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 we're going to have some of the highest paid employees in the industry and we're going to attract the best talent by just effectively overpaying for everyone. Basically, every employee at Trader Joe's get paid

22:00between 40% and 150% over what average compensation is for their roles in retail. 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. 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.

22:30And then if anybody asks us anything about them, literally anybody on staff could have the right answer. 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. The nautical name There's no dedicated cashiers. There's no dedicated baggers. There's no dedicated stockers. Everybody does everything. 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.

23:00All these employees have bet their life savings on him too. 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 like 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. So shortly after doing the buyout, he goes to one of his biggest suppliers, a dairy company called Ador Milk Farms,

23:31A-D-H-O-R, which is ROTA spelled backwards. Come back to that in a minute. He goes to the owner and president of Ador, 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 Ador dairy products, you know, milk, ice cream. Nothing like borrowing money from your most important supplier.

24:02Yeah, right, right, right. It's good because they know your business really well and you're working together anyway, but... It can work great, but you're really leveraged now on this one supplier. Yes. 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. Yep. So over the first couple years, it does go great. Pronto becomes Ador's largest retailer and then in October of 1965,

24:32Joe goes to meet Merritt for his monthly lunch meeting with him. They have monthly lunch meetings to check in about the business, the relationship, and 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.

Ador Dairy Farm

24:55And 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 Ador and about the dairy industry at this moment in time that sets up this meeting, one, refrigeration has gone mainstream at this point. Yes, 1965, we're well past the icebox era. 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 Ador company

25:26has had to do this crazy rejiggering of who is actually selling their product. And I said it a minute ago that Pronto, still relatively little Pronto markets in L.A., is Ador's now largest seller of their products. That is not a good sign for Ador. They are not doing good here. All right, so why are they not doing well? Well, the American preference was shifting from whole milk to skim milk. And you might just say, oh, well,

25:57I'm sure they just skim the fat off. That's part of the process. I assume that's what happens. There are different cows, that produce milk that is well-suited to be whole milk versus well-suited to be skim milk. There's Holstein cows, which produce white, chalky milk that you sort of expect to become skim milk. There's these Guernsey cows. The milk has this yellowish hue to them. It produces this really rich, creamy milk. Unfortunately, Ador had mostly Guernsey cows.

26:28And Ador, 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.

26:42In 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. 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. It's also 7-Eleven. And other competitors that pop up, too. Yes. So, what is the news?

27:12Well, after the fourth drink, the news that Merritt finally shares with Joe is that he has made the difficult decision to sell the family business, that or 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.

27:437-Eleven is coming to California and they needed a dairy supplier and yeah, I sold our operations to them.

27:53Brutal. Not good. Not good. Not great, Bob. 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 a incredible opportunity that is the flip side of the coin. Why are the cattle so fat, so happy, and distributed across so much land? And what has Merritt inherited that's been passed down

28:23through generations of his family? Why is it called Ador and what is Roda? His mother, Roda, was the descendant and inheritor of the original California Spanish land grant of the area that is now the entire city of Malibu. the most today expensive, attractive real estate in perhaps the entire country. They own the entire city. This is the dairy

28:53farm. The cows are grazing in Malibu.

28:58You 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. 7-Eleven is at least a thousand times bigger and any landlord is going to want to sign them 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,

29:29longer leases and we're more credit worthy. And the operating history, yeah, you're a landlord, would you rather have 7-Eleven be your tenant or start up pronto markets? You're going to bet on 7-Eleven. 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 smaller scale. And so the core insight is that pronto markets is effectively

29:59just 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