The Sentinel #21: On Retail Curation
Sibling Rivalries, North-South Divide and Two-Buck Chucks
Dear early supporters, with your continued faith, the email list has grown organically, mostly through word of mouth. Thank you. Welcome to new subscribers!
One early goal (also an operations maxim) was to write regularly and reach a stipulated number of posts. I am still here writing after 20 posts, so I suppose something works.
As always, love hearing your ideas and thoughts on things to write about or how to improve the blog.
Do email! - Senthil
After the posts on Retail and Grocery (How long will Amazon Retail last? and Why is Grocery E-commerce hard?), I revisit the retail terrain.
Spinoffs and Scaling
In the 1950s, Rexall Drug Co., a drugstore retailer running a franchise model in which each store was independently run by a local pharmacist, was struggling and was losing turf to other expanding chain store pharmacies. In 1958, they asked one of their employees, a 28-year-old Joe Coulombe, a Stanford graduate, to test-launch a convenience store brand, to expand into a different market against the likes of 7-Eleven. He launched and eventually ran six Pronto Markets in the Orange County area. In 1966, Rexall decided to relinquish convenience store markets and asked Coulombe to close the stores down. Instead, Coulombe decided to quit and buy out the stores. He renamed Pronto Markets as Trader Joe’s. (After himself, just like this newsletter’s name. How immodest!)
Coulombe's initial concept was to reposition Pronto as a convenience store, with good liquor. Eventually, due to macro trends (California 1970s deregulation), Trader Joe’s gave up being a convenience store and became an upscale, but value-oriented, seller of trendy, environmentally conscious products, and hard-to-find beers and wines.
Even today, Trader Joe’s has been a remarkable brand with their whimsical nautical themes, employees in Hawaii shirts, and fiercely loyal customers. The unique positioning of the brand has survived today, even though Joe Coulombe sold the stores in 1979 to Aldi Nord owned by Theo Albrecht (remember this name). Coulombe continued to run the company as CEO, eventually retiring in 1988.
Wait. You may already be aware of Aldi stores in the US, which are also based on similar TJ’s-like concepts: no-frills, low-price positioning, and small stores. In fact, there are more Aldi stores in the US than there are Trader Joe’s stores. Are Trader Joe’s stores different from Aldi USA? Why two brands?
Let’s look at German Retail History and some sibling rivalry.
The North-South Divide.
Have you heard of the Aldi-Equator? It’s an imaginary east-west line separating Aldi’s through Germany — and a source of funny European memes.1
The Albrecht family founded a corner store in Essen, Germany in 1913 which expanded into Aldi all over Germany. Aldi is a diminutive of Albrecht Diskont (Albrecht Discount). The Albrecht brothers, Theo and Karl, took over the firm. In 1961, they had a major falling out (apparently over whether to sell cigarettes in stores). I still keep forgetting which one wanted to sell cigarettes.
In any case, there are many ongoing jokes about good Aldi and bad Aldi — and I don’t want to take sides. Eventually, the company was divided geographically by the Aldi-Äquator (Aldi Equator), into Aldi Nord in northern Germany and Aldi Sud in southern Germany.
So compelling and thorough was the North-South divide, that it precedes and supersedes Germany’s division into East and West Germany as Aldi Nord took almost all of East Germany. Most countries have one or the other brand, but not both.
Sibling Rivalries in Life and Celluloid
I would be remiss in my blogging duties if I don’t take a detour and comment on sibling rivalries — the most delicious, the oldest cultural vestiges in our prurient minds. Of course, there is the very contextual German example — the Adidas vs. Puma rivalry of the Dassler brothers from the early 20th century.2 In India, there are the Reliance scions, the Ambanis: Mukesh vs Anil. In 2005, Anil, the more stylish brother and married to a Bollywood star, took over finance, power, and telecom businesses and ventured into film production. Mukesh took the less attractive oil products business. Guess who is doing better now?
A thriving Asian movie trope is about brothers, usually emotionally separated by family trauma, colliding as rivals on either side of the law. In the Indian film Deewaar (1975), meaning ‘Wall’, the ‘angry young man’ archetype, played by Amitabh Bachchan, was born. It still has a powerful sway over storytelling in many Indian movies. In my favorite Hong Kong caper, A Better Tomorrow (1986) directed by John Woo — a remake of Deewaar according to some sources — Chow Yun-Fat and Leslie Cheung (miss him!) are brothers who are separated and in constant conflict.
Somehow, compelling sibling rivalries in films in the West seem far and few between, barring the outstanding (but highly asymmetric) exceptions like the Corleone brothers — Fredo and Michael — in the Godfather series. One has to perhaps go back to Brando’s “I coulda been a contender” speech — perhaps the original dockyard film — as he takes on his brother in On the Waterfront (1956) or to the historical retellings of the English court.
Grocery Wars
Back to the Aldi and Trader Joe’s. Aldi Sud in the south of Germany is the firm expanding in the United States as Aldi USA, with more than 1900 stores in 36 states. The other company, Aldi Nord, owns 500+ Trader Joe’s stores and has retained TJ’s brand name, letting it thrive. Aldi Nord and Aldi Sud probably have a region-specific non-compete clause against competing under the same brand name. Most countries, as observed in the figure, have only ‘Aldi’.
Trader Joe’s has weathered all kinds of changes over the last 50 years. In the 90s, when they moved to the cold Northeast of the US, the California-style environmentalism and beachy vibes were not thought to be scalable. In 2005, TJ’s store on Market Street in Philadelphia reflected forward-looking sunny hopefulness in a seedy neighborhood — the store then stood across a series of neon lights and blinking silhouettes that screamed dancing girls — a far cry from the now gentrified and fancier neighborhood with million-dollar brownstones.
What makes them click? From theory and patronage, I focus on two aspects: one strength and one challenge.
Product Curation and Consideration Sets
Similar to Costco but at a smaller scale, and distinct from other grocery chains, Trader Joe’s focuses on limited brands within each category. Once they finalize a successful set, Trader Joe’s keeps the products in for the long run.
One strategy that facilitates this is supply chain integration. TJ directly buys from suppliers at cheap wholesale prices, and keeps the prices low, passing on the savings to customers. How traditional! We know this works in theory, but many firms are often tempted by the margins. It takes tremendous discipline to keep prices low!
This relentless focus on price is exactly why TJ-brand products like Two-Buck Chuck — a class of wines sold extraordinarily cheaply at $1.99, and slightly higher price outside of California — remain in popular consciousness. Two-Buck Chuck is the nickname for the famously cheap Charles Shaw wines made by Bronco Wine Company run by Fred Franzia. Not everyone at NY Times is a fan.3 These wines are not available in Pennsylvania Trader Joe’s as alcohol sale is prohibited in groceries in Pennsylvania (due to a combination of Puritan history and regulatory capture).
Of course, as with any experimentation, this curation doesn’t always succeed. For instance, their curated coffee selection is fairly unimpressive, even compared to other grocers. (I know, I know. I shouldn’t be expecting gourmet coffee at the grocers).
Why does “Less is More” work?
In the aftermath of the pandemic, many retailers have been moving towards SKU rationalization or a “Less is More” policy.
There is a long-held behavioral theory that in large stores with a wide variety of selections, customers often suffer from choice exhaustion. Barry Schwartz wrote a famous book on what he called the Paradox of Choice. Perhaps, this kind of exhaustion in search has recently become the bane of electronic commerce. (How many different products does Amazon carry in each category? How many of them are third-party products? How many of them are fake? How do you decide?).
A good (‘rational’) way to think about the stickiness of TJ’s branded products is to see the value of small consideration sets, using Weitzman’s Model of Optimal Search for the Best Alternative (Econometrica, 1979).4 For every item you shop for, there are a number of options within the consideration set. Each option has its own unknown value, search cost, and search time, and can be tested at some inconvenience to the customer (e.g., buying and not finding it great). You sample the options sequentially. Weitzman’s model argues that a customer should search in sequence and can confidently stop once a certain value is reached, without checking every other remaining product. There is no need to search further.
Curation cures the ills of costly experimentations. For one, the fewer options that are untested in your consideration set, the more confident you are of your choice. Two, the smaller the consideration set, the more likely you would have randomly tested the best product.
Worker Morale and Unions
Operations colleagues Fisher, Gallino, and Netessine wrote an HBR article5 about how most retailers are squandering their most potent weapons: their employees.
Trader Joe’s has been an exception in how they have approached staffing. It is often extraordinarily impressive how effective the workers at TJ’s seem to be compared to several other grocery stores. I have not had a genuinely unhelpful experience in 18+ years of shopping there.
At TJ’s, the workers are given the agency to solve problems and talk to customers. All members are called crew. No task is menial, and everyone can engage. The crew members are promoted to Merchants, then to Mates, and finally a Captain (who is always promoted from within). The Captain doesn’t sit in an office, but in true seafaring fashion along with his Mates, leads the crew on the floor.
A job comparison site like indeed.com shows that 66% of people feel that they are paid fairly at Trader Joe’s which is higher than the competitors (It is 44% at Starbucks and 58% at Whole Foods).6 And yet, there has been grumbling and emerging consternation between the management and the employees. In April 2023, Oakland TJ’s voted to unionize, becoming the first west coast store to do so. The workers at Trader Joe’s store unionized following allegations of union-busting, worker harassment, and rat infestation7 (emphasis mine).
There is not going to be an AI solution to solving a rat infestation anytime soon. Grocery Retail will always have a big component of human labor. Human problems are important (and difficult) to solve. Leadership and culture in retail space become paramount.
Also, of note is the Gallup poll on the increasing approval of unionization forces in the USA. Add to this the politically charged environment, and the lingering from covid boogiedoms. It is clear that customer-facing retail businesses are increasingly facing irate politically charged customers (ask Target) or disenchanted employees (ask Starbucks).
Brands Matter… Increasingly.
At TJ’s, the branding with the sea-faring theme is on point. The counters are named after the streets of the city the stores are located in. There are minor witticisms in the promotions and bright blue-white skies in the paintings. In theory, it seems like these visual exhortations shouldn’t transform the bottom line. But in practice, it works!
I hope such things are true with this newsletter too!
Answer to the Opening Quiz: The opening picture shows actresses Bette Davis and Joan Crawford — the original Hollywood rivals. Their legendary feud was petty at times, but persistent and extended over many years with a lot of unintended casualties. However, the continued rivalry in their old age burnished their screen presence, as sisters who hated each other in What Ever Happened to Baby Jane? (1962).
Calm Seas and Fair Travels, wherever you go, Fearless Flyers.
https://www.reddit.com/r/2westerneurope4u/comments/136zzbx/great_european_aldi_war/
I promise to write about this one day. https://en.wikipedia.org/wiki/Dassler_brothers_feud
Two-Buck Chuck: Wine of the People or a Cultural Wedge? https://www.nytimes.com/2022/09/26/dining/drinks/two-buck-chuck-wine-fred-franzia-trader-joes.html
https://scholar.harvard.edu/files/weitzman/files/optimalsearchbestalternative.pdf
https://hbr.org/2019/01/retailers-are-squandering-their-most-potent-weapons
https://www.indeed.com/cmp/Starbucks/salaries
https://oaklandside.org/2023/04/24/trader-joes-unionization-oakland-rockridge-labor-violations/
it is worth mentioning the sibling rivalries that long predate film: Cain and Abel (and Jacob and Esau). A story as old as society.
Loved the post. Your post publication timing perfectly hits my "let me catch up on whats happening on the internet" time.
Aldi owning TJ was TIL for me. Grocery chains seem to have a more interesting story than one would have thought. I recently heard the audiobook of John Green's Anthropocene Reviewed. In one chapter he covers the history of the Piggly Wiggly stores and the advent of self-service grocery stores. A fun listen if you haven't hear it. The podcast version is here https://www.wnycstudios.org/podcasts/anthropocene-reviewed/episodes/episode-9-pennies-and-piggly-wiggly