December 13, 2006 — The Trader Joe's Mystique

The privately held grocer brings its out-of-the-spotlight growth strategy to North Carolina
By Doug Campbell

Trader Joe's, the California-based specialty grocer, recently opened its first store in North Carolina. How's business? "It seems like we have been welcomed in the community," a company spokeswoman says.

And that is all she says. The response aptly sums up Trader Joe's business strategy: It's private.

For all the talk about the virtues of being publicly traded, there remain a number of firms that avoid the stock market and its accompanying spotlight. Mars of McLean, Va., is one of the nation's largest private firms by revenues, for example. Trader Joe's at present is much smaller than Mars, but with 265 stores and growing, the gap may be closing.

For a number of reasons, Trader Joe's values its privately held status. "They are very quiet," says Len Lewis, president of Lewis Communications in Floral Park, N.Y., and author of the book, The Trader Joe's Adventure. "They have built up this mystique."

In summary, Trader Joe's was born in the Los Angeles area and formerly known as Pronto Markets. The company's founder figured the best way to compete with rival convenience stores was to stock up on hard-to-find and value-priced items.

In 1979, Trader Joe's was sold to a trust established by Theo Albrecht, the co-founder of international grocer Aldi Group. Analysts estimate today's annual revenues at more than $2.6 billion. Profit margins are believed to be fatter than at other grocers thanks to Trader Joe's reliance on private labels and aversion to high-priced real estate markets.

The latest store to launch is in Cary, N.C., where lines on opening day were 10-carts deep, according to local newspaper reports. Another North Carolina store is planned for Charlotte. In all, Trader Joe's now has 16 stores in the Fifth District, stretching from Maryland to the Carolinas.

Where next? Trader Joe's isn't saying. As a private firm, it doesn't have to. This may help burnish the company's "mystique," but equally it helps keep competitors in the dark about Trader Joe's strategy and financial performance.

Another advantage of nonpublic status is avoiding regulatory compliance costs, including those associated with 2002's Sarbanes-Oxley Act, which was adopted in the wake of the Enron and WorldCom accounting scandals to thwart corporate fraud.

One theory of why some companies are better off being private is because it reduces agency costs. In many private companies, the top managers (the agents) are also the top owners, so the interests of managers and investors are aligned in ways that aren't necessarily true in public organizations. Managers in private firms may be freer to keep their eyes on long-term goals rather than short-term — but unsustainable — profits. Even more, impatient shareholders can demand immediate growth that may run contrary to a business' best interests.

Public shareholder pressure doesn't exist for Trader Joe's. In fact, the company does a number of things that Wall Street analysts would find curious. It has no debt, for example, paying for all its expansions out of working capital (which may help explain the slow pace of store openings). It also shuns the hottest retail areas, preferring lower-priced, sometimes aging, strip malls.

To be sure, being private is not necessarily a panacea for all firms. And perhaps Trader Joe's would be more successful if it went public. But it seems clear that the company's owners consider privacy part of a winning strategy.

"When you go public, you have to satisfy Wall Street," Lewis says. "Sometimes that means expanding farther and faster than you want in order to meet earnings expectations. But Trader Joe's doesn't have any master to answer to. ... They're very concerned about not overexpanding."