How do you get better quality for less? Building stronger relationships. The same principle applies when you want to get the best from employees.

Question: What was challenging in building relationships with vendors?

Doug Rauch:  Well, a lot of the challenge was simply to reinvent a way to buy.  At that time, back in the '70s, private label was mostly generic or brand name, where it was off-price, where you went into a store and if you got their own store label, you expected lower quality—and therefore, that’s why the tradeoff for paying less for it.

And the angle that we wanted and we took at Trader Joe’s, was let’s find a way by buying direct, by cutting out, you know, the various steps and all the... what we felt were unnecessary costs, and let’s see if we can’t get high quality at a lower price.  And so one of the obstacles was to make sure that the manufacturers understood what the process was.  The second was, you know, to make sure our customers understood.  When you walked in the store and suddenly there was... Coca Cola was gone. Or that whatever they’re used to.

So Trader Joe's was in a constant state of reinvention and was continually reinventing itself, which is both disorienting for existing customers, and at times, you know, exciting and new and different for new and existing customers.  Because I still remember to this day when we dropped cigarettes at Trader Joe’s in the mid '80s, a number of people were very upset that we were now turning into a health food store, simply by that one act.  They used to be able to come in and kind of use Trader Joe’s as a convenience store to buy cigarettes.  And Trader Joe's had clearly moved away from that model and they couldn’t offer, not only did it not fit in to sort of a health and wellness concept, but it also, you know, was just like Coke, couldn’t offer it at any better price, any different, there was nothing distinctive about it.

So for us, it was that every item had to have a reason to be there.  And it started to create this concept that we’re a store of stories.  And that every product has a story, every thing has a story, and that was the fun, the storytelling.  And the storytelling part of it was the part that really got to engage the parts of our customer that was just more than a transaction.  And the magic, I think, to Trader Joe's, as we moved forward, what has engaged customers over the years with Trader Joe’s, is the fact that we’ve been able to create a context that transcends just the content and that it’s more the context of the transaction is more important than the content.  A lot of comes out of that storytelling, out of that mission that was very clear. Now, executing it had many stumbles and, you know, I had more bad ideas than could fill an entire Wal-Mart before we hit upon some of the things that really worked.

Question: What does this mean for an employee?

Doug Rauch: If you’re going to come to Trader Joe’s, you know, it’s not just can you do the work and, you know, will you do the work?  But is it a fit?  And what makes it a fit with Trader Joe’s, or in this sense, I’d like to speak a little broader, if I could.  I think that, in general, if you’re an entrepreneur coming out of school or you’re young and you want to get into business, I think the key thing is to make sure that you are creating a value to a customer.  And this was the key thing I got in my education from Peter Drucker, was that the only valid definition of a business is to create and keep a customer.  So that customer focus is really critical.

And I think, particularly with Trader Joe’s, those employees that understand that they’re there to create a magnificent shopping experience—and I like to say about Trader Joe’s, is certainly from the retail end, that Trader Joe’s is a customer experience company that happens to sell food.  And that when they’re doing things right, it’s impossible for the customer to come into the store, interact with employees, leave, and not feel in some way a little better.  And it’s that sort of boomerang experience where they want to come back that creates that magic.

So whatever you’re doing, whatever role, whatever field, whatever profession you take on, it’s clear you got to identify who your customer is and make sure that you’re creating real value to them, that’s sustainable, long-term, and has in mind their benefit.

Recorded October 28, 2010

Interviewed by John Cookson