Inside the secret world of Trader Joe's

trader_joes.top.jpg By Beth Kowitt, reporter


FORTUNE -- Apple's retail stores aren't the only place where lines form these days. It's 7:30 on a July morning, and already a crowd has gathered for the opening of Trader Joe's newest outpost, in Manhattan's Chelsea neighborhood. The waiting shoppers chat about their favorite Trader Joe's foods, and a woman in line launches into a monologue comparing the retailer's West Coast and East Coast locations. Another customer suggests that the chain will be good for Chelsea, even though the area is already brimming with places to buy groceries, including Whole Foods and several upscale food boutiques.

But Trader Joe's is no ordinary grocery chain. It's an offbeat, fun discovery zone that elevates food shopping from a chore to a cultural experience. It stocks its shelves with a winning combination of low-cost, yuppie-friendly staples (cage-free eggs and organic blue agave sweetener) and exotic, affordable luxuries -- Belgian butter waffle cookies or Thai lime-and-chili cashews -- that you simply can't find anyplace else.

Employees dress in goofy trademark Hawaiian shirts, hand stickers out to your squirming kids, and cheerfully refund your money if you're unhappy with a purchase -- no questions asked. At the Chelsea store opening, workers greeted customers with high-fives and free cookies. Try getting that kind of love at the Piggly Wiggly.

It's little wonder that Trader Joe's is one of the hottest retailers in the U.S. It now boasts 344 stores in 25 states and Washington, D.C., and strip-mall operators and consumers alike aggressively lobby the chain, based in Monrovia, Calif., to come to their towns. A Trader Joe's brings with it good jobs, and its presence in your community is like an affirmation that you and your neighbors are worldly and smart.

The privately held company's sales last year were roughly $8 billion, the same size as Whole Foods' (WFMI, Fortune 500) and bigger than those of Bed Bath & Beyond, No. 314 on the Fortune 500 list. Unlike those massive shopping emporiums, Trader Joe's has a deliberately scaled-down strategy: It is opening just five more locations this year. The company selects relatively small stores with a carefully curated selection of items. (Typical grocery stores can carry 50,000 stock-keeping units, or SKUs; Trader Joe's sells about 4,000 SKUs, and about 80% of the stock bears the Trader Joe's brand.) The result: Its stores sell an estimated $1,750 in merchandise per square foot, more than double Whole Foods'. The company has no debt and funds all growth from its own coffers.

You'd think Trader Joe's would be eager to trumpet its success, but management is obsessively secretive. There are no signs with the company's name or logo at headquarters in Monrovia, about 25 miles east of downtown Los Angeles. Few customers realize the chain is owned by Germany's ultra-private Albrecht family, the people behind the Aldi Nord supermarket empire. (A different branch of the family controls Aldi Süd, parent of the U.S. Aldi grocery chain.) Famous in Germany for not talking to the press, the Albrechts have passed their tightlipped ways on to their U.S. business: Trader Joe's and its CEO, Dan Bane, declined repeated requests to speak to Fortune, and the company has never participated in a major story about its business operations.

Some of that may be because Trader Joe's business tactics are often very much at odds with its image as the funky shop around the corner that sources its wares from local farms and food artisans. Sometimes it does, but big, well-known companies also make many of Trader Joe's products. Those Trader Joe's pita chips? Made by Stacy's, a division of PepsiCo's (PEP, Fortune 500) Frito-Lay. On the East Coast much of its yogurt is supplied by Danone's Stonyfield Farm. And finicky foodies probably don't like to think about how Trader Joe's scale enables the chain to sell a pound of organic lemons for $2.

To get inside the mysterious world of Trader Joe's, Fortune spent two months speaking with former executives, competitors, industry analysts, and suppliers, most of whom asked not to be named. What emerged is a picture of a business at a crossroads: As the company expands into new markets and adds stores -- analysts say the grocer could easily triple its size in the coming years -- it must find a way to maintain its small-store vibe with customers. "They see themselves as a national chain of neighborhood specialty grocery stores," says Mark Mallinger, a Pepperdine University professor who has done research for the company. "It means you want to create an image of mom and pop as you grow." That's no easy task. Just ask Starbucks (SBUX, Fortune 500) CEO Howard Schultz, whose expansion has been a huge success but has come at the expense of credibility with some coffee aficionados. The alternative is to remain a small brand with unflagging devotees, like outdoor clothier Patagonia. If it can get the balance right, Trader Joe's may be one of the few retailers to marry cult appeal with scale. Just don't expect anyone from the company to talk about it.

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