359. Should America Be Run by … Trader Joe’s?

The quirky little grocery chain with California roots and German ownership has a lot to teach all of us about choice architecture, efficiency, frugality, collaboration, and team spirit.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

  Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example? Well, PNC Bank did, since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely-not-yolo type. PNC Bank: brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 0:48Stephen J. Dubner?

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• 1:20Stephen J. Dubner?

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• 1:53Stephen J. Dubner?

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• 2:36Speaker 01

  Let's play Shark Tank today. You're the investors.

• 2:40Stephen J. Dubner?

  Shark Tank, if you don't know, is the TV show where people pitch business ideas to famous investors.

• 2:46Speaker 01

  You might be Mark Cuban or Mr. Wonderful. You're trying to decide, would you invest?

• 2:50Stephen J. Dubner?

  And that is Michael Roberto. He's a business professor at Bryant University, formerly of the Harvard Business School. There's one lecture he likes to start by giving his students this fictional Shark Tank pitch.

• 3:02Speaker 01

  I'd like to open a new kind of grocery store. We're not going to have any branded items. It's all going to be private label. We're going to have no television advertising and no social media whatsoever. We're never going to have anything on sale. We're not going to accept coupons. We'll have no loyalty card. We won't have a circular that appears in the Sunday newspaper. We'll have no self-checkout. We won't have wide aisles or big parking lots. Would you invest in my company?

• 3:32Stephen J. Dubner?

  And of course, you're supposed to think, there is no way I'd invest in that company. That sounds like the stupidest company ever.

• 3:38Speaker 01

  And of course, you get a lot of consternation.

• 3:41Stephen J. Dubner?

  That's when Roberto reveals that not only does such a grocery store already exist, but they're crushing the competition.

• 3:47Speaker 01

  They're at the top by a wide, wide margin. The sales per square footage estimates are unbelievable. I mean, three and four times better than some of the leading players in the industry.

• 3:57Stephen J. Dubner?

  So it sounds like customers love this place, but you might think a store like this would be brutal to work for. And yet, it's ranked among the 100 best American companies to work for. So what's it called? Trader Joe's. Trader Joe's. Trader Joe's. Trader Joe's.

• 4:13Speaker 02

  Trader Joe's. I do love Trader Joe's.

• 4:19Stephen J. Dubner?

  There is a good chance you have never shopped at a Trader Joe's, maybe never even heard of it. It's got fewer than 500 stores. The big chains like Kroger and Albertsons have well over 2,000. Walmart sells groceries in more than 4,000 of its stores. And as Michael Roberto told us, Trader Joe's doesn't advertise or do a lot of things the typical grocery store does.

• 4:42Speaker 01

  A typical grocery store has a SKU count. SKU stands for stock keeping unit. So it's a number of different items carried in a store. What's a big grocery store, a supermarket, might have 35,000 SKUs, right? A tremendous selection of variety. You go to Trader Joe's and they only have, say, 3,000 stock keeping units in a typical Trader Joe's.

• 5:01Stephen J. Dubner?

  The grocery business is famous for low profit margins, lots of competition, and lately, an even bigger problem. For the first time in history, American consumers are spending more money in restaurants and bars than in grocery stores. Trader Joe's seems to be bucking this downward trend. It doesn't just have customers, it has fans.

• 5:23Speaker 03

  The first thing I do when I know I'm going somewhere is get on the internet and find where the closest Trader Joe's is.

• 5:29Stephen J. Dubner?

  It's never been easy to run a grocery chain, but Trader Joe's makes it look easy and, weirdly, fun.

• 5:37Speaker 02

  I don't walk into Trader Joe's with a strong to-do list. It's not a chore. When I walk into Trader Joe's, it's a variety-seeking exercise.

• 5:49Stephen J. Dubner?

  So how do they do it? That's the question we'll try to answer today, a question made more difficult by the fact that Trader Joe's is a fairly secretive company.

• 5:58Speaker 01

  I think that some of the secrecy is probably due to who owns them.

• 6:02Stephen J. Dubner?

  So we put on our Freakonomics goggles in an attempt to reverse engineer the secrets of Trader Joe's, which, it turns out, are incredibly Freakonomical. Things like choice architecture and decision theory, things like nudging and an embrace of experimentation. In fact, if Freakonomics were a grocery store, it might be a Trader Joe's, or at least try to be. It's like a real-life case study of behavioral economics at work. So here's the big question. If Trader Joe's is really so good, should their philosophy be applied elsewhere? To Trader Joe's...

• 6:41Stephen J. Dubner?

  I can't believe I'm going to say this, but should Trader Joe's be running America?

• 6:51Speaker 04

  From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 7:17Stephen J. Dubner?

  I first got interested in Trader Joe's about 10 years ago. I'd never been to one of their stores, but I had a general impression: cheap and cheerful, relatively laid back and sort of groovy for a grocery store, apparently a reflection of its surfy California roots. Also, not aggressively health-conscious, but leaning in that direction. And then I read a Wall Street Journal article about a German grocery chain called Aldi that was ramping up its US expansion. Aldi is a super-cheap, super-genereck grocery store. 95% of its products were house brands, and it was beating even Walmart on price. The article said the Aldi chain had two branches back in Germany, separately owned by two

• 8:01Stephen J. Dubner?

  wealthy brothers named Albrecht, and that one of those branches also owned Trader Joe's. I found this fact surprising, only because when I think of German business practices, I don't think of a groovy, earthy, crunchy, California-surfy vibe, but there it was. I also learned that Trader Joe's stores were much smaller than typical supermarkets, that they had their own way of doing things, and that places without Trader Joe's often started petitions to bring one to their town. It was a sort of loony devotion usually reserved for sports teams or your favorite band. What kind of grocery store has a following like that? And then when I learned that Trader Joe's outsells all other grocery stores per square foot, I really started paying attention.

• 8:45Stephen J. Dubner?

  Then one opened up near my office here in New York. I started shopping there and for the most part, loving it. I realize it's not for everyone. In fact, part of their strategy is trying not to be for everyone. But I did want to know the secrets to their success. We reached out to the Trader Joe's headquarters in Monrovia, California, and were politely told to get lost. As we mentioned earlier, the company is known for its secrecy.

• 9:13Speaker 01

  The two brothers who founded Aldi North and Aldi South in Germany, you know, have a record of that.

• 9:19Stephen J. Dubner?

  Michael Roberto again.

• 9:20Speaker 01

  That was kind of the family heritage of really being pretty secretive about their business operations. And really, they weren't even, you couldn't even find photos of them like on the internet for years, you know? I mean, they were very secretive.

• 9:30Stephen J. Dubner?

  It's a strange combination. A firm that prides itself on user friendliness while also keeping its distance, which means that a lot of what's known about it comes from industry analysts and other secondary sources. But let's start here. In the very beginning, there really was a Joe behind Trader Joe's, Joe Colom. He opened the first store in 1967 in Pasadena, California. He went with a South Seas theme. Beachy tchotchkes, Hawaiian shirts, calling employees captains and crew members. In 1979, Colom sold the chain to one of the secretive Albrecht brothers, Theo. Theo Albrecht was a recluse. Perhaps, it was said, because he had once been kidnapped

• 10:15Stephen J. Dubner?

  and held for ransom for 17 days in Germany. Albrecht died in 2010, but Trader Joe's remains notoriously press shy. It's also a privately held company, so no earnings calls with investment analysts, no public proclamations of any sort, really, about how it does business. And so to figure out how it works, we'll rely on a few people who've spent a lot of time thinking about Trader Joe's, including the business school professor, Michael Roberto, whom you've already met.

• 10:47Speaker 01

  Correct.

• 10:48Stephen J. Dubner?

  Also, the Columbia Business School professor, Sheena Ayengar, whose research specialty is particularly relevant here.

• 10:54Speaker 02

  So I've been studying choice. Why do we want choice? What are the things that affect how and what we choose? And what are some things we can do to improve our choice-making abilities?

• 11:05Stephen J. Dubner?

  We'll also talk to a Trader Joe's superfan.

• 11:08Speaker 03

  My name is Kirk DeSermia. I reside in Seward, Alaska.

• 11:12Stephen J. Dubner?

  Seward, by the way, does not have a Trader Joe's, nor does the state of Alaska. The closest store from DeSermia's house is 2,295 miles away by car in Bellingham, Washington. DeSermia is the guy who we heard earlier say this.

• 11:28Speaker 03

  The first thing I do when I know I'm going somewhere is get on the internet and find where the closest Trader Joe's is.

• 11:34Stephen J. Dubner?

  And we'll hear from a spy in the house of Trader Joe's, a former advertising executive named Mark Gardner, who became obsessed with the chain.

• 11:43Speaker 05

  And I just had this thought, like, you know, what if I just went and worked there? What would I learn about this company?

• 11:58Stephen J. Dubner?

  What Gardner learned about the company is that just about everything Trader Joe's does outside of exchanging food for money is unorthodox for a modern grocery store. There's a lot to talk about. The products, of course, the economics of their business model, their very homemade, do-it-yourself aesthetic, including the hand-painted murals that reflect the neighborhood of every store. But let's start with one of the first things I noticed when I started shopping there: the employees. Yes, they are friendly and helpful and enthusiastic.

• 12:30Speaker 01

  At Trader Joe's, what they want is employees in the aisles who have sampled the product, who know the product, who can say, have you tried this wine or that cheese?

• 12:38Stephen J. Dubner?

  But what really caught my eye was the sheer number of employees. There are so many of them. If you go in during a slow time, you can easily be outnumbered by employees in their TJ's t-shirts and Hawaiian prints. One reason is that rather than stocking shelves overnight, like most grocery stores, Trader Joe's stocks them during business hours. Why? As Mark Gardner learned when he went to work there, the priority is to maximize customer interaction.

• 13:07Speaker 05

  So they would tell us, "You're going to be looking for customers who seem like they can't find something that they want, or just seem curious about something. You're going to initiate conversations with these people, and that we want you to be friendly. We want you to be chatty. We want you to be empathetic. And more than anything else, we want you to do what it takes to make customers feel appreciated and wanted."

• 13:32Stephen J. Dubner?

  So that explains why there are so many employees in the aisles. But there are also a ton of employees staffing the checkout. On one level, this makes sense. It makes the long checkout line move fast, and checkout, after all, is where a store takes the customer's money. Lesson number one in sales: don't make it hard for people to give you their money. But Trader Joe's also has employees directing traffic at the checkout line. One telling you which register to go to, one pulling you out of the big queue and into the final queue, and one or two holding up handmade signs marking the middle of the queue and the beginning. That's three or four employees to do the job that most stores use zero employees to

• 14:17Stephen J. Dubner?

  do, or maybe they use some software. But Trader Joe's seems to be aggressively low-tech. No self-checkout aisles, no online ordering and pickup, no customer loyalty programs, and apparently Trader Joe's gathers no significant data on customers at all. In the modern business world, this is heresy. If you shop at Whole Foods, which is owned by Amazon, you can be sure the company has an algorithmic target on your back. Trader Joe's, meanwhile?

• 14:49Speaker 05

  It really didn't matter if it was a little old lady that was looking for one $5 bottle of wine, and if the wine shipment had just come in the back, and I would go and look, and look through 100 different cases and see if I could find the one that she wanted, and get her that one bottle of wine. If I spent 15 minutes doing that, and that made that customer really happy, then the managers were happy, and the store was happy.

• 15:15Stephen J. Dubner?

  So this is a riddle. Here's a company that doesn't harness big data and doesn't generally seem to embrace a lot of technology. It employs a lot of real, live people and pays them above the industry standard. As of 2013, full-time Trader Joe's crew members made about $50,000 a year, while captains made more than $100,000, also with better-than-average benefits. But this is also a company that sells its products at very low prices. According to one of those investigations comparing a basket of items at a bunch of different grocery stores, this one was done in 2016 by the MarketWatch website in the San Francisco Bay area, Trader Joe's was easily the cheapest compared

• 15:58Stephen J. Dubner?

  to Safeway, Target, and Whole Foods. It was 32% cheaper than Whole Foods. So how on earth can Trader Joe's, as Michael Roberto told us, take in the most revenue per square foot in the industry? They're at the top by a wide, wide margin. A 2012 analysis estimated that Trader Joe's sells just over $2,000 of groceries per square foot. Whole Foods, about $1,200. Walmart, $600. How is this happening? We should probably start with the products that Trader Joe's sells. Here, let me read off some of what they say are their most popular items. Spatchcocked Lemon Rosemary Chicken and Carne Asada Autentica.

• 16:42Stephen J. Dubner?

  Kohlrabi Salad Blend and Cold-pressed Matcha Green Tea Lemonade. Sea Salt and Turbinato Sugar Chocolate Almonds and Gochujang Almonds. Peanut Butter Filled Pretzels and Five-Seed Almond Bars. From the freezer section, Chicken Tikka Masala and Gluten-Free Cheese Pizza with a Cauliflower Crust. These are the sort of foods that light up Instagram accounts and Facebook pages, that inspire fanatical devotion even among people who don't have a Trader Joe's within 2,300 miles, like Kirk Desermia, who works as a facilities manager for the National Park Service in Alaska.

• 17:22Speaker 03

  Whenever I leave the state, I usually buy a couple hundred dollars worth of goods and I have an extra suitcase or duffel bag with me in my luggage.

• 17:32Stephen J. Dubner?

  Desermia and his duffel bag have been all over.

• 17:36Speaker 03

  I've been, I know, to some in Portland, Oregon, Reno, Nevada, all over Southern California. There's a number of them. My wife is from Kentucky, and so we've been to, they have one in Louisville now, as well as Indianapolis.

• 17:56Speaker 03

  I go to DC about once a year for work, and I love to go to the Trader Joe's in Georgetown.

• 18:07Stephen J. Dubner?

  What is it about Trader Joe's foods that creates such a lust? Let's put aside for a moment the question of how good their food is, especially since taste is subjective, at least to some degree. But there are a few things to say about how Trader Joe's is at least different from a typical grocery store. First, there is a sense of globetrotting adventure. The tikka masala, the carne asada, the gochujang almonds. That's why Sheena Iyengar thinks of shopping there as a variety-seeking exercise.

• 18:39Speaker 02

  Oh, let's see what kind of candy bars they have. They usually have cool candy bars. Let's see what kind of deals they might have on wines or cheeses. Are their prepared food sections kind of cool? What might they have that could add some more variety to the house?

• 18:53Stephen J. Dubner?

  They also offer a rather unsubtle blend of healthy, or at least healthy seeming, and hedonistic. Yes, you can buy kohlrabi salad and cauliflower crust pizza, but you've also got your peanut butter-filled pretzels and sea salt and turbinado sugar chocolate almonds. Speaking of which, turbinado sugar, also known as natural brown sugar, but still, sugar. Why add the turbinado? I have a few guesses. One, to say you're just adding sugar to your already chocolate-covered almonds doesn't sound very healthy. But turbinado sugar? Hmm, intriguing, possibly even sophisticated.

• 19:37Stephen J. Dubner?

  Additionally, Trader Joe's seems to understand what everyone in sales understands, especially real estate agents. Adjectives are inexpensive and often useful, especially when the actual virtues are limited. A charming house is often, in fact, a small house. Trader Joe's reportedly puts a great deal of effort into scouting, sourcing, and producing food that their customers truly love. But they also pay a lot of attention to package design and descriptive salesmanship. Their marketing director is called Director of Words and Phrases and Clauses. They publish an old-fashioned newsprint bulletin, the Fearless Flyer,

• 20:20Stephen J. Dubner?

  with in-depth descriptions of new products. When you walk into a Trader Joe's, there's a playful vibe, as if to say, "Hey, you're just buying food. Food is delicious, so enjoy yourself." There's also an artsy vibe, a writerly vibe, more so, oddly enough, than in a typical bookstore. These details, as casual as they might seem, would also appear to be strategic. In a 2011 interview with the LA Times, Joe Colom said that when he started Trader Joe's in the 1960s, he was inspired by an article he read in Scientific American about the huge spike in Americans attending college.

• 21:03Stephen J. Dubner?

  "I felt this newly-educated class of people would want something different," he recalled, and that was the genesis of Trader Joe's. Why did he choose Pasadena as the first store location? "Because," he said, "Pasadena is the epitome of a well-educated town. Trader Joe's is for overeducated and underpaid people, for all the classical musicians, museum curators, and journalists," he said. This suggests that, from the very beginning, Trader Joe's understood cream skimming, targeting a certain kind of customer and letting the rest slide by. As for the underpaid part of Colom's equation, that would appear to be outdated.

• 21:47Stephen J. Dubner?

  An analysis by the research firm Agdata found that Trader Joe's stores today are located in counties with higher household median income than any other grocery chain, including Whole Foods, and about $10,000 higher than the US median income. But, and this seems to be another key component of Trader Joe's' success, they also value frugality. As Michael Roberto found, they usually set up shop in the cheaper parts of the expensive areas.

• 22:14Speaker 01

  Frankly, in many cases, they're in sort of old strip malls, so they've saved money on the real estate.

• 22:18Stephen J. Dubner?

  The real estate firm Zillow found that homes near Trader Joe's stores appreciate more quickly than homes in the city as a whole. Concluding that either Trader Joe's is really good at picking areas that are on the rise, or that they are in part causing the rise. So how about a new store in Seward, Alaska? That is Kirk DeSermia's dream.

• 22:43Speaker 03

  So I started a Facebook page called Bring Trader Joe's to Alaska.

• 22:48Stephen J. Dubner?

  This was in 2012.

• 22:50Speaker 03

  I thought, man, these guys, maybe they just don't know what they're missing yet. And if I can create this Facebook page and I can get people around the state to start liking it and sending Trader Joe's an email to say, hey, we would really love to see your store here, then maybe Trader Joe's will actually listen to us.

• 23:09Stephen J. Dubner?

  So after one of his out of town Trader Joe's shopping binges.

• 23:13Speaker 03

  When I come home with a suitcase full, I like to throw it on the kitchen table and take a picture of it and put it out there, hopefully to motivate people to send that email to Trader Joe's and let them know we're out here.

• 23:27Stephen J. Dubner?

  His Facebook page got some traction, about 1,200 likes.

• 23:31Speaker 03

  I would say most of my friends in Seward are aware that this is something that I would like to see happen.

• 23:38Stephen J. Dubner?

  Unless you think DeSermia is one of those guys who makes a Facebook page for everything.

• 23:43Speaker 03

  No, some of my friends might say I'm fairly politically active, but you know, I honestly can't think of any other store that I might think to start a page to bring up here.

• 23:54Stephen J. Dubner?

  Seward, Alaska does have a relatively high median household income, but the population is a problem, fewer than 3,000 people. DeSermia concedes that Anchorage, a few hours away, would be a more sensible site for the first Trader Joe's in Alaska, and he'd happily make the drive. He just really wants a Trader Joe's.

• 24:14Speaker 03

  Every time I go to a Trader Joe's in the lower 48, they always look sideways at me when I'm getting $200 to $300 worth of goods. But I tell them, you know, it's because we live in Alaska and we can't get you guys to come up here. And since I started this page in 2012 and they've never responded to a single email, it seems a little unlikely, but hopefully they're going to listen to this interview and then my percentage will go up.

• 24:45Stephen J. Dubner?

  Coming up after the break, we'll get into the economic details of Trader Joe's success. We'll hear how they flipped the script on customer relations.

• 24:54Speaker 05

  Just imagine if you would. What if you changed the rules? What if you guys were both on the same side?

• 25:03Stephen J. Dubner?

  And we'll answer the question we know you've been thinking. What does Trader Joe's have in common with Michelangelo? It's coming up right after this.

• 25:24Stephen J. Dubner?

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• 26:05Stephen J. Dubner?

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• 26:27Stephen J. Dubner?

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• 26:58Stephen J. Dubner?

  Freakonomics Radio is sponsored by PNC Bank. Boring. Great word, bad rep. Yet, time and time again, here at Freakonomics, we find that when something culture-changing happens, boring things like calculations and careful planning are usually behind it. Which begs the question, why not apply it to other aspects of life? Like banking, for example. Well, PNC Bank did, since its inception, proving time and again that the best banking strategy isn't the exciting type, but the steady, reliable, definitely-not-YOLO type. PNC Bank: brilliantly boring since 1865. Brilliantly boring since 1865 is a registered mark of the PNC Financial Services Group, Inc. PNC Bank, National Association, Member FDIC.

• 27:52Stephen J. Dubner?

  Of all the mysteries concerning the success of Trader Joe's, here's what strikes me as the most interesting one. Their stores, as we've learned, are generally quite small, roughly a third the size of a typical supermarket. Michael Roberto again.

• 28:06Speaker 01

  We're all acclimated to every other supermarket looks the same. It has 35,000 items, it has 7 million varieties of toothpaste and tomato sauce. Every other player has all those things.

• 28:17Stephen J. Dubner?

  But Trader Joe's...

• 28:19Speaker 01

  They only have, say, 3,000 stockkeeping units in a typical Trader Joe's, or 4,000 at most, in one of their larger stores.

• 28:26Stephen J. Dubner?

  Moreover, as we've learned, Trader Joe's prices are relatively low. And yet, they also take in much higher revenues in stores that have more variety and more expensive items. So, how? Remember, Trader Joe's doesn't sell a lot of brand-name groceries. Roughly 80% of their products are private-label items, also known as store brands.

• 28:49Speaker 01

  What that means is Trader Joe's has mitigated the power that suppliers might have over them. So while they're not nearly as big as Kroger's, they can get great purchasing power. Because they're condensing all they're buying in tomato sauce to one vendor for a very limited number of items.

• 29:06Stephen J. Dubner?

  And when you're selling something that you also manufacture, or at least source directly, you obviously stand to make more money than if you're buying from a middleman. That said, even store branded products need to taste good. Judging from the chain's success, they do. In fact, some Trader Joe's branded items may taste identical to brand named foods. Why? Because, it appears, they are identical. An investigation by the food website Eater, using Freedom of Information Act requests, found that many Trader Joe's items are, in fact, manufactured by the same companies that make the brand name versions of products that you can buy in many other grocery stores, usually for

• 29:49Stephen J. Dubner?

  significantly more money. For instance, those Trader Joe's pita chips with sea salt? They appear to be exactly the same as Stacy's Simply Naked pita chips. Trader Joe's gluten free chocolate chip cookies, according to the investigation, are "nearly identical in taste, packaging, and ingredients to Tate's Bake Shop cookies." There's nothing wrong with this, and it's hardly unusual for brand name manufacturers to run a side business selling to private labels, but most places that sell a lot of house brands are seen as downmarket discounters, not upmarket superstars like Trader Joe's. So, why are

• 30:30Stephen J. Dubner?

  they different? Some of the credit must go to the clever packaging and the artful product descriptions, but to get to the real secret of Trader Joe's, what I think might be the single biggest reason for its success, you have to go back to Sheena Iyengar.

• 30:49Speaker 02

  I have been at the Columbia Business School since 1998, and I started to study choice way back in 1990.

• 30:59Stephen J. Dubner?

  Iyengar's PhD is in social psychology. As an undergrad, she double majored in psychology and economics. She was born in Toronto to parents who'd immigrated from India. Her background, she believes, gave her a different perspective on decision making when she started working in the field.

• 31:17Speaker 02

  And I got very interested in the kinds of questions that we wouldn't have ordinarily asked, like, well, do all cultures see choice in the same way? We had assumed that it was innate. We had assumed that everybody saw it the same way, that it was somehow universal. And I think because I was an Asian American, I didn't see it as that obvious.

• 31:38Stephen J. Dubner?

  She wanted to explore this question with kids from different backgrounds. Her theory was that Asian American kids and white American kids might think differently about choice. Before comparing the two groups, she wanted to establish a baseline to confirm that for the white kids, choice indeed had a positive effect. This baseline experiment turned out to be pretty interesting on its own. Here's how it worked. She brought a bunch of three-year-olds, one by one, into a roomful of toys. Half of them were allowed to choose any toy, and they could switch as they pleased. The other half would be given just one toy with no option to switch.

• 32:19Speaker 02

  I started by looking at white American kids because I had to first show that I'm capable of actually replicating what prior scientists would say.

• 32:27Stephen J. Dubner?

  What prior scientists would say, and had been saying for decades, is that choice is motivating, that having choice, or even the illusion of choice, is associated with increased satisfaction and feeling more control over your life. Therefore, the kids who could choose their toy should be happier for having the options and more likely to play longer. These ideas about choice were prominent not just in psychology, they were baked into the foundation of economic thinking at the time, that more choice is almost always better than less choice. But when Iyengar started her study and brought in the kids who could choose from an entire roomful of toys...

• 33:08Speaker 02

  The white kids would come in, and they would look at all these toys.

• 33:14Speaker 02

  And stare outside the window. And then when I would just give them Legos, they were really happy and they were playing. And I was like, wait, this goes totally against what I'm supposed to find. There's something wrong here.

• 33:24Stephen J. Dubner?

  So Aangar went back and examined some of those earlier studies about choice and decision making. She realized that when those researchers described giving people lots of choice, in reality, that meant something like two to six options, not a room full, like she had tried. So Aangar ran a different study, this time limiting the number of choices. And now she confirmed what her predecessors had found. But she kept thinking about what happened in that first study with the room full of toys.

• 33:55Speaker 02

  Why were they staring out the window? I don't get it. I gave them really, really cool toys. I gave them all the most modern toys.

• 34:04Speaker 02

  At the same time, I was going to this upscale grocery store.

• 34:09Stephen J. Dubner?

  The store is called Trader's Market. It's a Northern California institution. Aangar was at Stanford at the time.

• 34:15Speaker 02

  So they had like 250 different kinds of mustards and vinegars and mayonnaises and 500 different kinds of fruits and vegetables and 100 different kinds of olive oils. And, oh my God, it was amazing. And I would go to all these little tasting sessions and try out like 10 different kinds of vinegars. And I also then thought to myself, well, how come you never buy any of those things you taste? And I then went to the store manager and I asked him whether his model of offering people all this choice was working. Now, he said it did, and he pointed to the traffic, and this store did have a lot of traffic. But it was still an empirical question. Was it helping or was it not?

• 34:57Stephen J. Dubner?

  So Aangar designed an experiment at Drager's to answer the question. She set up a tasting booth for jams, and she alternated the choice set. Sometimes the booth would feature six different jams and sometimes 24.

• 35:12Speaker 02

  And we looked at two things. First, we looked at in which case did more people stop to sample some jam? And we found that more people stopped when there were 24 on display. So 60% stopped when there were 24 on display versus when there were six on display, only 40% of the people stopped. And then when people stopped, we gave everybody a coupon giving them $1 off if they bought a jar of jam. And in the back of the coupon was a code that told us if they saw six versus 24. Now, what we found was that of the people who stopped when there were 24 on display, only 3% of those coupons were redeemed.

• 35:54Speaker 02

  Whereas of the people who stopped when there were six on display, 30% of the coupons were redeemed.

• 36:01Stephen J. Dubner?

  Interesting. A larger choice set generates more interest. The smaller choice set generates more action. Sheena Iyengar's JAM study, very simple, but very powerful, would go on to become one of the most famous studies in decision science because it illustrates what a lot of us feel when we enter, for instance, a gigantic supermarket.

• 36:26Speaker 02

  With the finding illustrated was that we want more choice, presumably because of all the opportunities it provides us, but when it comes down to making a choice, we don't want that choice to be too hard, or too conflict ridden, or too burdensome.

• 36:42Stephen J. Dubner?

  Iyengar followed up her JAM study with a look at employee participation in retirement savings plans.

• 36:49Speaker 02

  And essentially, what we found was that the plans that offered their employees more options, you saw a real decrease in participation rates. So if you had a plan that offered people less than five options, the likelihood to participate was roughly around 75%. And by the time you got to plans that offered people around 60 options, now participation rates had dropped below 60%.

• 37:16Stephen J. Dubner?

  This phenomenon has come to be called the paradox of choice. But Iyengar doesn't think that's quite right. It's not that more choice is always worse and that less is always better. She argues that choice is both a limiting and a powerful tool. Every context is different.

• 37:36Stephen J. Dubner?

  You can imagine that a huge choice set is particularly welcome in the digital realm, where you can search for exactly what you want with a few keystrokes, assuming that is you know what you want. But in the analog world, in the world of a grocery store, for instance, the size of a choice set matters, not just because of the cost of real estate and transportation, storage and labor to stock the shelves, but because of how we, people, make decisions. Envision a shelf in a typical supermarket.

• 38:08Speaker 01

  It has 7 million varieties of toothpaste and tomato sauce.

• 38:11Stephen J. Dubner?

  And a Trader Joe's shelf.

• 38:13Speaker 02

  It doesn't overwhelm me. It usually gives me just a few choices per domain.

• 38:18Stephen J. Dubner?

  And having just a few choices per domain is more likely to lead to action. Imagine yourself standing in an aisle in Trader Joe's, and you come across their five-seat almond bars. And your lizard brain says, well, there are no four-seat almond bars or six-seat almond bars. I don't even know why I need seeds in my almond bars, but sure, I think I'll get some of those. Trader Joe's understands less is more. It understands, to use a word of the moment, curation.

• 38:52Speaker 02

  They don't overwhelm you with choice, which is why you're more willing to examine each novel's choice.

• 39:01Stephen J. Dubner?

  There is a story, probably not true, about Michelangelo. Someone supposedly asked him how difficult it had been to sculpt his famous David, and he said, "It's easy. Just chip away the stone that doesn't look like David." I am not saying Trader Joe's is quite on Michelangelo's level, but you get the idea. There is great value in clearing away the clutter, which is one reason Sheena Iyengar personally loves shopping at Trader Joe's.

• 39:30Speaker 02

  It doesn't give me the boring stuff, right? It keeps me excited because I want to see what they have. And what do they have that might get me thinking about something I don't ordinarily think about? So they also maintain the mystery of novelty for me.

• 39:45Stephen J. Dubner?

  Novelty is also a powerful tool in sales, and this too Trader Joe's understands. It is famous for constantly introducing new products, experimenting with them really, which means old products have to go. Maybe they'll come back, maybe they won't. This strategy would appear to be risky.

• 40:04Speaker 01

  Normally, in a typical grocery store, if the item that you typically bought isn't there, you're really pissed, right? You're mad.

• 40:10Stephen J. Dubner?

  Michael Roberto again.

• 40:11Speaker 01

  At Trader Joe's, customers have come to understand that that's part of the trade-off. You might see your peach mango salsa disappear, but there'll be something new to try that you can offer at your next cocktail party and wow people with.

• 40:25Stephen J. Dubner?

  Iyengar notes this strategy also gives every trip to Trader Joe's a sense of a treasure hunt, but that our appetite for novelty is domain-specific.

• 40:36Speaker 02

  I deliberately go into that venue.

• 40:39Stephen J. Dubner?

  That venue being Trader Joe's.

• 40:41Speaker 02

  Because I want to learn about some choices. I'm trying to update my brain on choices. But when I go into my coffee shop in the morning, I do not engage in any act of updating. I don't want to know. I walk into my coffee shop every morning. I don't even say anything. They just bring me out exactly what they bring me every other day, and it's made exactly the same. And I have no interest in engaging in any kind of variety-seeking.

• 41:19Speaker 05

  I discovered Trader Joe's totally by accident.

• 41:23Stephen J. Dubner?

  That's Mark Gardner again, the former advertising executive who wound up working at Trader Joe's. He was living in California at the time.

• 41:30Speaker 05

  I thought it was a local store. It had a kind of a surf theme, and I didn't know any better because they don't do any advertising. I only was exposed to it because it happened to be in my neighborhood.

• 41:42Stephen J. Dubner?

  Then Gardner moved to Kansas City.

• 41:44Speaker 05

  Yes, and that's when I really learned about Trader Joe's as a company, because there was no Trader Joe's. But there were these rumors, oh, but we're going to get a Trader Joe's. And there was so much excitement. There's a Facebook page called Bring Trader Joe's to Kansas City that has 5,000 friends.

• 42:04Stephen J. Dubner?

  As a former advertising guy, Gardner was impressed.

• 42:08Speaker 05

  I think the number one thing that struck me about Trader Joe's is that they almost don't advertise at all. They don't market. They have a pretty good website now, but for years, they had a rudimentary website. They had almost no social media presence. They had almost no kind of public relations. So they didn't do a whole bunch of the things that I had spent my entire working life thinking, well, you know, these are the things that you do when you build a brand. So that was really striking to me. And I just had this thought, like, you know, what if I went and worked there?

• 42:52Speaker 05

  What would I learn about this company?

• 42:55Stephen J. Dubner?

  Gardner learned enough about the company by working there that he wrote a book about it called Build a Brand Like Trader Joe's. How did Trader Joe's respond?

• 43:03Speaker 05

  Well, as you know, they're a very, very secretive company, so they responded exactly the way I expected, which was with utter silence.

• 43:15Stephen J. Dubner?

  What initially impressed Gardner was how Trader Joe's had grown so much without spending all the money that most firms spend on marketing, advertising, and so on. But what impressed him once he got inside, working as a crew member for $12 an hour, was the company's culture. Well before the new Kansas City store had opened on the first or second day of training, a Trader Joe's executive came in to meet with the roughly 50 new hires, including Gardner. The proceedings began with that standard horrifying request to say your name and tell a story about yourself.

• 43:49Speaker 05

  And I am not kidding you, 50 hands went up.

• 43:54Speaker 05

  It was like all these people were like, "Pick me. I want to be the first. I want to start. I want to tell you my story." And I looked around at that group of hands going up, and mine was up too, you know? Because I love talking about myself. But most people don't, at least not to a group of strangers. And I thought, wow, this is not an ordinary group of people. And what I realized pretty quickly is, oh, my God, this is what they hire for. They hire for this kind of extroverted, naturally chatty kind of person.

• 44:30Stephen J. Dubner?

  As the training progressed...

• 44:32Speaker 05

  These guys really weren't too worried about teaching me how to operate a grocery store, right? I mean, there was some discussion about, you know, keeping the cold things cold and how important that is. And there was a little bit of discussion about, this is how a cash register works. About, you know, when you're bagging groceries, this is how you do it. There was some discussion of process. But actually, there was a lot of discussion of Trader Joe's values. There was a tremendous amount of discussion about, how are you going to be with the customers?

• 45:11Stephen J. Dubner?

  And then, once the store opened...

• 45:13Speaker 05

  No matter how crazy the store was, no matter how much pressure there was to do something else, if you were doing something for a customer, that trumped everything.

• 45:25Stephen J. Dubner?

  Seeing how Trader Joe's encouraged its employees to interact with customers, to partner up with them, didn't just make sense to Gardner. It inspired him to wonder why this theoretically obvious approach is, in fact, quite rare. Consider, he says, a standard trip to the Department of Motor Vehicles.

• 45:45Speaker 05

  But what happens when you go to the DMV? Well, what happens is you stand on one side of a counter, and then there's your opponent on the other side of the counter. And it's as if you're in sort of a game or a sport where you're trying to get your license plate or a driver's license. And they're going to say, "Oh, yeah, but you don't have an up-to-date inspection certificate for your cars. So get out of here," right? It's like a volleyball game practically. And it's you against them. Now, what if you changed the rules? And what if you said you guys are both on the same side? Your goal is to get them that driver's license or that license plate that they need. And so instead of just saying, "You don't have the right inspection,"

• 46:30Speaker 05

  what if you told them, "Look, this is what's wrong with the certificate that you've got. It's either out of date, or it's from the wrong state, or whatever. And this is where you would go to get the inspection that you need, right? And let me look at all your other things while I've got you here. And if there's anything else you need, I'll tell you what you need, so that the next time you come, it's going to be a slam dunk for you." What if that was? What if it wasn't adversarial? What if you guys were both on the same side?

• 47:07Stephen J. Dubner?

  What if you guys were both on the same side? It's a good question, don't you think? Look, I'm not saying Mark Gardner's example is necessarily fair to the DMV, nor am I saying that Trader Joe's should win the Nobel Peace Prize. But it does strike me that a lot of interactions in the modern world are set up to be more competitive than they need be, and that the benefits of collaboration are often undervalued. I think back to an interview we did with Microsoft CEO Satya Nadella, who's been reversing Microsoft's longstanding policy of treating tech rivals like Google and Apple as pure rivals, and instead, sometimes partnering with them.

• 47:50Speaker 06

  Nothing can be taken for granted. And there's no such thing as a perpetual motion machine. What you have to do is be good at being able to refresh yourself at the crucial times.

• 48:05Stephen J. Dubner?

  So if you had the choice, would you have Trader Joe's run the Department of Motor Vehicles? And maybe even, I'm not serious here, except maybe I am, would you have them run America? Or at least, would you try to export some of their collaborative, frugal, don't-take-yourself-so-seriously methodologies? Michael Roberto, the business school professor who's analyzed Trader Joe's, warns it's not so easy, that it wouldn't even be easy for another grocery store to replicate the Trader Joe's experience.

• 48:40Speaker 01

  To do what they do, you can't just hire the same people they hire. You have to emulate the private label strategy, the real estate strategy, the pricing, the quirky culture. And it's often the soft things, not just the kind of people you hire, but the way you train them and the culture you create. I mean, we can build a store that looks like a Trader Joe's, but when we have people walk in, can they have the same experience? Well, that's very hard to replicate.

• 49:06Stephen J. Dubner?

  Fair enough. And again, I don't mean to heap undue praise on a grocery chain just because they found a way to make their appealing food cheap and treat people pretty well along the way. But I will say this, we spend a lot of time, on this show and in modern society at large, pointing out problems and failures and sundry idiocies. It's nice, once in a while, to come across an institution, even if it's just a grocery store, that seems to work well for several constituencies on several dimensions, and to see what can be learned from it. If you have an idea for a future episode about something else that's

• 49:49Stephen J. Dubner?

  working well and what we can learn from it, let us know, would you? We're at [email protected]. Meanwhile, coming up next time on Freakonomics Radio. This was one of the most influential theses in the social sciences, but also one of the most controversial ones. We take a look at the Protestant work ethic and what sort of effect religion has on people today.

• 50:15Speaker 07

  People where religion is a bigger part of their life tend to drink less, do fewer drugs, live longer, report higher levels of happiness, do less crime. So lots of correlations.

• 50:27Stephen J. Dubner?

  Correlations, yes, but causality? That's next time on Freakonomics Radio. And if you're dying to learn a bit more about how Trader Joe's works, check out the episode that the podcast Household Name did about Two Buck Chuck, the famous cheap wine beloved by Trader Joe's fans. You can find it wherever you get your podcasts. Again, that's the Household Name podcast. Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Alvin Melathe. Our staff also includes Alison Kreglo, Greg Rippon, Harry Huggins, and Zach Lipinski. Our theme song is "Mr. Fortune" by The Hitchhikers. All the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or wherever you get your podcasts.

• 51:10Stephen J. Dubner?

  The entire archive is available on the Stitcher app or at Freakonomics.com, where we also publish transcripts and show notes and much more. If you want the entire archive ad-free, plus lots of bonus episodes, go to StitcherPremium.com/Freakonomics. We can also be found on Twitter, Facebook, and LinkedIn, or via email at [email protected]. Freakonomics Radio also plays on most of your better NPR stations. Check your local station for details. As always, thanks for listening.

• 51:46Speaker 04

  Stitcher.

• 51:52Stephen J. Dubner?

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• 52:23Stephen J. Dubner?

  Freakonomics Radio is sponsored by Southern Company. The world and its energy needs are always changing. Southern Company's commitment to meeting this demand stays the same. That's because Southern Company believes energy is more than a utility. It's what powers possibilities. So they are looking ahead and investing $80 billion in infrastructure upgrades and are committed to fueling growth in ways that benefit all customers so that reliable and affordable energy is accessible for generations to come. Go to southerncompany.com to learn more. Southern Company, building the future of energy.

• 53:00Speaker 08

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