Mark Mallinger, director of the MBA program at Pepperdine University, has studied Trader Joe’s. He recalls a conversation with the company’s former CEO, John Shields, about how managers interviewing job applicants watch for character clues. "John Shields told me that in the first interview, if they [the applicants] don’t smile within the first 30 seconds, they are gone."

    The trademark smiling stock clerks and cashiers decked out in Hawaiian shirts can now be found in Trader Joe’s stores from the West Coast to New England. And more are on the way. From its humble beginnings as a regional hybrid convenience store, Trader Joe’s has grown into a $3-billion-a-year national chain with 217 stores. It is adding 8 to 25 stores a year, all stocked with an eclectic selection of bargain gourmet-style foods, wines and health-food supplements. Analysts who study Trader Joe’s management system tend to focus on the many ways the company makes money by saving money--using private labels instead of name brands for nearly every product in its stores, dealing directly with producers to cut out middlemen, renting cheap real estate in existing neighborhood shopping centers, and keeping stores small. A typical Trader Joe’s covers 10,000 square feet, a fifth the size of a modern full-service supermarket, and carries a tenth as many items.

    But there’s another secret to Trader Joe’s success: the upbeat employees who wander the aisles, eager to chat about the latest Brie or the newest flavor of hummus. "Probably the most important thing they do is generate a very engaging experience between the customer and the employee," says Bill Bishop, president of Willard Bishop Consulting in Barrington, Illinois. Bishop and several other consultants and analysts say the upbeat, informal interaction sets Trader Joe’s apart from the rest of the grocery industry and serves as a powerful marketing tool.

    But the glue that holds the system together is generous compensation. Job postings indicate that part-time clerks earn from $8 to $12 an hour. Full-time employees, who typically work 47.5 hours a week, earn an average $40,150 in the first year, according to the company’s postings. That equals $16 an hour, well above the $12 average pay in the retail industry, according to the latest Bureau of Labor Statistics figures. These employees also earn an average annual bonus of $950 and $6,300 in retirement-plan contributions as well. It adds up to an average total package of $47,000 a year.

    For assistant store managers, the average compensation package works out to $94,000 a year. Store managers get an average compensation package of $132,000, an amount that one analyst put on a par with what the manager of a giant Wal-Mart might make running a store that probably grosses six or seven times what a Trader Joe’s takes in.

    How can such small stores afford such big salaries? The answer is that the cheerful and helpful clerks also know how to move groceries, which boosts margins. Trader Joe’s total sales at about 200 stores works out to approximately $15 million per store. With an average 10,000 square feet per store, that means each store generates an average $1,500 in sales per square foot. Compare that to Whole Foods, the profitable organic-food chain that offers some similar products but typically at higher prices. Whole Foods generates about $750 per square foot in sales, about half the Trader Joe’s rate.

    Trader Joe’s differs from Whole Foods and other grocers in another way. Its stock is constantly changing as its buyers travel the globe looking for new and interesting products that can be brought back, packaged and sold profitably at a relatively low price. To make sure that workers keep up with the stock, stores hold weekly tastings for employees to sample the latest goods. "After the store closed, we would try everything from the wine to frozen pizza to candy," says Melody Derloshon, a former Trader Joe’s stock clerk who worked in a Northern California store. "It was like a buffet table." Workers also get a 10 percent store discount, which serves as both an added bonus and an inducement to keep employees acquainted with the products. Trader Joe’s workers give the impression that they enjoy being at the stores, which suggests to customers that they should get with it and have some fun, too. "The people who work in our stores are the front line, the first customer contact," says Trader Joe’s spokeswoman Pat St. John. "They are the soul of Trader Joe’s."

    Fearful of being gobbled up by competitors, the company is famously tight-lipped about its business practices and how it wins the souls of its employees. St. John declined to elaborate beyond saying it’s no accident that Trader Joe’s employees are the way they are. But interviews with former employees, analysts and consultants and a careful reading of company job-recruitment postings reveal an outline of the Trader Joe’s business model.

    The essence is standard business management: a carefully crafted system of hiring, training and performance reviews, backed with competitive wages and benefits. But how those elements play out at Trader Joe’s is in many ways a distinct departure from the rest of the grocery business and in some ways a little wacky, like a cross between a religious cult and a merchant ship. For example, full-time employees are called novitiates, while managers are called first mates and captains.

    The system was born of necessity. Founder Joe Coulombe launched a small convenience-store chain in Southern California in 1958 called Pronto Markets. Then came the 1960s and the arrival of the powerful 7-Eleven chain. Coulombe realized that he had to change or get run over, so he went upscale, swapping soda pop and chips for wine and cheese, and he tried to improve business by talking up his goods and encouraging his workers to do the same. The combination clicked and evolved into a business that specialized in gourmet items that Coulombe would find in his travels and stock in his stores, where his workers would cheerfully tout the products to customers. He changed the company name to Trader Joe’s, sold out to German grocery magnate Theo Albrecht and retired. There have been two CEOs since then, both drawn from the retail industry, who refined and developed Coulombe’s system, then spread it throughout the country.

    Today, Trader Joe’s strives to hire employees who understand the importance of a sunny disposition and appreciate the company’s products. The company’s job postings use exclamation points to tip off applicants about the need for enthusiasm. One recent Internet posting began like this: "Trader Joe’s is looking for part-time Crew Members in Darien, Connecticut, to work in our unique grocery store! Come be a part of the excitement! If you like people, are ambitious and adventuresome, enjoy smiling, and have a strong sense of values, Trader Joe’s may be for you."

    Derloshon recalls that her job interview was "very informal, like a casual conversation. They wanted to know why I wanted the job, what could I bring to the store, am I familiar with the products." She says she was never aware of a smile test, although she could sense that the manager was probing for more than retail experience. "They definitely take a second look at a person who has good eye contact and is upbeat." Derloshon certainly qualifies, ending her voice-mail message with "and have an absolutely fabulous day."

    Derloshon was one of Trader Joe’s part-time workers, who account for 75 percent of the company’s workforce. Applicants for full-time positions are more thoroughly vetted. The job application requires a cover letter that must include descriptions of a favorite Trader Joe’s product and the store where the applicant typically shops. The message: if you aren’t familiar with Trader Joe’s and can’t make a convincing pitch for what’s good about the stores and the products inside, Trader Joe’s isn’t interested in you.

    Managers are never hired from outside the company, which ensures that supervisors know and understand the Trader Joe’s system before they are given authority. Prospective managers go through a series of training programs, including a stint at what the company calls Trader Joe’s University. It is their job to teach new part-timers the Trader Joe’s methodology. While managers are reviewed annually, part-time employees are reviewed every three months, an unusually frequent rate of evaluation. Retail consultants say they know of few other major companies that provide feedback that often, particularly when so many employees work part-time. John Dantico, a principal with The HR Group in Northbrook, Illinois, estimates that up to 80 percent of companies using performance reviews require them only once a year, and that perhaps one or two out of a hundred might use them four times a year.

    The nature of the evaluations is also unusual. Categories in the one-page evaluation forms include standard objective measures such as punctuality and thoroughness. Other more subjective assessments include "is always friendly," "creates a genuine fun shopping experience," "engages customers when running the register," "greets and asks customers if they need assistance while on the floor," "educates self about product features and shares with customers" and "promotes high morale in the store." Each category has a score of one to five. If an employee has a cumulative score below three, she doesn’t get a raise, says a former part-time cashier at a Trader Joe’s in Northern California.

    In 2000, Trader Joe’s hired Mallinger to measure how well the company’s culture was accepted and carried out by its workers. He had students mail out 150 questionnaires to the company’s employees in the San Fernando Valley, located north of downtown Los Angeles. To his surprise, he got 142 back--a far higher rate of return than expected for such a request. Mallinger believes that this is a reflection of employee dedication to the company. While he can’t discuss details of his findings, Mallinger says the results affirmed that workers understood the Trader Joe’s culture and their role in carrying it on. "Our conclusion was that, yeah, for the most part they got it."

    Part of the motivation for employees to stay with the company is the prospect of advancement, which is very real as the company grows rapidly. But that could quickly change. "If growth were to slow, and they now had too many very well trained, very experienced or high-paid people and no place to put them, then you’d have a problem," Dantico says. "People would get frustrated and leave." For now, Trader Joe’s future looks promising.

   George Whalin, president and CEO of Retail Management Consultants in San Marcos, California, has been a fan of Trader Joe’s for years. He shops at a local Trader Joe’s and frequently mentions the company in his talks to retailers. At one recent conference in Phoenix, he brought bottles of wine from Trader Joe’s to use as props and, while there, visited a local store. "It was the same, this sort of family atmosphere, everybody talking to the cashier, everybody talking to each other."