Pirate Joe's buys at Trader Joe's, sells in Canada

Jeff Daniels, Coordinating Producer, and Alexandria Hernandez, Special to CNBC

A Canadian store named Pirate Joe's that started in 2012 to sell Trader Joe's groceries in Vancouver is planning to add a second store and an online storefront.

Source: Pirate Joe's

Trader Joe's doesn't operate stores in Canada. The U.S. grocery chain sued Pirate Joe's and its founder and owner Michael Hallatt back in 2013 for trademark infringement and other causes, but it lost the case. It appealed last year to the U.S. Court of Appeals for the 9th Circuit, and a decision is pending.

"What I'm doing is not illegal," said Hallatt, who originally opened the chain as Transilvania Trading. "This is an example of corporate bullying."

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Even with an appeal decision looming, Hallatt is pushing ahead with big plans—a second store in the Vancouver market in the near future and an online store that will launch by the end of this month. When contacted by CNBC, a spokesperson for Monrovia, California-based Trader Joe's responded, "We don't have comment on this."

Pirate Joe's second store will be a "companion café"—a place where Trader Joe's items will be on display and can be sampled by customers, according to Hallatt. The exact location for the new store hasn't been selected but he's considering the east side of Vancouver because it's "a trendy spot."

I can't see a business strategy around this. It doesn't make any scalable business sense. His game now may be just to be annoying enough that he gets a lucrative buyout to go away.
David Ian Gray
retail consultant, DIG360 Consulting

The first Pirate Joe's store, which has become somewhat of a tourist attraction, is located across the street from a Safeway supermarket in an area just west of Vancouver's downtown district. The store sells some items that are not from Trader Joe's.

Hallatt said that the store experienced its slowest day last week, and he hopes going online will boost the business.

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He said he's spent "peanuts" putting the online website together. The businessman claims to have received more than 2,000 emails from people asking to have products shipped to locations across Canada, and he's also considering offering shipping to markets such as Japan. That said, not all the products sold in the Pirate's Joe store will be available for shipping—and liquor rules in Canada may limit the selling of such products, including Trader Joe's popular "Two Buck Chuck" wine.

Pirate Joe's gets the Trader Joe's brand products by going to U.S. locations near the border, particularly Washington state stores. The products are then resold with a hefty markup at the Pirate Joe's store. The weakening Canadian dollar has made it more expensive for the knockoff merchant to buy Trader Joe's products across the border.

"I can't see a business strategy around this," said David Ian Gray, a retail consultant at DIG360 Consulting in Vancouver. "It doesn't make any scalable business sense. His game now may be just to be annoying enough that he gets a lucrative buyout to go away."

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There's been chatter in British Columbia that Trader Joe's has looked at real estate space in the Vancouver market. The U.S. chain currently operates about 390 grocery stores in 30 states and the District of Columbia, including 14 stores in Washington state.

"We've had rumors off and on the last few years they are looking," said DIG360's Gray. "They have a very, very solid following in Canada, especially among Canadians in the border communities who have exposure" to U.S. Trader Joe's stores.

"Canada is much more difficult than most assume coming in," said Gray. "Our population, while smaller—roughly the size of California's—is spread across an immense geography. So it's not just where we will sell to the consumer but how will we move our products around."

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According to Gray, the smartest strategy for Trader Joe's in Canada would be to open in one region, such as Vancouver, and then slowly move eastward to Alberta and the rest of the country.

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"Target failed in Canada in part because they tried to do it all in about a year and a half, setting up stores across Canada," he said. "Wal-Mart, Lowe's and Home Depot didn't make the mistake Target did. And Trader Joe's wouldn't make that mistake."

In January, Minneapolis-based Target announced plans to exit the Canadian market and shut all of its 133 Canadian stores. The retreat came less than two years after Target entered Canada and resulted in the discount retailer taking a $5.4 billion pretax quarterly loss.

Target faced a similar situation to Trader Joe's when it wanted to launch in Canada more than two years ago, Gray said. Target had a copycat chain that was operating in the Canadian market.

"This person grabbed the Target name in Canada and actually made a lot of money on it," he said. "Ironically, perhaps his stores were doing better than the real Target stores in hindsight. They had to buy him out."