An Ode to Trader Joe’s
Trader Joe's wins over customers (and their wallets) by utilizing an operating model that is perfectly aligned with their core business strategies.
When I was a kid, one of my many career aspirations was to work at Trader Joe’s. Little did I know then that the things I loved about my neighborhood TJs– the happy employees in Hawaiian shirts, the oddly-named food products, the quirky store decorations—were all coordinated elements of a strategy that has grown Trader Joe’s into a retailer that now generates more than $10B annually from 450+ stores across the country[1] and is also extremely well-regarded by consumers[2][3]. The secret behind Trader Joe’s success is a unique operating model that is perfectly designed to enhance the TJs business model and customer value proposition.
Business Model:
Trader Joe’s fundamental strategy is to “offer value and a dedication to quality service through warm, friendly, committed employees along with a pledge to offer quality products”[4]. This strategy contains a few core elements:
- Offer value- Trader Joe’s has cultivated a reputation with consumers for being high-quality but inexpensive. As an example, Whole Foods (which considers Trader Joe’s to be its number one competitor) sells a bag of quinoa for $9.99 while a bag of quinoa at Trader Joe’s costs $4.99[5]. Trader Joe’s is committed to consistently low prices that customers can rely on, and as a result rarely runs sales.
- Dedication to quality service through warm, friendly, committed employees- Trader Joe’s is extremely focused on delivering quality service to customers. Employees are selected based on their energy and excitement for the job, and once hired they are trained on a number of different skills including communication, teamwork, leadership, and product knowledge[4].
- Pledge to offer quality products- Trader Joe’s offers a product selection that is totally unique and unlike the offerings found at other major grocery chains. The store stocks a combination of gourmet, natural, and multicultural foods, and even its grocery staples are rebranded with distinctive names and packaging.
By strongly adhering to this business model, Trader Joe’s has experienced tremendous growth and now has an average sales per square foot of $1,723, which is more than three times the industry average of $521 and nearly double the Whole Foods average of $973[6]. This success is really impressive, but in order to understand HOW Trader Joe’s has been able to execute on its business model and achieve these results, we need to take a closer look at how the company actually operates.
Operating Model:
In my opinion, the real reason that Trader Joe’s has been so successful is because of a unique, well-aligned operating model that perfectly supports the strategic objectives of the company. The most notable aspects of the TJs operating model are below:
- Private-label products- A vast majority (nearly 80%) of the products that Trader Joe’s stocks, from dairy goods to household cleaning supplies, are sold with an in-house label[5]. Because Trader Joe’s sources these products directly from suppliers and does not need to use middlemen, it is able to sell at a significant discount to consumers. Suppliers are willing to sell their products at a discount to Trader Joe’s so that they can gain access to TJs vast network of customers[7]. This emphasis on private label products directly ties to the TJs goal of providing value to customers.
- High investment in employees- Because of the high emphasis Trader Joe’s places on customer service, it invests a lot in securing top talent (full disclosure- I once applied for a job at Trader Joe’s and was not hired). Employees have higher salaries than they would at comparable retailers[8], and crew members are cross-trained so that they can assist employees at any point in the shopping process. As a result of this investment in staff, employee turnaround is only around 4%[4]. All of this directly ties to the TJs goal of dedication to quality service through warm, friendly, committed employees.
- Quick product turnaround- A Trader Joe’s store typically only carries about 4,000 SKUs, compared to other grocery chains that typically carry around 50,000 SKUs[9]. Because of the direct relationships with suppliers that TJs has established, they are able to rapidly cycle in new products to keep things exciting for customers. Popular products become store staples, while less popular items are quickly shifted out. New additions (and seasonal favorites) are promoted through the TJs monthly newsletter, The Fearless Flyer. Such an intense focus on product offerings directly ties to the TJs goal of pledging to offer quality products
Conclusion
Overall, the results speak for themselves—with such clear alignment between business and operating models, Trader Joe’s is a TOM Challenge winner!
Resources
[4] https://gbr.pepperdine.edu/2010/08/the-trader-joes-experience/
[5] http://www.businessinsider.com/trader-joes-sales-strategy-2014-10
[7] http://www.sfgate.com/news/article/Who-s-making-Trader-Joes-food-brand-relationships-6680520.php)
[9] http://fortune.com/2010/08/23/inside-the-secret-world-of-trader-joes/
Thanks–this is great! I always wondered how TJ’s was able to offer such great products at such low prices. The two questions that are still lingering in my mind after reading this are:
1. How has cutting distributors out of the acquisition process affected TJ’s inventory management system ? Having to source directly from many different suppliers could lead to varying lag times and put a lot of variability into the system. They seem to manage this process very well (they always seem to have what I need!) and wondering what parts of their operating model specifically allow and manage this.
2. They seem to iterate very quickly on product offerings and new products (as you mentioned in the article above) I wonder what in their operating model drives this and who is responsible for it? They seem to do a very good job of offering relevant products for the local customer. I wonder how they manage the information in conjunction with the products to make sure that if something is on the shelf it is going to sell?!
Thanks again–very enlightening article.
The industry-leading sales per square foot is an impressive result. I wonder if Trader Joe’s gains revenue from any slotting fees like mainstream supermarkets. My guess is the total amount of slotting fees is relatively low given that the company focuses on private-label products. Regardless, you’re right in arguing that private-label is one of the key drivers of the company’s success. Because Trader Joe’s does not rely on slotting fees to boost revenues, the company has the freedom to determine which products deserve the consumer’s attention. The shopper benefits from having the best products front and center (rather than just the product most supported by manufacturer’s promotional spending). It also might allow Trader Joe’s to direct customers to higher margin products.
Very interesting write up! I’ve always wondered how Trader Joe’s is able to offer high quality products at affordable prices, whereby Whole Foods offers similar quality products but at much higher prices.
You pointed out the benefit associated with selling private label products. I agree with you that that helps enhance margins by cutting out the middlemen. In addition to that, I believe that by cutting out the middlemen, TJ is able to reduce the impact on bullwhip in the supply chain, which arguably could help further reduce costs over the entire supply chain (thereby benefiting TJ).
Furthermore, the reliance on a limited SKUs is clearly evident in the TJ shopfloor. In addition to what you pointed out, this approach helps reduce TJ’s inventory holding costs, thereby contributing to TJ’s low cost advantage.
Finally, I found interesting their focus on customer-service. I know several TJ loyal customers who always cite strong customer service as one of key reasons for why they shop there.
Thanks for sharing – interesting post! Did you come across any information on if such a high amount of private label product limits customers’ willingness to come to TJ’s when the store enters new markets? I would imagine there is some period of ramp up wherein customers who are unfamiliar with the products may not want to try them and instead look for their typical grocery store staples, potentially leaving disappointed. Another thing that stuck in my mind was that TJs must have a very sophisticated real estate sourcing function that forms a key part of their competitive advantage – their ability to locate in high traffic areas, predict future occupancy/traffic trends and source products for specific areas based on demographics seem to be core competencies.
Thanks for the interesting read Ananth! I had always recognized that Trader Joe’s had gone the private-label route to lower costs and ultimate pricing to customers. I think the private-label model works for food products where brand and/or trust aren’t critical. Certain products, such as sports drinks (e.g. Gatorade) and baby food (e.g. Gerber), would struggle in Trader Joe’s due to consumer comfort with trusted brands. I think this contributes to fewer SKUs in store as well. TJ’s has actually run into trouble recently with some of its product. Pepperidge Farm sued Trader Joe’s, “accusing the grocery chain of trademark infringement for selling a cookie that looks too much like its Milano cookie.” [1] Could this lead to more law suits for TJ’s private-label products that resemble branded counterparts? How would you assess this risk?
Additionally, it’s interesting that Trader Joe’s would eliminate many distributors from the supply chain. Again, this effectively lowers costs when there is sufficient scale to warrant direct from supplier truckloads of product. While Trader Joe’s is a multi-billion revenue company, I question whether certain lower-volume suppliers are hurt financially by managing shipments direct to TJ’s distribution center rather than through a local distributor. Distribution has become even more complex in recent years given variable costs of gasoline and increasing shortages of truck drivers nationwide. TJ’s has actually also run into trouble with distributors recently. “Two dairy companies sued Trader Joe’s this month for allegedly coercing suppliers to end their contracts with them and to instead sell directly to the Monrovia-based grocery chain at a lower price.” [2] Thus, two questions I have are: how sustainable is the distribution infrastructure? And how far is TJ’s willing to go?
Sources:
[1] http://www.reuters.com/article/us-traderjoes-pepperidgefarm-lawsuit-idUSKBN0TN1X020151205
[2] http://www.ocregister.com/articles/joe-628644-dairy-trader.html
http://fortune.com/2010/08/23/inside-the-secret-world-of-trader-joes/