Trader Joe’s: Food for Thought
Delivering innovative, high-quality groceries at affordable price points
Groceries are not generally a pleasant topic of conversation. Grocery shopping is often considered a monotonous chore for Americans, and thin margins coupled with high inventory and capital requirements challenge the profitability of grocers. However, Trader Joe’s, a privately-held specialty grocery store headquartered in Monrovia, California, rises above the rest by delivering innovative, high-quality groceries targeted towards educated, upper-middle class consumers at affordable price points. Through a remarkable harmonization of its business and operating models, Trader Joe’s brings a pleasant shopping experience to its loyal customers while generating superior financial results.
Trader Joe’s creates value for its customers through product innovation and an enjoyable in-store experience. Trader Joes’ constantly experiments with creative culinary combinations such as mochi ice cream and chili-lime cashews. Consumers are drawn to Trader Joe’s to purchase their personal must-have affordable luxuries, and the mystery of new offerings from the test kitchen only adds to their excitement. Additionally, Trader Joe’s has consistently been ahead of food trends before they become mainstream, appealing to its target consumers’ desire to maintain a contemporary lifestyle. As an example, their stores prominently featured California wines and healthy eating habits long before those trends took hold in society. Finally, Trader Joe’s is a fun place to shop. The stores tend to have a local feel, as they are small in size and decorated with promotions and themes specific to their location. Additionally, the staff is knowledgeable, friendly, efficient, and dressed in Hawaiian shirts, leading to pleasant customer interactions.
Trader Joe’s captures value through efficient pricing and low costs. Trader Joe’s employs value-based pricing, which allows it to price at its perception of customer demand while retaining savings from operational efficiencies. Additionally, the prevalence of its innovative products and private-label branding allows it to sell groceries without discounts, which is rare for the industry. Finally, Trader Joe’s incurs minimal marketing and advertising expenses, as it relies on earned word-of-mouth media among its loyal customers.
The product sourcing, labor strategy, and supply chain efficiency in Trader Joe’s’ operating model align well with its business model, delivering value to both the firm and the consumers. Trader Joe’s minimizes its inventory and capital costs through its product sourcing strategy. A typical Trader Joe’s store carries 4,000 SKUs per store, a mere 8% of the 50,000 SKU industry average. It accomplishes this feat through offering few varieties of any given product, such as marinara sauce or peanut butter. The lack of options does not diminish the appeal to its customers, due to their trust in Trader Joe’s’ food quality. The low inventory levels at Trader Joe’s lead to an extremely high inventory turnover ratio, which ultimately leads to greater store efficiency and profitability. Moreover, the quick turnover allows the stores to purchase large quantities of a given good from manufacturers, which helps them negotiate discounts from scale.
Trader Joe’s employs a labor strategy that leads to an efficient workforce that delivers superior customer service. Trader Joe’s pays its employees above the industry average and includes a 15% contribution of an employee’s salary to retirement accounts. As a result, its employees are engaged and have a lower turnover rate than the industry average. Trader Joe’s also cross-trains its employees to perform different duties in the store, resulting in great customer service throughout the entire Trader Joe’s in-store experience.
Finally, Trader Joe’s runs an efficient supply chain. Instead of working through distributors, Trader Joe’s maintains direct relationships with manufacturers, preserving value for itself and its consumers. It incentivizes its manufacturers to work directly to bypass distributors by paying bills on time and eliminating extra charges, such as coupons and slotting allowances. Consequently, the ease and efficiency of doing business with Trader Joe’s is a motivation for manufacturers to work directly with them, instead of through a distributor.
Trader Joe’s distinguishes itself in the competitive grocery industry through a unique value proposition and a complementary operating model to create customer value. The financial results are compelling, as the sales per ft2, a common profitability indicator in the grocery industry, far exceed those of its competitors (Exhibit 1). Additionally, the evangelistic nature of its customers is a testament to the value it delivers to its loyal consumers. The harmonization of Trader Joe’s’ business and operating models position it well to maintain its success in the grocery store industry.
Exhibit 1 Grocery Store Sales per Ft2 and Planned Store Openings
Sources
http://www.traderjoes.com/our-story
http://fortune.com/2010/08/23/inside-the-secret-world-of-trader-joes/
http://www.businessinsider.com/trader-joes-sales-strategy-2014-10
I think you are spot on about the labor strategy (giving employees benefits, paying them well) and establishing a culture that drives home superior customer service! It is the main reason why I am willing to wait in line for 15-20 minutes for a basket of goods, whereas I would not feel the same way about Aldi or another discount supermarket. Does this impact their margins considerably, or do you think this customer service drives a higher volume of customers that then makes up for the larger salary expense?
I think the labor strategy helps them overall, similar to Mod Pizza’s philosophy on elevating service to a noble profession. By paying their employees well, they stay longer and can be cross-trained and more efficient, which balances the higher wages. Also, by making Trader Joe’s a fun place to work, its employees are engaged and contribute to making the shopping experience an enjoyable one.
Nice job Pantry Ninja! I always go there and hadn’t thought about a lot of this. I wonder how scalable the supply chain is and whether it can work well in the middle of the country, where there may be fewer local sourcing opportunities and fewer high-density locations close together.
Trader Joe’s tends to open multiple stores in a single location, rather than opening few stores in multiple locations. They aim for places where their target market frequents. These boundaries ensure that they can have the scale to be relevant to manufacturers and command a discounted price. If there are locations like this in the MidWest, then there’s hope for our friends there!
This is very interesting, thank you. I think for me their basis of differentiation primarily stems from product. I’m curious how they can continue to come up with new product ideas and innovations more effectively than competitors. This is really what gets people in the door and allows them to obtain higher margins. Do they own product development or is it effectively outsourced to vendors? What are their test procedures? What warrants full roll-out of a product, etc. They seem to have a recipe here which is really working.
The product is probably the biggest point of differentiation for me too. Trader Joe’s has a team of product developers who travel the world to find inspiration for new items in the store. In fact, their travel and lodging make up the lion’s share of Trader Joe’s’ R&D expenses. Once a product is developed, it’s typically introduce it in a few stores. If it meets sales targets, then it’s fully rolled-out.
I really enjoyed reading your post.
I was not aware that “a typical Trader Joe’s store carries 4,000 SKUs per store, a mere 8% of the 50,000 SKU industry average” but maybe the fact that Trader Joe’s are small-mid sized stores helped them to have the local feel.
FYI mochi ice cream was not very good…
Glad you enjoyed it. Try the mango mochi ice cream. That one is delicious and might change your mind 😉
I love Trader Joe’s, so I really enjoyed learning more about their business model and operating model. Regarding the low SKUs compared to industry average, I think your point about consumers trusting the Trader Joe’s private label brand makes complete sense. For example, other grocery stores typically carry many different brands of pasta, along with a private label option. Not so at Trader Joe’s, where there is only the private label brand, which dramatically reduces complexity. The amazing thing is that consumers not only are satisfied with the private label but actually seek it out. Furthermore, I think having primarily private label brands and offering everyday low prices without sales actually improves the experience for Trader Joe’s customers because it makes the shopping experience simpler. (I enjoy not wasting time evaluating options from different manufacturers and looking for which products are on sale.)
As a side note, I’m not sure if you have ever been to the Trader Joe’s on Boylston Street in Boston, but it is tiny yet still seems to have everything the customer needs. (During peak hours it is packed, but there is usually adequate inventory.) I would be curious to know more about how they refill their shelves and where they store backup inventory given how small the store is.
Glad you like Trader Joe’s too!
Interestingly, Trader Joe’s doesn’t have much of a backroom and just tends to be very adept at ordering the right quantity. Working directly with manufacturers without the distributor in the middle helps a lot. This practice minimizes the bullwhip effect and allows Trader Joe’s to adapt responsively with customer demand, should a major change arise.
Thanks for writing – interesting post! I am curious about the efficiencies of their in-store checkout process. In NYC (less so in Boston, from my experience), the line at Trader Joe’s winds all the way around the store regardless of the time of day, running through aisles and almost reaching the entrance. In fact, the line makes it difficult to do your food shopping, as you’re navigating around others’ carts, and makes the entire shopping experience unpleasant. Unlike Sherri, I am pretty impatient about waiting in line, so I only wait if I am committed to doing a big food shop. Is this checkout issue limited to NYC or does it apply to most stores? I wonder if Trader Joe’s has explored alternate checkout options to lessen the wait time – perhaps self-checkout, express lanes, or a purchase-in-advance combined with in-store pickup option. Or perhaps it is not worth it for them to invest more in their in-store shopping experience; maybe for most, the wait time is not a deterrent and is accepted as the “cost” of the discount pricing.
Great observation Julia. I agree that lines are often crazy at Trader Joe’s, and that could be the next point of innovation to improve the customer experience.
Here are some anecdotal experiences that have helped me justify the wait:
1. The lines move quickly, despite the length. I think this fits in with their labor strategy of hiring and retaining efficient workers through higher wages.
2. Most people buy a lot when visiting Trader Joe’s, rather than just an item or two. In my mind, if I’m buying enough to stock my pantry, then I know I’d be waiting for a while at any grocery store I visited.
Thank you for the interesting article. My wife loves Trader Joe’s for the very reasons you mentioned, and I love Mango mochi icecream, too. Their products with unique design, combined with friendly staff, succeed in delivering great customer experience. It is surprising that their SKU is only 8% of industry average, and Trader Joe’s can still attracts customers. Trader Joe’s is a great example of how innovative business and operating model can create values, regardless of the attractiveness of industry itself.
I’m glad you also love the mango mochi ice cream. That’s my favorite item in the store!
Great analysis, I thought your points about supply chain, SKU choices and employee pay to be spot on and really unique to Trader Joe’s. I am shocked that Trader Joe’s only holds 4,000 SKUs relative to the industry average of 50,000 SKUs. How can Trader Joe’s continue to manage this unique product selection while scaling the business around the US?
The low number of SKUs is a result of having few brands of a particular item. Trader Joe’s often only carries private label products for a given type of merchandise, such as yogurt or potato chips, while conventional grocers carry many brands of those items. Additionally, Trader Joe’s doesn’t typically have the same level of variety as a normal grocery store, further reducing SKUs.
Great write-up! You translated the feeling I have whenever going into a Trader Joe’s: easy and quick to navigate, with few high quality options that satisfy the consumer. I think that having its store brand is a key advantage for the company’s growth, because it is a great way to manage its margins.
I would be interested to learn, from an operational/supply chain point of view, how the direct relationship with its manufacturers works and if it would make sense for the company to bring manufacturing inhouse as a part of its growth strategy.
That’s an interesting idea Manju. I’m don’t know the details of the supplier relationship, but my hypothesis is that Trader Joe’s might not have the scale to capture efficiencies of large quantities. These manufacturers supply large grocery chains as well, which justify the capital investment for processing equipment. Additionally, Trader Joe’s tends to be more fluid in its product offerings to adapt to customer preferences, which may challenge ownership of fixed manufacturing equipment.