Trader Joes – Innovation in the grocery business

In 2012, Fast Company ranked Trader Joes as the 11^th most innovative firm in the US. This type of recognition is almost unprecedented for a grocery store. That same year, Trader Joes managed to outperform the rest of the grocery industry with a record revenue per square feet of $2,054 (compared with Whole Foods – $1,257, HEB – $867, Walmart – $607 and Publix – $591). The key to the success of Trader Joes is that it has an operational model that enables it to meet its pledge to consumers. This pledge can be described as offering a WOW experience through interesting products, everyday low prices, relatable staff and a unique brand personality.

Trader Joes is an American grocery store that started in California. Since inception, it has positioned itself as the grocery of choice for the frugal yet sophisticated consumer. A typical customer is a young professional who is health conscious and enjoys new experiences. The company’s business model was to capture this highly inquisitive consumer by offering sophisticated products (e.g., chili jam, Indian red rice) at remarkably low prices. The operating model that enables this operation consists of innovative store designs, a deliberate recruitment and employee management philosophy, strategic merchandising, dynamic product offerings, and a fully aligned advertising strategy.

The store designs are characterized by having a significantly smaller footprint than the typical grocer. The layout is strategically designed with diagonal hallways. This allows the consumers who peak into a given walkway to have better visibility over the products. At the same time, having un-regimented walkways fits into Trader Joe’s brand personality of being an un-standardized hipster brand.

Recruitment and employee management is also critical. The company believes that the quality of the employees is fundamental to its continued success. Trader Joes claims it hires employees who are sophisticated and inquisitive so that they can emphasize with the customer base. It also pays significantly more than any other competitor ($50,000 – $100,000 for full-time store employees). Additionally, each store has a mechanism for staff to purchase new products either free or highly subsidized. This guarantees that the staff will be knowledgeable about the products to support the customers shopping experience. Finally, the roles at the store are rotated every few hours which enables employees to have a more varied and enjoyable experience, leading to better service.

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It is also important to note that the store has made a conscious decision not to invest in technology at checkout. There are no self-checkout counters and no screens on the regular checkout lanes. The store management instead encourages its employees to chat with customers. This is a great way to leverage one of the best resources of the company (i.e., the quality of its employees) to produce a better shopping experience.

The high employee salaries paid to the staff are offset by a highly strategic sourcing and merchandising approach. This is what enables the low prices. Specifically, this can be attributed to three elements. First, there is a very high number of private label products (~80% of the merchandize). This products are typically less costly than branded labels. Second, the lower number of SKU’s allows for a direct to manufacturer model (i.e., avoiding distributor fees). And third, the high purchasing volumes of less products enable savings through economies of scale.

The company also has a couple of mechanisms to create mystic around its products. First, it keeps the product mix dynamic, meaning that every week it introduces ~10 new products (and discontinues the same number). Second, the company forces suppliers to abide by very strict secrecy rules. This created a sense of seasonality and made the products more interesting and special.

The advertising strategy is also aligned with this philosophy. The company went against existing supermarket advertising practices (e.g., TV commercials, coupons, promotions, etc.) instead it only showcases the source and stories of new products through the radio and its customer newsletter called the “fearless flyer”.  This is aligned with its costumer promise of constantly providing new products that inspire customers.

Through this highly deliberate operational model, Trader Joes has been able to grow its operations and continues to surprise its consumers with extravagant products and extraordinarily low prices. No wonder a Market Force study ranked Trader Joes as #1 supermarket in America!