Trader Joe's: a Strategic Analysis

Trader Joe’s: A Case Study and Analysis

Joe Coulmbe, the innovate and unorthodox founder of Trader Joe’s, opened his first grocery store chain in 1958 called Pronto Markets. Originally located exclusively in Southern California, Joe Coulombe began to build his quite empire by revolutionizing the traditional business strategies employed by the supermarket industry. After 10 years of quietly expanding throughout Southern California, Joe Coulombe changed the name of his markets to the famous name recognized throughout the country today, Trader Joe’s. From 1967 to present day, Joe Coulombe and his Trader Joe’s markets have methodically expanded across the country with 460 stores in 41 states and the District of Columbia. This paper will explore the methods that Trader Joe’s has incorporated into their business model that has created a cult following. To the patrons of Trader Joe’s, it is more than a supermarket; it has become a societal movement. It is very common for patrons to camp outside of a new Trader Joe’s location days before the grand opening, to have the honor of being the first inside. Although Trader Joe’s is known for being incredibly secretive and maintaining a very light social media presence, the patrons of the store have stepped up to create a social media frenzy. Countless Facebook pages and other media outlets organized by consumers have amassed thousands of followers. The pages are dedicated to advertising new products, recipes and promoting hopeful new locations. Trader Joe’s is a privately held company that was purchased by Theo Albrecht, the owner of one of Germany’s most successful discount grocery store chains Aldi North, in 1979. Although Theo Albrecht purchased Trader Joe’s, he has left the organization to manage itself, with executives only visiting the Trader Joe’s headquarters once a year to maintain a light presence. Trader Joe’s has been able to maintain their original identify of a “quirky cool” South Seas market. Joe Coulombe created an environment with patrons and employees that made people feel comfortable and to enjoy being in the store. He paid employees higher than average salaries and offered more benefits than most leading retailers.

The supermarket industry is one of the toughest and most competitive industries in existence. With razor thin margins of between 1 and 3 percent on average, companies must be very creative and innovative to maintain profitability. The key companies in the industry include names like Walmart, Whole Foods, Safeway, Kroger and Trader Joe’s. Each of these companies employs a different strategy to be profitable and to maintain their competitive strategy.

Walmart, the largest grossing supermarket in the US, has employed a strategy that has enabled them to be the most dominate big-box-store in the world. Walmart focuses on being the undisputed cost leadership champion. Walmart is so large and powerful that their power of bargaining with suppliers enables them to purchase products to stock their shelves at the lowest possible price. These bargains are then passed on to their consumers. Walmart creates profitability by purchasing brand name products at a discounted price that other chains can’t match. Walmart attracts consumers from all socioeconomic categories because of the tremendous diversity of SKU’s (up to 100,000) and products. Unlike many other grocery store chains who supplement revenue by charging rent for shelf space, Walmart has dominated the market by becoming the undisputed cost leader, generating billions in revenue from the turnover of products.

One of the newest competitors in the supermarket industry is Whole Foods. Known as the darling of the grocery industry, Whole Foods rose to fame and domination during the late 90’s and early 2000’s. Whole Foods has used a competitive strategy of focused differentiation to carve out their successful niche in the industry. Unlike traditional supermarkets, Whole Foods has focused on smaller stores, organic-healthy products and perishable foods including deli and vegetables. Per square foot of store space, Whole Foods ranks second with $940 of sales annually only trailing Trader Joe’s. Whole Foods’ farmer’s market feel and heathy focused marketing attracts a crowd of educated consumers who have disposable income and who are less prices sensitive. Using their strategy of focused differentiation, Whole Foods has been able to maintain strong profitability by being to charge a premium for their products. The patrons who frequent Whole Foods aren’t looking for a good deal, they are searching for a premium product.

Safeway, one of the nation’s largest grocery retailers uses more traditional methods of earning profitability. Safeway offers the consumer a wide range of products that are needed for everyday life. When you walk into a Safeway, you know that you are going to find the product and brand that you want. With this strategy, Safeway charges food producers a rental fee for space on their shelf. This fee supplements much of the profit lost on low margin food sales. Safeway has not set out to be the low cost leader or differentiate themselves from other stores, but instead offer consumers convenience. Adding to the convenience, Safeway has invested millions of dollars into software development to increase efficiency allowing for greater margins on sales. The strategy of

Kroger, America’s largest grocery chain by volume uses a competitive strategy of running a very low cost operation that is able to sell products at relatively low prices and still generate good financial returns. Supporting their success is a marketing strategy of focusing on the customer and their desires. Kroger refers to this as their “Customer 1st” strategy . This marketing strategy drives sales and results in economies of scale that enable the company to offer lower prices without negatively affecting financial returns. Implemented in 2010, the “Customer 1st” strategy has taken the form of focusing mainly on offering very low prices, based on the company’s perception that one of the primary things that consumers seek, is low prices. Although Kroger offers very low prices, they are still not able to overtake Walmart as the undisputed cost leadership champion, but their combination of low prices and quality service has led Kroger to the top of the list.

Trader Joe’s has revolutionized the way that supermarkets maintain a profitable margin. Trader Joe’s has created low overhead by maintaining smaller stores in prime locations, less staff, unique relationships with manufactures, the ability to produce products in-house, superior employee training and unsurpassed customer insight. These factors have enabled very low prices without compromising the quality of the product and creating an amazing brand image.

Most grocery stores are on average 40-50,000 square feet, while the average Trader Joe’s is less than 15,000. The smaller space is obviously less rent and less to manage, leading to a tremendous financial savings over larger grocery stores. These savings automatically transfer over to the patrons as reduced cost on foods purchased. The smaller stores also lead to a smaller work force necessary to run the store, reducing cost further. Trader Joe’s strategically places their stores in locations that target their demographic. Smaller stores, less staff and prime locations create an incredibly efficient and low cost business model.

Trader Joe’s is a very secretive company, and they go to great lengths to keep their relationships with manufactures hidden. Trader Joe’s is in the minority of grocers who don’t charge a display fee to their suppliers to place their products on the shelves. This relationship with manufactures has reportedly led to great partnerships with mutual benefits. The store has a policy of removing 15-20 items from the shelves each week and replacing them with new ones. By constantly removing poorly selling products and replacing them with products that do sell well, they have maximized their shelf space profitability. Trader Joe’s gains valuable insight into their consumers purchasing habits by understanding what products sell well.

Another advantage that Trader Joe’s has is that they can produce many of their own products in-house. This allows for great cost savings, without the fear of reduction in quality. The knowledge that they are constantly controlling the cost and quality of their product ensures highly rated products on the shelves. This only adds to the amazing brand image that Trader Joe’s has created. Their strong image is perhaps their best competitive advantage.

Porter is quoted as “the essence of strategy is choosing what not to do”. Trader Joe’s has utilized this concept extremely well. They have set out on their own path and have made it a point not to follow any trends.

While other companies are charging for rental space to supplement revenue, Trader Joe’s focused on establishing strong mutually beneficial relationships with manufactures and suppliers. This concept has created an awesome diversity of high quality products that are in strong demand by their consumers.

Many of the other major grocery chains have invested heavily in social media to raise awareness about sales and product info. Trader Joe’s on the other has almost no social media exposure, besides what pages consumers have created. To raise awareness about their products, Trader Joe’s releases a newsletter called the “Fearless Flyer”. The Fearless Flyer isn’t designed to offer coupons or advertise but to provide information about their products and fun recipes that can be created with unique Trader Joe’s products. Trader Joe’s never offers coupons but instead they offer everyday low prices on high quality products. The newsletter is less about selling products and more about sending letters out to loyal patrons, to let them know that Joe’s is thinking about them.

Trader Joe’s limits their products to around 4000 SKUs. Most grocery chains offer up to 40,000 products to bombard the consumer with anything that is available. This may seem like a great strategy but it is so unselective that most of the products will sit on the shelf collecting dust. On the contrast, Trader Joe’s will continually pull products off the shelf that aren’t selling to fill those spots with products that will generate revenue. This focused approach has served Trader Joe’s very well by generating the highest volume of sales per square foot of floor space.

Trader Joe’s has ridden their very unique competitive advantages to great economic success. While there are many other grocery chains out there that will continue to be successful with their strategy, will anyone successfully move into Trader Joe’s arena? The main threats faced by Trader Joe’s is that more and more companies are trying to imitate the way they do business. Some of their competitive advantages can be copied. Finding manufactures who want to team up with other companies to produce products is already happening. More and more stores are migrating into the manufacturing industry to reduce cost and offer more unique products. Removing products from the shelves that aren’t selling can be done without much effort.

However, there are a few competitive advantages that will be tougher to emulate. The training that Trader Joe’s provides to their employees is extremely unique. It’s less about training and more about falling in love with the company and its vision. Employees, enjoy working for Trader Joe’s so much that the quality of service gleams through with every customer interaction. This will be incredibly difficult for other companies to copy. It’s not just about training employees, but it is adding people to a societal movement.

Although Trader Joe’s may not be able to maintain all of their advantages forever, there will be a few that remain intact. The advantage that they hold on low price and quality is something that can and will eventually be copied, but that is not enough to challenge the dominance of their success. The environment and culture that Joe Coulombe has created is something that I don’t think will be successfully copied anytime soon.

The supermarket industry is one of the toughest industries to navigate today. The margins are razor thin and there is extreme competition for market share. A few companies have separated themselves from the pack, but none more than Trader Joe’s. From the humble beginning in the 1950’s to the $10 billion dollar silent empire today, Trader Joe’s has accomplished unbelievable success with entirely unorthodox methods. Setting out to do the opposite of what their competition does, Trader Joe’s has paved their own road. Joe Coulombe envisioned a supermarket built around the customer