The success of Trader Joe’s is the result of a business model that pairs unique products offerings with low prices. By making luxury affordable, many well-educated, budget conscious, consumers are drawn to Trader Joe’s on a regular basis. As of 2012, the company ranked 12th in overall grocery sales (7.6 billion), however 1st in grocery sales per square foot ($2,054/ft.)1. As a basis for comparison, Whole Foods ranks second at $1,257.14/ft. To date, the company’s growth strategy has involved offering a differentiated shopping experience to markets with high concentrations of college educated consumers who value a “good deal”.
It is estimated that 80% of Trader Joe’s customers attended college. The company’s unique and limited product lines, low-cost merchandising capabilities, unparalleled commitment to customer service, and focus on employees has allowed Trader Joe’s to carve out a position in the market is rare, inimitable, non-substitutable, and most importantly, provides value to customers.
Trader Joe’s is a national chain of neighborhood grocery stores and this works for them for many reasons.
The company prides itself on creating a customer experience unmatched by others in the industry – similar to what you may receive at your local village market.2 This is a major source of their competitive advantage, however, this is not the only reason why the company has experienced so much success. The company is also deeply committed to its employees – paying them well-above industry norms. Where labor costs can be prohibitive for many companies, Trader Joe’s uses high salaries and strong benefit packages to attract and retain employees who embody the core values of the company.
They are viewed as assets to the company, they are empowered to make decisions that best serve customer’s needs, and they are expected to engage with customers. All of this relates directly back to providing a truly unique customer experience.
Many Trader Joe’s employees have similar backgrounds and values as stores patrons. This makes for a comfortable shopping environment and adds a tremendous amount of value to the customer experience. Since Trader Joe’s pays higher than normal wages the company is forced to control costs through other means in order to maintain their low prices. Trader Joe’s achieves this by employing their core competency in sourcing and procurement. By limiting their product lines3, they are able to purchase goods in large quantities which allows them to work directly with manufacturers and keep prices down. Additionally, they incentivize manufacturers to work with them by paying their bills in a timely manner and by not charging suppliers for space on their shelves. They maintain a lot of power in this regard, which they strategically use to their advantage from a positioning standpoint. They further leverage their relationship with manufactures by requiring suppliers to maintain secrecy regarding their relationship with the company, making their business model harder to replicate.
Additionally, offering high quality products at such low prices reduces the risk that competitors will be able to offer substitutes that are of the same quality at the given price point – again adding to their competitive advantage. Their core competency in sourcing also adds to the company’s rare product offerings and inimitability in the market place. By avoiding trade shows where other major retailers are apt to buy, Trader Joe’s global sourcing strategy allows the company to locate and introduce new product offerings to their stores on a regular basis. Furthermore, 80% of Trader Joe’s products are from their private labels and simply cannot be found elsewhere.
While they only offer a limited selection of fresh meat and produce, their global sourcing strategy aligns well with their extensive offerings of frozen and non-perishable items. While this serves as a differentiating strategy, it also adds to the experience of shopping at Trader Joe’s. New products are constantly introduced in limited quantities which incentivizes shoppers to return regularly and adds to the allure of “exploring the store” to find new goodies. These strategies work in conjunction with one another to support the overall strategy of providing a differentiated product line paired with a truly unique shopping experience.
Finding appropriate markets for expansion
As Trader Joe’s continues to expand the company has many strategic options to consider in order to maintain its competitive advantage. Moving into the appropriate markets that have both the appropriate population densities and number of college educated residents will be key. In order to ensure that the company moves into the appropriate markets, Trader Joe’s could contract a consulting firm or devote internal resources (assuming that they do not already do so) on the development of business intelligence programs to analyze potential markets for expansion five, ten, or fifteen years from now.
Conducting extensive market intelligence studies to examine key demographics and competition in potential areas of expansion will ensure that the company opens new locations in markets with similar demographics to their existing locations. The goal of market intelligence is to understand opportunities and threats in order to compete and grow in a strategic manner. However, devoting resources to this type of project may not be the best option for Trader Joe’s as working with a consulting firm can be incredibly costly and they will undoubtedly be forced to disclose loads of information to a third party. Similarly, Trader Joe’s has intentionally avoided engaging with consulting firms in the past.
In order to protect and maintain its exclusive relationships with manufacturers and suppliers Trader Joe’s could look to restructure its contracts with current providers. Engaging in longer term contracts may allow the company to maintain their exclusive relationships with more certainty, however, they may run the risk of getting locked into a situation that may become unfavorable in the long run. Additionally, Trader Joe’s buyers benefit from working with a number of suppliers in order to diversify their product lines. Lastly, as a result of a high volume purchasing, manufacturers have a natural incentive to maintain their “special” relationships with Trader Joe’s as it benefits them immensely as well. A potential risk to Trader Joe’s is being aside by major grocers like Wal-Mart or Target with even more purchasing power than Trader Joe’s.
Maintaining their unique culture and “neighborhood market feel” will be crucial as Trader Joe’s expands into new markets. Trader Joe’s culture is such an integral part of both the customer and employee experience that if this is abandoned or augmented as the company grows than Trader Joe’s may lose one of its greatest sources of competitive advantage. Despite their secretive nature, it is much easier for competitors to develop similar product offerings, or employ similar processes, than it is to mimic institutional values.
Values and culture take time to be built and must be maintained and nurtured during periods of growth. In order to maintain Trader Joe’s culture, I recommend devoting internal resources to create “Cultural Ambassadors” or some form of training model, where teams of seasoned Trader Joe’s employees travel around and spend periods of time at different locations throughout the year in order to make sure that the core values of the company are being upheld by new managers and employees, especially in recently opened stores. This will be especially crucial when opening and hiring candidates for new locations.
Secondly, strategically sourcing ingredients and products allows Trader Joe’s to keep its costs down, however, turning these ingredients into attractive delicious recipes is what really draws customers to their stores. There are many other low-cost grocers available as substitutes in the markets, however, none with the product offerings that you see at Trader Joe’s. My second recommendation is to increase R&D spending for the development of new recipes (especially for frozen items) as well as devote additional resources on market research in order to stay informed of consumer trends in the food industry. Furthermore, since Trader Joe’s cannot patent any of its products it is crucial to keep coming up with new and exciting offerings that will surprise and delight customers when they explore the store.
I recommend finding out where Trader Joe’s customers go out to eat and incorporate those recipes into the company’s private label offerings. Trader Joe’s customer base is another asset for the company and they’re loyal. With that said, I recommend giving customers only what they really want. In order to do so the company should increase sales goals on product offerings across the board and eliminate products that don’t measure up to the more competitive standards. Avoid offering products that no one wants and give consumers more of the stuff that they absolutely love. This may lead to increased revenues, more favorable deals with suppliers, and even greater customer loyalty in the long-run.
From 2001 to 2011 the percentage of consumers shopping in major supermarkets declined approximately 15% from 66% in 2001 to 51% in 2011. During this time, Trader Joe’s grew from approximately 175 stores to almost 400 and expanded into new markets where major players like Wal-Mart and Target had an established presence. There is something very unique about the Trader Joe’s brand that allowed them to grow at such high rates while others maintained modest levels of growth. The alignment of their culture, product offerings, and how they source their goods is unique and it’s that uniqueness that has allowed them to be so successful. The benefits and experience that Trader Joe’s customers receive are directly related to the company’s strategy and ability to maintain its position in the market. If they’re able to grow while maintaining the values on which the company was founded than Trader Joe’s will continue to perform extremely well for years to come.