To : M. Scott Morton

From : Giovanna Casey

Subject: Trader Joe’s: A Unique Grocery Store

Date : November 20, 1996

“At Trader Joe’s, our goal is to sell high-quality products at value prices. If it can be sold elsewhere for less, we don’t handle it.” So boasts a flyer for this “unique grocery store”, whose outlets are described as a cross between a gourmet deli and a discount warehouse club. The concepts behind Trader Joe’s 85 stores go against most of the recent trends in food retailing with apparently great success. These concepts include limited SKUs (i.e. fewer items), relatively small plain stores, extensive private labeling, no promotions, primitive information technology and exclusively company owned (no franchised) stores. Value chain analysis reveals the source of some of their unique value proposition.

Suppliers. In food retailing, there are multiple paths grocery products can take to the retailer. For perishable goods, there are strong regional systems, often using food brokers. Food manufacturers deal directly with larger retailers, and regional wholesalers supply other retailers. In the nineties, the economic relationships between food manufacturers and retailers are quite complicated - manufacturers often pay slotting fees for shelf space and fund trade promotions, that is, they subsidize advertising for their products.

Trader Joe’s has reinvented the relationship with suppliers in a variety of ways. In some ways, they simplify. There are no middlemen, they buy directly from the manufacturers. They buy large quantities and reportedly pay cash. They do not do special promotions or sell shelf space. They do, however, change the balance of power in the supplier relationship by purchasing specialty goods in bulk. For example, Trader Joe’s is the largest retailer of wine in California. In considering whether to supply them with private label goods, a manufacturer does not need to worry about cannibalizing existing products because Trader Joe’s probably does not carry them. The additional costs of trade promotions are not incurred, and buying is centralized. The end result is low cost, high quality gourmet goods for sale.

Buyers. Trader Joe’s does not seek to replace your grocery store, but to augment it. The model is that shopping should be an adventure, that you never know what you are going to find at Trader Joe’s. Defining what they carry is an adventure itself - gourmet foods, all-natural processed and frozen foods, coffee, wines, and other special purchases. Even among the private label items there is some uncertainty about what will be there week to week. They don’t stock multiple sizes of the same good, but nor are they warehouse jumbo sizes. Simply put, they carry “treats”.

Trader Joe’s does provide great deals on high quality foods, but they require an educated customer. It appeals to bargain-minded yuppies, and provides not just a unique blend of products but also a unique shopping experience. Listening to some Californians talk about their native born Trader Joe’s, it is clear the company has achieved almost cult status. They do little advertising, but provide very high quality products and service.

The value proposition is clear when you visit the stores - money has not been spent on layout or display. But much effort has been made toward customer education - there are flyers with commonly asked questions and plenty of incredibly friendly staff garbed in Hawaiian shirts. The employees are very knowledgeable about the products, and provide key feedback for Trader Joe’s management as well as the customers. Maintaining the high quality of the goods is of primary concern, with Trader Joe’s being actively involved in the formulation and refinement of the private label products.

Trader Joe’s has managed to create a highly branded shopping experience in a traditionally undifferentiated market. It is supposed to be fun to shop at Trader Joe’s, and by all accounts (including this shopper’s experience) it is.

Costs. Little financial information is available because Trader Joe’s is privately held, but evidence is strong that they are extremely successful. Key drivers of profitability in food retailing are sales per square foot, which are remarkably high at around $1000 per year, “double that of conventional supermarkets and more than triple that of most specialty food stores”. Company flyers brag that they don’t carry loss leaders, that all their products “pay for themselves”.

All stores are company operated, presumably in order to keep better control over their human “information systems”. Their sites are relatively small, but carefully chosen to match the right demographics, which includes areas with high concentrations of epicurean magazine subscriptions. Marketing and sales expenses are minimal, but service is emphasized.

Why is this company interesting? Following trends in food retailing in the nineties, one would find several takes on the efficiency theme. One is the rush towards the hypermarket, which is large is scale and scope and delivers value to the customer through the convenience of one stop shopping. Information technologies were used to gain efficiencies in warehousing and distribution, which are significant costs in this low margin business, and now are being pursued to gain point of sale information about customers. But two underlying characterizations of the business has not changed for many years - the significance of store location to profitability and the highly regional character of distribution and marketing.

Trader Joe’s seems to break all these rules. Trader Joe’s stores are an addition to your grocery store shopping, not a substitution. They are extremely efficient in their inventory management, but they achieve this through low tech solutions - having 2000 rather than 20,000 items, buying centrally and in large quantities, stocking shelves directly from the trucks, and having employees deliver feedback about what’s selling and what’s not. The company has a very strong culture and has achieved the impossible - a loyal following (not based on location) in food retailing. Now, as Trader Joe’s are seeking to add 50 stores over 5 years in the Northeast, they are trying to be successful nationally. If any company can do it, it’s Trader Joe’s.