Thanks for the interesting read Ananth! I had always recognized that Trader Joe’s had gone the private-label route to lower costs and ultimate pricing to customers. I think the private-label model works for food products where brand and/or trust aren’t critical. Certain products, such as sports drinks (e.g. Gatorade) and baby food (e.g. Gerber), would struggle in Trader Joe’s due to consumer comfort with trusted brands. I think this contributes to fewer SKUs in store as well. TJ’s has actually run into trouble recently with some of its product. Pepperidge Farm sued Trader Joe’s, “accusing the grocery chain of trademark infringement for selling a cookie that looks too much like its Milano cookie.”  Could this lead to more law suits for TJ’s private-label products that resemble branded counterparts? How would you assess this risk?
Additionally, it’s interesting that Trader Joe’s would eliminate many distributors from the supply chain. Again, this effectively lowers costs when there is sufficient scale to warrant direct from supplier truckloads of product. While Trader Joe’s is a multi-billion revenue company, I question whether certain lower-volume suppliers are hurt financially by managing shipments direct to TJ’s distribution center rather than through a local distributor. Distribution has become even more complex in recent years given variable costs of gasoline and increasing shortages of truck drivers nationwide. TJ’s has actually also run into trouble with distributors recently. “Two dairy companies sued Trader Joe’s this month for allegedly coercing suppliers to end their contracts with them and to instead sell directly to the Monrovia-based grocery chain at a lower price.”  Thus, two questions I have are: how sustainable is the distribution infrastructure? And how far is TJ’s willing to go?
Great read. I too wasn’t aware of Taco Bell’s in-kitchen practices. It’s pretty interesting the company would outsource food preparation. You touched on it, but I think the key for Taco Bell was minimizing the initial investment for a new store. Per Yum Brand’s latest annual report, ~80% of restaurants are owned by third-party franchisees. I believe Taco Bell pursued the “Kitchen Minus” program In order to lower initial investments costs, which, in turn, helped the company convince franchisees to invest in Taco Bell and open new stores. Given franchisees pay a royalty based off of sales, Taco Bell was incentivized to maximize revenue throughout their entire system. The more stores, the higher the entire company’s revenue. Thus, while the company may be sacrificing some margin by outsourcing cooking to third party suppliers (I believe they are paying a premium and could likely do more cost-effectively in-house given their scale), they are able to maximize sales and corporate profits by focusing on store count growth.
2) Yum Brand’s 2014 Annual Report
Great write-up, Scott. I think you hit the nail on the head in detailing Southwest’s success in the industry to date. I wanted to emphasize a point you touched on in your note: the importance of a single model plane and uniform fleet. My prior employer considered investments in several airline companies. Two of the key factors in considering an investment were the cost of airplane maintenance (typically significant) and overall labor cost. As you mentioned, a single airplane type lowers maintenance costs through standardization. There are significant benefits that include streamlined maintenance practices across the firm, lower costs to train maintenance employees, lower equipment costs, etc. Additionally, the labor cost savings from a single airplane type are immense. Unions play a huge role in the airline industry and often put restrictions on which pilots can fly which type of planes (often based on seniority) and when. When a company has several airplane models, this leads to almost forced training for pilots across all plane types as airlines have some restrictions as to how they staff planes.
A couple of questions I think about in terms of Southwest’s continued profitability and success are:
Do you think Southwest’s current model is sustainable in the face of increasing consolidation in the industry? Do you think consolidation will impact gate or terminal pricing or availability in the long-term? How would Southwest cope?