Trader Joe’s – Alignment Under Secrecy

Trader Joe's leverages secrecy to execute on their promise of great food + great prices

Company Background
Trader Joe’s (TJs) is a privately held specialty grocery store chain. TJs operates over 450 stores across 41 states, and brought in an estimated $11.3 billion in revenue last year.

Business Model
According to the company website TJ’s business model is admittedly “not complicated”

          We just focus on what matters — great food + great prices = Value

Alternatively stated, TJs creates value by providing customers with products they desire at low prices, and captures value by pricing over cost and driving retail volume.

Operational Model
Trader Joes is notoriously secretive; corporate leaders have never granted access for a major news story or business profile. A 2010 story by reporter Beth Kowitt in Fortune—for which she spoke to former executives and suppliers—remains the most in-depth account of TJs business practices. The Fortune profile, along with a 2014 Packaged Facts report, points to several core aspects of TJs operational model:

SKU Control
The average TJs store contains ~3,500 unique products, or stock keeping units (SKUs). This is compared to ~50,000 in traditional grocers, and ~20,000 at quasi-peer Whole Foods (see Table 1). From the customer perspective, SKU control has several advantages. In The Paradox of Choice, psychologist Barry Schwartz describes the phenomenon of “choice overload”—too many options can induce anxiety and lack of action. Consider, for example, purchasing ketchup. At a traditional grocer, there may be 10 different SKUs. At TJs, there is only 1. Instead of spending time worrying about which of 10 seemingly identical products to buy—and sometimes choosing to buy none at all—at TJs customers can quickly select an item and continue with their shopping. The success of this approach is bolstered by the fact that TJs has built a trusting relationship with customers. Shoppers believe that TJs has done the evaluative legwork for them, selecting the single very best ketchup to stock on their shelves.

Outside of consumer preference, SKU control offers TJs a tremendous operational advantage—high turnover. If a traditional grocery store sells 100 units of ketchup per week, they will sell 10 units of each type of ketchup. Under the same scenario, TJs will sell 100 units of their single product. High turnover affords TJs the ability to secure volume-based discounts from suppliers and also streamlines supply chain management.

Private Label Dominance
Between 80% and 90% of TJs SKUs are private label. This is compared to just 16% at Whole Foods (see Table 1). Below are some examples of TJs private label products and their branded counterparts, demonstrating striking price differentials for the same product:

 

PitaChipsTJs Pita Chips ($1.99) vs. Stacy’s ($3.99)
Image Source

 

MacnCheese
TJs Macaroni + Cheese ($1.49) vs. Annie’s ($3.29)
Image Source

Suppliers are forbidden from disclosing their relationships with TJs and its private label products, a level of secrecy benefits both parties. For TJs, a low SKU count and a high percentage of private label items builds brand loyalty . Customers perceive TJ-branded products as unique items that cannot be purchased elsewhere. Suppliers prefer to remain secret so that other purchasers (consumers or other retail stores) are not aware that a lower-priced version of the same product is available at TJs.

Strong Supplier Relationships
Trader Joe’s private label product strategy depends on strong supplier relationships. TJs employs a cadre of product line-specific purchasers who stay abreast of customer preferences and industry trends and then work with suppliers to identify and source private label products. TJs purchasers have substantial leverage when working with suppliers. In addition to the promise of large-volume purchases (see ‘SKU Control’) TJs has a reputation for not stretching accounts payable. And unlike traditional grocery stores, TJs does not levy advertising, couponing, or stocking fees.

Product Mix Variation
TJs frequently changes its product mix. As many as 10-15 new products are introduced (or discontinued) every week based on changes in price, seasonality, tepid sales, and new trends. High-turnover (see ‘SKU Control’) enables TJs to rapidly exchange new and old products without wasting unused inventory or waiting for current inventories to be depleted. By changing their product mix, TJs can quickly capitalize on food trends or shifting preferences. Doing so also furthers customer perceptions that TJs is working to find them the best products available.

Lean Operations
Trader Joe’s has eliminated many operating expenses that drive low margins at traditional grocery stores. TJs does not provide any in-store services (e.g. Deli, Bakery, Seafood), does not sell ready-to-eat food, and does not provide sit-down space—all of which decreases in-store labor and retail footprint. For example, the average store size at TJs is ~10,000 sq ft, compared to ~38,000 at Whole Foods (see Table 1). As a result, sales per sq ft are ~$1,700, close to double that of Whole Foods. By working directly with manufacturers (see ‘Strong Supplier Relationships’) TJs avoids additional fees imposed by distributors. Finally, TJs commits few resources to marketing and promotion outside of their in-store pamphlet (The Fearless Flyer), relying instead on word of mouth. By reducing overhead costs, TJs can price products closer to cost, and capture more value at any given price point.

Conclusion
Trader Joe’s parsimonious value proposition (great food + great prices = value) is well positioned for alignment with operational strategies. It is relatively simple to determine whether an initiative will drive performance on either of these goals.

Based on available information, Trader Joes is executing on this customer promise. Strong supplier relationships and product mix variation allows TJs to provide shoppers with the products they desire and also adapt to evolving demands. Private label dominance, SKU control, and lean operations mean TJs can offer these products at low prices.

Since TJs is a private company, profitability metrics and financial statements are unavailable. But available metrics suggest that TJs alignment between business and operational models is driving strong performance. According to a 2014 Packaged Facts report, TJs revenue had a CAGR of 9.65% from 2008-2014. And survey data indicate that 13% of adults who shop for groceries have shopped at Trader Joe’s in the past three months, a 60% increase from a decade ago.

Simply put, Trader Joe’s is a winner.

TABLE 1. Comparison between Trader Joe’s and Whole Foods Market on select variables and attributes. All data is for FY 2013.
TJ2
Image Source

Sources:

Packaged Facts. 2014. Trader Joe’s and the Natural Food Channel. 

Beth Kowitt. Inside the Secret World of Trader Joe’s. Fortune. 2010.

Trader Joe’s Company Website. Accessed November 28, 2015.

Supermarket News. 2014. Trader Joe’s Co.

Previous:

Apple – AppStore, Industrial Design, Innovation, and Supplier Leverage

Next:

Xiaomi – Mobile Disruptor from China

10 thoughts on “Trader Joe’s – Alignment Under Secrecy

  1. Brian, I 100% agree (as a huge Trader Joe’s fan)! I actually didn’t realize how tightly-lipped TJ’s was regarding their operating model. As you point out, the simplicity to their vision/mission makes it easier to keep their business model & operations fully aligned (i.e., always prioritize value for price, and keep prices low). Some of their key operating decisions (e.g., fewer SKUs) also result in a ‘stress-free’ experience for both the consumer (i.e., easier to decide) & employees (i.e., easier to stock) which I think is key to their success. I’ve heard TJ employees/managers have extremely high satisfaction due to high salary & benefits, which also is an operating model decision that I think ultimately feeds into their vision of ‘high quality’!

  2. Very intriguing points about choice overload and private label strategy! I had always thought that consumers unambiguously prefer stores with more SKUs and never considered the possibility that too many choices can lead to inaction! The perception that the one SKU that TJ offers must be the highest quality product that TJ has carefully selected for its customers sounds even more enlightening! I think such perception is created by TJ’s private label strategy to a large extent. If their limited SKU selection consists primarily of branded products that can be easily found elsewhere, consumers wouldn’t perceive them as the best choices. It is really the private label strategy that allows TJ to achieve the perception of high quality with a small SKU portfolio.

  3. Brian, this is an insightful and eye-opening analysis, and the points you have articulated indeed sound very compelling.
    I am just curious as to what the margin sensitivity is, on a couple of counts:

    1) How do they think about competition from grocery e-retailers (say: Instacart) — because it amounts to erosion of their own margins, since products are offered at the same retail price to the end-consumers, therefore someone is bearing the cost of order fulfillment, bagging and delivery. Instacart is performing this function today, and is admittedly operating at a loss. But going forward, how do you think these are likely to pan out? Does Trader Joes gain or get hurt? Where to “steady state” margins settle at?

    2) High private label penetration is usually accretive to margins. I am wondering why competing players do not have this level of private label penetration and how would Trader Joe’s margins get impacted, once the others (say Whole Foods) start doing so in a more aggressive manner i.e. how defensible are these private label margins?

  4. Hi Brian!

    When my wife and I moved here we were told “Trader Joe’s is cheap; go there”. However, we struggled with the layout of the store. The private labels made shopping hard and unintuitive: We are used to our own Ketchup, our favorite brand of chips, etc. Do you think that under the general “price X quantity” test, the choice to go with only private label products was a wise one? Could they have maybe gone with some private and some known, or would that take away their edge?

  5. BP, thanks for the post — really intriguing. The price differential between Trader Joe’s private label and counterpart branded products was quite enlightening; I had no idea that private label products could be more than half the price of their branded counterparts. I would be really interested in seeing what the P&L looks like on a per unit basis for some of these private label products. I wonder if they are low margin, with profit driven primarily by volume.

  6. Hi BP,

    Fantastic post – really enjoyed reading it. Having worked in the grocery industry in the past I can say the advantages you pointed out are certainly points that worry competitors! I am curious if you have looked into a few things (thought I know with their policy of secrecy these may not be easy to come by):

    1) How do they set their pricing strategies? Many grocers use KVI’s (key value items) that consumers commonly price check (milk, bananas, cucumbers are common) to establish their positioning as a low price leader. They then drive significantly higher margins on less common and harder to compare items. Especially given the prominence of their private label offerings, this might be an effective strategy for them.

    2) How do they approach Fresh? Low SKU variety definitely helps here, but do they employ any other strategies like requiring frequent deliveries from suppliers, etc. to optimize on their fresh/produce goals? They definitely seem to achieve high quality fresh (look, feel, as well as expiry dates) while minimizing out of stock instances, which is impressive in this category.

    3) Related, I would be curious to learn how they balance scale and distance with their suppliers. How much do they look for local suppliers, especially in fresh, seasonal offerings vs. try to leverage their scale for purchasing power at a national level? My hypothesis is that their scale isn’t large enough vs. many other grocers (especially given industry consolidation in recent years) to really drive purchasing power. However, if they are utilizing a lot of local suppliers, they don’t seem to be capitalizing on that fully through advertising / in-store signage.

    Again, thanks for a really enjoyable post!

  7. A huge fan of TJ’s thanks for posting! In moving across the country, it has come to my attention that Trader Joe’s also seems to have a localized SKU selection. I wonder how they go about deciding to introduce new SKUs in specific markets. 1) How do they pick a new product in the first place? (Customer requests? External trends?) and 2) How do they go about testing demand? Do they introduce a small amount? Would be interesting to understand how they would choose a partner/supplier for a test product and what the threshold would be to introducing it fully in a store or on a national scale.

  8. Thanks BP for a fascinating article on TJs cloak-shrouded foodstuffs business dealings. What’s interesting about there business model is that they seem to have set up as a consumer-facing wholesaler- focusing on a smaller SKU selection, at whole sale pricing and at the same time driving high volume. They’ve also dis-intermediaried the distributor which could pose some interesting inventory risk management challenges. This leaves them more producer surplus to pass on to the consumer. With 11 billion in revenues and at a scale of 450 stores in 41 states, perhaps they have the greenbacks to establish systems that can manage direct-from-the-manufacturer inventory however, I would imagine this may have been incredibly challenging when they were just starting out. I would also have been really interested to see how their merchandising team makes stocking decisions and how those decisions support theirs customer promise.

  9. TJ’s is awesome and you made a lot of interesting points regarding their business and operating model. One thing I have noticed (and several others have said to me) is that TJ’s is often out of certain items, which with their relatively small number of SKU’s I find to be very surprising. I wonder if that points to more systemic problems or is an outlier. In my opinion, the optimal number of products consumers want to see is 4 to 6, not too many to be overwhelmed, but enough to give them options. I sometimes wonder if they have mastered the problem of giving enough options while still maximizing their limited shelf space. I would be curious to know if they do A-B testing at various stores to determine the best product mix. I also wonder if customers flock to the store because they love one particular item that only TJ’s sells? It’s pretty likely that if you buy something at TJ’s, with it’s abundance of private label items, that it might not be available elsewhere (in my case it’s their hummus). I see that as a big advantage over some of it’s competitors, where most of the items they sell are available at multiple retailers.

  10. Thanks so much for this great read! A few questions/comments came to mind when I was reading the post:

    (1) It would be great to better understand TJ’s approach to staffing and HR. The employees I’ve encountered there stand out significantly from other grocery stores (or even retailers in general). Do employees go through extensive training, or do they just hire the “right” people?

    (2) I’m curious about TJ’s approach to growth/expansion and store locations. How did the footprint evolve and are they looking to enter the remain 9 states they aren’t currently located in?

    (3) I’ve always been confused by TJ’s approach to product display and placement. I regularly have to search the aisles for products I have on my list to purchase and, because of the overwhelming amount of products, displays, and “handwritten” signage, I feel like I’m constantly sifting through clutter. Additionally, product placement regularly changes, so customers can’t necessarily rely on past experiences to find the products they are looking for. Has TJ’s done any A/B testing to understand why this type of display is particularly effective (or ineffective)?

Leave a comment