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.
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.
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:
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:
TJs Pita Chips ($1.99) vs. Stacy’s ($3.99)
TJs Macaroni + Cheese ($1.49) vs. Annie’s ($3.29)
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.
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.
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.