Trader Joe’s (TJ) is a U.S. based chain of grocery stores specializing in fresh and organic food as well as beverages. It has around 460 stores across 41 states and an estimated c.$10Bn in sales.
I have picked TJ as an example of a highly effective firm, as exemplified by its profitable growth in an otherwise troubled industry. I believe that central to its success is a clear business model that is enabled by a perfectly aligned and well-executed operating model.
TJ’s business model is rather simple: selecting, purchasing and selling high quality foods and beverages at relatively low prices through quirky brick and mortar retail outlets. They create value by selling goods that people love at prices that they can afford and capture that value by charging a mark-up over their supplier’s prices. As stated on their website, “great food + great prices = Value.”
Operating Model, Alignment and a Sustainable Competitive Advantage
As analyzed below, the TJ operating model is ideally designed to support the firm’s business model, with each component directly helping increase product quality or lower pricing.
Lean Distribution and Efficient Logistics: Unlike many of its competitors, TJ tries to purchase straight from manufacturers, who in turn ship products straight to TJ distribution centers. Compared to traditional retailers, this process cuts out the distributor and creates a clear and sustainable cost advantage. After products reach the TJ centers in bulk they are prepared (i.e. cheese is cut and packaged) and delivered to stores on a daily basis. Often times new store locations are picked so as to maximize the distribution network efficiencies. Furthermore, the company has invested a great deal in an efficient logistics system with precise ordering from distribution centers so that in-store product availability can be high despite the small space dedicated to in-store storage. Lastly, the firm is creative in finding ways to further extract operational efficiencies such as selling its fresh offering in units rather than by weight to shorten customer check out times.
Limited SKUs: TJ carries about 4,000 SKUs compared to a typical grocery store which carries c.50,000 units. If a specific product is not selling well it will be discontinued and replaced, ensuring a higher quality for products that are actually stocked. Furthermore, the lower number of SKUs means that TJ orders higher quantities of each SKU and can leverage scale to negotiate prices. Also, from an operational point of view, the fewer SKUs make day-to-day running of the business, such as shelve re-stocking, more efficient.
Own-Branding: Of the products offered in TJ stores, about 80% are packaged and branded under the “Trader Joe’s” name. This allows TJ to cut costs and offer the same products as other retailers, but without third-party brands and at lower prices. Furthermore, TJ requires for all of its suppliers to not disclose their relationship. The suppliers are happy because customers do not know that their product is being offered for a cheaper price at TJ compared to other supermarkets and TJ is happy because their customers can keep believing in the products’ uniqueness.
Purchasing and Supplier Relationships: Relative to its competitors, TJ invests a great deal of its labor resources in purchasing, having created a team of “product developers” in order to secure the highest quality and most innovative products. Furthermore, being first to select “hidden gems” allows TJ to set up contracts with less-established suppliers early on and thus secure more competitive prices. Also, TJ has a favorable reputation with suppliers for paying them on time and eliminating extra fees such as slotting etc. which again enables them to get better deals on pricing. Lastly, part of the reason why TJ is able to sustain such low prices is that it sources goods globally, where costs (particularly in developing countries) can be lower.
Smaller Stores: Their relatively smaller sized stores have lead TJ to have one of the highest sales per square foot ratios (c.$1,750) in the grocery business. This creates more room for the business to invest in lower prices since costs such as rent are spread over a denser revenue base (lower costs as a percent of sales).
The two pillars of TJ’s business model are clear, 1) high-quality products at 2) low prices. These pillars leverage directly on the components of the operating model we have evaluated, with each component leading to either 1) higher quality through better purchasing or greater flexibility in product offerings or 2) lower prices through lower operating costs or lower supplier pricing. What’s more is that these advantages are sustainable as long as the TJ operating model does not change, setting the business on a clear long-term positive trajectory with little room for disruption.