Trader Joes – Innovation in the grocery business

In 2012, Fast Company ranked Trader Joes as the 11th most innovative firm in the US. That same year, Trader Joes managed to outperform the rest of the grocery industry with a record revenue per square feet of $2,054 (compared with Whole Foods – $1,257, HEB – $867, Walmart – $607 and Publix – $591). Trader Joes key to its success has been that it has an operational model that enables it to meet its pledge to consumers. This pledge can be described as offering a WOW experience through interesting products, everyday low prices, relatable staff and a unique brand personality.

 

In 2012, Fast Company ranked Trader Joes as the 11th most innovative firm in the US. This type of recognition is almost unprecedented for a grocery store. That same year, Trader Joes managed to outperform the rest of the grocery industry with a record revenue per square feet of $2,054 (compared with Whole Foods – $1,257, HEB – $867, Walmart – $607 and Publix – $591). The key to the success of Trader Joes is that it has an operational model that enables it to meet its pledge to consumers. This pledge can be described as offering a WOW experience through interesting products, everyday low prices, relatable staff and a unique brand personality.

Trader Joes is an American grocery store that started in California. Since inception, it has positioned itself as the grocery of choice for the frugal yet sophisticated consumer. A typical customer is a young professional who is health conscious and enjoys new experiences. The company’s business model was to capture this highly inquisitive consumer by offering sophisticated products (e.g., chili jam, Indian red rice) at remarkably low prices. The operating model that enables this operation consists of innovative store designs, a deliberate recruitment and employee management philosophy, strategic merchandising, dynamic product offerings, and a fully aligned advertising strategy.

The store designs are characterized by having a significantly smaller footprint than the typical grocer. The layout is strategically designed with diagonal hallways. This allows the consumers who peak into a given walkway to have better visibility over the products. At the same time, having un-regimented walkways fits into Trader Joe’s brand personality of being an un-standardized hipster brand.

Recruitment and employee management is also critical. The company believes that the quality of the employees is fundamental to its continued success. Trader Joes claims it hires employees who are sophisticated and inquisitive so that they can emphasize with the customer base. It also pays significantly more than any other competitor ($50,000 – $100,000 for full-time store employees). Additionally, each store has a mechanism for staff to purchase new products either free or highly subsidized. This guarantees that the staff will be knowledgeable about the products to support the customers shopping experience. Finally, the roles at the store are rotated every few hours which enables employees to have a more varied and enjoyable experience, leading to better service.

It is also important to note that the store has made a conscious decision not to invest in technology at checkout. There are no self-checkout counters and no screens on the regular checkout lanes. The store management instead encourages its employees to chat with customers. This is a great way to leverage one of the best resources of the company (i.e., the quality of its employees) to produce a better shopping experience.

The high employee salaries paid to the staff are offset by a highly strategic sourcing and merchandising approach. This is what enables the low prices. Specifically, this can be attributed to three elements. First, there is a very high number of private label products (~80% of the merchandize). This products are typically less costly than branded labels. Second, the lower number of SKU’s allows for a direct to manufacturer model (i.e., avoiding distributor fees). And third, the high purchasing volumes of less products enable savings through economies of scale.

The company also has a couple of mechanisms to create mystic around its products. First, it keeps the product mix dynamic, meaning that every week it introduces ~10 new products (and discontinues the same number). Second, the company forces suppliers to abide by very strict secrecy rules. This created a sense of seasonality and made the products more interesting and special.

The advertising strategy is also aligned with this philosophy. The company went against existing supermarket advertising practices (e.g., TV commercials, coupons, promotions, etc.) instead it only showcases the source and stories of new products through the radio and its customer newsletter called the “fearless flyer”.  This is aligned with its costumer promise of constantly providing new products that inspire customers.

Through this highly deliberate operational model, Trader Joes has been able to grow its operations and continues to surprise its consumers with extravagant products and extraordinarily low prices. No wonder a Market Force study ranked Trader Joes as #1 supermarket in America!

 

 

 

 

 

 

 

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6 thoughts on “Trader Joes – Innovation in the grocery business

  1. Aaron I really like how you pointed out the checkout counter as I’ve never really thought about how analog the how experience it is! Makes me wonder how much technology really benefits the purchasing experience when Trader Joe’s shows us how enjoyable the checkout experience can be without any technology at all.

  2. Great choice, Aaron! Trader Joe’s is a wonderful company – I should know, because I used to work there! I think you hit the nail on the head when you talked about the role that hiring and recruitment plays in Trader Joe’s success. Not only does the store manager interview each job applicant prior to hiring, but they also make each job applicant take a written math test as part of the interview! That’s a pretty high bar for a grocery store. Once hired, Trader Joe’s puts its employees through rigorous job training, including shadowing, sign-offs, and rotations (like you mentioned). When I was 16, they actually sent me to a regional Trader Joe’s L&D conference for up-and-coming leaders – free of charge! Overall, Trader Joe’s is a wonderful place to work and an even better place to shop. All the food is 100% guaranteed – you don’t like it, you bring it back for a full refund. In my opinion, at the core of Trader Joe’s success is its emphasis on people and customer satisfaction. There’s a lot that we can learn!

  3. Great article Aaron! I found it especially interesting how they optimise the physical space with the diagonal layout of the aisles. Would you happen to know how much smaller a typical Trader Joe’s store is compared to a typical grocer? Am wondering how much of their higher revenue per square foot in comparison to the other stores can be attributed to the fact that they made the strategic choice to have a smaller footprint!

    Like Hyon Bin, I’ve also never noticed the lack of technology during the checkout process, and it was great that you pointed it out

  4. I’m so glad you wrote about Trader Joe’s! I think you captured their business and operating model really well. It makes a lot of sense to me that their value proposition is a “Wow experience”, as opposed to convenience or something like Walmart’s “Everyday Low Prices.” Some components of TJ’s operating model, e.g., the funky store layout, the lack of technology at the checkouts, and the high turnover of products, wouldn’t align well to a model that delivered value through convenience or consistency. But that’s not what TJ’s is going for. Thanks for sharing!

  5. Thanks for all the great comments! I just noticed I missed including sources on my post:

    • Fast Company Innovative firm list. http://www.fastcompany.com/3017772/most-innovative-companies-2011/11trader-joes
    • Mallinger, M., Rossy, G. “The Trader Joe’s Experience.” Graziadio Business Review. https://gbr.pepperdine.edu/2010/08/the-trader-joes-experience/
    • Progressive Grocer “The Super 50” http://www.progressivegrocer.com/research-data/super-50/pg-web-extra-super-50?nopaging=1
    • Palmari, Christopher. “Trader Joe’s Recipe for Success.” http://www.bloomberg.com/bw/stories/2008-02-20/trader-joes-recipe-for-success
    • Aaron Stolear – In-store interview with crew
    • David L. Ager and Michael A. Roberto “Trader Joes” Harvard Business School Case 9-714-419 April 8, 2014

  6. Excellent post Aaron!

    I found really interesting how they managed to obtain lower prices in their products while paying high salaries to their employees. The key of their operational model that you mentioned is the high percentage of private label products that represent more than 80% of their merchandise. That is their key element of differentiation and their competitive advantage to achieve low prices. My question would be, why Whole Foods cannot achieve the same prices as Trader Joe’s while also having a large percentage of private labels? I found this article that talks about how the uniqueness of Trader Joe’s products are increasing the loyalty of their customers over Whole Foods.

    http://www.businessinsider.com/why-trader-joes-is-so-cheap-2015-5

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