Trader Joe’s – using operations to support a distinct value proposition
Trader Joe’s pays new staff members $10-12/hour, a new assistant store manager makes $40-75K and store managers make six figures [1][2] and has a labor-intensive operating model [3]. Even with high labor costs, it has grown to over 440 stores financed entirely through retained earnings [1]. It does this through a unique strategy in North American grocery enabled by its operating model.
In 2010, Fortune estimated Trader Joe’s sales per square foot was double Whole Food’s, that 80% of their SKUs were private label, and carries 4,000 SKUs relative to a typical grocery store’s 50,000 SKUs, with these SKUs changing frequently [3]. These three factors combine to improve profitability:
- Higher sales per square foot reduces the cost of rent as a percentage of sales and allows Trader Joe’s to launch stores in urban locations where other chains may not be feasible;
- Private label products have higher margins than national brands – partially through vertical integration and partially through the elimination of marketing and sales expense of the manufactures;
- Fewer SKUs allow for lower inventory levels and higher inventory turns as sales in a category are spread across fewer SKUs, which reduces inventory-holding costs and enables smaller, cheaper store footprints; and
- Frequently changing SKUs allow Trader Joe’s to optimize margins on an ongoing basis by replacing low-performing products with new product introductions with higher potential.
These strategic decisions allow Trader Joe’s to dramatically shrink the size of stores relative to competitors, without reducing store sales. It therefore creates major savings in real estate expense.
Trader Joe’s uses a portion of the incremental margin to invest both in higher wages and higher staffing levels. Higher wages facilitate the frequent new product introductions – employees are more qualified and likely stay longer. When you ask an employee to help find a product they will walk you there and recommend a specific product [3]. This reduces frustration from products that disappear and aids in new product discovery, as well as supporting the private label strategy.
More importantly, higher labor hours enable a lean inventory, small store approach. Trader Joe’s has shallower shelves and narrower aisles than other grocery stores [3]. This means lower real estate expense per SKU, but means that stock-outs become more likely. Trader Joe’s compensates by continuously restocking shelves, reducing the risk of stock outs. This approach allows for smaller storefronts.
Higher labor quantities show up again at check-out, where Trader Joe’s almost always has a dedicated grocery bagger at each checkout to decrease cycle times. In addition, Trader Joe’s does not price items by weight in order to speed check out times [3]. Customers value shorter wait times, and shorter queues allow for a smaller front aisle reducing required store space.
Finally, Trader Joe’s chooses to carry only small-size SKUs. It does not carry diapers, nor does it carry a large range of sizes for a given product. Families cannot do all of their groceries there. These products have lower margin per foot of shelf space – because the customer expects discounts for buying in bulk, and large items take up lots of space. This operational decision further enables their small-store strategy.
[1] http://chc.tbe.taleo.net/chc03/ats/careers/requisition.jsp?org=TRADERJOES&cws=1&rid=1200, http://chc.tbe.taleo.net/chc03/ats/careers/requisition.jsp?org=TRADERJOES&cws=1&rid=982
[2] http://archive.fortune.com/2010/08/20/news/companies/inside_trader_joes_full_version.fortune/index.htm
[3] Store visit
Thanks for the insightful post on one of my favorite grocery chains!
It makes sense that fewer SKUs allow for lower inventory levels and higher inventory turns, but this raises another question of what to stock to maximize store traffic despite the fact that families can’t do all of their groceries at Trader Joe’s. It’d be interesting to understand Trader Joe’s product policy for what range/type of products to carry, given its smaller store sizes, which can only fit so much inventory. Perhaps they collect data from their customers on what SKUs they’d like to see or track sales by product line to continually update what they carry based on demand or competitive research?
Regardless, Trader Joe’s must be doing something right, as there seems to be a lot of brand loyalty for its customers who find the private label products of consistently high quality and attractiveness.
Wow! This is fascinating to me! 6 figures as a general manager of a grocery store?! Where do I sign up???
On a more serious note, I don’t think Trader Joe’s gets enough credit for its innovative business model. They were selling private label grocery products before it was the norm and this was a big risk. In hindsight a no-brainer. We now see private label products in nearly all grocery stores and you can hardly find a branded cereal in a Whole Foods. As the competition begins to copy their methods, it will be interesting if they will remain at the front of the pack or if they will be crowded out of the market. My hunch is that the consumer loves their community engagement projects and realizes that the authentic brand and appeal matter a lot to them. We saw this at Hublot too! -JCB
Great analysis on Trader Joe’s. I read recently that a lot of their products are actually completely made by manufacturers, the only slap their private label on it after the products have proven to be a success. I wonder if this tactic is new and if it hurts their margin.
By the way, great insights on the compensation piece. Time to go back to my career coach…
Great article Steve! I have always admired Trader Joe’s business model – not only for what you described above but also because (willingly or unwillingly) they seem to have a focus on healthier and less processed foods. I assume that in the future years they will begin to face stronger competition and wonder to what extent they will strive to keep their higher margins through vertical integration – and how, if at all, they can leverage their current operating model to do that.
Steve – very interesting insights here. Two questions for you:
1.) How does the Company ensure availability of product in-store given faster inventory turns and consistent re-stocking? Does Trader Joe’s compensate for a smaller “selling” store footprint with more extensive warehousing or larger stockrooms? Or perhaps given its private label relationships, it can demand more frequent deliveries to its stores?
2.) Do you think the primary advantage of real estate savings within grocery is sustainable longer term? I can’t help but wonder if “medium / big box” square footage will get cheaper over time (or at least decline as a % of costs) as certain retail categories (i.e., sporting goods, consumer electronics) shift more to the online channel.