Trader Joe’s pays new staff members $10-12/hour, a new assistant store manager makes $40-75K and store managers make six figures  and has a labor-intensive operating model . Even with high labor costs, it has grown to over 440 stores financed entirely through retained earnings . 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 . 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 . 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 . 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 . 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.
 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
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