In a heavily competitive industry, Trader Joe’s (TJ’s) has proven to differentiate itself from the traditional grocery store. That differentiation is rooted in its business model of offering value products and excellent customer service. Yet, what has led to its tremendous success is arguably its effectiveness of aligning its business and operating models.
Trader Joe’s delivers value to customers by adopting an everyday low price strategy. It executes on this strategy partly by carrying a limited number of products. In fact, TJ carries 5x fewer products (~2,500 SKUs) than the traditional supermarket. TJ’s doesn’t aim to be a one-stop shop like a full-service supermarket and rather serves as the secondary store. For example, TJ’s intentionally lacks a pharmacy, meat and fish counters, and wide selection of produce and staples.
Another way to deliver on its low price value proposition is through private label. Over 75% of TJ’s product offerings carry the TJ’s label. Unlike competitors, such as Bristol Farms and Whole Foods, TJ’s doesn’t carry any national brands. Executing on this strategy allows it to keep costs low without compromising on quality.
The buying process is another source of differentiation. TJ’s buys directly from manufacturers and by cutting out middleman distributors, the company is able to keep prices low. Beyond this streamlined process, the purchasing team is also disciplined about buying products that it can sell for a better price than supermarkets. Its strategy lies in part in its ability to buy in large volume and strike deals with suppliers. TJ can thus pass the results of its buying efficiencies through to customers.
Exhibit 1: Range of TJ’s Private Label Products
Source: Huffington Post
Good Customer Service
TJ’s executes on this customer centric strategy by empowering its employees, specifically through training programs, its hiring process and compensation packages. Employees collectively exude a level of enthusiasm and energy, and are cross-trained across multiple functions such as cashier, stocker and customer interface roles. They are also trained in communication skills, teamwork, leadership skills and product knowledge. Besides opportunities for personal development, employees also enjoy attractive compensation packages. For example, part-time clerks earn between $8-12 per hour and full-time clerks make ~$16 per hour. Assistant store managers can make an average of $94,000 a year while store managers can make on average $132,000, comparable to that of a Wal-Mart store generating 6-7x in store revenue. Compensation is a key driver of employee satisfaction, which is particularly pertinent in any customer facing role. On the talent acquisition side, TJ’s looks to hire people who are ambitious, friendly, and engaging. These qualities are also stressed in performance evaluations as they are key to employing good customer service. At the corporate level, the company runs on a lean organization with only two levels between the CEO and a cashier. All of these factors create a strong culture and results in a low annual turnover of 4% amongst full-time employees. A happy and motivated workforce allows TJ’s to maintain a high level of customer service.
Alignment Between Business and Operating Models
The success story of Trader Joe’s has proven the importance of aligning a company’s business and operating models. Every aspect of its business from its purchasing process and private label strategy align with its commitment to low prices. Similarly, its focus on instilling a customer-centric culture and hiring the right talent delivers on its promise for excellent customer service. Trader Joe’s epitomizes a company’s business model aligning with its operating model as evident in the results of the satisfaction survey below (Exhibit 2). Thus, it’s no surprise that Trader Joe’s is has one of the highest sales productivity metrics in the industry (Exhibit 3) and has proven to be a formidable player in the grocery business.
Exhibit 2: Reader’s Satisfaction Rating by Category by Select US Supermarket Chains
Source: Coriolis Research
Exhibit 3: Grocery Store Sales Per Sqft and Store Opening Plans
Aiken, Kristen. “Who Really Makes Trader Joe’s Food?.” Huffington Post. <http://www.huffingtonpost.com/2013/02/12/who-makes-trader-joes-food_n_2664899.html>
Lutz, Ashley. “How Trader Joe’s Sells Twice As Much As Whole Foods.” <http://www.businessinsider.com/trader-joes-sales-strategy-2014-10>
Mallinger, M., Rossy, G. “The Trader Joe’s Experience.” Graziadio Business Review. <https://gbr.pepperdine.edu/2010/08/the-trader-joes-experience/>
Palmari, Christopher. “Trader Joe’s Recipe for Success.” http://www.bloomberg.com/bw/stories/2008-02-20/trader-joes-recipe-for-success
“Understanding Trader Joe’s.” Coriolis Research. May 2006. < http://www.coriolisresearch.com/pdfs/coriolis_understanding_trader_