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Trader Joe’s: Groceries for the “Overeducated and Underpaid”

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How a Caribbean-themed wine shop turned into an high-performing grocery business.

Trader Joe’s, a privately-held American grocery business, executes on its vision of delivering high-quality, low-cost products in a simple and fun environment through a unique private-labeling model, efficient supply chain, simplified inventory, and committed workforce.

 

 

As founder, Joe Coulombe describes, Trader Joe’s aimed to serve the “overeducated” and “underpaid” customer, beginning first with low-cost wine and eventually expanding into grocery business. These customers sought both staple and gourmet products at an affordable price point. Between its founding in the 1960’s and today, Trader Joe’s honed its model to efficiently source high-quality products and retain its committed staff.  It is now one of the most successful grocery chains in the country.

 

Unique Private Labeling Model: One of Trader Joe’s most significant assets is its stable of private label products, which comprises over 80% of the store’s stock (vs. 20% at competitors).[1] Relationships with brand-name grocery products are critical to the success of the private label. By procuring products directly from the supplier, branding the product as “Trader Joe’s”, and distributing it in its stores, Trader Joe’s offers its customers the same quality they might find at competitors (e.g., Whole Foods, Shaw’s) at a significantly lower price. For example, Annie’s Homegrown Organic Shells and White Cheddar (a personal favorite), sells at Whole Foods for $3.29; the same Trader Joe’s labeled product sells for $1.49.[2] [3] It does extensive consumer research to inform product selection decisions and meet consumer demand.

 

Efficient Supply Chain: Trader Joe’s often buys its food directly from the supplier and distributes the food through its own centralized distribution network, allowing for lower cost on customers’ desired products.[4] The supplier is responsible for transporting the goods to the distribution center, and Trader Joe’s supplies its local stores with these products daily. Its use of private labeling minimizes the customer’s loyalty to a given supplier, which allows Trader Joe’s to solicit competitive bids from and switch between its suppliers to keep costs consistently low. Suppliers benefit from the company’s reliable payment terms, transparent procurement process, and private business terms, which allows major brands to avoid cannibalization of its higher-price version of the same products.[5]

 

Simplified Inventory: Trader Joe’s carries a much more limited number of SKUs at smaller stores, which allows for both more efficient inventory management process and more simplified choices for consumers. The company carries less than 2,000 SKUs, compared to its competitors’ 30,000 SKUs.[6] Its smaller stores offer a mom-and-pop store environment, while also reducing the total fixed cost of stores compared to their competitors. In addition, the company uses just-in-time technology to manage precise deliveries at these small, low-inventory stores.

 

Committed Workforce: From the beginning, Trader Joe’s sought to find and retain exceptional team members. It has a low headcount, but pays its staff at far more competitive rates than industry standard ($13/hr entry level, and over $100,ooo/yr for supervisors). It fosters a collaborative work environment in which managers sweep floors, stock shelves, and work the registers as the need arises. It invests in customized training and development for staff, and holds its team to high performance standards. The investment seems to be paying off – Workforce.com suggests that Trader Joe’s is “known for treating employees with a measure of respect and dignity that is virtually unequaled in the supermarket industry,” which in turn has led to high employee engagement and low turnover rates. [10]

 

So what? Trader Joe’s thoughtful execution of its operating model has translated into significant profits over the years. In 2010, the chain sold $1,750 per square foot, which was more than double the sales of Whole Foods. [7] In 2014, its revenue was estimated at $9.38 billion, with net income of $578 million, as compared to revenue of $12.9 billion and net income of $551 million for Whole Foods.[8][9]

 

 

Sources:

[1] http://fortune.com/2015/12/08/trader-joes-milanos/

[2] http://www.clarkhoward.com/trader-joes-sells-brand-names-under-private-label-

[3] http://groundswell.org/the-truth-behind-trader-joes-what-you-may-not-know-about-tjs-brand/

[4] http://www.popsugar.com/smart-living/Why-Trader-Joe-So-Cheap-34885089

[5] http://ocw.mit.edu/courses/sloan-school-of-management/15-768-management-of-services-concepts-design-and-delivery-fall-2010/projects/MIT15_768F10_paper05.pdf

[6] http://ocw.mit.edu/courses/sloan-school-of-management/15-768-management-of-services-concepts-design-and-delivery-fall-2010/projects/MIT15_768F10_paper05.pdf

[7] http://www.wsj.com/articles/SB10001424127887324000704578386652879032748

[8] https://en.wikipedia.org/wiki/Trader_Joe%27s

[9] https://en.wikipedia.org/wiki/Whole_Foods_Market

[10] http://www.workforce.com/articles/fostering-a-loyal-workforce-at-trader-joe-s

6 thoughts on “Trader Joe’s: Groceries for the “Overeducated and Underpaid”

  1. Good stuff, now I know better why experience a great grocery purchasing experience at TJ’s, if there ever were one.

    Anecdotal life experience affirms Trader Joe’s dedication to quality and competitive pricing. While Whole Foods may not be the best benchmark for any other everyday person grocery food chain due to sky-high price tags, I wonder how Trader Joe’s compares to low-cost outfits such as Wal-Mart.

    I love the low-inventory and private-label offerings, which allow for high quality foods, in line with my experience. Interactions with employees has been a humanizing experience.

  2. It is fascinating that Trader Joe’s is offering higher quality and higher salaries while positioning itself as lower cost by optimizing inventory and supply chain. In general retail itself is a competitive industry, and this is a tight rope business model which requires constant real time monitoring of profitability and quick tactical execution to retain relevance , profitability and competitive edge. A very insightful article, thank you.

  3. Thanks for the great read – big fan of TJs. Their financials definitely exemplify a well run business but what I wonder is how their vendors view them as a customer based on what I assume is a lower margin sale versus selling to a retailer like Whole Foods who can pass through a higher price to the end user. Maybe because they have such low SKU count, their volume / turnover is higher so they make up for it that way.

  4. Very cool post! I had no idea they were so close to Whole Foods in revenue and more profitable. What a nice story with a really strong operational alignment.

  5. Who is this mysterious M?!?! Love TJs, nice post. They have in essence created a “fancy” private label that consumers love which was genius. To Raj’s point on the vendors – unlike Whole Foods who is buying from large branded companies, TJ’s is sourcing from contract manufacturers who already expect lower margins since most of what they produce is private label. The Annie’s example given is a bit unique, as even Annie’s does not produce the product – they buy from a contract manufacturer and are, in essence, a marketing company. Annie’s doesn’t own production facilities! So a TJ’s buying mac from the same supplier as Annie’s is really just viewed as incremental business; so long as it is profitable the manufacturer doesn’t really care that it is lower margin than the product produced for Annie’s so long as they have capacity. That said, Whole Foods and other retailers are growing their private label offerings and driving price points down – long term, as the consumer continues adopt private label I wonder if TJ’s will struggle to compete against the traditional food retail players as their mix of products/price starts to look like TJ’s.

  6. Awesome read! I would have never guessed that Trader Joe was more profitable than Whole Foods, or that it was founded way back in 1960. I really thought that the chain popped up over night a few years ago.

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