At one point or another, we have mentioned nearly every major food retailer in the US. One that has thus far escaped mention is Trader Joe’s. According to an article in Fortune, that’s how the company likes it (Inside the secret world of Trader Joe’s, Aug 23). The company is privately held and generally prefers not to talk about itself. I guess that makes writing an article on the firm a little harder than usual. The story that emerges, however, is pretty interesting. It depicts a firm that has tied its operations very closely to its strategy.
For those unfamiliar with Trader Joe’s, here is how Stephen Dubner (the New York Time’s resident Freakeconomist) put it:
[T]he world is divided into three sets of people.
1. Those who have never been to a Trader Joe’s, and perhaps have never heard of it.
2. Those who love Trader Joe’s more than they love their own families.
3. Those who love Trader Joe’s more than they love their own families and are incensed that there isn’t one nearby.
So Trader Joe’s is more than just a grocery store. It is something special that inspires loyalty. What is interesting about that is that as grocery stores go, it is pretty limited. As the article notes, a typical family cannot do all its shopping here even if wanted to. Being a loyal Trader Joe’s shopper means having to go to some other store as well. The question then is how does the firm offer enough value to justify coming in on a regular basis? First, somewhat counterintuitively, it limits its selection:
Trader Joe’s has a deliberately scaled-down strategy: It is opening just five more locations this year. The company selects relatively small stores with a carefully curated selection of items. (Typical grocery stores can carry 50,000 stock-keeping units, or SKUs; Trader Joe’s sells about 4,000 SKUs, and about 80% of the stock bears the Trader Joe’s brand.) The result: Its stores sell an estimated $1,750 in merchandise per square foot, more than double Whole Foods’. The company has no debt and funds all growth from its own coffers.
It then turns that restricted assortment into a virtue:
Take peanut butter. Trader Joe’s sells 10 varieties. That might sound like a lot, but most supermarkets sell about 40 SKUs. For simplicity’s sake, say both a typical supermarket and a Trader Joe’s sell 40 jars a week. Trader Joe’s would sell an average of four of each type, while the supermarket might sell only one. With the greater turnover on a smaller number of items, Trader Joe’s can buy large quantities and secure deep discounts. And it makes the whole business — from stocking shelves to checking out customers — much simpler.
What reinforces the value of TJ’s limited selection is an investment in purchasing. Yes, Trader Joe’s may only have ten varieties of peanut butter, but they have the right ten.
Customers accept that Trader Joe’s has only two kinds of pudding or one kind of polenta because they trust that those few items will be very good. “If they’re going to get behind only one jar of Greek olives, then they’re sure as heck going to make sure it’s the most fabulous jar of Greek olives they can find for the price,” explains one former employee. To ferret out those wow items, Trader Joe’s has four top buyers, called product developers, do some serious globetrotting. A former senior executive told me that Trader Joe’s biggest R&D expense is travel for those product-finding missions. Trade shows that feature the flavor of the moment “are for rookies,” a former buyer said. Trader Joe’s doesn’t pick up on trends — it sets them.
Trader Joe’s then treats its suppliers well and operates an efficient supply chain. It pays its bills on time and doesn’t demand slotting allowances or mess with coupons. It does require that suppliers not disclose their relationship with Trader Joe’s. What the article depicts this as being rather sinister, it seems a natural outgrowth of their overall strategy. People are loyal to Trader Joe’s because they carry the right products at the right price; publicizing that, say, TJ’s private label salsa is the same as some branded salsa or some mainstream supermarket’s private label salsa undercuts the perception of having special offerings.
As for the supply chain, they run a tight ship.
Over the years Trader Joe’s has improved the way it distributes Joe’s-branded goodies to its stores. Management has sought to minimize the number of hands that touch a product; whenever possible, Trader Joe’s purchases directly from the manufacturers, which then ship their wares straight to Trader Joe’s distribution centers. A U.S.-made cheese, for example, is sent to distribution centers nationwide, where it’s sometimes cut and wrapped, taking another cost out of the equation. At a traditional supermarket, that same cheese would probably go through a distributor first, tacking on another cost. Trucks leave the distribution centers daily for the stores. Trader Joe’s small stores don’t have much of a back room, so ordering from the distribution centers has to be precise.
A final bit of operations, TJ aims for low turnover in its stores. This both creates the neighborhood store feel that customers value but also facilitates cross training so every employee is familiar with every department. Further it minimizes costs of recruiting and training. The article reports that they pay their people well. I would guess that they have sales per employee numbers that out do most of the industry.
What’s interesting about this is not anyone particular part. A competitor could come in with relatively small stores with limit selections but that alone won’t replicate Trader Joe’s. There needs to be the investment in purchasing to determine what are the right products to offer. There needs to be the relationship with suppliers that keeps the suppliers’ costs low (e.g., no couponing or slotting fees) so they will play ball on discreetly doing private label. And all of that has to be supported by an efficient logistics system that allows them to have high availability despite little backroom storage as well as a productive in store staff that keeps people moving through during busy times. Importantly, the firm also respects the limits that operations imposes on what they can do. They only open five stores per year and locations are dictated by where their DCs are. That allows them to identify the best locations while integrating stores smoothly and delivering the experience they want in their stores.