The Trader Joe's Business
True differentiating and winning
One of the very first retail stores I visited when I came to the US about a year back, this grocery shop immediately gave some completely unique vibes, with compact stores, Hawaiian shirts, almost classic yet subtle decorations, and shelves filled with unique labels that you won’t find elsewhere.
Today, I’m looking into the cult grocery retailer, Trader Joe’s.
Trader Joe’s doesn't do a lot of other grocery stores do — no loyalty program, no digital platform, and very little advertising, and yet, it has always been one of the very popular brands and top-ranked grocery outlets.
The Exceptional Numbers
Looking at the numbers, there are a total of 564 stores across 43 US states, and have an annual sales revenue of about $13.3B. Compared to the likes of Walmart (4,630 stores) and Target (1,948 stores), TJ’s has a much smaller footprint. Zoom into each of those stores, Trader Joe’s stores are also much smaller in size (average size of 10,000 sqft.) as compared to Walmart (150,000 sqft.) and Target (125,000 sqft.) locations.
Smaller stores mean less number of products on shelves — less variety (or low number of SKUs). SKUs mean stock-keeping units (think unique items). Trader Joe’s has about 4,000 SKUs, which is several times lower than any other grocery outlet. However, the exceptional thing about this is that TJs are so well-located in densely populated areas that their sales per square foot is $2,100 (about 4x of Walmart and Target).
The Model
Joe Coulombe, the founder of Trader Joe’s, worked on unique principles that are very different from the rest of the industry. One of the founding values he had was to pay people well, which during the 1950s (when TJ’s was known as Pronto Markets) meant, an employee earns the median income in the state of California. This value/policy lives even today and some TJ’s employees can get an hourly wage of more than $25, which is much above the minimum wage pay.
Referring to this policy in his memoir, Coulombe wrote, “This is the most important single business decision I ever made“. According to Coulombe, “turnover is the most expensive form of labor expense“ because there is a lot of churn in retail workers and there is an extraneous amount of wasted time and money in hiring and training new employees.
To maintain higher wages, Coulombe had to be strategic and different from the industry in how he ran his business and what he brought to the market. In the 1960s, there was a new education wave where of all the people qualified to go to college, 60% actually were. Secondly, the Boeing 747 was to be launched in 1970, which was going to reduce the cost of travel and a sign of increased global connectedness in the future.
Being the visionary Coulombe was, he rode this wave to focus on the “over-educated and underpaid“consumers who were newly educated shoppers, curious about products from around the world.
Product Knowledge
Rather than following the general supermarket way of stocking shelves with products from all kinds of manufacturers, Trader Joe’s focused on a set of high-quality items that people will desire but not find anywhere else.
Trader Joe’s is probably the only grocery retailer who have such deep knowledge of its product line. Everything you see in these stores has a high consumption rate and can be maintained easily.
This is why you would see so little vegetables and fruits but quite a bit of alcohol. In fact, Trader Joe’s became so good at managing alcohol, that they invented the “Two Buck Chuck” — a profitable $2 wine only found at TJ’s.
But a nitpicking of products also means customers can not depend on this grocery location as a one-shop stop. But that was never the point. It is about giving new people a chance to explore delicacies from around the world.
Customer Trust
While a lot of supermarkets provide the choice from a multitude of options, they leave it to the customer to make a purchase based on quality, brand preference, promotions and discounts, public reviews, etc.
In contrast, all you need when shopping at Trader Joe’s is your preference for type and taste. Customers have this accepted trust that anything at Trader Joe’s is almost hand-picked by a set of experts to be on the shelves.
Most products are branded with Trader Joe’s, which reduces the paradox of choice problem of choosing from too many options (think not able to choose anything new to watch because there’s so much content on Netflix).
There are also no weekly, monthly, or seasonal promotions, but rather low prices throughout.
Stores Experience
To make the strategy work where you can provide selective high-quality items at cheaper prices while paying employees well, Trader Joe’s can not be everywhere. Stores are optimally placed in locations where people want to spend on nice things but are also frugal.
This is why you would find a TJ’s outlet close to where college students and seniors (who want high-quality things cheap) live rather than in areas populated with new families (who want a one-stop shopping place). This ensures the footfall comes from the right customers who bring good profit and have the best experience.
Talking about the experience, we can not - not address why there is no Trader Joe’s online platform. Well, according to Trader Joe's FAQ, "After considering the options, we're still just big ‘ole fans of the neighborhood grocery store where we can say hello when you're looking around wondering - ‘what's for dinner?’”
Trader Joe’s is not the best place to shop for all things and is not suitable for a lot of people. However, it is a successful business and there are definitely several valuable takeaways from Joe’s decisions.
This is a unique brand that has developed on the core value of “paying people well“, a thorough study of the grocery industry, and embracing product knowledge. But most importantly, we see a cult around this brand because of the extreme alignment with the right customer.
Hope you liked what you read! If you enjoyed this letter, share it with your friends ✌️