September 20, 2005

Excerpts: Trader Joe's Adventure - Part III

By: 800-CEO-READ @ 1:41 PM – Filed under: Management & Workplace Culture


Since being launched by Joe Coulombe nearly four decades ago, Trader Joe's has pretty much defied standard definitions of what a retailer should be and how it should act. By making up its own rules, the company has clearly differentiated itself from the rest of the retail pack. It is nowhere near being a supermarket based on accepted definitions of size and selection. And what's on the shelves of this highly successful niche retailer can hardly be referred to as mere commodities in any sense of the word--unless raspberry salsa, salmon patties, and natural blueberry waffles are your idea of commodities.

Differentiation within the supermarket industry is something everyone talks about, yet few have achieved it. Doing something differently than the competition is the key to prospering in any business, because it creates a unique identity that attracts consumers and keeps them coming back. It's particularly important in the food business, where all stores look alike and carry pretty much the same items. As a result, customer loyalty is virtually obsolete, and patrons instead look around primarily for the best price.

How can retailers differentiate themselves in such a crowded arena? By creating a reason for shoppers to come to the store! Target has done it with glitzy ads and the "cheap chic" of designer apparel and home fashions. Wal-Mart accomplished it with stores that carry everything--including the kitchen sink--and offer the perception of having the lowest prices around. Krispy Kreme did it with a unique product that became a cult classic but then made the mistake of offering it in every supermarket, convenience store, and railroad station. Kmart didn't do anything unique and slipped into bankruptcy. Despite a recent financial resurgence, the chain is still doing little to create its own footprint in the marketplace. By examining the Trader Joe's business model, we can identify a number of strategies that can be highly effective when it comes to standing out in the retail industry.
  • Offer reasonable prices on a line of distinctive products that can't be purchased anywhere else, thereby creating a bond with customers.
  • Have more products that are ready-to-make rather than ready-to-eat to attract those who want to be involved with their food.
  • Take a hard look at existing products and don't be afraid to drop those that customers don't need. (They don't need 20 varieties of the same toothpaste or 10 sizes of the same laundry detergent.)
  • Hire, train, and retain people who enjoy interacting with customers and are capable of suggestive selling.
  • Develop relationships with suppliers based on the research and development of new products not on promotional allowances.
  • Know your customers. Find out about their lifestyles and how you fit in--not the other way around. Ask them what they like and don't like and how you can make things better.
  • Build stores of a manageable size with a specialty focus.
  • Pursue innovation. Don't just copy what the competition is doing.

How does Trader Joe';s define itself? A former vice president of operations for the chain put it this way: "It's a mix of supermarket, grocery store, and international gourmet shop with wholesale club pricing." Industry analysts and various other retail experts generally classify Trader Joe's as a specialty retailer or niche marketer. But which niche? Basically, the chain's simple but brilliant marketing strategy is to take a little from each concept and offer great products at fantastic prices. There really are no complex marketing strategies--just good solid execution based on giving consumers something different.

Trader Joe's is simply different from the rest of the food retailing herd, and it stands out in an industry that has long survived on conformity in everything from store design to product selection. By contrast, Trader Joe's is a convenience store with an attitude that matches its outspoken, unique customer base--a group that runs from hippie to yuppie. Over the years, it has made gourmet foods available to a large but not necessarily upscale audience and single-handedly sent the California wine industry into a tailspin.

The stores may be a bit bigger than in the beginning, but they still remain small by most standards, with the average location running 6,000 to 12,000 square feet. That's one-sixth the size of the average supermarket. Overall selection is narrow, and 80 to 85 percent of the store's 2,000 items consist of Trader Joe's various private labels. (The typical supermarket, by comparison, carries about 25,000 items.) The stores are often erected in vacant spots within old strip centers where the rent's cheap and the amenities are few, making them seem better suited to dollar or closeout stores than a purveyor of gourmet foods.

By being different, Trader Joe's has built itself into a business with estimated annual sales of $2.6 billion, or $1,300 per square foot, which is about twice the supermarket industry average.

The past decade has been an active one for Trader Joe's, with a tenfold growth in profits and a fivefold increase in the number of stores. This growth was a big change from prior decades, when store growth was slower and the chain avoided the over-expansion that has plagued the rest of the supermarket industry. This is perhaps one reason Trader Joe's has been able to fly under the retail radar, more or less coexisting peacefully with larger, mainstream supermarket chains.

On another front, a virtually unseen threat to the supermar- ket industry is the slow and steady expansion of Trader Joe's parent company, Aldi, which intends to open as many as 40 stores annually in the United States over the next seven to ten years. This move could help to finance a more aggressive expansion plan by its gem of a subsidiary, Trader Joe's. And one thing's for sure: Aldi has shown it is definitely a force to be reckoned with.
This is excerpted from Trader Joe's Adventure: Turning A Unique Approach to Business Into A Retail and Cultural Phenomenon by Len Lewis