Group D Trader Joe Case Analysis

BUSMHR 2400 24 October 2018

How do firms in the supermarket industry make money?

The most common method that supermarkets use to make money is buying goods from
suppliers and selling goods at a higher price. Due to the competitive nature of the industry,
supermarkets rely on making profit on thin margins on large amounts of customers.
Supermarkets strategize on how they will attract large masses of customers to the store so they
can achieve economies of scale. Supermarkets attract people to their stores by using sales
promotions and being a one-stop shop for all grocery needs. The second method that
supermarkets use to make money is by selling preferred shelf space in the store to suppliers.
Suppliers will pay a premium to make sure their product is at eye level, at a prime location in the
store. Supermarkets can also exploit these psychological and subconscious factors to increase the
chances of customers of buying more goods. This fact explains why most supermarkets place
routinely purchased goods like dairy products in the back so that customers have to walk pass
and see other goods on sale. This inconvenience to the customer is worth the extra profit that the
supermarket will make from customers picking up one or two more items that they did not intend
to buy.
What are the key sources of Trader Joe’s competitive advantage?
Key sources that Trader Joe’s uses to gain competitive advantage are numerous. To
begin, TJ’s unique target consumer market consisted of higher educated people who, “were
health conscious, enjoyed travel, and liked trying new things”(Ager/Roberto,6). Trader Joe’s
founder Joe Coloumbe knew that sophisticated people making not enough money needed a place
to buy what they liked and supplied the need with Trader Joe’s. Private labeling of their products
attracted this target market, as well as the constant rotation of new products (10-15 new products
a week along with seasonal products) and small number of stock keeping units (SKU’s). With
new items arriving on shelves with limited supply makes the products a scarcity and consumers
try to purchase them while they last. Pricing of products is much better compared to that of their
closest rivals, for example can buy a Trader Joe’s bottle of wine for only $2.99, and it is
considered to be “cheap chic”(Ager/Roberto,3). One big resource that Trader Joe’s possesses that
gives them a competitive advantage is their relationships with suppliers. Trader Joe’s being a
privately owned company is able to keep purchases from suppliers in secret, which is usually for
the best because they are receiving products from large brand names for a low-cost versus what
that brand sold theirs for (i.e. Pepsi snacks produced Trader Joe’s pita chips). In addition, Trader
Joe’s takes advantage of the small store space their locations make up; generating the best sales
per square footage ratio for any grocery store or supermarket (including Walmart, Kroger,
Target, etc.). Customer service in store is also very impressive and adds to Trader Joe’s
advantage, mostly because of how well Trader Joe’s treats their employees, paying more than
fair wages and providing very good benefits.
What are the threats to this advantage?
Trader Joe’s key sources allow it to maintain a competitive advantage over a target
market of sophisticated/higher educated individuals. However, Trader Joe’s lack of marketing
and convenience to its customers presents a threat to their advantage over this target market.
Supermarket giants such as Walmart, Kroger, and Target already have a heavy marketing
presence through social media platforms and commercials. Even smaller, more specialized
grocery stores such as Whole Foods have a much more developed marketing platform than
Trader Joe’s. Trader Joe’s jeopardizes gaining and retaining customers by not exposing more
individuals to their business model through social media and commercials. While one can “find a
great deal of content generated by fans of the company”, Nicole Spector of Direct Marketing
claims, “‘Marketing experts concur that not having an authoritative voice in social media is a
weakness’”(Ager/Roberto,7&8).
Walmart, Kroger, and Target also capitalize on introducing stores to areas with a low
concentration of current supermarkets and grocery stores. One of the most successful strategic
moves made recently by Walmart was their introduction of “Neighborhood Markets”, or “‘a bit
of a hybrid between a food, pharmacy, and convenience store”(Ager/Roberto,1). These smaller
marketplaces owned by Walmart and Target present a threat to Trader Joe’s as they are often
designed to be overly simplistic. They only carry name brand products, advertise heavily, operate
efficiently, and maintain the low space concept also used by Trader Joe’s. Trader Joe’s is also
infamous for its crowded parking lots, confusing grocery store aisles, and lack of technology.
These inconveniences may not cater well to the ever increasingly impatient and technologically
savvy generations.
 Lastly, Trader Joe’s may experience a threat to their market hold due to their lack of
convenience. Walmart, Target, and Kroger’s online order pickups, Amazon’s household grocery
delivery service, and in general, supermarket layout and size, all exist to provide efficiency to
their customers. However the “quirky, cramped layout of [Trader Joe’s]” often leaves its
“Checkout lines...quite long...and parking lots….quite crowded”(Ager/Roberto,5). Once again
the advancing importance of productivity and time scarcity in recent generations may present a
problem to Trader Joe’s in terms of maintaining customers. Amazon’s household grocery service
may present an even greater threat to Trader Joe’s, and not only because of the convenience it
provides. Trader Joe’s maintains its customer base due to the private label items it provides in its
stores. However, Amazon provides a wide selection of premium, non-perishable grocery
products through its delivery service. This may present a threat to the individuals who currently
buy these goods from Trader Joe’s.
How would you modify Trader Joe’s strategy in the future?
Trader Joe’s does not currently have any social media presence whatsoever. Their online
presence is lackluster in providing online viewers with even fundamental information regarding
what their store encompasses and why Trader Joe’s is so unique compared to the big
supermarket brands. Trader Joe’s target market is primarily “intelligent, educated, inquisitive
individuals” which are comprised of mainly recent college graduates and well educated members
of society. Since these people on average are more likely to be involved with technology, social
media, and online interactions on a daily basis, it is crucial for Trader Joe’s to personally connect
with these potential customers by creating social media platforms such as Instagram, Twitter,
and Facebook for many benefits at a minimal cost. Trader Joe’s should also improve their
website to be updated seasonally to include new seasonal products to inform the massive amount
of people of the new and exciting local products they have in store. These new strategies will
attract many customers that fit the target market of Trader Joe’s. Because of the major social
media and online presence in today's society, word of mouth marketing is much less effective
than strategizing social media platforms to not only advertise products, but also possible meals
with their unique products and investing in a more in depth website to advertise to be able to be
discovered around the world.
How do the results reflect the distinct strategies pursued by these firms?
Numerous strategies can be employed in the supermarket industry to capitalize on
different sections of the market. Firms, such as Walmart, focus on having everything that a
customer would need in stock and on shelves. This leads to increased sales but requires much
more floor space. This is illustrated in Exhibit 1 where Walmart has a 0.607 ratio of sales in
billions to square feet of selling space in millions. This is lower than most other stores shown in
the table.
Kroger, in a similar way to Walmart, focuses on a high volume of sales, by having
everything that a customer needs from a grocery standpoint, compared to Walmart’s complete
“one-stop-shop” mentality. They have a high amount of revenue compared to their counterparts
but also have a significant increase in expenses, over $17 billion in 2013 as seen in Exhibit 2.
Similar to Walmart, Kroger has a low ratio of sales in billions to square feet of selling space in
millions, at 0.5875. This is so low because many of the options that Kroger offers aren’t bought
by the typical customer.
On the other side of the spectrum, Whole Foods looks into having the most specialized
foods for a specific market segment. Unlike Walmart and Kroger who target the mass
population, Whole Foods focuses on bringing in expensive specialty foods and foods with unique
qualities such as being organic, or tending to specific allergies. Since the store is smaller and
offers less options the sales to selling space ratio is significantly higher at 1.26. Since this food is
specialized, they sell it not just for a higher price but also for a larger margin, making a 35%
margin, compared to Kroger’s 21% margin. This larger margin percentage allows Whole Foods
to be at 1/6th of Kroger’s gross profit while only making 1/9th of the revenue.
What do the results say about how firms in the supermarket industry can deliver financial
returns?
In a general sense all brands in the supermarket industry, Walmart, Target, Trader Joe’s,
etc. deliver financial returns in the same way, by selling products they buy from suppliers at a
higher price than purchased, and consumers are willing to pay more because of the convenience.
What differentiates say a Kroger from a Trader Joe’s is the strategy they take to obtain these
financial returns. Companies can specialize their supermarkets by differentiating themselves
either in association to a target market, or by creating a unique aspect of the store that attracts
customers to shop at their stores. By finding a few qualities of the brand that makes it unique
from the rest of the industry allows for profit opportunity, even if 75%-85% of the store is
similar to a competitor, there are going to be consumer markets that prefer that differentiation
from other supermarkets, and this is where financial returns are made and delivered.
 Works Cited
1. Ager, David L, and Michael A Roberto . ​Trader Joe's.​ Harvard Business School, 2014,
pp. 1–17, ​Trader Joe's​.