Trader Joe’s
Elsevier Food International Vol.8, No.1, February 2005
Len Lewis
Since its inception in the late 1960s by entrepreneur Joe Coulombe, Trader Joe’s brand of speciality retailing has remained something of a retailing anomaly. In the hyper-competitive and supersized world of food retailing in which bigger is better, the Monrovia, California, based chain has continued to operate small stores with a limited selection and in locations which are often inconvenient. By all accounts, they should have fallen victim to competitors a long time ago, even with the backing of its German-based parent company Aldi, which now operates more than 6,000 stores worldwide.
National phenomenon
However, the operating strategies that might have made Trader Joe’s only a footnote in retail history are exactly what makes it so successful against conventional supermarkets. In fact, Trader Joe’s is becoming a national phenomenon, yet still largely dismissed as a competitive threat by other retailers. “We used to take people from traditional supermarket chains through Trader Joe’s and for the most part we got a lot of blank stares,” one consultant remarked. “The stores were pretty ugly, everything was packed in boxes and there were no brands. They couldn’t understand why people went there. They just didn’t get it.”
Consumers do get it. The chain has achieved a cult-like status among loyal customers that include health food fanatics, sugar fiends and bargain hunting gourmets. The typical Trader Joe’s consumer has been alternately described as “overeducated and underpaid” or “college professors who drive Volvos, old ones”. They are the people who lobby local politicians to help them get a store in their neighbourhood. This is a marked difference from Wal-Mart, which many consumer groups are trying to keep out. At the same time, the chain has been very adept at mining new cultural and lifestyle trends and its mix of funky nautical décor and Hawaiian-shirted staff put some fun and adventure back in the grocery shopping experience. Basically, it is a destination for shoppers who are more likely to pack up the family for a vacation in Morocco than Disney World.
Kevin Kelley, a principal in the design and consulting firm of Shook Kelley, put it this way: “You have to understand that Trader Joe’s is an acquired taste. But once people get into it they see it as a weekly hunting trip to find out what’s new. People will go out of their way to find one cracker that only Trader Joe’s sells,” he said.
But behind this laid-back exterior is a sales and marketing powerhouse. With virtually no advertising, Trader Joe’s sales are between US$2.3-US$2.6 billion, according to recent estimates. A more important measure, one which makes the chain the envy of every supermarket executive, is sales per square foot of US$1,100 to US$1,300, more than double the industry average. This gives the average Trader Joe’s store sales of about US$12 million annually, an enviable level for stores that only average about 10,000 square feet. Sales of course vary by store and some are lower than the average. But others, like two stores in the affluent Santa Barbara, California, market are reportedly producing sales of US$300,000 per week. Additionally, profits have increased tenfold over the past decade primarily due to higher profit and unique private label items, which account for 80-85 per cent of the merchandise mix. This includes the now infamous ‘Two-Buck Chuck’, the Charles Shaw wines which gained considerable acclaim at US$2.99 a bottle, as well as more eclectic items like Ahi jerky or raspberry salsa.
Steady expansion
At present, the chain only has about 220 stores across the US. The bulk of them are still in California where the chain got its start. However, it is steadily expanding in the Chicago area, where it would like to open as many as 20 stores, along with selected markets in the Midwest including, Illinois, Michigan, Minnesota, Indiana and Ohio. Expansion is also likely in the 500-mile Boston to Washington, D.C., corridor which, because of its demographics, has been dubbed ‘Trader Joe’s Country’.
Wherever it goes, Trader Joe’s real estate strategy is to take advantage of the fact that there is an estimated 500 million square feet of excess, abandoned or undeveloped retail real estate in the US - particularly small, underdeveloped ‘strip malls’, shopping centres often considered a relic of the 1950s and far too small for conventional supermarket chains. “Trader Joe’s finds a shell at the bottom of the ocean that no one else wants and makes it work,” said Kelley. “Most supermarkets would never think of putting a store in a centre that has another grocery store, deli, or bagel shop. But Trader Joe’s likes them because those stores draw traffic and they know people will still come to them for unique items.” Aldi, whose stores are smaller and located in lower income areas, has a build-to-suit strategy and prefers ground up construction.
The move that most industry observers are monitoring most closely these days is Trader Joe’s intention to open multiple sites in New York City where it is scouting 9,000 to 12,000 square foot sites. Many retailers are taking another look at opportunities in urban markets, areas which account for an estimated US$85 billion in retail spending. The chain already has a number of stores in New York suburbs where it often leases space for as little as US$10-US$15 per square foot. However, retail real estate in the ‘Big Apple’ is now averaging nearly US$60 per square foot, according to figures from NAI Direct, a Hightstown, New Jersey, real estate services firm.
However, this may not be an issue. “Normally, real estate accounts for approximately ten per cent of a company’s operating expenses. Paying extra to get a good location is no big deal if it means you’re going to sell more products,” said Scott Muldavin, president, The Muldavin Company, a California-based real estate investment and development firm.
For the first time, Trader Joe’s may also find itself competing for space with other retailers, for which Manhattan is the newest hot button. Whole Foods, Trader Joe’s closest rival now has two stores in the city, one of them in Chelsea, a trendy neighbourhood that Trader Joe’s is also scouting. And although the profile of the typical urban consumer fits Trader Joe’s, the chain will have to rely solely on a customer base that is within walking distance of the store.
Biting the ‘Big Apple’
Nonetheless, there is no reason to believe that Trader Joe’s eclectic product selection and quirky format will not be as successful in New York City as it has been in Chicago and San Francisco. In fact, the company might be surprised at how much business they might do. “If a typical Trader Joe’s is doing US$12 million a year in sales, a similar 10,000-square-foot store in a busy urban centre like Manhattan could rake twice that amount,” according to one retail industry source. However, he conceded that inner city retailing can be a constant headache due to traffic patterns and loss prevention and security matters that Trader Joe’s does not face at suburban stores.
Despite what might appear to be aggressive expansion, Trader Joe’s growth is still dictated by profitability. Borrowing to finance growth is not done. The company pays vendors in cash and maintains a debt-free balance sheet. This means that expansion is financed by cash flow from existing operations, a very Aldi-like strategy but also the way Trader Joe’s has operated for 45 years. “As long as you don’t have competitive pressure to maintain market share, there’s no reason to accelerate store rollouts or go outside for capital,” said Alex Lintner, senior analyst with The Boston Consulting Group, San Francisco.
Overall, Trader Joe’s is expected to open 10-15 stores per year, compared with about 40 stores annually for the parent company’s US operation. Aldi’s aggressive expansion is likely to help finance growth at Trader Joe’s, according to some industry sources. This may be one of the few points of contact between the two chains. Aldi seems to have maintained a largely hands-off attitude toward Trader Joe’s since acquiring it.
At its current rate of growth, Trader Joe’s could be a 2,000-store chain, or more, over the next decade, thus becoming a truly national chain of neighbourhood stores. “But there’s no wind at their back,” said Ken Harris, a partner in Cannondale Associates. “The only thing that’s pushing them is a following across the country and pent-up consumer demand. But there’s no bottom line need to be national the way there is at a company like Kroger,” he said.
However, one of the major issues in terms of growth is trying to find the right kind of people to staff the stores. Trader Joe’s basic prerequisite is finding people who enjoy interacting with customers and engaging them in conversation to find out what they like and do not like. These are people who also like working in a collaborative environment in which even the store manager helps sweep the floors and stock the shelves. While Trader Joe’s, and Aldi take a somewhat bare-bones approach to the amount of labour needed in store, neither one scrimps when it comes to paying for good people.
Employees are paid an average of US$21 per hour compared with US$17.90 at union operations. Even first-year managers in training have a total compensation package of about US$47,000 including salary, bonus and a company-paid retirement plan which amounts to about 15 per cent of salary. An assistant manager, or first mate in Trader Joe’s vernacular, makes about US$67,000 annually, while the captain or store manager can have a total package valued at US$132,000. Aldi also has a generous management training programme with a starting salary of about US$43,000. The addition of a company-paid car, usually an Audi, brings the total package to about US$62,000.
Copying Trader Joe’s?
However, as Trader Joe’s sales and customer base grows, it may become more of a thorn in the side of conventional stores who may decide it is time to copy the format. This would be an improbable if not impossible task for most chains. For one thing, there are no national brands like Coca-Cola or Tide. Private labels, which give the chain significant brand recognition, account for 80-85 per cent of the 2,000 or so products in Trader Joe’s stores. This compares with about 20 per cent mix of private labels in conventional supermarkets. Store brands, under the Trader Giotto name for Italian items, Trader Ming for Asian and Trader Jose for Mexican fare, are produced for the chain under exclusive agreements. The chain only buys directly from manufacturers through a relatively small 15-20 person buying staff which travels the world developing relationships with thousands of vendors and looking for unique items. This takes an enormous amount of marketing, advertising and supply chain costs out of the system.
The stores do carry regional and local brands as well as speciality items produced exclusively for the chain in the US and overseas. However, it does not accept slotting or promotional fees associated with conventional retailing and would therefore be an impractical model for the typical chain to adopt from sales or profit standpoint. Interestingly, there seems to be little if any crossover in terms of buying between Aldi and Trader Joe’s. The two chains cater to different demographic groups and do not carry the same items. However, at some point in the buying process, sources believe that Trader Joe’s must be taking advantage of Aldi’s considerable global buying power.
“Trader Joe’s was successful without Aldi years ago and now they really don’t need Aldi to make things happen,” said Harris.
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