Company Case Trader Joe’s: Cheap Gourmet—Putting a Special Twist on the Price-Value Equation Apple Store openings aren’t the only place where long lines form these days. Early on a summer morning, there’s a crowd gathered, eagerly awaiting the opening of a Trader Joe’s outpost. The waiting shoppers discuss all things Trader Joe’s, including their favorite items. One customer suggests the chain will be good for the neighborhood even though there are already plenty of grocery stores around, including various upscale food boutiques. This is a scene that plays out every time the Southern California–based Trader Joe’s opens a new store—something that only happens a handful of times each year. Within moments of a new opening, a deluge of customers makes it almost impossible to navigate the aisles. They line up 10 deep at checkouts with carts full of Trader Joe’s exclusive $2.99 Charles Shaw wine—aka “Two-Buck Chuck”—and an assortment of other exclusive gourmet products at impossibly low prices. Amid hanging plastic lobsters and hand-painted signs, a Hawaiian-shirt-clad manager (the “captain”) and employees (the “crew”) explain to first timers that the prices are not grand opening specials. They are everyday prices. What is it about Trader Joe’s that has consumers everywhere waiting with such anxious anticipation? Trader Joe’s seems to have cracked the customer value code by providing the perfect blend of benefits to prices. High on Benefits Trader Joe’s isn’t really a gourmet food store. Then again, it’s not a discount food store either. It’s actually a bit of both. One of America’s hottest retailers, Trader Joe’s has put its own special twist on the food price-value equation—call it “cheap gourmet.” It offers gourmet-caliber, one-of-a-kind products at bargain prices, all served up in a festive, vacation-like atmosphere that makes shopping fun. Trader Joe’s isn’t low end, it isn’t high end, and it certainly isn’t mainstream. “Their mission is to be a nationwide chain of neighborhood specialty grocery stores,” said one business professor who does research on the company. However you define it, Trader Joe’s inventive price-value positioning has earned it an almost cult-like following of devoted customers who love what they get from Trader Joe’s for the prices they pay. Trader Joe’s describes itself as an “island paradise” where “value, adventure, and tasty treasures are discovered, every day.” Shoppers bustle and buzz amid cedar-plank-lined walls and fake palm trees as a ship’s bell rings out occasionally at checkout, alerting them to special announcements. Unfailingly helpful and cheery associates in aloha shirts chat with customers about everything from the weather to menu suggestions for dinner parties. Customers don’t just shop at Trader Joe’s; they experience it. Shelves bristle with an eclectic assortment of gourmet quality grocery items. Trader Joe’s stocks only a limited assortment of about 4,000 products (compared with the 45,000 items found in an average supermarket). However, the assortment is uniquely Trader Joe’s, including special concoctions of gourmet packaged foods and sauces, ready-to-eat soups, fresh and frozen entrees, snacks, and desserts—all free of artificial colors, flavors, and preservatives. Trader Joe’s is a gourmet foodie’s delight, featuring everything from organic broccoli slaw, organic strawberry lemonade, creamy Valencia peanut butter, and fair-trade coffees to corn and chile tomato-less salsa and triple-ginger ginger snaps. Trader Joe’s sells various items that are comparable to other stores, like organic vanilla yogurt, almond milk, extra pulp orange juice, smoked gouda cheese, and roasted garlic hummus. But the quirky retailer also maintains pricing power by selling things that are uniquely Trader Joe’s. Try finding Ginger Cats cookies, quinoa and black bean tortilla chips, or mango coconut popcorn at any other store. More than 80 percent of the store’s brands are private-label goods, sold exclusively by Trader Joe’s. If asked, almost any customer can tick off a ready list of Trader Joe’s favorites that they just can’t live without—a list that quickly grows. People go into the store intending to buy a few favorites and quickly fill a cart. “I think consumers look at it and think, ‘I can go and get things that I can’t get elsewhere,’” says one food industry analyst. “They just seem to turn their customers on.” Low on Prices A special store atmosphere, exclusive gourmet products, helpful and attentive associates—this all sounds like a recipe for high prices. Not so at Trader Joe’s. Whereas upscale competitors such as Whole Foods Market charge upscale prices to match their wares (“Whole Foods, Whole Paycheck”), Trader Joe’s amazes customers with its relatively frugal prices. The prices aren’t all that low in absolute terms but they’re a real bargain compared with what you’d pay for the same quality and coolness elsewhere. “At Trader Joe’s, we’re as much about value as we are about great food,” says the company. “So you can afford to be adventurous without breaking the bank.” All that low-price talk along with consumers’ perceptions is valid. A recent report from Deutsche Bank compared prices at Trader Joe’s with those at Whole Foods for a basket of 77 products—a mix of perishable items, private-label products, and non-food items. Trader Joe’s was 21 percent cheaper than Whole Foods and had the lowest price on 78 percent of the items. Even when comparing private-label brands, Trader Joe’s was 15 percent cheaper. What’s more, Trader Joe’s price advantage has been increasing, a point that is particularly telling given that Whole Foods has focused strategically on lowering its prices over the past few years. How does Trader Joe’s keep its gourmet prices so low? By maintaining a sound strategy based on price and adjusting the nonprice elements of the marketing mix accordingly. For starters, Trader Joe’s has lean operations and a near-fanatical focus on saving money. To keep costs down, Trader Joe’s typically locates its stores in low-rent, out-of-the-way locations, such as suburban strip malls. Notorious for small parking lots that are always packed, Trader Joe’s points out that spacious parking lots require more real estate and that costs money. Its small stores with small back rooms and limited product assortment result in reduced facilities and inventory costs. Trader Joe’s saves money by eliminating large produce sections and expensive on-site bakery, butcher, deli, and seafood shops. And for its private-label brands, Trader Joe’s buys directly from suppliers and negotiates hard on price. Finally, the frugal retailer saves money by spending almost nothing on advertising. Also, it offers no coupons, discount cards, or special promotions of any kind. Trader Joe’s unique combination of quirky products and low prices produces so much word-of-mouth promotion that the company doesn’t really need to advertise. The closest thing to an official promotion is the company’s website or The Fearless Flyer, a newsletter mailed out monthly to people who opt in. In the absence of traditional advertising, Trader Joe’s most potent promotional weapon is its army of faithful followers. If you doubt the importance and impact of fanatical Trader Joe’s fans, just check out the numerous fan sites (such as traderjoesfan.com, whatsgoodattraderjoes.com, clubtraderjoes.com, livingtraderjoes.com, and cooktj.com) where the faithful unite to discuss new products and stores, trade recipes, and swap their favorite Trader Joe’s stories. Something Extra Although the simple calculation of benefits to prices equates to strong value, there’s something bigger that plays in Trader Joe’s favor. Beyond all the wonderful and unique products, friendly staff, quirky store design, the combination of all these things produces synergy. It adds up to an atmosphere and kind of trust that eludes most companies. One industry observer who is not a fan of grocery shopping sums it up this way: Walking into a Trader Joe’s, my demeanor is noticeably different than when I’m shopping anywhere else. Somehow I don’t mind going there. At times—and it’s still hard for me to believe I’d say this about shopping—I actually look forward to it. Trader Joe’s does something pleasant for my brain, as it does for millions of others. There’s more transparency in my dealings with TJ’s than most other places. Authenticity is something you can feel—it’s crucial to the buzz. Trader Joe’s proves that even when you get the other elements of the experience right, people still matter most. Finding the right price-value formula has made Trader Joe’s one of the nation’s fastest-growing and most popular food stores. Its 482 stores in 45 states now reap annual sales of at least $13 billion by one analyst’s estimate (the private company is tight-lipped about its financial results), an amount that has quadrupled in the past decade. Trader Joe’s stores pull in an amazing $1,750 per square foot, more than twice the supermarket industry average. In Consumer Reports’s “Best Supermarket Chain” review, Trader Joe’s has occupied one of the top two spots every year for the past five years. It’s all about value and price—what you get for what you pay. Just ask Trader Joe’s regular Chrissi Wright, found early one morning browsing her local Trader Joe’s in Bend, Oregon. Chrissi expects she’ll leave Trader Joe’s with eight bottles of the popular Charles Shaw wine priced at $2.99 each tucked under her arms. “I love Trader Joe’s because they let me eat like a yuppie without taking all my money,” says Wright. “Their products are gourmet, often environmentally conscientious and beautiful . . . and, of course, there’s Two-Buck Chuck—possibly the greatest innovation of our time.” Questions for Discussion 10-18 Under the concept of customer value-based pricing, explain Trader Joe’s success. 10-19 Does Trader Joe’s employ good-value pricing or value-added pricing? Explain. 10-20 Does Trader Joe’s pricing strategy truly differentiate it from the competition? 10-21 Is Trader Joe’s pricing strategy sustainable? Explain. 10-22 What changes—if any—would you recommend that Trader Joe’s make? Sources: Kathleen Elkins, “I Compared Prices of Trader Joe’s Items to Those of Whole Foods 265 Everyday Value—Here’s What I Found,” Business Insider, February 29, 2016, www.businessinsider.com/i-compared-the-price-of-whole-foods-365-items-to-trader-joes-heres-what-i-found-2016-2; Craig Giammona, “Whole Foods Is Ready to Convince You That It Can Do Cheaper,” Bloomberg, May 18, 2016, www.bloomberg.com/news/articles/2016-05-18/whole-foods-seeks-to-shed-whole-paycheck-rap-with-new-format; Kathryn Vasel, “Who’s Got Better Prices: Whole Foods or Trader Joe’s?” CNNMoney, March 31, 2016, www.money.cnn.com/2016/03/31/pf/trader-joes-whole-foods-prices/; David DiSalvo, “What Trader Joe’s Knows about Making Your Brain Happy,” Forbes, February 19, 2015, www.forbes.com/sites/daviddisalvo/2015/02/19/what-trader-joes-knows-about-making-your-brain-happy/#27f0f6f41539; Beth Kowitt, “Inside the Secret World of Trader Joe’s,” Fortune, August 23, 2010, accessed at www.fortune.com; and “SN’s Top 75 Retailers & Wholesalers 2016,” Supermarket News, www.supermarketnews.com/rankings-research/top-75-retailers-wholesalers and www.
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