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10 Secrets to Trader Joe's Success

Secret to Trader Joe's SuccessWho knew that your friendly neighborhood Trader Joe's grocery store, with its eclectic selection of healthy foods and super-friendly staff, is actually part of an $8 billion company? That would put it somewhere around 300 on the Fortune 500 list if it wasn't privately held.

Well, after months of research into the famously secretive chain, Fortune just published a fascinating article that cracks open the Trader Joe's enigma. Besides being a fan of TJ's, I'm always on the lookout for companies that somehow manage to take a boring, black and white picture of an age-old industry and completely redraw it using their own multicolor crayon set.

That's exactly what Trader Joe's has done with the retail grocery store business. Even Whole Foods and its quirky CEO, John Mackey, seem remarkably undifferentiated, by comparison. So, from the Fortune story and my own observations, here's an analysis of this unique company's more or less counterintuitive approach to a mature industry, and insight into how its strategies may apply to other businesses.

  1. Consumers want fewer choices? Contrary to long-standing grocery store dogma, TJ's stores are smaller and the choices are fewer but consumers are happier. On average, TJ's sells less than one tenth the number of SKUs, but achieves twice the revenue per square foot versus Whole Foods. I mean, who needs 40 varieties of peanut butter to choose from, anyway?
  2. Economies of scale: Low prices for high-quality products. Amazingly, TJ's offers high-quality products at rock bottom prices. How does it do that? Scale. Since it carries fewer products, its volumes are higher, giving it bargaining power when negotiating with its coveted suppliers. Everybody wins. It's nothing new in business operations, but it's very new in the grocery business.
  3. The death of branding? Not at Trader Joe's. 80 percent of Trader Joe's stock bears the company's brand. Customers trust the brand, which is one of the ways the company gets away with having fewer choices.
  4. Secrecy. Some think TJ's secretiveness comes from Germany's Albrecht family which owns the chain, but that's not the case. TJ's is secretive because it doesn't want anyone to know who's making its products. It's a competitive advantage. And in many cases, suppliers feel the same way, since they cut TJ's a better deal on the same product than they do other customers.
  5. Take care of employees. Store managers can make in the low six figures while full-time employees start out at about half that; not bad for retail. Plus TJ's contributes 15.4% of employee's salary to tax-deferred retirement accounts. No wonder the employees always seem so happy.
  6. An in-store experience that hails to an earlier, happier time. Every employee knows the whole store and, instead of telling you where an item is, will literally guide you there. They'll offer you a basket or a cart if they think you need one and even tell you what they think of a product you're about to buy.
  7. Don't follow trends, start them. TJ's was offering healthy foods before most consumers even knew what organic meant. They had the largest offering of California wines before anyone - and I mean anyone - thought they were worth a damn. Same goes for microbrewed beers. If you want to see what grocery stores will be selling tomorrow, go to TJ's today.
  8. Know your customer and put your stores where they are. TJ's isn't all things to all people; it knows its customer and it maintains a laser-like focus on predicting and meeting their ever-changing needs. That includes knowing where to locate stores by paying attention to demographics like education and food and cooking magazine subscriptions.
  9. Keep logistics simple. Fewer items means simplified distribution, stocking, everything. And TJ's always seeks to cut out the middleman by buying directly from manufacturers and shipping directly to its distribution centers. It even sells fresh produce by unit instead of weight to simplify the checkout process.
  10. If it isn't broke, don't fix it. Founder Joe Coulombe sold the 43 year-old chain to Theo Albrecht in 1979, but the Albrechts stay completely out of the business, only visiting once a year to check out the family "investment." Trader Joe's has always run itself. Moreover, TJ's is entirely self funded with no debt.
Industry observers wonder if Trader Joe's can maintain its mom and pop image as it continues to expand. The obvious analogy is Starbucks, which sacrificed its specialty coffee image in favor of expansion. While it's natural to think of this in terms of maintaining a balance, I think the bigger issue will be TJ's ability to maintain its value proposition - its differentiation - as existing competitors seek to be more Trader Joe's-like and new competitors enter the market. To me, that's the challenge.

My sort of big, broad takeaway on the TJ's story is this: Even in seemingly mature markets, innovation will always occur because "one thing leads to another." In other words, one thing changes - like the internet, mass customization, or the advent of foodies - and that leaves gaping holes of opportunity for the business leaders of tomorrow to jump through.

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