Know Thy Customer: The secret of Trader Joes success
Conventional wisdom says that the grocery business is one of the tiny profit margins, dominated by huge stores, patronized by notoriously disloyal customers wholl go wherever discount coupons take them. Its a tough, tough business.
Monrovia, Californiabased trader Joes confounds all these truisms… and boasts some of the highest profit margins in the industry. It’s secret? Focus on a very specific customer niche, understand those customers extremely well, and create products and a company personality that clearly appeals to that particular customer base.
the origin of trader Joes is remarkably humble. It began as a small chain of convenience stores in Southern California in the late 1950s named pronto Markets. Rexall drug launched pronto in 1958 when convenience stores were just gaining a foothold in the American retail landscape. When the 7-eleven chain entered the California market, Rexall decided to leave the field rather than compete. the relatively young (the early 30s) head of the pronto division, Joe Coulombe, recognized an entrepreneurial opportunity. With bank financing, he arranged a buyout.
So, Coulombe now owned a small chain of stores, but he faced the same dilemma that stymied his former bosses at Rexallhow to compete with 7-eleven. he realized that he couldnt. Not directly. hed have to find a different way to succeed.
Soon after taking ownership, in 1967, Coulombe changed the name of one store to trader Joes (perhaps because he had recently returned from an extended trip to the Caribbean) and began experimenting.
Coulombe himself was a well-educated, avid reader. From his reading and research, he learned that a higher percentage of Americans attended- ing college, and they were becoming more sophisticated in their food choices. Moreover, increasingly affordable jet travel was creating a segment of Americans who came home from international travel with more venturesome tastes.
From the beginning, Coulombe knew exactly the type of customer he was trying to reach. I wanted to appeal to the well-educated and people who were traveling more, he explained in a 1989 issue of Forbes, like teachers, engineers, and public administrators. Nobody was taking care of them.1
Coulombe recognized that merely because his potential customers were well-educated, they werent necessarily swimming in cash. that meant offering quality, interesting food at low prices. One of his early decisions was to search out unique, high-quality, often-international food products; negotiate hard with suppliers directly; and put the stores name on the products. By eliminating intermediaries and big brands, he cut
1. Brie, but no Budweiser, by ellen paris, oct. 2, 1989. Forbes.
challenge
Find a way to differentiate when competition is stiff, profits are small, and cash is scarce
solution
Develop a sharp focus on a clearly defined target market
most of the costs out of the distribution chain, and passed those savings on to customers.
Coulombe also realized that these customers bought liquor a highly profitable business. at first, trader Joes offered virtually every California wine made. In the late 1960s and early 1970s, this wasnt difficult: Napa Valley hadnt yet permeated the consciousness of the nations wine drinkers, and California wine was considered second-rate. Indeed, many mocked trader Joes for carrying such a low-rent product. (It still does. the companys inexpensive wine, which debuted in 2002 at $1.99 a bottle and quickly came to be known affectionately as Two Buck Chuck, is highly popular, and mocked, offering.)
trader Joes also recognized that its target market, though not all health food nuts, was showing a growing interest in health foods. the company has never touted itself as an organic or natural food store, yet it was the first grocery store chain to stock large selections of these products.
Operationally, Coulombe decided to limit his customers choices. Go into a Safeway, Kroger, or any large supermarket, and youll find at least a dozen types of ketchup. trader Joes offers just one. the idea, of course, is that trader Joes offers the best ketchup. to give you an idea of how radical a strategy this is, the average grocery store carried 42,214 different products in 2014, according to the Food Marketing Institute. trader Joes has about 4,000, and 80 percent of those items carry a trader Joes private label.
With fewer products, trader Joes could operate much smaller stores. the company knew customers preferred small stores they could enter and leave quickly. the average supermarket in 2014 was a gargantuan 46,000 square feet. a trader Joes is about 12,000 square feet. By deliberately keeping stores small, trader Joes has retained its appeal as a cozy, unique store, and not some big impersonal superstore. all of thisplus its friendly and helpful employees, garbed in loud Hawaiian shirtsappeals to the self-image of a well-educated professional, eschewing a more common supermarket.
privately held Trader Joes (it was bought by the German food retail giant Albrecht family in 1979) is now the grocery industrys poster child. revenues were estimated at approximately $8 billion per year in 2011. and, as of that year, the company was estimated to rake in more than $1,750 in merchandise sales per square foot, more than double the amount Whole Foods achieves, despite its targeting essentially the same niche market. Its little wonder that trader Joes is one of the hottest retailers in the United States.
Most important, trader Joes keeps a close eye on its target customer base. Before opening a store, it carefully monitors demographics in a market by salary, education, and even such indicators as subscriptions to gourmet food and health magazines.
Communities and consumers aggressively lobby the chain to open stores in their areas. a trader Joe does not only bring good jobs, its presence in your community also serves as an affirmation that you and your neighbors are worldly and smart. after all, thats exactly the type of customer trader Joe targets.
questions
1. InwhatotherwayscouldJoe Coulombe has changed his convenience stores to be able to survive when 7-eleven entered the market?
2. Whatothermarketsegments could have beenor could be nowa good customer base for trader Joes?
3. astraderJoeskeepsexpanding, can it continue to be perceived as a store aimed at a narrow market segment, especially one that considers itself special?
4. Whatcanlargesupermarketsdo to grab a piece of the trader Joes market