Know Thy Customer: The secret of Trader Joe’s success
Conventional wisdom says that the grocery business is one of the tiny profit margins, dominated by huge stores, patronized by notoriously disloyal customers who’ll go wherever discount coupons take them. It’s a tough, tough business.
Monrovia, California–based trader Joe’s 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 Joe’s 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 Rexall—how to compete with 7-eleven. he realized that he couldn’t. Not directly. he’d have to find a different way to succeed.
Soon after taking ownership, in 1967, Coulombe changed the name of one store to “trader Joe’s” (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 weren’t 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 store’s 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 Joe’s offered virtually every California wine made. In the late 1960s and early 1970s, this wasn’t difficult: Napa Valley hadn’t yet permeated the consciousness of the nation’s wine drinkers, and California wine was considered second-rate. Indeed, many mocked trader Joe’s for carrying such a low-rent product. (It still does. the company’s 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 Joe’s 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 you’ll find at least a dozen types of ketchup. trader Joe’s offers just one. the idea, of course, is that trader Joe’s 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 Joe’s has about 4,000, and 80 percent of those items carry a trader Joe’s private label.
With fewer products, trader Joe’s 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 Joe’s is about 12,000 square feet. By deliberately keeping stores small, trader Joe’s has retained its appeal as a cozy, unique store, and not some big impersonal superstore. all of this—plus its friendly and helpful employees, garbed in loud Hawaiian shirts—appeals to the self-image of a well-educated professional, eschewing a more “common” supermarket.
privately held Trader Joe’s (it was bought by the German food retail giant Albrecht family in 1979) is now the grocery industry’s 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. It’s little wonder that trader Joe’s is one of the hottest retailers in the United States.
Most important, trader Joe’s 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, that’s exactly the type of customer trader Joe targets.
questions
1. In what other ways could Joe Coulombe has changed his convenience stores to be able to survive when 7-eleven entered the market?
2. What other market segments could have been—or could be now—a good customer base for trader Joe’s?
3.As trader Joe’s keeps expanding, can it continue to be perceived as a store aimed at a narrow market segment, especially one that considers itself special?
4. What can large supermarkets do to grab a piece of the trader Joe’s market
