Trader Joe's has achieved competitive advantage through differentiation and maintaining relatively low costs. It differentiates itself by offering a unique shopping experience in small stores with curated private label products that change frequently. This strategy attracts customers seeking novelty. Trader Joe's also benefits from strong supplier relationships and minimal marketing, allowing it to pay employees more and reinvest in the customer experience, driving growth through word of mouth. While not the absolute lowest cost, Trader Joe's maintains a perception of lower prices compared to premium competitors like Whole Foods.
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Trader Joe's
Trader Joe's has achieved competitive advantage through differentiation and maintaining relatively low costs. It differentiates itself by offering a unique shopping experience in small stores with curated private label products that change frequently. This strategy attracts customers seeking novelty. Trader Joe's also benefits from strong supplier relationships and minimal marketing, allowing it to pay employees more and reinvest in the customer experience, driving growth through word of mouth. While not the absolute lowest cost, Trader Joe's maintains a perception of lower prices compared to premium competitors like Whole Foods.
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Final Exam Trader Joes Case Study
1. Supermarket Industry Analysis In 2013, the traditional supermarket industry is unattractive because of: a) Existence of powerful substitutes in the form of large discount retailers (Wal-Mart, Target), warehouse clubs (Costco, Sams Club, BJs, and pharmacy chains (CVS, Walgreens) that have increased emphasis on grocery sales. Because increased traffic leads to increased sales of higher margin items in retail stores, there is growing attractiveness for retail stores to enter grocery industry Retail leaders such as Wal-Mart and Target run highly efficient operations. Coupled with a large volume sale philosophy, both are able to take market share from traditional supermarkets through significant price cuts. As such traditional supermarket share has dropped in last year from 67% to 51% with the growth of retailers participating in grocery sales Lack of differentiation across products and brands gives consumers a high degree of bargaining power because they incur little to no switching costs between rival competitors and brands (see below) and because of the growth of substitutes. Customers who want to do all their shopping both retail and grocery supplies either in small volume purchases or in bulk have many options to choose from (Wal-Mart vs Schnucks vs CVS vs Costco) b) Strong competitors across all segments of supermarkets, which can be broken down into traditional, premium, and discount stores, The supermarket industry is traditionally a low profit margin industry and these margins are becoming increasingly smaller as traditional supermarkets face the challenge of price competition from both small discount stores and from strong substitute retail stores such as Walmarts that offer a comparably large inventory of grocery products at low prices Low supplier power contributes to the relative state of competition within the industry as suppliers compete for contracts with large volume buyers such as 436728
Wal-Mart. Traditional supermarkets can expect higher prices from their suppliers. Firms such as Trader Joes that have exclusivity with private labels also makes it difficult for competitors to source from the same suppliers. Again, high bargaining power of customers and relative ease of switching between different grocery stores increases competition as firms seek to adjust prices and offer different products to entice customers c) While the threat of new entrants is low because it is highly difficult for new entrants to compete with strong incumbents, this further highlights the already intense rivalry that exists within the industry Economies of scale for the market leaders, i.e. Whole Foods , or substitute retail stores, i.e., Walmart, both of whom who can produce high volumes with low costs Capital investments to become a major player are high and difficult to establish means of differentiation among well-branded/recognized players 2. Financial Ratio Analysis and Strategy Reflection Financial ratio analysis highlights how traditional supermarkets are finding themselves squeezed between premium players such as Whole Foods and discounters such as Aldi.
Implications of analysis are as follows: a) For both Kroger and Safeway, financial analysis indicates a real lack of strategy and competitive advantage. They are neither differentiators nor low cost options. This is evident in the following ways: Whole Foods Kroger Safeway ROE 11.45% 15.18% 14.01% ROA 7.98% 2.56% 3.43% ROS 3.39% 0.67% 1.18% Debt to Equity 43% 492% 309% SGA/Sales 30% 19% 24% COGS/Sales 65% 79% 73% Operating Profit 5.42% 1.41% 2.60% 436728
Operating margins are thin at 1.41% and 2.60% and ROS are also low at 0.67% and 1.18% respectively. Much of this is driven by the inability to price compete due to lack of product differentiation in the traditional supermarket space. COGS/Sales for both companies are over 70% indicating competition for suppliers who are not incentivized to provide low price or discounts to traditional supermarkets especially with strong substitute players such as Wal-Mart and Costco who can buy in large volume. Both Kroger and Safeways high debt to equity ratio, 492% and 309% indicates an inability to finance growth without incurring large amounts of debt and should be a major concern given a low ROS and operating profit margin. The amount of debt being taken on is not being justified by the earnings. b) Whole Foods position as leading retailer of organic and natural foods is evident when comparing its numbers across the board with these two traditional supermarkets. While COGS/Sales is only slightly lower at 65%, both ROA 7.98% and ROS 3.39% are much higher. Whole Foods differentiates itself through selling premium products for which they can charge higher prices for and receive better deals with their suppliers for due to brand image among consumers. WF generally doesnt carry nearly as much inventory as supermarkets, but has higher markups on its products. The above strategys success is reflected in a much higher operating margin of 5.42% and an above average ROE of 11.45%. Comparison to Kroger and Safeway in ROE is not useful due to their inflated numbers, which is evident when comparing debt to equity ratios for all three firms. Whole Foods debt to equity ratio is only 43% compared to 492% and 309% Higher SGA/Sales percentage of 30% (compared to 19% and 24%) could indicate more well paid staff and therefore better customer service.
3. Key Sources of Competitive Advantage 436728
Trader Joes competitive advantage stems from several sources that include 1) remarkable consistency in strategy from both an internal and external fit perspective, 2) added value through differentiation that drives up customers willingness to pay while maintaining a relatively lower cost structure, and 3) competitively valuable resources in the form of a system of difficult to imitate or substitutable activities. a) Trader Joes system of activities demonstrates both internal and external fit Operationally, most stores are less than 15,000 square feet and are in suburban locations in order to best serve their target market. The small space adds to the quirky, adventure, and inviting feel that Trader Joes is celebrated for by its customer segment who actively seek this kind of environment. And even though the spaces are relatively small, some analysts believe that Trader Joes has doubled the sales per square foot achieved by Whole Foods. Trader Joes only carries about 4,000 SKUs per location, 80% of which though are private label items that constantly change that adds to the mystique and cool factor they try to exude. They are not a place to go to get staples and so they do not target that customer base. This also allows them to maintain a dynamic product mix that is in line with former CEO Coulombes scarcity strategy, and that in turn builds upon their relationships with suppliers. Suppliers enjoy free product placement, prompt payment, and develop brand attractiveness by being in the store, but in turn are also required to be innovative and maintain secrecy. The mutually beneficial relationship with suppliers and lack of active marketing (therefore lower costs) allows Trader Joes to pay their employees more and build upon the customer experience within the store. The people Trader Joes hires are the people to whom they want as their customers. Happy, extroverted, well-informed, and motivated employees create an environment that is cool, fun, and in turn, leads to self-marketing through word of mouth from customer to customer, employee to friends who become new customers, and so forth. 436728
Trader Joes store locations are in line with the types of customers they want to attract. Their slow location expansion and growth is in line with their quirky style thats unlike most firms. b) Trader Joes could be considered as having a dual competitive advantage as both a low cost and differentiated player. While Trader Joes has certainly increased customers willingness to pay by offering both a differentiated shopping experience and a differentiated product line, it is more difficult to argue they are truly low cost. But Trader Joes is low cost compared to premium competitors and there is a perception of low cost in comparison to traditional supermarkets. Reasons follow for both differentiation and low cost: Private quality labels with interesting brand names that disappear forever appeal to their targeted customer segment who dont necessarily come into the store to buy everything they need but rather for a couple items; and then end up walking out with something new and fun as well Trader Joes marketing strategy through the Fearless Flyer and radio spots adds to its charm and appeal. Customers are willing to actively market for Trader Joes and this serves as a further point of differentiation. Knowledgeable employees that are constantly visible stocking shelves, walking customers to products, chatting with customers, and providing an uplifting mood within the store itself is a differentiated service that adds to customers experience and willingness to pay. No discounts or coupons and no questions asked return policy give the perception that everything is on sale and at low cost. c) Trader Joes system of activities that is effectively exploited through a consistency of internal and external fit is a competitively valuable resource that will be hard to imitate and substitute for especially given its strong brand image and the satisfaction of the current customer base. In fact, the growing outcry for more stores despite growing number of substitutes and already strong incumbents in the supermarket industry, is an indication of this competitive advantage 436728
More specifically, the types of employees who subscribe to the philosophy of Trader Joes, the cult-like following of customers who active difficulty market for the firm and generate more appeal, and the innovative dynamic product line that allows Trader Joes exclusivity with many suppliers are all competitively valuable resources 4. Threats to Trader Joes Competitive Advantage Given the previous assessment of Trader Joes competitive advantage and its competitively valuable resources AND the unattractiveness of the industry as a whole, it seems unlikely for Trader Joes to experience any kind of external threat. Traditional supermarkets will find it difficult to become differentiated players especially with both Trader Joes and Whole Foods dominating this type of segment, and new entrants will face the same difficulties. Smaller format experiments from retailers such as Target, Giant, and Publix will end up competing against each other for thin profit margins and unless they are truly able to offer a differentiated product line from the standard grocery products, it is unlikely for them to be a threat. Farmers Markets do not offer an expansive enough range of products nor adventure and friendly customer experience that can match Trader Joes. Online grocery stores such as Amazon will not .be able to replicate nor replace the in store experience and charm that Trader Joes offers. However, Trader Joes must be careful that customers do not have the ability to come into the stores to find new products without purchasing them, and then going online to buy them for lower costs. This seems unlikely since purchases to tend to be spur of moment and customers will continue to for the foreseeable future prefer to be able to see, hold, and touch grocery products they want to buy One potential threat that Trader Joes should be wary of is hold-up from their suppliers, whom they rely heavily on due to standing mutually beneficial relationship to drive their scarcity and innovation of food philosophy. Whole Foods has the ability to attract these suppliers 436728
although it remains questionable as to whether they will be able to take away customers as a premium retailer with much larger spaces and a wholly different philosophy. 5. Strategy Moving Forward Trader Joes current competitive advantage seems sustainable and so they should not alter their current strategy going forward unless market conditions change that allow for new entrants to position themselves well to challenge Trader Joes brand image. Trader Joes could take into consideration the following three points: 1) The employee base that wholly subscribes to the philosophy and strategy of Trader Joes is an important and valuable resource that must be maintained. Growing bureaucracy through new processes and procedures that lead to competition among employees and damage the happy and motivated environment needs to be taken into control. Consider giving longstanding employees equity share so that they have an incentive to do whats best for the firm 2) Test marketing through social media and innovative technology that does not detract from the mystique and appeal of Trader Joes, but rather complements it and therefore in part shows its customers that it is paying attention and taking note of their efforts to promote their beloved store. Having a growing yet controlled voice in the digital media space will be important as customers continue to become more tech savvy 3) Acquiring major suppliers that produce their highest grossing and popular product lines to avoid losing them to competitors. Trader Joes could also consider starting their own brand of products (small range to keep it manageable).